5.2.1 Standard of Review

JurisdictionArizona

One of the benefits that flows from the insurance policy is the expectation that the carrier will not wrongfully deprive the insured of the security against financial catastrophe for which the insured bargained.[142] "Conduct by the insurer which does destroy the security or impair the protection purchased breaches the covenant of good faith and fair dealing implied in the contract."[143] The Arizona cases do not, however, require the insurance company to prevent all harm to the insured.[144] An insurance carrier acts in good faith where it acts "honestly, on adequate information and does not place paramount importance on its own interest."[145]

Standard insurance policies contain the usual provision requiring the carrier to defend any suit against the insured and giving the carrier the right to make such investigation and settlement of any claim or suit as it deems expedient.[146] A significant amount of litigation in Arizona has focused on the carrier's obligations to the insured when exercising its right to decide whether a claim under the policy will be settled within the carrier's policy limits in those cases where there is a possibility of the claim exceeding such limits.[147] Determining the extent of this implied contractual duty has been a troublesome problem for the courts in this context.[148]

The Arizona Supreme Court, in Dodge v. Fidelity & Deposit Co. of Maryland,[149] observed that "[t]he two most important factors" in determining whether a tort action for bad faith will be permitted "are (1) whether the plaintiff contracted for security or protection rather than for profit or commercial advantage, and (2) whether permitting tort damages will 'provide a substantial deterrence against breach by the party who derives a commercial benefit from the relationship.'"[150] Thus, an assessment must be made as to the nature of the exposure/risk in determining whether to permit the tort of bad faith as opposed to a breach of contract action. Does the case involve an injured insured awaiting payment of medical expenses, or does it represent a case where an insured faces potentially devastating liability due to the insurer's bad faith failure to settle a third-party claim within policy limits?[151] Thus, as an example, the court in Bojry v. Insurance Company of the West,[152] found that an insurance company's decision whether to pay dividends on a workers' compensation policy, or how much to pay, did not place the insured employer at risk of losing the "contracted for security or protection" from the insured risk of claims by an injured employee. The court observed that the employer was at risk of losing, at most, only a potential "profit or commercial advantage" in the form of a refund of a portion of the premium paid." The court observed that such an interest is adequately protected by contract remedies such as a judgment for the amounts wrongfully withheld and, therefore, the factors for determining when a fiduciary duty arises did not apply to those factual circumstances. In situations where the insurance company's refusal to provide policy benefits creates a risk of losing a potential profit or commercial advantage, reliance upon the tort of bad faith is inapplicable and the claim should be remedied by simple contract principles.

In Clearwater v. State Farm Mutual Automobile Insurance Co.,[153] the court upheld a trial court's refusal to give the insurance carrier's request for a "fairly debatable" instruction on bad faith. The trial court refused to give the "fairly debatable" instruction as being the appropriate first-party, rather than third-party, bad faith standard. The court, instead, gave the jury an instruction based on the "equal consideration" criteria announced in General Accident Fire & Life Assurance Corp. v. Little.[154] The "fairly debatable" instruction was based on case law involving first-party coverage in which insureds brought actions against their own insurance...

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