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Arizona Reverses Award of Punitive Damages in Bad Faith Case Again

Arizona Reverses Award of Punitive Damages in Bad Faith Case Again

The Holding

In Preciado v. Young America Insurance Company, 2017 WL 2805631 (Ariz.App. June 29, 2017) (unpublished), the Arizona Court of Appeals held the trial court erroneously failed to grant an Insurer’s motion for judgment as a matter of law on a punitive damages claim and reversed a $750,000 award of punitive damages in a bad faith case arising from an auto theft claim.

The Takeaways

  • A punitive damages claim may not be based on extrapolations from isolated portions of an adjuster’s deposition testimony unfamiliar with an Insurer’s company-wide policies and procedures.
  • The Preciado case continues the trend of Arizona reducing or reversing punitive damages in bad faith cases.
  • When Insurer defense counsel prepares an adjuster for a deposition, if possible, defense counsel should:
  1. advise the adjuster to limit testimony to that adjuster’spractices and procedures rather than the Insurer’s company-wide policies and procedures; and
  2. encourage the Insurer to identify and consistently use a polished 30(b)(6) or “person most knowledgeable” witness regarding the Insurer’s company-wide policies and procedures.

The Facts

In Preciado, an Insured reported his truck stolen and claimed an actual cash value (“ACV”) of $13,800.? The Insurer eventually approved the claim, learned the truck could not be recovered (because it was located in a portion of Mexico controlled by a drug cartel), offered the Insured $11,600, became non-responsive, and was acquired by another Insurer.? The subsequent Insurer lost the Insured’s paperwork, asked the Insured to submit the same documents again, and eventually sent the Insured a settlement check that deducted $3,200 for the salvage value of the truck.? The Insured filed suit for breach of contract, bad faith, and punitive damages.

The Rationale

The Court of Appeals held the trial court erred when it failed to grant the Insurer’s motion for judgment as a matter of law regarding punitive damages.? The Court of Appeals overturned the punitive damages award because the Insured did not produce “clear and convincing evidence” that the Insurer acted with an evil mind.? The Court of Appeals reasoned as follows:

  • The Insured conceded the punitive damages claim was not based on intentional harm.? Rather, the Insured alleged the Insurer maintained and followed a policy of always offering the “wholesale value” rather than “retail value” for the ACV of a stolen vehicle or total loss vehicle.
  • The Insured based the punitive damages claim on extrapolations from unfair representations of a single portion of deposition testimony from a single adjuster for the subsequent Insurer.
  • The adjuster was not an executive, claim manager, supervisor, or other original Insurer employee or representative that could speak knowledgeably about the original?Insurer’s policies and practices.
  • There was no evidence that the original Insurer maintained and followed the alleged policy.
  • The case was not similar to Hawkins v. Allstate Ins. Co., 152 Ariz. 490, 733 P.2d 1073 (1987), in which three former Insurer employees testified the Insurer followed a policy of always deducting a $35 cleaning fee from the value of a total loss vehicle (regardless of the vehicle’s cleanliness) to save the Insurer money.
  • Unlike Nardelli v. Metro. Grp. Prop. & Cas. Co., 230 Ariz. 592, 277 P.3d 789 (App. 2012), the Insured presented no evidence that the Insurer directed claims adjusters to reduce claims payouts.

Other Important Holdings in Preciado

  • The trial court did not err in ruling ACV meant “retail value,” because the Insurer affirmatively conceded “retail value” was the appropriate definition of ACV when determining value for a total loss vehicle.
  • The trial court did not abuse its discretion in refusing to instruct the jury regarding the Insured’s alleged “comparative bad faith,” because bad faith is an intentional tort, and the principles of comparative fault do not apply to intentional torts.
  • “Without question, [the Insurer] should have itself affirmatively disclosed/produced [a] consent order” from the Arizona Department of Insurance (“ADOI”) regarding the Insurer’s failure to promptly investigate claims and maintain proper claim files while it was handling the Insured’s claim.
  • The jury’s award of $34,500 in breach of contract damages was not supported by the evidence, because the difference between the Insured’s $13,800 request and the Insurer’s eventual payment of only $11,600 was only $2,200, and the Insured disclosed no other breach of contract damages.? Thus, the Court of Appeals vacated the award and directed the trial court to enter a breach of contract award of $2,200 plus interest.
  • The trial court did not abuse its discretion in awarding the Insured $300,000 in attorney fees, because the Insured was the prevailing party on the breach of contract and bad faith claims.

Other Takeaways From Preciado

  • At the risk of stating the obvious, an Insurer should not concede that ACV means retail value.
  • Although the comments to Arizona’s model jury instructions state the “duty of good faith and fair dealing applies to both the insurer and the insured,” Arizona courts will likely refuse to allow a jury to allocate fault against an Insured in a bad faith case or otherwise instruct a jury on “comparative bad faith.”
  • Insurers have an affirmative obligation to disclose Consent Orders regarding similar claims and similar alleged conduct while the Insurer adjusted the litigated claim.
  • Arizona courts are willing to award and uphold attorney fees in bad faith cases that substantially exceed—and in Precadiotripled—the awarded damages.
Arizona Court of Appeals Confirms Attorney-Client Privilege Holder Must Affirmatively Inject Attorney-Client Communications Into Litigation to Impliedly Waive the Privilege

Arizona Court of Appeals Confirms Attorney-Client Privilege Holder Must Affirmatively Inject Attorney-Client Communications Into Litigation to Impliedly Waive the Privilege

The Holding

In Robert W. Baird & Co. Inc., v. The Honorable Christopher Whitten, 2017 WL 4296583 (Ariz. App. Sep. 28, 2017) (774 Ariz. Adv. Rep.4), the Arizona Court of Appeals just held that a legal malpractice plaintiff did not impliedly waive the attorney-client privilege regarding communications with subsequent counsel, simply because the defendant alleged plaintiffs’ contributory negligence and the non-party fault of subsequent counsel for charging unreasonable fees in subsequent litigation.

The Takeaways 

Although not a bad faith case, the Whitten case:

  • Confirms an insurer privilege-holder must affirmatively inject attorney-client communications into a case to impliedly waive the Privilege;
  • Continues the trend of Arizona state courts being less likely to find an implied-waiver of the Privilege than Arizona federal courts; and
  • Suggests an insurer (or any litigant accused of impliedly waiving the Privilege) should closely examine whether its actions or the actions of its opponent injected the sought attorney-client communications into the case.

The Rationale

In Whitten, plaintiffs claimed defendants caused it to incur significant defense costs from subsequent counsel in subsequent litigation because of a transaction defendants negligently prepared.  The trial court concluded plaintiffs’ claims waived the Privilege and work-product protection of plaintiffs’ communications with subsequent counsel.

The Court of Appeals stated the three-part Hearn test for the implied waiver of the Privilege in Arizona:

  1. The assertion of the privilege was the result of some affirmative act, such as filing suit or raising an affirmative defense, by the asserting party.
  2. Through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case.
  3. Application of the privilege would have denied the opposing party access to information vital to his defense.

The Court of Appeals held plaintiffs did not knowingly and voluntarily waive the Privilege, because:

  • The purported waiver did not result from plaintiffs’ act; rather, it resulted from defendants’decision to assert plaintiffs’ contributory negligence as an affirmative defense and to name subsequent counsel as a non-party fault;
  • Plaintiffs’ communication with subsequent counsel had no inherent relevance to plaintiffs’ malpractice claim—plaintiffs’ communications with subsequent counsel were not necessary to decide whether defendants committed malpractice ; and
  • Preservation of the Privilege did not deny defendants information vital to their defense.
Arizona District Court: Insurer Expert’s Deposition Testimony Impliedly Waived Attorney-Client Privilege in Bad Faith Case

Arizona District Court: Insurer Expert’s Deposition Testimony Impliedly Waived Attorney-Client Privilege in Bad Faith Case

The Takeaways 

·       Bad faith defense counsel should caution their bad faith experts not to speculate that an insurer’s claim decisions were based on advice of counsel. 

·       The Hunton case continues the trend of Arizona federal courts finding an implied waiver of the attorney-client privilege in bad faith cases more often than Arizona state courts. 

In Hunton v. American Zurich Ins. Co., 2017 WL 3712445 (D.Ariz. Aug. 29, 2017) (Order), an insurance bad faith case, the Arizona District Court granted a motion to reconsider and held that an insurer’s bad faith expert impliedly waived the attorney-client privilege, because the expert testified during his deposition that: 

·      He did not know why an adjuster waited several months to approve a claim, but “speculated that it was based on? a series of e-mails…between [the adjuster] and counsel”; and 

·       He did not know why the adjuster ultimately approved the claim but he “suspected it was a discussion [the adjuster] had with counsel the day [the adjuster] accepted” the claim. 

 

The Ruling

This order overruled the Arizona District Court’s previous ruling that, after an in camera inspection, certain documents were properly withheld based on the attorney-client privilege, in part, because the Insurer was defending based on objective reasonableness alone.   

The District Court held the insurer, “through the testimony and opinion of its bad faith expert, [put] the subjective beliefs of the claims adjuster directly as issue, and those beliefs implicate the advice [the adjuster] received from” counsel.? Furthermore, “[b]y electing to defend [based] on the subjective, not just objective, reasonableness of its adjuster’s actions, [the Insurer] placed at issue its subjective beliefs and directly implicated the advice and judgment it received from [counsel] incorporated in those actions.”? Thus, the Insurer “rendered the advice and judgment its adjuster received from [counsel] relevant to the case.”  

The District Court then reasoned the Insurer attempted an improper use of the attorney-client privilege as both a sword and a shield.?? On one hand, the Insurer sought to use the privilege as a shield to protect evidence the Insured would need to challenge the adjuster’s subjective belief.? On the other hand, the Insurer sought to use the privilege as a sword through the Insurer Expert’s opinion that the was no bad faith because the adjuster apparently resolved any concerns through advice of counsel. ? 

If you would like additional information regarding the implied waiver of the attorney-client privilege in Arizona, please contact Nate Meyer at 602.248.1032 or ndm@jaburgwilk.com for the following articles: 

·      How to Avoid the Implied Waiver of the Attorney-Client Privilege in Arizona Bad Faith Cases

·      Guidelines to Assist an Insurer’s Analysis of Whether a Court Will Find an Implied Waiver of the Attorney-Client Privilege in Arizona Bad Faith Cases

·     Tips to Avoid the Implied Waiver of the Attorney-Client Privilege in Arizona Bad Faith Cases

Arizona Court of Appeals Reverses $1 Million Award of Punitive Damages in Insurance Bad Faith Case for Alleged “Institutional Bad Faith”

Arizona Court of Appeals Reverses $1 Million Award of Punitive Damages in Insurance Bad Faith Case for Alleged “Institutional Bad Faith”

In Sobieski v. Am. Standard Ins. Co. of Wisconsin2016 WL 5436588 (Ariz.App. Sept. 29, 2016),[1] despite upholding a bad faith judgment for an insurer conducting an unreasonable investigation and denying a claim, the Arizona Court of Appeals reversed a $1 million award of punitive damages.  In so holding, the Court of Appeals continued Arizona’s trend of reducing or reversing punitive damages in insurance bad faith cases and distinguished the alleged “institutional bad faith” of the Insurer in Sobieski from the insurer in Nardelli v. Metropolitan Group Property & Casualty Insurance.[2]

Facts & Procedural History

The Sobieski case arose from an uninsured motorist (“UM”) claim.  The Insured, while riding a motorcycle, was badly injured when he rear-ended an uninsured car after it slowed to make a turn and then stopped abruptly.[3]  The Insured had $100,000 of UM coverage.  The Insurer twice denied the claim because it concluded the Insured was at fault for the accident.[4]  The Insureds[5] sued the Insurer for breach of contract.  An arbitrator allocated 60 percent of fault to the Insured and found that the Insured incurred $950,000 of damages, so the Insured’s total damages of $380,000 significantly exceeded the $100,000 UM limits.[6]  The Insurer paid the policy limits.

The Insureds sued the Insurer again—this time for bad faith and punitive damages.  Regarding bad faith, the Insureds alleged the Insurer unreasonably investigated and denied the UM claim.[7]  Regarding punitive damages, the Insureds did not allege the Insurer intended to injure them by performing an unreasonable investigation, by unreasonable claims handling policies, or that the Insurer deliberately engaged in routine claims practices intended to benefit the Insurer at the expense of insureds.[8]

Rather, in Sobieski, the Insureds alleged the Insurer’s bad faith “was driven by business policies that compelled the company’s claims handlers to favor corporate profits at the expense of its insureds.”[9]  The Insureds likened the Insurer’s conduct to the conduct of the insurer in Nardelli[10] and alleged five broad categories of evidence indicated claims adjusters denied the Insureds’ claim because of “undue pressure” from the Insurer “to promote company profits at the expense of” insureds:  (1) claims department business plans, (2) company-wide incentive-pay programs, (3) employee performance reviews and personnel files, (4) claims manager training materials, and (5) a mandate to claims employees to focus on comparative negligence in adjusting claims.[11]  The jury awarded the Insureds $500,000 of compensatory damages and $1 million of punitive damages.[12]  The trial court denied the Insurer’s motions for judgment as a matter of law and new trial.

Holding

The Court of Appeals held that a close review of the record revealed “no evidence” that the Insurer’s “business plans, employee evaluations, compensation programs or training materials were designed or applied with the purpose of arbitrarily reducing or denying claims to further the [Insurer’s] bottom line, or that those plans, materials or programs had any inappropriate effect whatsoever on how claims employees handled the [Insureds’] claim.”[13]  Accordingly, Sobieski reversed the $1 million award of punitive damages.[14]

Rationale

The Court of Appeals began its analysis by stating the legal principles guiding the imposition of punitive damages in Arizona.[15]  Next, Sobieski analyzed the conduct warranting an award of punitive damages against the insurer in Nardelli.[16]  Then, the Court of Appeals analyzed the five categories of evidence that allegedly caused undue pressure on claims adjusters to promote company profits at the expense of insureds.

  1. Regarding the business plans,Sobieski held the plans “contain no support for the assertion that the [Insurer] sought to turn its claim department into a ‘profit-center’ at the expense of its insureds” for the following reasons:  (a) the “plans set no arbitrary goals for claims payouts”; (b) the plans “did not direct adjusters to keep company profits in mind when settling claims”; (c) “a company keeping statistics on resolution of claims and looking to their bottom line are reasonable internal procedures; particularly [if an insured] has offered no evidence that this behavior ever resulted in the denial of a legitimate (or illegitimate) claim”; (e) “an insurer does not open itself to punitive damages simply by taking steps to monitor profitability”; (f) there was no evidence that “company officers directed adjusters to reduce claims payouts to  enhance the company’s bottom line”; and (f) on the contrary, the plans emphasized customer (insured) service and satisfaction and an Insurer philosophy to “pay what we owe.”[17]
  2. Regarding compensation policies, the Court of Appeals held that, unlikeNardelli:  (a) there was no evidence that “any specific severity[18] goal was imposed on the claims office that handled the [Insureds’] claim”; (b) there was no evidence that “compensation paid to claims employees was linked to their success in limiting claims payouts”; and (c) the Insurer’s “incentive plan was a company-wide profit sharing program in which all employees could be rewarded in accordance with the company’s overall performance,” including non-claims related activity such as return on Insurer investments.[19]
  3. Regarding claims employee personnel files,Sobieski held “employee personnel files in the record offer no support for the argument that [Insurer] management encouraged claims workers to arbitrarily or unreasonably deny claims,” because:  (a) there was no evidence of “documented demands managers placed on claims workers…to handle claims with a ‘laser-like focus’ on meeting company profit goals”; (b) there was no evidence or inference that the pertinent claims manager “encouraged his employees to deliberately short-change insureds to improve company profits or his standing within the company”; and (c) again, the personnel files included praise for the pertinent adjuster’s customer (insured) service.[20]
  4. Regarding training materials for claims managers, the Court of Appeals noted that the materials’ answer to the question, “How can a manager control severity?” belied the contention that the Insurer “trained its managers to control severity by short-changing claimants.”[21]
  5. Regarding corporate documents urging claims employees to apply comparative fault,Sobieski noted:  (a) “there is nothing wrong in the abstract with an insurer seeking to lay off an appropriate share of the liability on a third party’s insurer when the third party is at fault”; and (b) there was no evidence that “an improper [Insurer] focus on comparative fault drove [the Insurer] to deny the [Insureds] claim.”[22]  Rather, the Insureds argued that the Insurer committed bad faith by failing to apply comparative fault.[23]

Analysis

There are at least two significant take-ways from Sobieski.  

FirstSobieski’s reversal of the $1 million award of punitive damages continues Arizona’s trend of reducing or reversing punitive damages awards in bad faith cases.  Four years ago in Nardelli,[24] the Court of Appeals upheld a trial court’s reduction of a $55 million punitive damages award in an insurance bad faith case to only $620,000, and further reduced the punitive damages award to only $155,000—a 1:1 ratio with compensatory damages.  Two years ago in Arellano v. Primerica Life Insurance Company,[25] the Court of Appeals again reduced a punitive damages award in an insurance bad faith case of approximately $1.1 million to only $328,000—a 4:1 ratio with compensatory damages.

Second, insurers should note the distinctions that the Court of Appeals drew between the insurer’s conduct in Nardelli and the Insurer’s conduct in Sobieski to help insulate themselves from bad faith claims and punitive damage awards based on “institutional bad faith.”  At the risk of stating the obvious, Insurers should not:  (a) “set arbitrary goals for claims payouts”;[26] (b) “direct adjusters to keep company profits in mind when settling claims”[27] or “reduce claims payouts to  enhance the company’s bottom line”;[28] (c) set “any specific severity goals”;[29] (d) link “compensation paid to claims employees…to their success in limiting claims payouts”;[30] (e) document employee personnel files to include manager demands or encouragement to handle claims or deliberately short-change insureds with a focus on meeting company profit goals, improving company profits, or improving the manager’s standing within the company”;[31] or (f) “train its managers to control severity by short-changing claimants.”[32]  Equally at the risk of stating the obvious, insurers should:  (a) emphasize customer (insured) service and satisfaction in business plans;[33] (b) emphasize a philosophy to “pay what we owe” in business plans;[34] (c) make incentive pay plans available to all employees—not just claims employees—linked to overall company performance, including non-claims related activity;[35] and (d) document personnel files with praise and an emphasis on customer (insured) service.[36]

[1] The Arizona and Pacific Reporter citations are not yet available.

[2] 230 Ariz. 592, 277 P.3d 789 (App. 2012). 

[3] See Sobieski, 2016 WL 5436588 at *1, ¶ 2.

[4] Id. at *1, 2, ¶¶ 3-6.

[5] Both the insured motorcyclist and his wife sued the Insurer.

[6] Id. at *2, ¶ 7.

[7] Id. at *3, ¶ 11.  Although not the focus of this article, the Court of Appeals held the Insureds presented sufficient evidence from which the jury could conclude the Insurer’s investigation of the claim was unreasonable because:  (1) the Insurer knew there were five witnesses to the accident, but spoke only to the Insured and the Uninsured Motorist; (2) the Insurer reached a first conclusion regarding liability before it received the Accident Report; (3) the Insurer had reason to question the Uninsured Motorist’s account of the Accident; (4) after the Insurer re-opened the claim because of statements from witnesses casting additional doubt on the Uninsured Motorist’s account of the accident, the Insurer performed no additional investigation before it reached a second conclusion regarding liability and it denied the claim a second time; (5) the Insurer’s decision to not interview other witnesses because it thought the witnesses would be biased in favor of the Insured, was undermined by the fact that the Uninsured Motorist’s account of the Accident was clearly biased in favor of the Insurer; and (6) despite knowing the Insured’s damages were significant, so even a slight amount of comparative fault applied to the Uninsured Motorist could result in at least some recovery to the Insured, the Insurer failed to investigate and apply comparative fault. Id. at *3, ¶¶ 12-15.

[8] Id. at *5, ¶ 19.

[9] Id. at *5, ¶ 19.

[10] 230 Ariz. 592, 277 P.3d 789.  To see a previous article regarding the “low to moderate” reprehensible conduct warranting punitive damages in Nardelli, but the Court of Appeals nevertheless upholding a $54 million reduction of the punitive damages award, click here:  http://www.jaburgwilk.com/news-publications/arizona-upholds-54-million-reduction-of-punitive-damages-in-insurance-bad-faith-case .  In Nardelli, the Arizona Court of Appeals found the following facts presented clear and convincing evidence that the Insurer acted with an “evil mind” when it decided to repair rather than total an insured’s theft-recovered vehicle:  (1) the insurer “instituted an aggressive company-wide profit goal for 2002”; (2) the insurer “assigned the claims department a significant role in achieving that goal”; (3) the insurer “aggressively communicated this goal to the claims department (including the office and employees handling [the Insureds’] claims)”; (4) the insurer “tied the benefits of claims offices and individuals to, among other things, the average amount paid on claims”; (5) the insurer’s efforts to reach its profit goal influenced how its employees handled claims; and (6) the insurer did nothing to ensure its focus on meeting its profit goal did not affect how its employees handled, evaluated and assessed claims.” Id. at 605, 277 P.3d at 802. 

[11] Sobieski, 2016 WL 5436588 at *6, ¶ 24.

[12] Id. at *2, ¶ 7.

[13] Id. at *11, ¶ 45.

[14] Id. at *11, ¶ 49.

[15] “A breach of the duty of good faith and fair dealing is not sufficient, by itself, to support a claim for punitive damages.” Id. at *4, ¶17.  “There must be circumstances of aggravation or outrage, such as spite or ‘malice,’ or a fraudulent or evil motive on the part of the defendant, or a conscious and deliberate disregard of the interests of others.  We restrict punitive damages to those cases in which the defendant’s wrongful conduct was guided by evil motives. Thus, to obtain punitive damages, plaintiff must prove that defendant’s evil hand was guided by an evil mind. The evil mind which will justify the imposition of punitive damages may be manifested in either of two ways. It may be found where defendant intended to injure the plaintiff. It may also be found where, although not intending to cause injury, defendant consciously pursued a course of conduct knowing that it created a substantial risk of significant harm to others.  Such 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.  When defendant’s motives are shown to be so improper, or its conduct so oppressive, outrageous or intolerable that such an “evil mind” may be inferred, punitive damages may be awarded.” Id. (italics in original) (citing Rawlings v. Apodaca, 151 Ariz. 149, 162–63, 726 P.2d 565, 578–79 (1986) (citations omitted)).  Furthermore, “a plaintiff suing for punitive damages must prove the defendant’s ‘evil mind’ by clear and convincing evidence.” Sobieski, 2016 WL 5436588 at *4 ¶17 (citing Linthicum v. Nationwide Life Ins., 150 Ariz. 326, 332, 723 P.2d 675, 681 (1986)).  “Punitive damages are appropriate only in the most egregious of cases, upon proof of both the defendant’s reprehensible conduct and evil mind.” Sobieski, 2016 WL 5436588 at *4 ¶18 (citing SWC Baseline & Crismon Inv’rs, L.L.C. v. Augusta Ranch Ltd. P’ship, 228 Ariz. 271, 289, ¶ 74, 265 P.3d 1070, 1088 (App. 2011)).  The Arizona “supreme court has made clear that an insurer does not open itself to punitive damages simply by considering its own interests in denying a claim.” Sobieski, 2016 WL 5436588 at *4 ¶18 (citing Gurule v. Ill. Mut. Life & Cas. Co., 152 Ariz. 600, 607, 734 P.2d 85, 92 (1987) (“Self-interest is not, however, evidence of an ‘evil mind.’”)).  “Because punitive damages may be awarded only when they will serve to punish a defendant that acted with an evil mind, the defendant’s motives are determinative.” Sobieski, 2016 WL 5436588 at *4 ¶18 (citing Bradshaw v. State Farm Mutual Automobile Insurance, 157 Ariz. 411, 422, 758 P.2d 1313, 1324 (1988)).

[16] Sobieski, 2016 WL 5436588 at *5-6, ¶¶ 20-23. See note 10, supra.

[17] Id. at *6-7, ¶¶ 25-31.

[18] Sobieski explained “severity” as “amounts paid out on claims.” Id. at *8, ¶ 35.

[19] Id. at *7, ¶¶ 32, 33.

[20] Id. at *8, ¶¶ 34-38 (internal citations omitted).

[21] Id. at *10, ¶ 39.  The answer focused upon encouraging adjusters to exercise their curiosity by conducting “great investigations” so that a “file supports the information that’s in it.” Id.

[22] Id. at *10, ¶¶ 40-42.

[23] Id.

[24] 230 Ariz. 592, 277 P.3d 789.  Again, to see a previous article regarding Nardelli upholding a $54 million reduction of the punitive damages award, click here:  http://www.jaburgwilk.com/news-publications/arizona-upholds-54-million-reduction-of-punitive-damages-in-insurance-bad-faith-case .

[25] 235 Ariz. 371, 332 P.3d 597 (App. 2014).  To see a previous article regarding Arellano upholding a $700,000 reduction of punitive damages, click here:  http://www.jaburgwilk.com//news-publications/az-reduces-punitive-damages-in-insurance-bad-faith-case-again .

[26] Sobieski, 2016 WL 5436588 at *6, ¶ 25.

[27] Id. at *6, ¶ 27.

[28] Id.

[29] Id. at *7, ¶¶ 32, 33.

[30] Id. at *7, ¶ 32.

[31] Id. at *8, ¶¶ 34-38.

[32] Id. at *10 ¶ 39. 

[33] Id. at *6, 7, ¶¶ 28, 29.

[34] Id. at *7, ¶¶ 29, 30.

[35] Id. at *7, ¶¶ 32, 33.

[36] Id. at *8, ¶¶ 34, 37 (internal citations omitted).

Arizona District Court Holds Insurer That Never Conceded Coverage, But Offered Policy Limits, is Not Liable as a Matter of Law for Excess Judgment

Arizona District Court Holds Insurer That Never Conceded Coverage, But Offered Policy Limits, is Not Liable as a Matter of Law for Excess Judgment

In GEICO Indem. Co. v. Smith, 2016 WL 5791532 (D. Ariz. Oct. 4, 2016) (Arizona and Pacific Reporter citations not yet available), the Arizona District Court held that an Insurer who offers its policy limits as a business consideration, but never concedes coverage, is not liable as a matter of law for an excess judgment against its Insured.

In Smith, an Insurer twice denied coverage for a claim, but then offered its $20,000 policy limits as a business consideration when presented with the choice of either paying the policy limits or the Insured executing a “Damron Agreement,” an agreement in which the Insured would stipulate to a $2 million judgment and assign all its rights against the Insurer to the plaintiff. Despite the Insurer’s agreement to pay the policy limits to plaintiff, the Insured and the plaintiff executed the Damron Agreement anyway.

The decision

Plaintiff cited Acosta v. City of Phoenix Indem. Ins. Co., 214 Ariz. 380, 153 P.3d 401 (Ariz. App. 2007), and argued the Insurer was liable as a matter of law for the stipulated $2 million excess judgment. The District Court, however, held that “Acosta does not hold that insurers that make settlement offers are liable for excess judgments as a matter of law.” Rather, Smith explained that Acosta held, “if an insurer concedes coverage” and the concession is not based on the “discovery of new facts going to coverage,” then the insurer cannot argue the insured (or the insured’s assignee) is equitably estopped from using the concession of coverage against the insurer. Since the Insurer in Smith never conceded coverage, Acosta did not apply to render the Insurer liable as a matter of law for the excess judgment.

The primary takeaway

From Smith is that, in Arizona, if an Insurer offers policy limits as a business consideration, then the Insurer should not concede coverage and make it clear that it is not conceding coverage when it offers policy limits.