Ariz. court analyzes bad-faith denial of an insurance claim

An Arizonan buys insurance with the expectation that if he or she suffers a covered loss, the insurance company will act in good faith to compensate the policyholder under the terms of the insurance policy. The insurer, as party to a contract, has the implied duty of good faith and fair dealing that requires it to carry out the policy terms for the benefit of the other party to the contract, the insured.

Insurance bad faith

The question of what is a bad-faith insurance denial depends on the individual facts of each situation. In Nardelli v. Metropolitan Group Property and Cas. Ins. Co., the Court of Appeals of Arizona considered this question in the case of an automobile claim filed when a vehicle was stolen, ransacked and damaged, and recovered in Mexico.

According to the appellate opinion, the Ford Explorer's owners and MetLife disagreed early on, with the owners believing that the car was a total loss and the insurer that it could be repaired.

The lawsuit

The owners, Kenneth and Tammy Nardelli, represented by Arizona insurance law firm Dawson & Rosenthal, P.C., of Sedona, sued MetLife (the name used by the court to refer collectively to the two related insurance companies involved) in Arizona court for breaching the implied covenant of good faith and fair dealing in their automobile claim for the Explorer's damage.

The jury awarded the plaintiffs $155,000 in compensatory damages, those meant to reimburse the injured party for related financial losses and emotional damages. The jury also awarded $55 million in punitive damages, those meant to punish and deter the defendant's wrongful behavior. The court reduced the jury's punitive damages award to $650,000 (later reduced further on appeal) and awarded sanctions and interest.

On appeal, the court looked at whether the evidence supported a finding of bad faith on the part of the insurance company.

Bad faith definition

The court defined "bad faith" by an insurer as having two parts: whether the insurer "unreasonably investigates, evaluates, or processes a claim" and whether the insurance company "knows it is acting unreasonably or acts with such reckless disregard that such knowledge may be imputed."

The state appeals court found that three things MetLife did would allow the jury to reasonably find bad faith:

  • Electing to pay for repair rather than total loss
  • Issuing a check insufficient to pay for repair
  • Failing to tell the Nardellis about policy provisions possibly beneficial to them

Legal counsel important

Anyone in Arizona who has an insurance claim denied or who feels that a claim has been inadequately paid should consult an experienced insurance attorney to explain the policyholder's rights and the legal remedies available, including the possibility of a lawsuit for bad-faith handling of the claim.