5.4.3 Zilisch v. State Farm Mutual Automobile Insurance Company (Defending Debatable Claims)

• Jurisdiction: Arizona

In Zilisch v. State Farm Mutual Automobile Insurance Co.,^[409] the Arizona Supreme Court vacated the Arizona Court of Appeals decision,^[410] where the court of appeals held that as long as the amount the insurance company ultimately offers to its insured on an underinsured motorist claim is fairly debatable, "poor practice and bad motives [in the investigation process] do not enter into the inquiry [of whether bad faith has taken place]."^[411] In rejecting the court of appeals analysis, the Arizona Supreme Court found that "fair debatability" as a "threshold question" is not outcome determinative of the bad faith inquiry. Recognizing that insurance companies may defend fairly debatable claims, an insurance company must exercise reasonable care and good faith when defending a fairly debatable claim.^[412] The court then provided the basic rules governing the inquiry of whether bad faith has occurred or not:

The tort of bad faith arises when the insurer "intentionally denies, fails to process or pay a claim without a reasonable basis." [Citation omitted.] While an insurer may challenge claims which are fairly debatable [citation omitted], its belief in fair debatability "is a question of fact to be determined by the jury." [Citation omitted.] An insurance contract is not an ordinary commercial bargain; "implicit in the contract and the relationship is the insurer's obligation to play fairly with its insured." [Citation omitted.] The insurer has "some duties of a fiduciary nature," including "[e]qual consideration, fairness and honesty." [Citation omitted.] Thus, "an insurer may be held liable in a first-party case when it seeks to gain unfair financial advantage of its insured through conduct that invades the insured's right to honest and fair treatment," and because of that, "the insurer's eventual performance of the express covenant?by paying the claim?does not release it from liability for 'bad faith.'" [Citation omitted.] And in Deese [citation omitted], we noted that an insurance contract provides more than just security from financial loss to the insured. We said, "the insured also is entitled to receive the additional security of knowing that she would be dealt with fairly and in good faith." [Citation omitted.] Thus, if an insurer acts unreasonably in the manner in which it processes a claim, it will be held liable for bad faith "without regard to its ultimate merits." [Citation omitted.] . . . [C]oming up with an amount that is within the range of...