Plaintiffs often allege an insurer breached the duty of good faith and fair dealing by conducting an unreasonable and/or an inadequate investigation. But, Arizona courts have held for over 30 years that an insurer’s unreasonable investigation can be the basis of bad faith liability only if a reasonable investigation would have disclosed relevant facts. So, consider this post a refresher.

The Takeaway

In Arizona, a bad faith claim based on an alleged inadequate and/or unreasonable investigation fails unless the plaintiff meets its burden of proving additional investigation would have revealed facts favorable to the insured.

The Holdings

• In Aetna Cas. & Sur. Co. v. Superior Ct. In & For Cty. of Maricopa, 161 Ariz. 437, 440, 778 P.2d 1333, 1336 (App. 1989), the Arizona Court of Appeals held, “An insurance company's failure to adequately investigate only becomes material when a further investigation would have disclosed relevant facts.” “The plaintiff here has not advised this court, specifically or otherwise, concerning what additional pertinent facts would have been determined by any further investigation. Therefore [plaintiff] has failed to establish that the [insurer’s] pre-denial investigation could amount to bad faith.”
• In Lennar Corp. v. Transamerica Ins. Co., 227 Ariz. 238, 243, 256 P.3d 635, 640 (App. 2011), the Arizona Court of Appeals cited Aetna and “rejected the argument that the insurer breached [the duty of good faith and fair dealing] by failing to investigate the claim because the insured failed to cite any material fact the insurer would have discovered if it had investigated.”
• In Young v. Allstate Ins. Co., 296 F. Supp. 2d 1111, 1124 n.23, (D. Ariz. 2003), the Arizona District Court cited Aetna, but refused to grant an insurer summary judgment because the insureds “offered evidence that a reasonable investigation, evaluation, and/or processing of [the insured’s] claim would have uncovered certain medical bills and lost earnings not included in [the insurer’s] final voluntary offer."
• In Clark v. Indem. Ins. Co. of N. Am., 726 F. App'x 557, 558 (9th Cir. 2018) (Arizona law), the Ninth Circuit cited Aetna and upheld the Arizona District Court’s dismissal of the portion of a bad faith claim based on unreasonable investigation because the insured did not explain “how examination of his medical records, rather than a summary of them, might have revealed facts supporting coverage for his neck injury..."

See also Martinez v. One Beacon Am. Ins. Co., 2020 WL 7016053, *13 (D. Ariz. Mar. 23, 2020); Carlson v. Indep. Ord. of the Foresters, 2017 WL 957283, *7 (D. Ariz. Mar. 13, 2017); Webb v. Farm Bureau Prop. & Cas. Ins. Co., 2017 WL 6328482, *6 (Ariz.App. Dec. 12, 2017); White Mountain Communities Hosp. Inc. v. Hartford Cas. Ins. Co., 2015 WL 1755372, *5 (D. Ariz. Apr. 17, 2015); Henrickson v. Am. Fam. Ins. Grp., 2008 WL 11446832, at *6 (D. Ariz. Mar. 21, 2008).

The Rationale

Although the above cases are surprisingly silent on the rationale of this rule, the rationale is causation. Both first party and third party bad faith must cause damages. See RAJI (Civil) 7^th at Bad Faith 4 (First-Party) Causation (2013) (“Before you can find [insurer] liable on the bad faith claim, you must find that [the insurer’s] breach of the duty of good faith and fair dealing was a cause of [plaintiff’s] damages.”); Id. at Bad Faith 11 (Third-Party) Causation (Insured-Plaintiff) (same).

An analogy makes the rationale clear. A motorist who breaches the duty to drive reasonably by running a stop sign is not liable for negligence unless the breach caused damages, i.e. unless the motorist collided with another vehicle while running the stop sign. Likewise, an insurer who breaches the duty of good faith and fair dealing by conducting an inadequate and/or unreasonable investigation is not liable for bad faith unless the breach caused damages, i.e. unless the insurer failed to uncover facts favorable to the insured because of the unreasonable investigation.