5.2.2 Equal Consideration Test

• Jurisdiction: Arizona

Arizona courts have adopted what is generally referred to as the "equality of consideration" test to determine the extent of the implied contractual duty of good faith and fair dealing in the third-party context.^[170]

The "equality of consideration" test was first adopted by the court in Farmers Insurance Exchange v. Henderson.^[171] Under this test, a carrier must not be motivated by partiality to itself. If the carrier fails to give equal consideration to the interests of the insured, it will have acted in bad faith. "In the event good faith obliges the [carrier] to terminate the litigation by settlement, its failure to do so renders it liable as between the insured and [carrier] for the full amount of the judgment."^[172]

In discussing application of the "equality of consideration" test, the courts generally speak in terms of the "good faith" or "bad faith" of the insurance carrier.^[173] However, "no dishonest or fraudulent motive on the part of the [carrier] is required in order to find that the [carrier] has failed to give the required equality of consideration to the interests of the insured."^[174] For example, in State Farm Mutual Automobile Insurance...