Arizona Upholds Bad Faith Liability For An Insurer's Failure to Advise Policyholders of Pertinent Policy Provisions

by Jaburg Wilk
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The Arizona Court of Appeals recently held that the duty of good faith and fair dealing includes "some obligation" to inform a policyholder about the extent of coverage and rights under an insurance policy.

The case, Nardelli v. Metro. Group Prop. & Cas. Ins. Co., --- Ariz. ---, 277 P.3d 789 (App. 2012) (Arizona Reporter citation not yet available), arose from the theft of a recently purchased automobile.  In December 2001, the Nardellis purchased a new 2002 Ford Explorer and obtained comprehensive insurance coverage from MetLife.  In September 2002, ten months later, the vehicle was stolen and eventually found abandoned in Mexico with slit seats, cut wires, a torn interior, VIN numbers removed and an engine ultimately deemed irreparable.  A dispute ensued between the Insurer and Policyholders regarding whether the vehicle should be repaired or totaled.  According to the Policyholders, the Insurer's claims supervisor eventually stated he was mailing them a check for $11,000, the Insurer's obligations would then be met, and the Policyholders could do whatever they wanted with the check and their vehicle.  The Policyholders turned the check over to the dealership and voluntarily allowed their lender to repossess the vehicle.

The Policyholders sued the insurer for bad faith.  The jury awarded the Policyholders $155,000 in compensatory damages and $55 million in punitive damages.  The Insurer appealed the jury's finding of bad faith liability and the jury's decision to award punitive damages.[1]

Nardelli began its analysis of bad faith liability with the definition of bad faith -"[a]n insurer acts in bad faith when it unreasonably investigates, evaluates, or processes a claim (an objective test), and either knows it is acting unreasonably or acts with such reckless disregard that such knowledge may be imputed to it (a subjective test)."[2]

The Court of Appeals ultimately found substantial evidence from which a jury could have found that at least three of the Insurer's acts constituted bad faith:

  1. The Insurer's decision to repair rather than total the vehicle.
  2. The Insurer sending the Policyholders a check for an amount that did not cover the repair costs.
  3. The Insurer failing to advise the Policyholders of pertinent policy provisions.[3]

This article focuses on the third basis of bad faith because the obligation to advise a policyholder of pertinent policy provisions is an expansion of the duty of good faith and fair dealing in Arizona.

The Policyholders presented evidence that the Insurer failed to advise them of two provisions that would have provided additional benefits:  a new car endorsement and the appraisal provision.  The new car endorsement, which applied if the vehicle was a total loss, less than a year old and had less than 15,000 miles, promised replacement of the damaged vehicle with a similar new vehicle or repair of the damaged vehicle to "like new" condition.  Despite the fact that application of the new car endorsement was a close call, the Insurer failed to advise the Policyholders that the new car endorsement might apply.  Nardelli held that a reasonable jury could find that the Insurer thereby deprived the Policyholders of "a meaningful opportunity to marshal their best evidence" that the endorsement applied.[4] The appraisal provision allowed either the Policyholders or the Insurer to demand appraisal in order to settle a dispute regarding the amount of the loss.[5] The Court of Appeals suggested that the disagreement regarding the amount of the loss obligated the Insurer to inform the Policyholders of the appraisal provision.[6]

Nardelli rejected the Insurer's argument that "it had no duty to point out the two policy provisions to the [Policyholders]."[7] Although the Court of Appeals "acknowledge[d] an insurer is not required to explain every fact and provision without limitation,"[8] it still held "the duty of good faith encompasses some obligation to inform the insured about the extent of coverage and his or her rights under the policy and to do so in a way that is not misleading."[9] In so holding, Nardelli relied on a single Arizona case, Rawlings v. Apodaca,[10] three cases from other jurisdictions[11] and two regulations from the Arizona Administrative Code.[12] The Arizona regulations state, "no insurer [or agent] shall fail to fully disclose [or conceal from] first party claimants all pertinent benefits, coverage or other provisions of an insurance policy or contract."[13]

The facts of Nardelli also influenced the Court of Appeals' holding that an Insurer owes some obligation to advise Policyholders of pertinent policy provisions.  The Insurer's representatives admitted they should have advised the Policyholders of the pertinent policy provisions, if they applied.  Also, the Insurer's training materials directed the Insurer's claims adjusters to timely advise a Policyholder of a contract right and cited the appraisal provision as a specific example.  Thus, the Court of Appeals found "substantial evidence from which a reasonable jury could have found [the Insurer] acted objectively unreasonably in failing to raise the two [policy] provisions with the [Policyholders and] substantial evidence, including [the Insurer] employees' admissions and its internal guidelines, that [the Insurer] subjectively knew it was unreasonable to fail to advise the [the Policyholders] of the provisions."[14]

Accordingly, Nardelli upheld the jury's finding of bad faith liability.

Conclusion

The Nardelli case is a significant development in Arizona insurance bad faith law.  It is now the law in Arizona that "the duty of good faith encompasses some obligation to inform the insured about the extent of coverage and his or her rights under the policy."[15] The extent of this duty or obligation is unclear.  Nonetheless, Nardelli suggests that, if an insurer internally analyzes a particular coverage to determine if it applies, then an insurer should disclose the potentially applicable coverage to the policyholder so that that the policyholder has a meaningful opportunity to gather and present evidence that the coverage applies.

About the Author: Nathan D. Meyer is a Partner at the Phoenix law firm of Jaburg Wilk. One of his specialties is insurance coverage and bad faith. Nate advises and represents his insurance clients in coverage, bad faith, contribution and liability matters. He can be reached at 602.248.1032 or ndm@jaburgwilk.com

This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.


[1] A previous article analyzed the trial court's initial reduction of $55 million in awarded punitive damages to $620,000 and the Court of Appeals' further reduction of punitive damages to $155,000 because the Due Process Clause of the United States Constitution imposes a substantive limit on the size of punitive damages awards.  /articles/arizona-upholds-$54-million-reduction-of-punitive-damages-in-insurance-bad-faith-case.aspx

[2] Nardelli, 277 P.3d at 794-95 (parentheses in original) (citing Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 238, 995 P.2d 276, 280 (2000); Miel v. State Farm Mut. Auto. Ins. Co., 185 Ariz. 104, 110, 912 P.2d 1333, 1339 (App.1995); Trus Joist Corp. v. Safeco Ins. Co. of Am., 153 Ariz. 95, 104, 735 P.2d 125, 134 (App.1986)).

[3] Nardelli, 277 P.3d at 795.

[4] Id. at 799.

[5] Id.

[6] Id. ("[T]he parties disagreed regarding the amount of the loss, and this disagreement implicated the appraisal provision.").

[7] Id. at 800.

[8] Id.

[9] Id. (emphasis added).

[10] 151 Ariz. 149, 156-57, 726 P.2d 565, 572-73 (1986).

[11] Nardelli, 277 P.3d at 800 (citing Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133 (Wash. 1986)) ("insurer must deal fairly with an insured, giving equal consideration in all matters to the insured's interests"); Sarchett v. Blue Shield of Arizona, 233 Cal.Rptr. 76 (1987) ("important facet" of duty of equal consideration is "the duty reasonably to inform an insured of the insured's rights and obligations under the insurance policy"); State Farm Mut. Auto. Ins. Co. v. Shuman, 370 N.E.2d 941 (Ind.App. 1977) (sustaining punitive damages when insurer attempted to induce estate of insured decedent to settle claim without disclosing or explaining all benefits and estate representative "lacked the education and experience to understand the policy terms on her own").

[12] Nardelli, 277 P.3d at 800 (citing A.A.C. R20-6-801(D)(1)-(2).

[13] Id.

[14] Nardelli, 277 P.3d at 801.

[15] Id. at 800 (emphasis added).

 

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