Has My Disability Insurer Acted in
Bad Faith Under Arizona Law?

Under Arizona insurance law, the relationship between a disability insurance company and its policyholder/insured is a special relationship giving rise to heightened duties not ordinarily found in other contractual agreements. Rawlings v. Apodaca, 151 Ariz. 149, 163, 726 P.2d 565, 579 (1986); Dodge v. Fidelity & Deposit Co., 161 Ariz. 344, 346-47, 778 P.2d 1240, 1242-43 (1989). Arizona courts further recognize that a disability insurance company’s duties to its insured are non-delegable and that an insurer remains liable for actions taken by a delegate (like reinsurers and third-party claim administrators) who take over disability claims and act in bad faith:

[A]n insurer who owes the legally imposed duty of good faith to its insureds cannot escape liability for a breach of that duty by delegating it to another, regardless of how the relationship of that third party is characterized. Clearly, an insurer may seek assistance by delegating performance of its duty of good faith to non-servants through whatever organizational arrangement it desires. In doing so, however, the insurer cannot give this delegate authority to deprive its insureds of the benefit of the insured’s bargain. If the insurer were allowed to delegate the duty itself, an injured insured would have no recourse for breach of the duty against either the insurer, from whom the duty is owed, or its delegate, with whom the insured has no contractual relationship. Such a result would render a cause of action for breach of the duty virtually meaningless. Thus, we hold that, although an insurer may delegate the performance of its duty of good faith to a non-servant, it remains liable for the actions taken by this delegate because the duty of good faith itself is non-delegable.

Walter v. Simmons, 169 Ariz. 229, 238, 818 P.2d 214, 223 (Ct. App. 1991) (citations omitted) (emphasis added); see also State Farm Mut. Auto. Ins. Co. v. Mendoza, 2006 WL 44376, at *12 (D. Ariz. Jan. 5, 2006) (“Insurers cannot escape their duty of good faith and fair dealing by delegating tasks to third-parties . . . .”) (citing Walter).

To establish a claim for bad faith, the a dentist or physician must show: (1) that the insurer acted unreasonably in the investigation, evaluation or processing of his/her claim; and (2) that the insurer acted knowingly or with reckless disregard as to the reasonableness of its actions. Leavey v. Unum/Provident Corp., No. CV-02-2281-PHX-SMM, 2006 WL 1515999, at *3 (D. Ariz. May 26, 2006); Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 238, 995 P.2d 276, 280 (2000); Acosta v. Phoenix Indem. Ins. Co., 214 Ariz. 380, 153 P.3d 401, ¶ 13 (Ct. App. 2007). Intent can be inferred from the defendant’s conduct. Services Holding Co. v. Transamerica Occidental Life Ins. Co., 180 Ariz. 198, 207, 883 P.2d 435, 444 (Ct. App. 1994) (noting that “the intent requirement of the second element [of a bad faith claim] can be established by conduct”).  Moreover, an insurer can be held liable in insurance bad faith for the distinct acts of misconduct discussed on our Homepage, regardless of whether the insured’s claim is even paid. As the Zilisch court held:

The carrier has an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim. It should do nothing that jeopardizes the insured’s security under the policy. It should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less. Equal consideration of the insured requires more than that.

196 Ariz. at 238, 995 P.2d at 280; see also Leavey, 2006 WL 1515999, at *5 (noting that “reasonable jurors could conclude that defendants acted unreasonably in their evaluation and processing of Plaintiff’s claim,” despite the fact that the insurer never missed a payment).

Disability insurance companies’ duties include the following:

To not impose requirements on the insured that are not contained in the policy.

To treat the insured fairly and honestly at all times.

To not try to gain an unfair advantage over the insured. To give as much consideration to the insured’s interests as its does to its own.

To make claims decisions without regard to profitability. To not attempt to influence the opinions of independent medical examiners.

To not destroy or alter documents to conceal evidence of claim handling.

To not lie about actions taken on a claim.

To act reasonably in handling the claim.

To not misrepresent facts or policy provisions to avoid paying benefits.

To reasonably interpret contract provisions.

To not take unreasonable legal positions.

Each of the foregoing duties remain the liability of the primary insurer and are non-delegable as noted above.

If you think that your Arizona disability claim has been denied in bad faith, a disability insurance attorney can help you determine what legal claims you might have against your insurer.