Deese v. State Farm Mut. Auto. Ins. Co.
| Decision Date | 25 June 1991 |
| Docket Number | No. 1,CA-CV,1 |
| Citation | 168 Ariz. 337,813 P.2d 318 |
| Parties | Deborah C. DEESE, Plaintiff-Appellee, Cross Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellant, Cross Appellee. 88-540. |
| Court | Arizona Court of Appeals |
Deborah Deese (Deese) brought this action against State Farm Mutual Automobile Insurance Company (State Farm) after State Farm refused to pay a portion of medical benefits that Deese claimed were due under an insurance contract. The decisive issue on appeal is whether State Farm, having prevailed on Deese's claim for breach of contract, could be found liable for the tort of bad faith.
Deese purchased an automobile insurance policy from State Farm. The policy provision pertaining to medical benefits provided:
We will pay reasonable medical expenses, for bodily injury caused by accident, for services furnished within three years of the date of the accident. These expenses are for necessary medical, surgical, X-ray, dental, ambulance, hospital, professional nursing and funeral services, eyeglasses, hearing aids and prosthetic devices. The bodily injury must be discovered and treated within one year of the date of the accident.
On March 16, 1985, Deese was involved in a two-car accident. Elise Mankosa, D.C., treated Deese for injuries she sustained in the accident until April 29, 1985, and charged Deese $1,756.00 for her services. Deese submitted the bill to State Farm for payment.
A State Farm senior claims representative, John Vance, questioned whether Dr. Mankosa's charges were reasonable and necessary pursuant to the policy. Vance sent the bill to Daniel Glassman, D.C., for review. Dr. Glassman concluded that Deese's injuries were not as severe as Dr. Mankosa had diagnosed and recommended that State Farm reduce the charges by $667.00. Dr. Glassman also concluded that Deese's treatment should have ceased on April 20, 1985.
A State Farm claim committee adopted Dr. Glassman's recommendation and State Farm issued Deese a check for $1,089.00. State Farm informed Deese that, if Dr. Mankosa brought an action against her to recover the unpaid portion of the bill, State Farm would provide an attorney to represent her and would satisfy any judgment entered against her.
Beginning on June 11, 1985, Sandra Clark, D.C., treated Deese and charged $296.00 for her services. Deese submitted the bill to State Farm. State Farm, however, refused to pay the bill because, according to Dr. Glassman, treatment should have ceased on April 20, 1985. State Farm also informed Deese that it would not pay any further medical expenses arising out of the accident.
On January 24, 1986, Deese filed a two-count complaint against State Farm alleging breach of the insurance contract and the tort of bad faith. Deese alleged that, under the terms of the insurance policy, State Farm had a duty to pay her reasonable and necessary medical expenses and that State Farm breached the contract by failing to pay fully the medical claims submitted. The gravamen of Deese's tort claim was that State Farm's unreasonable failure to pay the medical claims she submitted constituted a breach of the insurance contract's implied covenant of good faith and fair dealing. Deese requested compensatory and punitive damages, costs and attorney's fees.
At trial Deese maintained that State Farm systematically reduced claims for chiropractic care through the use of select review chiropractors, such as Dr. Glassman, who predictably recommended reduction of chiropractic claims. State Farm maintained that the unpaid amounts on Deese's chiropractic claims were not reasonable or necessary expenses, and thus not compensable under the terms of the insurance contract. During trial Deese moved for a directed verdict on the contract and bad faith claims and State Farm moved for a directed verdict on the contract, bad faith and punitive damage claims. The trial court denied both parties' motions.
The trial court separately instructed the jury on the elements of breach of contract and the tort of bad faith. The jury returned a verdict in favor of State Farm on the breach of contract claim. The jury, however, returned a verdict in Deese's favor on the bad faith claim and awarded Deese compensatory and punitive damages. The trial court entered judgment in accord with the verdicts and, after offsetting the parties' requests for attorney's fees and costs incurred in connection with the claim on which each was successful, awarded Deese $10,196.94 in costs and $29,129.50 in attorney's fees. Both parties moved for judgment notwithstanding the verdict. The court denied the motions.
State Farm filed a notice of appeal and Deese filed a notice of cross appeal. We have jurisdiction pursuant to A.R.S. § 12-2101.B.
State Farm argues that, in an action for benefits allegedly due under the terms of an insurance contract, a finding that an insurer unreasonably or in "bad faith" withheld benefits must necessarily be predicated upon a finding that the insurer breached the insurance contract. Deese argues that Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986), establishes that breach of contract is not an indispensable requisite to showing bad faith. For the reasons set out below, we conclude that Deese interprets Rawlings too broadly and that, under the facts of this case, State Farm was entitled to judgment on the bad faith claim as a matter of law.
In defining the elements of the tort of bad faith, Arizona courts consistently have held that when an insured bases a bad faith claim on the insurer's unreasonable failure to pay or delay in paying a claim, the insured must demonstrate that a valid claim exists under the terms of the insurance policy. In Noble v. National American Life Insurance Co., 128 Ariz. 188, 624 P.2d 866 (1981), the supreme court first expressly recognized that breach of an insurer's implied duty to act in good faith in dealing with an insured's claim constitutes the tort of bad faith. The tort arises when the insurer "intentionally denies, fails to process or pay a claim without a reasonable basis for such action." Noble, 128 Ariz. at 190, 624 P.2d at 868.
In reaching its conclusion, the court enunciated the policy reasons underlying its decision to permit tort recovery for an insurer's breach of the implied covenant of good faith. The court recognized that the purpose of an insurance contract is protection against calamity and that "[w]hen the loss insured against occurs the insured expects to have the protection provided by his insurance." Id. at 189-90, 624 P.2d at 867-68. Therefore, "[t]he whole purpose of insurance is defeated if an insurance company can refuse or fail, without justification, to pay a valid claim." Id. (emphasis added).
In several subsequent decisions, the court has repeated the test set out in Noble for defining when a claim for bad faith arises. See, e.g., Dodge v. Fidelity & Deposit Co. of Maryland, 161 Ariz. 344, 346, 778 P.2d 1240, 1242 (1989) (); Filasky v. Preferred Risk Mutual Insurance Co., 152 Ariz. 591, 597, 734 P.2d 76, 82 (1987) (); Brown v. Superior Court, 137 Ariz. 327, 336, 670 P.2d 725, 734 (1983) (); Sparks v. Republic National Life Insurance Co., 132 Ariz. 529, 538, 647 P.2d 1127, 1136, cert. denied, 459 U.S. 1070, 103 S.Ct. 490, 74 L.Ed.2d 632 (1982) ().
If an insured's claim for benefits does not fall within the coverage of the policy, the insurer's failure to pay the claim does not constitute a breach of the insurance contract. "[T]he implied covenant in an insurance contract neither entitles the insured to payment of claims that are excluded by the policy, nor to protection in excess of that which is provided for in the contract, nor to anything inconsistent with the limitations contained in the contract." Rawlings, 151 Ariz. at 155, 726 P.2d at 571. When no coverage exists, it is self-evident that an insured seeking recovery for bad faith cannot establish the basic requirement that an insurer failed to pay a valid claim and cannot demonstrate that the insurer lacked a reasonable basis for denying the claim.
We therefore conclude that when an insured's claim for bad faith arises from an insurer's failure to pay a claim for benefits due under an insurance contract, establishing a breach of contract by showing the insurer denied, failed to pay or failed to process a valid claim is a prerequisite to stating a claim for bad faith.
The two Arizona decisions that have addressed the specific issue raised by this appeal reached the same conclusion. In Brown v. Superior Court, the insureds, who brought an action against the insurer for bad faith failure to pay a loss of earnings claim, argued that the trial court erred in denying their motion to compel production of the insurer's entire claims file. In deciding whether the insurer could be compelled to produce the entire file the supreme court assumed, but did not decide, that if an insured's bad faith claim arises out of the insurer's failure to pay a valid claim, then the bad faith claim must be predicated on a finding that the insured breached the insurance...
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