The law imposes a duty or obligation on insurance companies (insurers) to act in good faith (reasonably and fairly) when investigating and settling claims with their insureds. This duty was traditionally created by judges in court opinions (common law) but is now often located in a state’s statutes—often in the insurance code.
This duty of good faith and fair dealing in insurance practices generally requires an insurer to settle a claim with its insured (known as a first-party claim) promptly when liability has become reasonably clear. In contrast, an insurer generally does not have a duty of good faith and fair dealing in the investigation and settlement of a claim with a party other than its insured (a third party or third-party claim). This is because the duty of good faith and fair dealing is rooted in the insurance contract between the insurer and its insured, and a person or entity who is not a party to the insurance contract is not owed the duty of good faith and fair dealing.
An insured who believes their insurer acted in bad faith in the investigation and settlement of an insurance claim may file a lawsuit for breach of the duty of good faith and fair dealing in the insurance contract—known as a bad faith claim. A court may award a plaintiff whose insurer has acted in bad faith (1) interest on a claim amount, (2) punitive damages, and (3) attorney fees.
The bad faith standard requires an insured to prove with clear and convincing evidence that (1) the insurer lacked a reasonable basis for delaying or denying benefits or payment under the insurance contract; and (2) the insurer knew or recklessly disregarded its lack of reasonable basis for delaying or denying benefits under the insurance policy.
Bad faith claims are fact specific and turn on the conduct of the insurer towards the insured. A plaintiff must plead specific facts as evidence of bad faith and cannot rely on conclusory statements.
The insurer does not breach the duty of good faith and fair dealing by investigating a claim, by refusing to pay a claim, or by litigating a dispute with its insured if there is a legitimate dispute as to coverage or amount of the claim—provided the insurer's position is reasonable and legitimate.
In general, an insurer's litigation tactics and strategy in defending a claim are not relevant to the insurer's decision to delay or deny coverage for the claim. And once litigation has begun, the actions taken in its defense are not evidence of whether the insurer acted in bad faith in the investigation and settlement of the insured’s claim for benefits under the insurance policy.
In Arizona, insurance companies are legally obligated to act in good faith and deal fairly with their insureds when handling claims. This duty is rooted in both common law and statutory law, often found in the state's insurance code. Insurers must promptly settle first-party claims when liability is reasonably clear. However, they do not owe this duty of good faith to third parties, as it arises from the contract with their insured. If an insured believes their insurer has acted in bad faith, they may file a lawsuit. To succeed, the insured must show with clear and convincing evidence that the insurer had no reasonable basis for denying or delaying payment and that the insurer knew or recklessly disregarded this lack of reasonable basis. Specific facts must be presented to prove bad faith; general claims are insufficient. An insurer does not breach this duty by investigating, refusing to pay, or litigating a claim if there is a legitimate dispute over coverage or the claim amount, as long as the insurer's actions are reasonable. Actions taken by the insurer in litigation defense are not indicative of bad faith in the claim investigation and settlement process.
