Deese v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 02 October 1992
• Docket Number: No. CV-91-0323-PR,CV-91-0323-PR
• Citation: 172 Ariz. 504,838 P.2d 1265
• Parties: Deborah C. DEESE, Plaintiff-Appellee, Cross-Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee.
• Court: Arizona Supreme Court

Page 1265

838 P.2d 1265

172 Ariz. 504

Deborah C. DEESE, Plaintiff-Appellee, Cross-Appellant, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee.

No. CV-91-0323-PR.

Supreme Court of Arizona, In Banc.

Oct. 2, 1992.

Thur, Dawson & O'Sullivan by Calvin C. Thur and Steven C. Dawson, Phoenix, for Deese.

O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears by Ralph E. Hunsaker and Christopher Robbins, Phoenix, for State Farm Mut. Auto. Ins. Co.

[172 Ariz. 505] Broening, Oberg & Woods by James R. Broening and Neal B. Thomas, Phoenix, for amicus curiae Farmers Ins. Co.

OPINION

MOELLER, Vice Chief Justice.

STATEMENT OF THE CASE

Deborah Deese (Deese) sued State Farm Mutual Auto Insurance Company (State Farm) for breach of contract and for bad faith after State Farm refused to pay a portion of Deese's medical expenses which Deese contended were payable under her automobile policy with State Farm. A jury returned a verdict for State Farm on the breach of contract claim and for Deese on the bad faith claim. The court of appeals held:

[W]hen 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.

Deese v. State Farm Mut. Auto. Ins. Co., 168 Ariz. 337, 340, 813 P.2d 318, 321 (App.1991).

We granted Deese's petition for review pursuant to Rule 23, Ariz.R.Civ.App.P., 17B Ariz.Rev.Stat.Ann. (A.R.S.) We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24. We hold that breach of an express covenant of an insurance policy is not a necessary prerequisite to a tort claim based on bad faith.

FACTS AND PROCEDURAL HISTORY

On March 16, 1985, a Saturday, Deese was involved in a two-car accident. Over the weekend, she experienced pain in her arm and back. On Monday, March 18, she called the office of Elise Mankosa, D.C. Because Dr. Mankosa was unable to see Deese that day, an appointment was made for the following day, Tuesday. Deese also called State Farm on Monday and spoke with John Vance, a claims representative. Deese informed Vance of the accident, of her pain, and of her upcoming chiropractic treatment. Vance verified Deese's "med-pay" coverage and told her to send him the bills.

Dr. Mankosa treated Deese from March 19 until April 29, 1985, charging $1,756.00 for her services. Deese submitted Mankosa's bill to State Farm for payment. Some weeks later, before hearing from State Farm and while visiting relatives in Alabama, Deese experienced additional pain for which she sought treatment from an Alabama chiropractor, Sandra Clark. Dr. Clark treated Deese on June 11 and 12, 1985, and charged $296.00 for her services. Deese then submitted Clark's bill to State Farm.

Thereafter Vance, on July 2, 1985, wrote to Deese stating that "there is a question as to whether all of [Dr. Mankosa's charges] are reasonable and/or necessary under your policy." Presumably, the question had been raised by Vance himself, who, that same day, sent Dr. Mankosa's bills to Daniel Glassman, D.C., for review. Vance's letter to Dr. Glassman said: "I would appreciate your evaluating the bills with what information we have here. I hope this information will be sufficient for you to arrive at a conclusion."

Dr. Glassman did arrive at a conclusion and, on July 8, 1985, wrote back to Vance, questioning the severity of Mankosa's diagnosis and recommending that Mankosa's bill be reduced by $667.00. Dr. Glassman stated that Dr. Mankosa's treatment should have terminated as of April 20, 1985, approximately 9 days before it in fact did terminate. After a State Farm claim committee adopted Dr. Glassman's recommendation, State Farm, on August 9, 1985, sent Deese a check for $1,089.00, that being the amount of Dr. Mankosa's bill less $667.00. In a letter accompanying the check, State Farm informed Deese that if Dr. Mankosa sued her for the unpaid portion of the bill, State Farm would provide an attorney to represent her and would satisfy any judgment entered against her. This arrangement was unsatisfactory to Deese because Dr. Mankosa had been her family doctor and Deese did not want to jeopardize their relationship. Deese paid the balance of Mankosa's bill.

On October 9, 1985, Vance sent Deese a second letter informing her that State Farm would not honor any of the June charges of the Alabama doctor. Vance stated: "Please be advised that under the original claim and the independent medical recommendations made, treatment for this injury should have been concluded no later than April 20, and any further charges would be and should be denied." While there had been no mention of future treatment, Vance's letter went on to inform Deese that State Farm would not pay for any future medical expenses arising from the accident. Ultimately, Deese arranged payment of the Alabama doctor's bill, in part through other insurance and in part personally.

On January 24, 1986, Deese filed a two-count complaint against State Farm, alleging both breach of the insurance contract and the tort of bad faith. In her breach of contract claim, she alleged that State Farm had breached its duty to pay her reasonable and necessary medical expenses arising out of the accident. The gravamen of her separate tort claim was that State Farm's actions were unreasonable and 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.

For purposes of the issue dealt with in this opinion, a detailed recitation of the evidence in the month-long trial is unnecessary. It is necessary only to set forth the general positions of the parties. Deese contended that State Farm systematically reduced claims for chiropractic care through the deliberate use of select chiropractors, such as Dr. Glassman, who predictably recommended reduction of chiropractic claims. She contended, essentially, that State Farm's claims review process in this case, including the approval of Dr. Glassman's findings by a claims committee, was a sham.

State Farm, on the other hand, maintained that the claims had been properly handled, conceding, however, that it had no basis for rejecting potential future claims out of hand. State Farm contended that the unpaid amounts on Deese's chiropractic claims were not reasonable or necessary expenses and were not compensable under the terms of the insurance contract.

At trial, Deese moved for directed verdicts on the contract and bad faith claims, and State Farm moved for directed verdicts on the contract, bad faith and punitive damage claims. The trial court denied both parties' motions and then separately instructed the jury on the elements of breach of contract and the tort of bad faith. The trial court refused an instruction which would have expressly stated that a breach of contract was an essential element of the bad faith claim. The jury returned a verdict in favor of State Farm on the breach of contract claim and a verdict in favor of Deese on the bad faith claim, awarding her $3,000 compensatory damages and $75,000 punitive damages. The trial court entered judgment in accordance with the verdicts, and denied both parties' motions for judgment notwithstanding the verdict.

ISSUE

Whether breach of an express covenant in an insurance policy is a necessary prerequisite to a bad faith tort claim.

DISCUSSION

I. The Implied Covenant of Good Faith and Fair Dealing and the Tort of Bad Faith

In Noble v. Nat. Life Ins. Co., 128 Ariz. 188, 624 P.2d 866 (1981), this court first recognized the tort of bad faith. We concluded "that there is a legal duty implied in an insurance contract that the insurance company must act in good faith in dealing with its insured on a claim, and a violation of that duty of good faith is a tort." Id. at 190, 624 P.2d at 868. We held that to establish bad faith, "a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim." Id. (quoting Anderson v. Continental Ins. Co., 85 Wis.2d 675, 271 N.W.2d 368, 376 (1978)).

In Sparks v. Republic Nat. Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied, 459 U.S. 1070, 103 S.Ct. 490, 74 L.Ed.2d 632 (1982), we noted that "the inquiry into whether an insurer has acted in bad faith towards its insured is a question of reasonableness under the circumstances of the case.... Whether the action amounts to bad faith depends upon whether the insurer failed to honor a claim without a reasonable basis for doing so." Id. 132 Ariz. at 538, 647 P.2d at 1136. See also Brown v. Superior Court, 137 Ariz. 327, 336, 670 P.2d 725, 734 (1983) ("No matter how the test is defined, bad faith is a question of reasonableness under the circumstances.").

In Linthicum v. Nationwide Life Ins. Co., 150 Ariz. 354, 723 P.2d 703 (App.1985), aff'd in part, 150 Ariz. 326, 723 P.2d 675 (1986), the court of appeals observed that "[t]he tort of bad faith only arises when the insurance company intentionally denies or fails to process or pay a claim without a reasonable basis for such action. In applying this standard, however, it is necessary to determine whether a claim was properly investigated and whether the results of that investigation were reasonably reviewed and evaluated." Id. 150 Ariz. at 362, 723 P.2d at 711 (citing Anderson, 271 N.W.2d at 377); see also Farr v. Transamerica Occidental Life Ins. Co., 145 Ariz. 1, 5, 699 P.2d 376, 380 (App.1984) (tort of bad faith "is established if the plaintiff demonstrates that the defendant had knowledge of or recklessly disregarded the lack of a reasonable basis for denying the claim"); Trus Joist Corp. v. Safeco Ins. Co. of Am., 153 Ariz. 95, 104, ...