Does It Constitute Bad Faith In Arizona If The Insurer Does Not Investigate A Claim Reasonably?

In order to prove bad faith, the insured must show that the insurer acted unreasonably and either knew its conduct was unreasonable or acted with such reckless disregard that they should have known that their conduct was unreasonable.  According to a new decision rendered by the Arizona Court of Appeals, unreasonable conduct may include not contacting all of the witnesses to the accident, even if liability appears to be clearly rest with the insured driver.  In Sobieski v. American Standard Ins. Co. of Wisconsin, which arose out of an underlying uninsured motorist claim (UM) the insured was operating a motorcycle when he rear-ended a vehicle that had stopped suddenly in the road, allegedly to avoid a pedestrian.  The insured was cited by the investigating officer for failing to control his speed and following too closely.  The adjuster interviewed the insured’s spouse and the driver of the motor vehicle which was rear ended.  However, the adjuster did not interview the adverse driver’s boyfriend who was sitting in the front passenger seat of the vehicle at the time of the accident, and did not interview any of the other motorcyclists who witnessed the accident and were identified in the police report.  The insured was unable to recall any details about the collision, so the adjuster advised him that they would not make an offer on his UM claim because it was determined he was at fault for the accident.

The insured sustained significant injuries and had medical bills in excess of $100,000.00.  His attorney provided written statements from three other motorcyclists who suggested that the driver of the car was at fault for stopping abruptly and failing to use her turn signal.  American Standard re-opened the claim but did not interview any of the additional witnesses identified by the insured.  As such, the claim was once again denied based upon a finding that the insured was wholly at fault for the accident.

After the claim was denied a second time, the insured demanded arbitration under the UM portion of the policy. The arbitrator who heard the claim found the insured’s total damages to be $950,000 and ruled that the uninsured motorist was 40 percent at fault for the accident. After American Standard paid the policy limit of $100,000, the insured sued again, alleging breach of the duty of good faith and fair dealing. A jury found in favor of the insured and awarded $500,000 in compensatory damages and $1,000,000 in punitive damages. American Standard subsequently appealed.

The Arizona Court of Appeals found that American Standard did not conduct a reasonable investigation of the claim because they did not contact the other four witnesses to the accident.  Once additional witnesses were brought to American Standard’s attention, they still did nothing more to investigate the claim.  American Standard should have known that comparative fault applied to the claim, and the value of the claim would have exceeded the available UM policy limits if it was found that the motorist was only partially at fault for the accident.

While the compensatory damages of $500,000.00 were affirmed, the court vacated the award of punitive damages.  In particular, the court found that the record did not support a finding by clear and convincing evidence that American Standard acted with an “evil mind” while handling the claim.  There was no evidence that American Standard’s business plans, employee evaluations, compensation programs or training materials were designed or applied with the purpose of arbitrarily reducing or denying claims to further the company’s bottom line, or that those plans, materials or programs had any inappropriate effect on how the adjuster handled the claim.  Even though the business plans showed that the company was paying out less than its competitors on comparable personal injury claims, and had called on department leaders to “manage the gap,” this did not open American Standard to punitive damages because they were simply taking steps to monitor profitability.  Business plans calling for a “pay what we owe” mentality were also insufficient to support a claim for punitive damages.  An insurer is entitled to engage in actions which ensure that it pays no more than what it owes on a claim. There was no indication that instructions to “control severity” of claims had anything to do with short-changing claimants.  There was also nothing wrong with the insurer seeking to apportion fault to the insured based upon Arizona’s comparative fault system.

Thus, the essential take away here is that evidence of an incomplete and/or biased investigation in connection with an unreasonable claim denial will support a claim for bad faith. However, absent clear and convincing evidence of malice or placing profits ahead of the interest of the insured, punitive damages will not be proper.