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Arizona Medical Liens No Longer Apply to MedPay Benefits

Arizona Medical Liens No Longer Apply to MedPay Benefits

The Amendment

Arizona recently amended ARS § 33-931 so that medical payment (“MedPay”) benefits are no longer subject to health care provider liens for treatment rendered to injured persons.

Why It Matters  

  • ARS § 33-931 previously stated healthcare provider liens do not apply to Uninsured Motorist and Underinsured Motorist benefits (only).
  • The amendment to ARS § 33-931 overrules Dignity Health v. Farmers Ins. Co. of Ariz., 1 CA-CV-18-0292, 2019 WL1499855 (Ariz. App. June 11, 2019) (Memorandum Decision), which held MedPay benefits were subject to medical liens because MedPay coverage did not qualify as “health Insurance” exempt from medical liens under ARS § 33-931.

The Takeaways

  • Insurers in Arizona no longer need to protect medical liens when paying MedPay benefits.
  • Arizona claimants and/or their counsel may accuse an insurer of bad faith if the insurer demands protection of a medical lien before payment of MedPay benefits.

The Amended Statute

ARS § 33-931(A) now states, in full, “Every individual, partnership, firm, association, corporation or institution or any governmental unit that maintains and operates a health care institution or provides health care services in this state and that has been duly licensed by this state, or any political subdivision or private entity with ambulances operated, licensed or registered pursuant to title 36, chapter 21.1, is entitled to a lien for the care and treatment or transportation of an injured person as prescribed by subsection E of this section. The lien shall be for the claimant’s customary charges for care and treatment or transportation of an injured person. A lien pursuant to this section extends to all claims of liability or indemnity, except health insurance and medical payments coverage and underinsured motorist and uninsured motorist coverage as defined in § 20-259.01, for damages accruing to the person to whom the services are rendered, or to that person’s legal representative, on account of the injuries that gave rise to the claims and that required the services.” (emphases added).
Arizona Supreme Court Clarifies and Heightens Punitive Damages Standard in Negligence Cases

Arizona Supreme Court Clarifies and Heightens Punitive Damages Standard in Negligence Cases

The Holding

In Swift Trans. Co. of Az., LLC. v. Carman in and for County of Yavapai, — Ariz. —, 515 P.3d 685 (Aug. 23, 2022), a bodily injury and wrongful death case arising from a tractor-trailer accident, the Arizona Supreme Court recently held, “to be entitled to punitive damages in a negligence action, a plaintiff must generally show that the defendant’s conduct was outrageous, oppressive, or intolerable, and created a substantial risk of tremendous harm, thereby evidencing a conscious and deliberate disregard of the interests and rights of others.” (all emphases in original, unless otherwise indicated)

The Takeaways 

  • Although Swift primarily addresses negligence cases, Swift has numerous, defense-friendly statements regarding the limited availability of punitive damages in Arizona that insurers and defendants will undoubtedly cite in negligence and insurance bad faith cases for years to come.
  • Swift confirmed that, to be entitled to punitive damages, a plaintiff must establish an “evil hand” and an “evil mind.”
  • To establish an “evil mind,” a plaintiff must present clear and convincing evidence that the defendant’s conduct was:
    • intended to cause harm,
    • motivated by spite, or
    • outrageous.
  • In negligence cases, outrageous conduct is often the only way to establish an “evil mind” because:
    • by definition, a negligent defendant does not act with intent; and
    • spite usually does not motivate a negligent defendant.
  • Although society typically deters outrageous conduct that causes a substantial risk of harm by imposing criminal liability, to establish entitlement to punitive damages in negligence cases, Swift does NOT require:
    • a plaintiff to establish criminal conduct, or
    • a plaintiff to identify an applicable criminal statute.
  • To be entitled to punitive damages in a negligence case, a plaintiff must establish: (1) (a) subjective knowledge of facts creating a substantial risk of harm, or (b) subjective appreciation of facts creating a substantial risk of harm, and (2) conscious disregard of a substantial risk of harm. “[I]t is not enough that a defendant had reason to appreciate the severity of the risk; the defendant must have actually appreciated the severity of the risk before consciously disregarding it.”
  • Arizona’s model jury instruction regarding punitive damages will be revised because it currently allows punitive damages if a defendant “acted to serve his own interests, having reason to know and consciously disregarding a substantial risk that his conduct might significantly injure the rights of others.” (emphasis added)

The Facts

Swift arose from a tractor-trailer, multiple-vehicle accident. The tractor-trailer Driver was operating the tractor-trailer in the rain, while on a hands-free telephone call, with his cruise control set 13 mph below the speed limit, on a downhill-sloping curve, and attempting to pass a vehicle in the right lane when the tractor-trailer hydroplaned, jack-knifed, and partially blocked traffic in the left lane. Shortly thereafter, another tractor-trailer attempted to avoid the stopped tractor-trailer, collided with two vehicles, and the collision injured or killed several travelers.

Plaintiffs sought Defendant’s financial records to support a punitive damages claim. The trial court ruled Plaintiffs were entitled to Defendant’s financial records because it found the facts demonstrated the Driver “consciously disregarded the unjustifiable substantial risk of significant harm to others.” Defendant filed a Special Action and the Court of Appeals granted jurisdiction, denied relief, and found the record supported the trial court’s finding.

The Rationale

First, Swift reviewed the evolution of Arizona’s standard for punitive damages.

Before 1986, reckless indifference to the rights or safety of others was sufficient to support a claim for punitive damages. But, the Supreme Court “significantly altered the availability of punitive damages in civil lawsuits” in Rawlings v. Apodaca, 151 Ariz. 149 (1986), and Linthicum v. Nationwide Life. Ins. Co., 150 Ariz. 326 (1986), two insurance bad faith cases.

 Rawlings held a jury may award punitive damages “only when a plaintiff can prove that the defendant’s evil hand was guided by an evil mind.” The requisite “evil hand” is merely “the intent to do the act” and is “sufficient to establish the tort of bad faith.” However, both an “evil hand” and an “evil mind” are “necessary to warrant punitive damages…because something more than the mere commission of a tort is always required for punitive damages, in order to restrict its availability to those cases in which the defendant’s wrongful conduct was guided by evil motives.” The requisite “‘evil mind’ is “the intention to engage in the wrongful conduct required for punitive damages.” “An evil mind may be found where the defendant [1] intended to injure the plaintiff or… [2] consciously pursued a course of conduct knowing that it created a substantial risk of significant harm to others.”

 Rawlings also noted outrageous conduct is necessary to award punitive damages. “[P]unitive damages are recoverable in bad faith tort actions when, and only when, the facts establish that defendant’s conduct was aggravated, outrageous, malicious or fraudulent.” Mere negligence—even if “so extreme or egregious to be characterized as gross”—is insufficient to warrant punitive damages. Conduct justifying an award of punitive damages must involve some element of “outrage similar to that found in a crime.”

 Linthicum also focused on outrageous conduct and raised the standard of proof for punitive damages to clear and convincing evidence. Linthicum stated, “before a jury may award punitive damages there must be evidence of an evil mind and aggravated and outrageous conduct.” However the “requisite mental state is expressed, the conduct must also be aggravated and outrageous.” Linthicum also held “punitive damages should be awardable only upon clear and convincing evidence…”

Just one year after Rawlings and Linthicum, however, Swift noted the Supreme Court “muddied the waters” in Gurule v. Ill. Mut. Life & Cas. Co., 152 Ariz. 600 (1987), another insurance bad faith case. Gurule stated, “[e]ven if the defendant’s conduct was not outrageous, a jury may infer evil mind if the defendant deliberately continued his actions despite the inevitable or highly probable harm that would follow,” and the “quality of the defendant’s conduct is relevant and important only because it provides one form of evidence from which the defendant’s motives may be inferred.” Swift observed, [t]hese statements seemingly conflict with Linthicum, which required an evil mind and outrageous conduct to support a punitive damage award” and “cases following Gurule failed to clarify this point.” Swift, however, made an important distinction—it noted “Gurule was not a negligence case” and “most of [the Supreme] Court’s punitive damages jurisprudence addresses the outrageous conduct issue only in the context of intentional tort claims.”

Next, Swift observed Volz v. Coleman Co., 155 Ariz. 567 (1987)—a post-Rawlings/Linthicum case that analyzed a punitive damages claim arising from negligence—is instructive. In Volz, a manufacturer defectively designed a liquid fuel lantern, learned of the defect, corrected the defect in new lanterns, did not recall old lanterns, did not notify purchasers of old lanterns of the defect, and an old lantern sprayed burning fuel that severely burned a child. Volz set aside the jury’s award of punitive damages because “plaintiff’s evidence was insufficient as a matter of law to demonstrate that type of outrageous conduct on which an award of punitive damages must depend.” Volz cited Rawlings and Linthicum and “affirmed that the punitive damages standard in Arizona requires something more than gross negligence, and that something more is the evil mind, which may be shown by: [1] evil actions; [2] spiteful motives; or [3] outrageous, oppressive or intolerable conduct that creates a substantial risk of tremendous harm to others.” Thus, Volz “required that, absent evidence of evil actions or spiteful motives, the evil mind motivating a defendant’s conduct must be shown by outrageous, oppressive or intolerable conduct that creates substantial risk of tremendous harm to others.”

Second, Swift distinguished some of Arizona’s rationales for compensatory damages versus punitive damages and emphasized the limited availability of punitive damages in Arizona.

Swift observed that compensatory damages deter negligent conduct, but punitive damages deter and punish outrageous conduct. Swift noted “punitive damages serve two functions: punishment and deterrence,” but “courts do not aim to punish and deter all negligent conduct by way of punitive damages, only that [conduct] which involves some element of outrage similar to that usually found in crime.” Thus, the Arizona Supreme Court’s punitive damages jurisprudence has “repeatedly stated that courts may not award punitive damages based on mere negligence, gross negligence, or recklessness.” A “defendant may not be subject to civil punishment through punitive damages unless he or she acts with a knowing, culpable state of mind.” “Compensatory damages are sufficient to deter unintentional and even grossly negligent conduct.” As an example, Swift cited Filasky v. Preferred Risk Mut. Ins. Co., 152 Ariz. 591, 599, n3 (1987), and noted “a trial judge would commit error by including” the phrase “reckless disregard in jury instructions on punitive damages in a bad faith case.” A “defendant may not be subject to civil punishment through punitive damages unless he or she acts with a knowing, culpable state of mind.” Requiring evidence of “an evil mind, as mandated by [the Arizona Supreme Court’s] previous decisions, was intended to limit punitive damage awards only to cases in which they further the objectives of punishment and deterrence.”

Third, Swift reasoned that, in negligence cases, outrageous conduct is often the only way to establish the “evil mind” necessary for punitive damages.

Swift confirmed that, to be entitled to punitive damages, a plaintiff must still prove both an “evil hand” and an “evil mind.” To establish an evil mind requires clear and convincing evidence that the defendant’s actions[/conduct] either (1) intended to cause harm, (2) were motivated by spite, or (3) were outrageous, creating a substantial risk of tremendous harm to others.” Id. In negligence cases, however, “by definition there is not intent to injure the plaintiff,” and “a negligent defendant is unlikely to be motivated by spite or ill will.” Id. Thus, the “outrageousness of the defendant’s conduct” is “the only means by which” a plaintiff may prove the requisite evil mind for punitive damages in a negligence case. Id. 

Application

Swift applied the above reasoning to the facts and concluded Plaintiffs did not establish a prima facie case for punitive damages because the Driver’s conduct, although negligent and perhaps even grossly negligent:

  • did not “amount to the sort of outrageous conduct required to establish an evil mind,”
  • was “not so far outside the realm of reasonable conduct [to] be considered one of the most egregious cases warranting punitive damages,”
  • could “hardly be considered aggravated or outrageous,”
  • complied with applicable laws and regulations,” and
  • was a “far cry from outrageous or quasi-criminal conduct sufficient to establish an evil mind.”

 

Accordingly, Swift vacated both the Court of Appeals’ and trial court’s orders.

Arizona Insureds are Legally Entitled to Recover Reasonable Rather Than Incurred Medical Expenses

Arizona Insureds are Legally Entitled to Recover Reasonable Rather Than Incurred Medical Expenses

Is an insured legally entitled to recover the incurred amount of medical expenses or a reasonable amount of medical expenses?

This issue often arises in first-party bad faith cases arising from uninsured motorist (“UM”) and underinsured motorist (“UIM”) claims because many Insuring Agreements in UM and UIM coverages state: the insurer “will pay compensatory damages which an insured is legally entitled to recover from the owner or operator of an uninsured/underinsured motor vehicle…”

This issue also arises in third party bad faith claims arising from an insurer’s alleged breach of the duty to give equal consideration to an insured’s interests when considering settlement offers, and, of course, general liability claims because many Insuring Agreements in auto or homeowners liability policies state: the insurer “will pay compensatory damages for bodily injury for which any covered person becomes legally liable because of an auto accident” or “damages because of bodily injury” “for which the insured is legally liable.”

Numerous Arizona cases indicate medical expenses must be reasonable. Also, despite a recent attempt to delete the reasonableness requirement, Arizona’s model jury instruction regarding personal injury damages explicitly states “expenses for necessary medical care, treatment, and services” must be “reasonable.” RAJI (Civil) 7th Personal Injury Damages 1, Measure of Damages (2013).

The Takeaway

In Arizona, insureds and personal injury plaintiffs are legally entitled to recover the reasonable amount of medical expenses rather than the incurred amount of medical expenses.

The Authority

At least five published Arizona Supreme Court and Court of Appeals cases indicate a plaintiff’s recovery of medical expenses is limited to the reasonable amount of medical expenses. 

  • In Meyer v. Ricklick, 99 Ariz. 355, 358 (1965), the Supreme Court analyzed whether a personal injury award should be overturned as inadequate. In so doing, the Supreme Court: (1) noted “the medical expenses [plaintiff] allegedly incurred were not proven as reasonable” (emphasis added); and (2) distinguished plaintiff’s failure to prove the reasonable amount of the medical expenses versus plaintiff’s failure to prove causation of the medical expenses as separate and distinct bases on which the jury could have limited its verdict. Indeed, the Supreme Court stated, “The jury could very well have limited their verdict based on any or all of the following factors: (1) that the medical expenses she allegedly incurred were not proven as reasonable; … [or] (3) that some part of such medical expense and loss of earnings may have been due to [i.e. caused by] either the congenital deformity of the spine or the prior automobile accident…” Id. (emphasis added).
  • In Larsen v. Decker, 196 Ariz. 239, 241 (App. 2000), amended (Feb. 22, 2000), the Court of Appeals indicated a personal injury plaintiff must prove medical bills are “necessary and reasonable” when it favorably cited Patterson v. Horton,  929 P.2d 1125, 1130 (Wash.App. 1997) for the proposition that a “negligence plaintiff cannot rely only on medical records and bills to show medical expenses were necessary and reasonable; other evidence must establish the latter.” (emphasis added).
  • In Lopez v. Safeway Stores, Inc., 212 Ariz. 198, 207 (App. 2006), the Court of Appeals held that a personal injury plaintiff was “entitled to claim and recover the full amount of her reasonable medical expenses for which [she] was charged, without any reduction for the amounts apparently written off by her healthcare providers pursuant to contractually agreed-upon rates with her medical insurance carriers.” (emphasis added).
    • In so holding, the Court of Appeals merely prohibited reductions of medical expenses based on health insurance rates alone.
    • Lopez did not address reductions of medical expenses based on unreasonable amounts because the Court of Appeals specifically noted the defendant stipulated that the billed charges ($59,700) were “reasonable and customary medical expenses” and whether the amount accepted by the providers ($16,700) was “the reasonable value of the medical services was not preserved for appeal” Id. at 202 n. 4 (emphasis added). Of course, this begs the questions: 
      • If proof of the “reasonable value” of medical services is not required under Arizona law, then why did defendant stipulate that $59,700 was a reasonable value?
      • Why would the Court of Appeals bother noting the “reasonable value” of the medical expenses was not preserved for appeal?
    • Nonetheless, Lopez indicates recovery of medical expenses is limited to the “reasonable value of medical services”—not simply the amount charged. Id. at 204, 205  (emphasis added).
      • Lopez noted, “Restatement [of Torts] § 924, which is entitled ‘Harm to the Person’ and found under the topic heading of ‘Compensatory Damages for Specific Types of Harm,’ provides that a tort victim may recover damages for ‘reasonable medical and other expenses.’” Id. at 204 (emphasis added).
      • Furthermore, Lopez remarked that “comment f to § 924 states, in part: ‘The injured person is entitled to damages for all expenses and for the value of services reasonably made necessary by the harm.’” Id. (emphasis added).
      • Additionally, Lopez specifically found Restatement § 924 “directly applicable to the issue presented here,” the proper measure of personal injury damages. Id. 
  • In Sanchez v. Gama, 233 Ariz. 125, 126-127 (App. 2013), as amended (Sept. 4, 2013), the Court of Appeals examined whether a treating physician was entitled to compensation for his subpoenaed deposition testimony, i.e. whether the treating physician was a fact witness or an expert witness. In its analysis, Sanchez stated, “As part of her prima facie case, [plaintiff] would have to prove that she was injured, and that her treatment and the charges were reasonable and necessary.” (emphasis added).
  • In Benedict v. Total Transit Enterprises, 252 Ariz. 151 (App. 2021), the Court of Appeals recently analyzed whether a neurologist’s testimony that all plaintiff’s medical expenses were reasonable was admissible and cited Larsen as “hold[ing] that a plaintiff may not rely solely on medical records and bills to establish the reasonableness of medical expenses; instead, this court noted, the plaintiff must offer ‘other evidence’ that the expenses were reasonable.” Id. ¶ 18 (emphases added) (citing Larsen, 196 Ariz. at 243, 244).
See also Burns v. Jaquays Min. Corp., 156 Ariz. 375, 380 (App. 1987) (“Compensation for reasonable and necessary medical expenses is consistent with well accepted legal principles.”); LaBombard v. Samaritan Health System, 195 Ariz. 543, 552 (App. 1998) (hospital lien allowed recovery of “customary charges” rather than “billed charges” so hospital could not recover “billed charges” if the hospital regularly accepted less than “billed charges” as payment in full); Canyon Ambulatory Surgery Ctr. v. SCF Arizona, 225 Ariz. 414, 423, 424 (App. 2010) (upheld trial court’s determination that “the reasonable value of [a  medical providers’] services was best measured by the overall rate of payment accepted from other payors for the same services” rather than the billed charges); Jimenez v. Progressive Preferred Ins. Co., 2020 WL 2037113 (D. Ariz. Apr. 28, 2020) (held the phrase “reasonable expenses incurred for necessary medical services” in medical payments coverage “are those expenses which the healthcare provider accepts as payment in full.”).

Arizona’s model jury instruction states a plaintiff’s recovery of medical expenses is limited to the reasonable amount of medical expenses. 

  • The model instruction for the measure of personal injury damages states, “If you find Defendant liable to Plaintiff, you must then decide the full amount of money that will reasonably and fairly compensate Plaintiff for each of the following elements of damages proved by the evidence to have resulted from the fault of the Defendant: … 3. Reasonable expenses for necessary medical care, treatment, and services already incurred and reasonably probable to be incurred in the future.” RAJI (Civil) 7th Personal Injury Damages 1, Measure of Damages (2013) (emphasis added).
  • The Arizona Supreme Court approved of the reasonableness requirement in the model instruction. Although the Arizona Supreme Court stopped approving model instructions after the first edition in 1974, the first edition included the reasonableness requirement.  
At least two unpublished Arizona Court of Appeals cases also indicate a plaintiff’s recovery of medical expenses is limited to the reasonable amount of medical expenses.
  • Haven v. Taylor, 2014 WL 3608782, at *3 (Ariz.App. July 10, 2014) (“The court, as a result, did not abuse its discretion by limiting Dr. Freberg to testifying as a fact witness and precluding him from testifying that the medical records and bills from the other doctors were necessary, reasonable, and causally related to the accident.”) (emphasis added) (analyzed separately whether medical bills were admissible to prove causation (¶14) or reasonableness (¶15)).
  • Dennis v. Ryan, 2010 WL 3211910, at *3 (Ariz.App. Aug, 12, 2010) (“‘Reasonableness’ relates to the amount charged for the medical services and ‘necessity’ describes a degree of casual connection between the accident in question and the medical services.”) (noting “the traditional foundation required for the admission of medical bills is a showing of reasonableness and necessity.”) (emphasis added).
Secondary authority also indicates a plaintiff’s recovery of medical expense is limited to the reasonable amount of medical expenses:
  • The Restatement (Second) of Torts, § 924 “Harm to the Person,” states, “One whose interests  of personality have been tortiously invaded is entitled to recover damages for past or prospective: … (c) reasonable medical or other expenses; …” (cited favorably by Lopez, 212 Ariz. at 204) (emphasis added).
  • American Jurisprudence (Second), Damages, § 396 states “generally, a plaintiff who has been injured by the tortious conduct of the defendant is entitled to recover the reasonable value of medical and nursing services reasonably required by the injury…” Am.Jur.2d Damages § 396, at 358 (2003)  (emphasis added) (cited favorably by Lopez, 212 Ariz. at 204).
Meyer, Larsen, Lopez, Sanchez, Benedict, Taylor, Ryan, the Restatement, and American Jurisprudence could have simply stated a personal injury plaintiff is entitled to recover incurred or billed medical expenses, but they did not.  Rather, they each indicate or state that a tort victim’s recovery must be limited to “reasonable” medical expenses and/or the “reasonable value” of medical expenses.

Arizona’s limitation of plaintiffs’ recovery of medical expenses to the reasonable amount of medical expenses is also consistent with the overwhelming majority rule. 

  • No opposing counsel or member of the Arizona plaintiff’s bar has called the author’s attention to a case, from any jurisdiction, that holds a plaintiff’s medical expenses need not be reasonable.
  • Furthermore, a 50-state survey revealed cases from at least 46 states that require the amount of a plaintiff’s medical expenses to be reasonable to be recoverable.
An Inadequate Investigation Exposes Arizona Insurers to Bad Faith Only If the Insured Proves Additional Investigation Would Have Favored the Insured

An Inadequate Investigation Exposes Arizona Insurers to Bad Faith Only If the Insured Proves Additional Investigation Would Have Favored the Insured

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) 7th 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.
Arizona District Court Enforces “Virus Exclusion” to Dismiss COVID-19 Related Insurance Claims of Minor League Baseball Teams

Arizona District Court Enforces “Virus Exclusion” to Dismiss COVID-19 Related Insurance Claims of Minor League Baseball Teams

The Holding
In Chattanooga Prof’l Baseball LLC, v. Nat’l Cas. Co., 2020 WL 6699480 (D. Ariz. Nov. 13, 2020) (Order), the Arizona District Court held that a “Virus Exclusion” clearly precluded insurance coverage for losses caused by the COVID-19 Pandemic and incurred by Minor League Baseball teams.

The Takeaways
In the first Arizona opinion regarding insurance coverage related to the COVID-19 Pandemic,* albeit unpublished, the Arizona District Court did not hesitate to apply a clearly applicable “Virus Exclusion” to losses caused by the novel coronavirus pandemic.

The Facts
The Insureds, 24 entities associated with or providing services for 19 Minor League Baseball teams in 10 different states (not including Arizona), each held “substantially identical” commercial first-party property and casualty policies.  The Policies included a “Virus Exclusion” that stated, “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism.”

In 2020, Minor League Baseball experienced its first ever interruption since establishment.  The Insureds’ alleged the interruption was caused by:  [1] “continuing concerns for the health and safety of players, employees, and fans related to the SARS-CoV-2 virus; [2] action and inaction by federal and state governments related to controlling the spread of the virus; and [3] Major League Baseball not supplying players to their affiliated minor league teams.”

The Insureds submitted claims to the Insurers for losses related to the interruption, the Insurers either denied the claims or stated an intent to deny the claims, and the Insureds filed suit for breach of contract, anticipatory breach, and declaratory judgment.

The Rationale
In holding the Virus Exclusion precluded coverage, the District Court rejected the Insureds’ two arguments:  (1) whether the Virus caused the losses was a question of fact inappropriate for resolution in a motion to dismiss; and (2) whether the Insurers were estopped from applying the Virus Exclusion.

First, regarding the alleged factual dispute, the District Court dismissed this argument as “not plausible” because the operative Complaint explicitly attributed the losses to the Virus.  Although the District Court also noted the Insureds’ argument that government orders (such as stay-at-home orders) rather than the Virus caused the losses, it cited two other cases that previously rejected this argument and agreed this argument is “nonsense.”

  • Diesel Barbershop, LLC v. State Farm Lloyds, 2020 WL 4724305, at * 6 (W.D. Tex. Aug. 13, 2010) (“While the Orders technically forced the Properties to close[,] the Orders only came about sequentially as a result of the COVID-19 virus…Thus, it was the presence of COVID-19 …that was the primary root cause of Plaintiffs’ business temporarily closing.”);
  • Franklin EWC, Inc. v. The Hartford Finn. Servs. Grp., Inc., 2020 WL 5642483, at *2 (N.D. Cal. Sept. 22, 2020) (“[U]nder Plaintiffs’ theory, the loss is created by the Closure Orders rather than the virus, and therefore the Virus Exclusion does not apply. Nonsense.”).

Second, regarding estoppel, the District Court noted the Insureds’ two-pronged argument:  (a) “regulatory estoppel prevent[ed] enforcement of the [Virus Exclusion] because [the Insurers] were only able to gain regulatory approval for the virus exclusion in 2006 by making misrepresentations to state insurance commissions,” and (b) general equitable estoppel.  Regarding regulatory estoppel, the District Court noted this defense is a New Jersey state law defense, no other state has adopted this defense, and this defense has been rejected by almost every state and federal court to consider it.  Regarding general equitable estoppel, the District Court noted the insurance coverage principle that “general equitable estoppel is not available to bring within the coverage of a policy risks not covered by its terms, or risks expressly excluded therefrom.”

*According to the University of Pennsylvania Care Law School “Covid Coverage Litigation Tracker.”