Insurance Bad Faith: Different Standards for Different States – Part 1 (Arizona)

When a disability insurance company wrongly denies a claim, it can be subject to a suit for bad faith.  What constitutes insurer bad faith varies from state to state.  Over the next several days, we will be outlining the first-party insurance bad faith law of Arizona and nearby states.

In many states, an insurance company can be held liable for its wrongful conduct in two ways: (i) under the tort law of the state or (ii) under a state statute. Though tort law and the statute usually overlap somewhat, they are sometimes meant to create separate and distinct causes of action.  The tort law makes the insurance company pay damages to a private policyholder, while a violation of the statutes can often lead to either a suit by a private policyholder or charges brought by the state.

 Arizona Insurance Bad Faith Law

The Arizona Unfair Claim Settlement Practices Act was intended to give the state Department of Insurance guidelines for determining whether an insurer’s procedures and practices occur with such frequency as to indicate an unacceptable general business practice. This statute does not allow an individual to bring a lawsuit based solely on its provisions.

However, a private insured can bring an action under the state’s tort law.  Under Arizona tort law relating to disability claims, the core of the duty of good faith and fair dealing is that the insurer must act reasonably towards its insured, giving equal consideration in all matters to the insured’s interest.

The Statute: A.R.S. §20-461. Unfair claim settlement practices.

The Rules: An insurance company’s duties include the following:

  • To act reasonably in handling the claim.
  • To not misrepresent facts of policy provisions to avoid paying benefits.
  • To reasonably interpret contract provisions.
  • To not take unreasonable legal positions.
  • To not impose requirements on the insured that are not contained in the policy.
  • To properly investigate the claim.
  • To treat the policyholder fairly and honestly at all times.
  • To give as much consideration to the insured’s interests as it does to its own.
  • To make claims decisions without regard to profitably.
  • 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.

The Tort Law Standard:  An insurer can be liable for bad faith if there is an absence of a reasonable basis for denying benefits of the policy and the disability insurance company had knowledge or a reckless disregard of the lack of a reasonable basis for denying the claim.