How Far Can You Go? A Primer for Insurance Investigations in Arizona

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. At 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 boundaries.

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.