Opinion ID: 1155742
Heading Depth: 2
Heading Rank: 1

Heading: The Implied Covenant of Good Faith and Fair Dealing and the Tort of Bad Faith

Text: In Noble v. Nat. Life Ins. Co., 128 Ariz. 188, 624 P.2d 866 (1981), this court first recognized the tort of bad faith. We concluded that there is a legal duty implied in an insurance contract that the insurance company must act in good faith in dealing with its insured on a claim, and a violation of that duty of good faith is a tort. Id. at 190, 624 P.2d at 868. We held that to establish bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Id. ( quoting Anderson v. Continental Ins. Co., 85 Wis.2d 675, 271 N.W.2d 368, 376 (1978)). In Sparks v. Republic Nat. Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied, 459 U.S. 1070, 103 S.Ct. 490, 74 L.Ed.2d 632 (1982), we noted that the inquiry into whether an insurer has acted in bad faith towards its insured is a question of reasonableness under the circumstances of the case.... Whether the action amounts to bad faith depends upon whether the insurer failed to honor a claim without a reasonable basis for doing so. Id. 132 Ariz. at 538, 647 P.2d at 1136. See also Brown v. Superior Court, 137 Ariz. 327, 336, 670 P.2d 725, 734 (1983) (No matter how the test is defined, bad faith is a question of reasonableness under the circumstances.). In Linthicum v. Nationwide Life Ins. Co., 150 Ariz. 354, 723 P.2d 703 (App. 1985), aff'd in part, 150 Ariz. 326, 723 P.2d 675 (1986), the court of appeals observed that [t]he tort of bad faith only arises when the insurance company intentionally denies or fails to process or pay a claim without a reasonable basis for such action. In applying this standard, however, it is necessary to determine whether a claim was properly investigated and whether the results of that investigation were reasonably reviewed and evaluated. Id. 150 Ariz. at 362, 723 P.2d at 711 (citing Anderson, 271 N.W.2d at 377); see also Farr v. Transamerica Occidental Life Ins. Co., 145 Ariz. 1, 5, 699 P.2d 376, 380 (App. 1984) (tort of bad faith is established if the plaintiff demonstrates that the defendant had knowledge of or recklessly disregarded the lack of a reasonable basis for denying the claim); Trus Joist Corp. v. Safeco Ins. Co. of Am., 153 Ariz. 95, 104, 735 P.2d 125, 134 (App. 1986) (same). These and other cases demonstrate that whether an insurer has acted in bad faith towards its insured depends on the reasonableness of its conduct. In short, the implied covenant of good faith and fair dealing requires that an insurer treat its insured fairly in evaluating claims. [T]he insurance contract and the relationship it creates contain more than the company's bare promise to pay certain claims when forced to do so; implicit in the contract and the relationship is the insurer's obligation to play fairly with its insured. Rawlings v. Apodaca, 151 Ariz. 149, 154, 726 P.2d 565, 570 (1986) (citing Parsons v. Continental Nat. Am. Group, 113 Ariz. 223, 550 P.2d 94 (1976); Egan v. Mutual of Omaha Ins. Co., 24 Cal.3d 809, 169 Cal. Rptr. 691, 620 P.2d 141 (1979), cert. denied, 445 U.S. 912, 100 S.Ct. 1271, 63 L.Ed.2d 597 (1980)). See also Walter v. Simmons, 169 Ariz. 229, 238, 818 P.2d 214, 223 (App. 1991) (Although the duty of good faith is inherent in any insurance contract, it is not strictly a contractual obligation; rather, it is an obligation imposed by law that governs the insurer in discharging its contractual responsibilities.); Tank v. State Farm Fire & Casualty Co., 105 Wash.2d 381, 715 P.2d 1133, 1136 (1986) (an insurance company's duty of good faith means that an insurer must deal fairly with an insured, giving equal consideration in all matters to the insured's interest) (emphasis in original). While the proper inquiry into whether an insurer has acted in bad faith rests on a determination of reasonableness under the circumstances, the tort is not proven by showing mere negligence. Although the initial inquiry consists of an objective finding, i.e., whether the insurer acted unreasonably, the second inquiry focuses on the insurer's conduct and whether the insurer knew that its conduct was unreasonable or acted with such reckless disregard that such knowledge could be imputed to it. Mere negligence or inadvertence is not sufficient  the insurer must intend the act or omission and must form that intent without reasonable or fairly debatable grounds. Rawlings, 151 Ariz. at 160, 726 P.2d at 576. See also Trus Joist, 153 Ariz. at 104, 735 P.2d at 134 (Where an insurer acts reasonably, there can be no bad faith. However, the converse of this proposition is not necessarily true: merely because an insurer acts unreasonably does not mean that it is guilty of bad faith. Negligent conduct which results solely from honest mistake, oversight, or carelessness does not necessarily create bad faith liability even though it may be objectively unreasonable.) These general principles are well-established in our case law. We set them out here not only as background, but to emphasize that our decision today in no way alters the proof required to prevail on a bad faith claim. Our resolution of this case rests on a very narrow ground: whether breach of an express covenant in an insurance policy is a necessary prerequisite to a bad faith claim.