The test for first-party bad faith in Arizona case law is whether, during the “investigation, evaluation, and processing of the claim, the insurer acted unreasonably and either knew or was conscious of the fact that its conduct was unreasonable.”[1]  What does this vague definition of first-party bad faith actually mean in an insurer’s everyday business of adjusting claims? 

Although Arizona’s Unfair Claims Settlement Practices Act (the “Act”)[2] does not create a private cause of action for an insured and cannot be used to instruct a jury in an insurance bad faith case,[3] the Act and its companion Unfair Claims Settlement Practices regulation[4] (the “Regulation”) provide some specific standards for conduct and promptness during an insurer’s daily investigation, evaluation and processing of claims. 

Pursuant to Arizona’s Unfair Claims Settlement Practices Act:  

• An insurer shall “acknowledge and act reasonably and promptly upon communications with respect to claims arising under an insurance policy”;[5]

• An insurer shall “affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed”;[6]

• An insurer’s “claims payments to insureds or beneficiaries” must be “accompanied by a statement setting forth the coverage under which the payments are being made.”[7]  

• An insurer shall “promptly provide a reasonable explanation of the basis in the insurance policy relative to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.”[8]

Of course, the above provisions of the Act beg the questions:  What is a “reasonable” amount of time to act promptly upon an insured communication?  What is a “reasonable” amount of time to affirm or deny coverage?  Arizona’s Unfair Claims Settlement Practices regulation answers these questions and provides other specific standards for conduct and promptness. 

Pursuant to Arizona’s Unfair Claims Settlement Practices regulation: 

• 10 Days—Written Acknowledgment or Note of a Claim.  “Every insurer, upon receiving notification of a claim shall, within 10 working days, acknowledge the receipt of such notice unless payment is made within such period of time.”[9]  

• 10 Days—Response to Insured Communications.  “An appropriate reply shall be made within 10 working days on pertinent communications from a claimant which reasonably suggests a response is expected.”[10]

• 10 Days—Provision of Claim Forms, Instructions & Reasonable Assistance.  “Every insurer, upon receiving notification of claim, shall promptly provide necessary claim forms, instructions and reasonable assistance so that first party claimants can comply with the policy conditions and the insurer’s reasonable requirements.”[11]

• 30 Days—Complete Investigation after Notification of Claim.  “Every insurer shall complete an investigation of a claim within 30 days after notification of claim, unless such an investigation cannot reasonably be completed within such time.”[12]

• 15 Days—Acceptance or Denial of Claim after Proper Proof of Loss.  “Within 15 working days after receipt by the insurer of properly executed proofs of loss, the first party claimant shall be advised of the acceptance or denial of the claim by the insurer.”[13]

• 15 Days—Notification of Additional Time Needed after Proper Proof of Loss.  “If the insurer needs more time to determine whether a first party claim should be accepted or denied, it shall also notify the first party claimant within 15 working days after receipt of the proofs of loss, giving the reasons more time is needed.”[14]

• 45 Days—Notification of Additional Time Needed for Investigation Thereafter.  “If the investigation remains incomplete, the insurer shall, 45 days from date of the initial notification and every 45 days thereafter, send to such claimant a letter setting forth the reasons additional times needed for an investigation.”[15]

• 30 Days—Notify First Party Claimant of Imminent SOL Expiration.  “Insurers shall not continue negotiations for settlement of a claim directly with a claimant who is neither an attorney nor represented by an attorney until the claimant’s rights may be affected by a statute of limitations or a policy or contract time limit, without giving the claimant written notice that the time limit may be expiring and may affect the claimant’s right. Such notice shall be given to first party claimants 30 days…before the date on which such time limit may expire.”[16]

• Disclosure of Pertinent Policy Provisions.  “No insurer shall fail to fully disclose to first party claimants all pertinent benefits, coverages or other provisions of an insurance policy or insurance contract under which a claim is presented.”[17]

• No “Linkage.”  “No insurer shall request a first party claimant to sign a release that extends beyond the subject matter that gave rise to the claim payment.”[18]

• Denial Must Be Written & Cite Pertinent Policy Provisions.  “No insurer shall deny a claim on the grounds of a specific policy provision, condition, or exclusion unless reference to such provision, condition or exclusion is included in the [written] denial.”[19]

In conclusion, while the Arizona Unfair Claims Settlement Practices Act and Arizona’s Unfair Claims Settlement Practices regulation are often overlooked, they help counter the vague definition of first-party bad faith in Arizona case law by providing some specific standards for both conduct and promptness in good faith claims handling.

[1]Zilisch v. State Farm Mut. Auto Ins. Co., 196 Ariz. 234, 238, 995 P.2d 276, 280 (2000) (En Banc) (“The tort of bad faith arises when the insurer intentionally denies, fails to process or pay a claim without a reasonable basis.”); Twin City Fire Ins. Co. v. Burke, 204 Ariz. 251, 255, 63 P.3d 282, 286 (2003)(En Banc) (same); Lennar Corp. v. Transamerica Ins. Co., 227 Ariz. 238, 242, 256 P.3d 635, 639 (App. 2011) (“an insurance company breaches its duty of good faith and fair dealing if it intentionally denies, fails to process or pay a claim without a reasonable basis.  Further, [t]he carrier has an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim. It should do nothing that jeopardizes the insured's security under the policy. It should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less. Equal consideration of the insured requires more than that.”); Nardelli v. Metro. Grp. Prop. & Cas. Ins. Co., 230 Ariz. 592, 597-98, 277 P.3d 789, 794-95 (App. 2012), review denied (Jan. 8, 2013), cert. denied, 133 S. Ct. 2804, 186 L. Ed. 2d 862 (U.S. 2013) (“An 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).” (parentheses in original).

[2] A.R.S. § 20-461.

[3]See ARS § 20–461 (D) (2014) (provisions of the Act are not “intended to provide any private right or cause of action to or on behalf of any insured” and it is “the specific intent of [the Act] to provide solely an administrative remedy to the director for any violation of this section or rule related to this section.”); Melancon v. USAA Property & Casualty, 174 Ariz. 344, 347, 849 P.2d 1374, 1377 (App. 1992) (“new trial granted because trial court instructed jury on the Act’s provisions; “[t]he provisions [of the Act] are expressly not a standard of conduct against which and insurers’ conduct in handling individual claims to be measured for creating a claim for relief.”).

[4] A.A.C. 20-6-801

[5] A.R.S. § 20-461(A)(2).

[6] A.R.S. § 20-461(A)(5).

[7] A.R.S. § 20-461(A)(11).

[8] A.R.S. § 20-461(A)(15).

[9] A.A.C. R20-6-801(E)(1) (“If an acknowledgment is made by means other than writing, an appropriate notation of such acknowledgment shall be made in the claim file of the insurer and dated.”)

[10] A.A.C. R20-6-801(E)(3).

[11] A.A.C. R20-6-801(E)(4) (“Compliance with this paragraph within 10 working days of notification of a claim shall constitute compliance with paragraph (1) of this subsection.”).

[12] A.A.C. R20-6-801(F)

[13] A.A.C. R20-6-801(G)(1)(a).

[14] A.A.C. R20-6-801(G)(1)(a).

[15] A.A.C. R20-6-801(G)(1)(b).

[16] A.A.C. R20-6-801(G)(4) (also requires 60 days notice of imminent, expiring statute of limitation to third-party claimant).

[17] A.A.C. R20-6-801(D)(1); see also Nardelli, 230 Ariz. at 602, 603, 277 P.3d at 799, 800 (evidence that insurer failed to advise insured of pertinent policy provisions, specifically a new car endorsement and the appraisal provision, was part of substantial evidence supporting bad faith verdict).

[18] A.A.C. R20-6-801(D)(5).

[19] A.A.C. § R20-6-801(G((1)(a).