Opinion ID: 1374504
Heading Depth: 2
Heading Rank: 1

Heading: Third-Party Cases

Text: The tort of bad faith developed as a response to insurance adjustment abuses in third-party liability cases. Crisci v. Security Insurance Co., supra ; see also 16A APPLEMAN, INSURANCE LAW AND PRACTICE § 8877 (1981). The early Arizona cases, Parsons v. Continental National American Group, supra , General Accident Fire & Life Assurance Corp. v. Little, 103 Ariz. 435, 443 P.2d 690 (1968), and Farmers Insurance Exchange v. Henderson, 82 Ariz. 335, 313 P.2d 404 (1957), present typical third-party bad faith situations. Henderson was the first case in which we addressed the question of an insurer's liability for failure to settle a third-party claim against its insured. Because the insurer rejected three settlement offers despite the strong probability of an adverse verdict, we adopted the equality of consideration test to determine whether the insurer had breached its duty of good faith by insufficient consideration of the possibility that refusal to settle might harm the insured. Under this test, with the insurer in sole control of a decision that might result in great damage to the insured, we held that common honesty demanded that the insurer give equal thought to the end that both the insured and the insurer shall be protected. 82 Ariz. at 338, 313 P.2d at 406. On similar facts in Little, we held the insurer had breached its duty of good faith and fair dealing by rejecting the settlement offer and exposing its insured to great harm on the mere chance that it might avoid all liability. 103 Ariz. at 443, 443 P.2d at 698. In both Henderson and Little, we found a breach of the implied covenant of good faith even though the insurer breached no express covenant of the contract. Nothing in the policy requires the carrier to settle; the policy simply gives the insurer the right to settle if it thinks it best. Also, under the no action clause, it requires payment of the claim only if and when a judgment is entered against the insured. In Parsons the policy excluded injuries caused by intentional acts; the attorney therefore rejected numerous settlement offers within the policy limit, and then failed to defend the insured at trial. After judgment was entered for twice the policy limit, the insurer refused to pay, claiming no coverage. We noted the attorney's duty of undeviating and single allegiance to the insured. 113 Ariz. at 227, 550 P.2d at 981. Because the lawyer that it provided had actively worked against his client's interest, the insurer was held liable for the entire judgment against the insured. Here again, no express covenant was breached. The company had refused payment of a claim which was not covered. Insurance policies generally give the insurer the right to select counsel and obligate it to provide a defense. They do not require the carrier to provide a defense with undeviating ... allegiance to the insured, yet we held the insurer liable when the attorney failed to do so.