Arizona has required equal consideration for nearly seventy years

Farmers Insurance Exchange v. Henderson established the Arizona rule in 1957.

Once a liability insurer controls the defense and settlement of a covered claim, it cannot decide whether to settle by looking only at the amount of its own policy-limit exposure.

Henderson's rule: the insurer must give the insured's interests equal consideration with its own when deciding whether to settle a claim presenting potential liability beyond policy limits.

Arizona does not require the carrier to give the insured preferential treatment. Nor can the carrier give itself preferential treatment.

The concept is equality of consideration. The insurer must evaluate the settlement decision as a fiduciary-like responsibility arising from its contractual control over the insured's defense and settlement.

Compare the hazards facing the insurer and the insured

The potential conflict becomes clearest when a claimant offers to settle within the liability limit while the realistic verdict exposure is far higher.

Insurer Contractual limit

Before extracontractual consequences arise, the carrier's ordinary indemnity exposure may be capped at the purchased liability limit.

COMPARE

Insured Potentially unlimited excess

The insured may face personal liability for every dollar of judgment exceeding available insurance.

Example

Risk	Amount	Who bears it if settlement is rejected?
Liability policy limit	$100,000	Insurer's ordinary contractual indemnity exposure.
Settlement opportunity	$100,000	Potentially resolves the insured's covered personal exposure.
Likely verdict range	$300,000–$600,000	Creates substantial potential personal exposure above insurance.
Potential excess judgment	$200,000–$500,000	Insured unless insurer becomes legally responsible through bad faith or another doctrine.

This conflict is the reason the doctrine exists. Without equal consideration, a carrier could gamble with hundreds of thousands of dollars of the insured's money while risking little more of its own.

Clearwater supplies the clearest practical test

Clearwater v. State Farm explains why the first-party “fairly debatable” standard cannot simply be transferred into a third-party failure-to-settle case.

Prudent-Insurer Test Would a prudent insurer with no policy limit have accepted the settlement?

Imagine the carrier itself would have to pay the entire verdict, whether $50,000 or $5 million.

Would it still reject the available settlement?

The test neutralizes the policy-limit conflict. It forces the settlement decision to reflect the actual liability and damages risk rather than the carrier's capped contractual exposure.

Arizona considers the entire settlement decision

Clearwater identifies the established Arizona factors for evaluating third-party bad faith.

Liability and damages strength

How strong was the injured person's case against the insured?

Insured contribution

Did the insurer attempt to make the insured contribute personally toward settlement?

Adequacy of investigation

Did the insurer properly investigate the circumstances and evidence against its insured?

Advice of counsel or agent

Did the insurer reject material settlement advice from its own attorney or representative?

Communication of the offer

Did the insurer fail to inform the insured of the compromise opportunity?

Relative financial risk

What did the insurer stand to lose compared with the amount the insured personally risked?

Insured-created problem

Did the insured mislead the carrier or otherwise cause rejection of an otherwise reasonable settlement?

Other evidence

Consider any additional circumstance tending to establish or negate bad faith.

No single factor automatically decides the claim. Even disputed liability must be considered together with the magnitude of the insured's excess risk and the other settlement circumstances.

An insurer cannot intelligently evaluate settlement without investigating the case

The settlement decision should be based on a realistic assessment of what could happen if the case is tried.

Liability

Police evidence, witnesses, admissions, vehicle data, roadway evidence and applicable duties.

Comparative fault

Evaluate Arizona's pure comparative-fault system rather than assuming a contested fault issue eliminates excess risk.

Medical damages

Nature of injury, treatment, permanency, future care, causation and medical expense evidence.

Economic loss

Past and future income loss, earning impairment and other economic damages.

Noneconomic damages

Pain, disability, disfigurement and the human consequences likely to matter to a jury.

Verdict risk

Venue, witnesses, credibility, experts and probable verdict range.

Investigation is part of settlement protection. Clearwater expressly makes failure to properly investigate evidence against the insured a factor in the bad-faith analysis.

The insured should know when personal assets are at risk

Clearwater includes failure to inform the insured of a settlement offer as a relevant bad-faith factor.

Material information can include

available liability limits
amount of settlement demand
deadline for acceptance
claimant's evidence
liability evaluation
comparative-fault evaluation
damages evaluation
expected verdict range
potential excess amount
defense-counsel recommendation
settlement negotiations
request for personal contribution
multiple claimant problems
coverage reservations

The insured cannot protect against an excess judgment that the insured does not know is developing. Communication is part of the equal-consideration analysis.

Defense counsel's evaluation can become important evidence

Liability defense counsel may have the clearest direct view of:

Trial evidence

Which witnesses are strong, weak, credible or unpredictable?

Liability exposure

How likely is a plaintiff's verdict under the developed evidence?

Damages exposure

What verdict range does experienced counsel believe the evidence supports?

Settlement recommendation

Does counsel recommend settlement within or near policy limits?

Clearwater factor: rejection of settlement advice from the insurer's own attorney or agent can be relevant in determining whether equal consideration was actually given.

A policy-limits demand should create a genuine opportunity to resolve the insured's exposure

The demand is important because it can present the carrier with a concrete choice between settlement and continued excess-judgment risk.

Identify the claimants

Clarify who is offering settlement and whether derivative or related claims are included.

Identify what is released

Make clear which insureds and liabilities will actually be resolved.

State the amount

Identify the monetary settlement requested or the applicable policy limit.

Provide material support

Supply enough liability and damages information for meaningful evaluation.

State acceptance mechanics

Explain how and to whom acceptance must be communicated.

State the deadline clearly

Avoid uncertainty about when the settlement opportunity expires.

Do not reduce Arizona failure-to-settle law to a “gotcha letter.” The controlling inquiry remains whether the insurer reasonably evaluated the settlement opportunity and gave equal consideration to its insured's interests.

Equal consideration does not require acceptance of every demand

A settlement proposal can contain issues concerning:

amount beyond available coverage
unclear release language
unresolved claims of other persons
conditions the carrier cannot satisfy
coverage disputes
uncertain liens
multiple insureds
multiple claimants
insufficient information for informed evaluation

Peaton illustrates the limit. Equal consideration requires the insurer to protect the insured fairly; it does not require the insurer to pay every extra-contractual amount or satisfy every condition a claimant may impose.

Multiple claimants make the settlement problem more difficult

One crash can create claims whose combined value greatly exceeds the available per-accident limit.

Identify every known claimant. Do not evaluate the first demand in isolation if other substantial injury claims are known.

Estimate each claim realistically. Determine injury severity, liability and likely value.

Determine available per-person and per-accident limits. The coverage structure determines what can actually be allocated.

Communicate the conflict to the insured. The insured needs to understand the possibility that limits are inadequate for all claims.

Seek a coordinated resolution where reasonably possible. Global negotiation can sometimes protect the insured more effectively than isolated settlements.

Evaluate lawful protective procedures. Interpleader or another mechanism may be relevant depending on the particular facts and procedural posture.

One policy can protect several insured defendants

A crash may involve:

Driver

The person operating the vehicle.

Owner

A separately named defendant or insured vehicle owner.

Employer

A business defendant facing vicarious or independent liability.

Their interests may diverge. A proposed release should be analyzed to determine which insureds it protects and which remain exposed.

A serious settlement breach can change the insured's cooperation obligations

Helme identifies three fundamental liability-insurance duties:

Duty 1

Indemnify

Pay covered liability according to the policy.

Duty 2

Defend

Provide the promised legal defense.

Duty 3

Equal consideration

Protect the insured's interests when evaluating settlement.

A material actual or anticipatory breach can expose the insured to the very personal liability the insurance was purchased to prevent.

Helme's self-protection principle: when the insurer materially breaches its obligations, the insured's cooperation duties can narrow enough to permit reasonable steps to protect against personal exposure.

The exact settlement mechanism depends on whether the insurer:

refused the defense;
defended under reservation;
breached settlement duties; or
otherwise placed the insured in material personal jeopardy.

The bad-faith claim belongs to the insured—but it can become part of the injured claimant's case

The liability insurer's implied good-faith duty runs to its insured.

Before Assignment Insured owns the claim

The insured is the party whose financial interests the insurer had a duty to protect.

THEN

After Valid Assignment Claimant may pursue assigned rights

Arizona permits appropriate bad-faith rights to be assigned as part of a lawful settlement structure.

Clearwater itself followed this path. After an excess wrongful- death judgment, the insured assigned the bad-faith claim to the injured claimants in exchange for a covenant not to execute.

Direct claim is different. Under Leal, a third-party crash claimant generally does not possess a direct common-law bad-faith action against the tortfeasor's insurer simply because the claimant believes the carrier mishandled settlement.

An excess judgment also affects accrual

Taylor v. State Farm applies Arizona's two-year tort limitations period to the third-party failure-to-settle bad-faith action addressed there.

Taylor's accrual rule: that third-party bad-faith cause of action accrued when the excess judgment in the underlying liability action became final and nonappealable.

Do not use Taylor as a universal insurance accrual rule. First-party bad faith, negligent procurement, contract claims and other insurance causes of action can accrue differently.

Arizona failure-to-settle workflow

Identify every liability policy and limit. Determine the actual insurance available to protect the insured.

Identify every insured exposed to the claim. Driver, owner, employer and other defendants may have different interests.

Build the liability case. Evaluate fault, comparative fault and evidentiary strength.

Build the damages case. Estimate a realistic verdict range rather than simply adding medical bills.

Compare verdict risk with policy limits. Quantify the insured's potential excess exposure.

Identify every settlement opportunity. Preserve demands, offers, counteroffers and their exact terms.

Determine whether the offer could actually protect the insured. Examine releases, claimants, defendants, liens and settlement conditions.

Review the insurer's investigation. Determine what facts the insurer knew or reasonably should have obtained.

Review defense-counsel evaluations. Compare counsel's liability, damages and settlement analysis with the insurer's decision.

Review communications with the insured. Determine whether the insured was told about settlement and excess exposure.

Apply Clearwater's comparative hazards. Compare the financial risk borne by carrier and insured.

Apply the prudent-insurer test. Ask whether the decision would have changed if the insurer had no policy limit.

If breach exposes the insured personally, evaluate protective options. Use Guide 11 for Damron/Morris principles and current Arizona authority.

Preserve the entire chronology. Third-party bad faith is reconstructed from decisions made before the verdict.

Failure-to-settle evidence checklist

complete liability policy
declarations page
all applicable limits
umbrella/excess policies
claim activity log
liability investigation
police crash report
witness statements
photographs
vehicle data
expert liability reports
medical records
medical bills
wage-loss evidence
future-damages evidence
settlement demand
proof demand was received
support sent with demand
insurer response
counteroffers
defense-counsel evaluations
defense-counsel recommendations
communications with insured
excess-exposure letters
requests for insured contribution
multiple-claimant correspondence
mediation records where discoverable
trial evaluations
verdict
judgment
appeal history
assignment agreement
covenant not to execute

Common Arizona failure-to-settle mistakes

“Liability was debatable, so settlement handling cannot be bad faith.”

Clearwater rejects fair debatability as the controlling third-party standard. Comparative hazards still must be evaluated.

“An excess verdict automatically proves bad faith.”

No. The insurer's decision is judged from the circumstances reasonably known when the settlement opportunity existed.

“A policy-limits demand automatically creates liability.”

No. The complete settlement opportunity, investigation and equal- consideration analysis remain controlling.

“The insured does not need to know about the demand.”

Clearwater expressly lists failure to inform the insured of a compromise offer as a relevant factor.

“The insurer may value the case only from its own policy-limit risk.”

That is the precise conflict Henderson and Clearwater address.

“The injured claimant directly owns the bad-faith claim.”

Ordinarily no. The duty runs to the insured, though Arizona permits assignment of appropriate claims.

Arizona authority map

Arizona Supreme Court · 1957 Farmers Insurance Exchange v. Henderson, 82 Ariz. 335

Establishes Arizona's equal-consideration rule. When settlement is controlled by the insurer and excess liability is possible, the insurer cannot give its own financial interests paramount consideration.

Arizona Supreme Court · 1968 General Accident Fire & Life Assurance Corp. v. Little, 103 Ariz. 435

Provides the factors later summarized and applied by Clearwater for evaluating third-party bad-faith settlement conduct.

Arizona Supreme Court · 1990 Clearwater v. State Farm Mutual Automobile Insurance Co., 164 Ariz. 256

Confirms the equal-consideration standard, rejects the first-party fairly-debatable instruction for failure-to-settle cases, and focuses the inquiry on comparative hazards to insurer and insured.

Arizona Supreme Court · 1987 Arizona Property & Casualty Insurance Guaranty Fund v. Helme, 153 Ariz. 129

Identifies indemnity, defense and equal consideration as fundamental insurer obligations and explains how material insurer breach can narrow the insured's cooperation duties.

Arizona Court of Appeals · 1991 State Farm Mutual Automobile Insurance Co. v. Peaton, 168 Ariz. 184

Demonstrates that equal consideration does not require an insurer to satisfy every extra-contractual demand or settlement condition and requires careful examination of the actual settlement opportunity.

Arizona Court of Appeals · 2007 Acosta v. Phoenix Indemnity Insurance Co., 214 Ariz. 380

Applies Arizona's third-party bad-faith framework to a claimed failure to settle within liability limits and confirms that such a claim may be prosecuted by the insured or the insured's assignee.

Arizona Court of Appeals · 2000 Leal v. Allstate Insurance Co., 199 Ariz. 250

Confirms that a third-party claimant ordinarily has no direct common-law bad-faith claim against the tortfeasor's insurer merely because the claimant is affected by the carrier's settlement conduct.

Arizona Supreme Court · 1996 Taylor v. State Farm Mutual Automobile Insurance Co., 185 Ariz. 174

Applies Arizona's two-year tort limitations period to the third-party failure-to-settle bad-faith action before the Court and holds that the claim accrued when the excess judgment became final and nonappealable.

Primary Law · A.R.S. §20-461 Unfair claim settlement practices

Includes failure to attempt prompt, fair and equitable settlement where liability has become reasonably clear, while expressly providing that the statute itself creates no private cause of action.

Source-control rule: begin with Henderson and Clearwater. Ask what the insurer reasonably knew at the time, compare the hazards facing insurer and insured, and evaluate the decision as though a prudent insurer had no policy limit.

Frequently asked questions

What is Arizona's equal-consideration rule?

When a liability insurer controls settlement and its insured faces possible excess liability, the insurer must give the insured's financial interests equal consideration with its own.

Does the insurance company always have to accept a policy-limits demand?

No. Arizona examines the full circumstances, including liability, damages, investigation, terms of the settlement opportunity and the comparative risks to insurer and insured.

What is the prudent-insurer test?

Clearwater asks whether a prudent insurer without a policy limit would have accepted the settlement. The test prevents the carrier's capped contractual exposure from distorting the settlement decision.

What if liability is disputed?

The strength of liability is relevant, but Clearwater holds that debatability is not determinative. The insurer must also consider damages and the insured's financial risk from an excess judgment.

Does the insurer need to tell its insured about a settlement offer?

Failure to inform the insured of a compromise offer is expressly one of the factors Arizona considers in the third-party bad-faith analysis.

Does the insurer have to investigate before rejecting settlement?

Adequacy of investigation is another express Clearwater factor. The insurer should have a reasonable factual basis for evaluating liability, damages and excess risk.

What if defense counsel recommends settlement?

Arizona considers rejection of advice from the insurer's attorney or agent as a factor in evaluating good faith.

Does an excess verdict automatically prove bad faith?

No. The decision is evaluated from information reasonably available when the settlement opportunity existed. An excess judgment may, however, demonstrate the serious financial risk imposed on the insured.

Can the insurer be liable above the policy limit?

Potentially. If bad-faith failure to settle causes an excess judgment, Arizona law can impose liability beyond the insurer's contractual limit.

Can the injured claimant sue the insurer directly for failure to settle?

Ordinarily the good-faith duty belongs to the insured. The injured claimant may acquire the insured's appropriate rights through a valid assignment.

What happens if several people are injured but the policy limit is inadequate?

Multiple-claimant cases require a broader evaluation of all known claims, available per-person and per-accident limits, the insured's aggregate exposure, communication and possible coordinated settlement or other protective procedures.

Does A.R.S. §20-461 itself create a bad-faith lawsuit?

No. Section 20-461(D) expressly states that the statute does not create a private right or cause of action. Arizona's private failure-to-settle doctrine arises from common law.

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Evaluate the settlement as though the policy limit did not exist.

Build the liability case. Build the damages case. Identify the likely verdict range. Compare that exposure with the policy limits and the proposed settlement. Then ask the Arizona question: would a prudent insurer bearing the entire judgment have accepted the opportunity to protect the insured?

Public legal education only. VictimsGuide.com provides public-interest legal education. It does not provide individualized legal advice, does not offer or accept legal representation, and does not create an attorney-client relationship. Arizona failure-to-settle claims depend on liability, damages, policy limits, settlement terms, insurer investigation, communications, underlying litigation, assignments and current Arizona law. Verify controlling primary authority before legal reliance.