A carrier's proper and fair payment of a claim does not protect
it from bad faith liability. Zilisch v. State Farm Mut. Auto. Ins.
Co., 196 Ariz. 234, 238, 995 P.2d 276, 280 (2000). Before an
investigation can start on a first-party claim, the threshold
question is whether the claim, or the amount claimed, is "fairly
debatable." But this question is not outcome determinative. Id.
237, 995 P.2d at 279. In addition to paying a claim, the carrier
must conduct an immediate and adequate investigation, act reasonably
and promptly pay legitimate claims. Id.
The insured must comply with all of the cooperation requirements
in the policy. For example, an insured's refusal to answer questions
during an EUO while claiming the 5th Amendment Privilege against
Self-Incrimination will bar the insured's recovery. Warrilow v.
Superior Court of State of Ariz. In and For Pima County, 142 Ariz.
250, 253, 689 P.2d 193, 196 (App.1984), holds: "a failure or refusal
of the insured to comply with his obligation of cooperation under
such a provision will constitute a bar to any recovery against the
insurance company." In fairness, however, the insurer's attorney may
only ask relevant questions and explain the relevance if the insured
inquires as to the relevance. Id.
See also, e.g., Twin City Fire
Ins. Co. v. Harvey,
662 F.Supp. 216 (D.Ariz.1987).
Words like "fairly," "adequate," and "reasonably" often indicate
fact questions that prevent summary judgment. To avoid litigation,
investigators and claims handlers need to pay close attention to
their actions. However, some cases do give some guidance and outside
Below is a discussion of a case in which the court said bad faith
may lie despite payment of a claim and another case in which the
court held that there was no unreasonable delay in paying the claim.
Zilisch held that bad faith was a jury question and gives some
direction. The insured was hit by a teenage drag-racer in which her
fiancée died and she alleged permanent injuries. The third-party's
liability policy paid $146,500 and she sought her underinsured
limits of $100,000 but it took at least four months for the carrier
to evaluate the insured's doctor reports. After the insurer
conducted an examination under oath, its attorney evaluated the
total claim as having a value of $200,000 to $225,000 and requested
$75,000 in settlement authority. The insured once again demanded
policy limits. The carrier did not offer $75,000 in settlement until
just before the arbitration. Over a year later at the arbitration,
the panel awarded the insured her limit of $100,000. The court held
that, under these facts, the bad faith claim should go to the jury.
At trial, the insured received $460,000 in compensatory damages and
$540,000 in punitive damages.
Knoell v. Metropolitan Life Ins. Co., 163 F.Supp.2d 1072, 1074
(D.Ariz.2001), is an example of a case where the insurer was
justified in its investigation. In March of 1998, the insured
submitted a claim for long-term disability benefits dating back to
November of 1997 and supported the claim with the report of his
doctor. The insurer paid the claim, but later the insured claimed
partial disability benefits through June 1, 1998, and the insurer
investigated this additional claim. The insured did not provide the
insurer with the information it sought until September. In October
the insurer denied the additional benefits. In November of 1998, the
insured doctor reported that the insured could not work until
February of 1999. During the investigation in December of 1998 and
January of 1999, the insured refused to meet with the insurer or
submit to an Independent Medical Examination (IME). After the
insured filed suit and the trial court ordered an IME, the insurer
paid the claim. Since the insured did not submit to the IME until
after a court order and was untimely in providing requested
information, he had not complied with the provisions of the policy
and the carrier was not acting in bad faith.
Zilisch, Harvey and Knoell provide some basic guidelines for
claims handling. First, even if an insurer pays a claim, it can be
held liable for bad faith. Second, the insured must provide prompt
information to relevant requests from the insurer. Third, the
insurer is permitted to perform an investigation, but it must be
done with speed and diligence.
This article was published in the Winter 2007 NSPII Newsletter.