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Arizona Auto Insurance & Crash Law · Citizen Guide 09
Claims Handling & Insurance Bad Faith
Arizona permits insurers to investigate and dispute claims. It does not permit them to use unreasonable investigation, delay, lowballing, misrepresentation or self-interest to deprive an insured of the protection and security the insurance contract was purchased to provide.
Arizona bad faith begins by identifying which insurance relationship is involved
The insured seeks benefits from the insured's own policy
Examples include UM/UIM, MedPay, collision, comprehensive and other contractual first-party protection.
The insurer controls defense or settlement of a liability claim against its insured
The insurer must protect the insured's interests when deciding whether and how to settle the injured person's liability claim.
Noble establishes Arizona's first-party bad-faith tort
Arizona recognizes a legal duty implied in the insurance contract that the insurer must act in good faith when dealing with its insured's claim.
Did the insurer lack a reasonable basis for denying, delaying, failing to process or failing to pay the claim?
Did the insurer know, or recklessly disregard, that there was no reasonable basis for its conduct?
Rawlings explains what the insured actually purchased
Insurance is not merely a promise that money may someday be paid after a lawsuit. The insured purchases protection against calamity and the security of knowing the insurer will deal fairly with the insured when the loss occurs.
Protection
The policy transfers specified financial risk away from the insured.
Security
The insurance relationship is intended to protect the insured at the time the insured is economically vulnerable.
Fair treatment
The insurer may not deliberately impair the benefits and security created by the insurance relationship.
Arizona therefore does not reduce bad faith to a single question: “Was the check ultimately paid?”
Deese separates breach of contract from breach of the insurance relationship
Deese v. State Farm involved an automobile MedPay claim and allegedly unreasonable claims-handling practices.
Payment dispute
If the sole bad-faith theory is that benefits were wrongfully withheld, whether those benefits were actually owed may be essential to the claim.
Handling dispute
If the theory concerns an unreasonable claims practice independent of whether a particular bill ultimately proved payable, the implied covenant can present a separate issue.
“Fairly debatable” is not a license for unreasonable claim handling
Zilisch is the principal modern Arizona automobile case on this point.
An insurer may investigate and contest a claim whose value or coverage is reasonably debatable. But fair debatability does not make everything that occurs during the investigation irrelevant.
Investigate promptly
Obtain the material evidence needed to make an informed coverage or valuation decision.
Evaluate reasonably
Consider the evidence fairly rather than constructing artificial reasons to minimize the claim.
Pay legitimate claims promptly
Debatability does not justify indefinite delay after the material facts have become sufficiently clear.
Avoid needless adversarial obstacles
The insured should not be forced through unnecessary procedural hoops merely to obtain contractual protection.
A claims file should show how the decision was reached
When handling becomes disputed, chronology and decision-making matter.
| Claim activity | Questions to ask |
|---|---|
| Claim acknowledgment | When was the loss reported? When did the insurer respond? |
| Investigation | What evidence was obtained? What material evidence was ignored? |
| Medical evaluation | Were medical opinions fairly considered or selectively discounted? |
| Claim valuation | What evidence supports the value assigned to the claim? |
| Coverage analysis | What policy language and facts actually support the carrier's position? |
| Delay | What remained legitimately unresolved during each period of delay? |
| Settlement authority | Was internal authority consistent with the insurer's external offers? |
| Communications | Were requests answered accurately, promptly and completely? |
A.R.S. §20-461 regulates unfair claims practices—but does not itself create a private lawsuit
Section 20-461 identifies conduct Arizona's insurance regulator may treat as unfair claim settlement practices when performed with sufficient frequency to indicate a general business practice.
Misrepresentation
Misrepresenting pertinent facts or policy provisions relating to coverage at issue.
Communication
Failing to acknowledge and act reasonably and promptly upon claim communications.
Investigation
Failing to maintain reasonable investigation standards or refusing payment without reasonable investigation.
Coverage decisions
Failing to affirm or deny coverage within a reasonable period.
Settlement
Failing to attempt prompt, fair and equitable settlement where liability has become reasonably clear.
Explanation
Failing to reasonably explain the policy, factual or legal basis for denial or compromise.
Arizona separately regulates timely payment of first-party claims
A.R.S. §20-462 provides a specific payment rule for qualifying first-party claims.
The statute contains exceptions, including a claim denied in good faith within the thirty-day period.
Third-party bad faith protects the insured from unreasonable excess exposure
When the insurer controls settlement of a liability claim, its insured can face financial risk far beyond the insurer's policy limit.
Policy-limit exposure
The liability insurer ordinarily knows the maximum amount it promised to pay under the liability coverage.
Personal excess exposure
If the claim is not reasonably settled, the insured can face a judgment exceeding those liability limits.
Clearwater provides the failure-to-settle framework
Clearwater v. State Farm involved repeated policy-limits settlement opportunities followed by an excess judgment.
Factors include
- strength of the claimant's liability case
- strength of the claimant's damages case
- adequacy of the insurer's investigation
- advice of defense counsel or insurer agents
- whether settlement offers were communicated to the insured
- relative financial risk to insurer and insured
- attempts to make the insured contribute personally
- insured conduct affecting settlement
- other evidence bearing on good or bad faith
The injured claimant ordinarily does not directly own the liability insurer's bad-faith duty
Arizona's implied covenant arises from the insurance relationship between insurer and insured.
Third-party claimant
A crash victim ordinarily cannot directly sue the tortfeasor's insurer for common-law bad faith merely because settlement handling was poor.
Insured
The insured owns the contractual relationship and the corresponding claim when the insurer's settlement conduct improperly exposes the insured to excess liability.
Arizona law permits the insured's rights to become relevant through assignments and other lawful settlement arrangements. Clearwater itself was litigated by injured claimants who had obtained an assignment of the insured's bad-faith rights.
Bad-faith deadlines require separate accrual analysis
Arizona treats the insurer bad-faith cause of action as a tort for limitations purposes.
For that type of third-party claim, the Arizona Supreme Court held that accrual occurs when the underlying excess judgment becomes final and nonappealable—not merely when the initial excess verdict is returned.
Bad-faith compensatory damages and punitive damages are different questions
Loss caused by the tort
Arizona bad-faith law can permit recovery for damages legally caused by the insurer's breach of the implied covenant, subject to ordinary proof and causation requirements.
Something more is required
Proof of ordinary bad faith does not automatically justify punitive damages.
Arizona's punitive-damages threshold
Rawlings, Linthicum and Gurule require the heightened showing traditionally described in Arizona as an evil mind.
Negligence, an incorrect coverage determination or even conduct sufficient for ordinary bad-faith liability does not automatically satisfy this additional punitive-damages standard.
Arizona bad-faith investigation workflow
Claims-handling evidence checklist
- complete insurance policy
- declarations page
- all endorsements
- claim acknowledgment
- claim correspondence
- emails
- text communications where applicable
- coverage letters
- reservation-of-rights letters
- coverage denial
- requests for information
- claimant responses
- medical records submitted
- medical bills submitted
- expert reports
- independent medical examinations
- claim evaluations
- settlement offers
- settlement demands
- counteroffers
- policy-limit demands
- internal authority where discoverable
- claims manuals where discoverable and relevant
- adjuster notes
- claim activity logs
- defense-counsel evaluations
- communications with insured
- excess-exposure notices
- payment history
- arbitration records
- litigation chronology
Common Arizona bad-faith mistakes
“The insurer was wrong, so it acted in bad faith.”
An incorrect decision is not automatically tortious. Arizona also requires the bad-faith mental-state component.
“The claim was fairly debatable, so the handling cannot matter.”
Zilisch squarely rejects that absolute-defense formulation.
“The claim was eventually paid, so bad faith is impossible.”
Rawlings and Deese show why unreasonable handling can present a separate implied-covenant issue.
“A §20-461 violation gives me a statutory damages action.”
No. Subsection (D) expressly provides only an administrative remedy under that statute.
“A third-party claimant can directly sue the tortfeasor's insurer for bad faith.”
Ordinarily no. Arizona places the good-faith duty in the insurer-insured contractual relationship.
“Bad faith automatically supports punitive damages.”
No. Arizona requires clear and convincing evidence of the heightened punitive-damages state of mind.
Arizona authority map
Frequently asked questions
Does Arizona recognize insurance bad faith?
Yes. Noble recognizes a tort claim for breach of an insurer's implied duty of good faith and fair dealing toward its insured.
What generally must be proved in a first-party bad-faith claim?
Arizona generally requires absence of a reasonable basis for the insurer's challenged conduct plus knowledge or reckless disregard of that lack of a reasonable basis.
What does “fairly debatable” mean?
An insurer may challenge a claim that presents a legitimate dispute over coverage or value. But under Zilisch, fair debatability does not excuse unreasonable investigation, processing or delay.
Can the insurer act in bad faith even if it eventually pays?
Potentially. Rawlings and Deese establish that the implied covenant protects fair treatment and the security arising from the insurance relationship, not merely ultimate payment.
Does every violation of A.R.S. §20-461 create a lawsuit for damages?
No. Section 20-461(D) expressly states that the statute creates no private right or cause of action and provides an administrative remedy to the insurance regulator.
Does Arizona require payment of a first-party claim within 30 days?
Section 20-462 generally imposes interest on a qualifying first-party claim unpaid more than 30 days after receipt of an acceptable proof of loss containing the information necessary for adjudication, subject to the statute's exceptions.
What is third-party insurance bad faith?
It generally concerns the insurer's failure to properly protect its insured when handling a liability claim, particularly where an unreasonable failure to settle exposes the insured to liability beyond policy limits.
What does equal consideration mean?
The liability insurer must give the insured's financial interests equal consideration with its own interests when evaluating settlement and excess exposure.
Can an injured crash victim directly sue the other driver's insurer for bad faith?
Ordinarily not merely as a third-party claimant. Under Leal, the implied good-faith duty generally arises from the insurer-insured contractual relationship. Assignment and other lawful mechanisms can produce a different procedural posture.
Is a policy-limits demand automatically evidence of bad faith if rejected?
No. The complete circumstances matter, including liability, damages, investigation, terms and timing of the settlement opportunity, communications with the insured and comparative financial risk.
Does bad faith automatically support punitive damages?
No. Arizona requires clear and convincing evidence of the heightened state of mind described in Rawlings, Linthicum and Gurule.
How long is the limitations period for a third-party bad-faith failure-to-settle claim?
Taylor applies Arizona's two-year tort limitations period to that claim and holds that the particular claim accrues when the underlying excess judgment becomes final and nonappealable.
The question is not simply whether the insurer ultimately paid.
Reconstruct what the insurer knew, what it investigated, what it failed to investigate, how it evaluated the evidence, how quickly it acted and whose interests it protected. Then apply the correct Arizona standard: Noble and Zilisch for first-party handling, or Clearwater's equal-consideration framework for third-party settlement exposure.