Ness v. Western Sec. Life Ins. Co.

• Decision Date: 17 September 1992
• Docket Number: No. 1,CA-CV,1
• Citation: 851 P.2d 122,174 Ariz. 497
• Parties: , RICO Bus.Disp.Guide 8086 Scott NESS, Plaintiff-Appellant, v. WESTERN SECURITY LIFE INSURANCE COMPANY, an Arizona corporation; Valley National Bank of Arizona, an Arizona corporation, Defendants-Appellees. 90-399.
• Court: Arizona Court of Appeals

Page 122

851 P.2d 122

174 Ariz. 497, RICO Bus.Disp.Guide 8086

Scott NESS, Plaintiff-Appellant, v. WESTERN SECURITY LIFE INSURANCE COMPANY, an Arizona corporation; Valley National Bank of Arizona, an Arizona corporation, Defendants-Appellees.

No. 1 CA-CV 90-399.

Court of Appeals of Arizona Division 1, Department A.

Sept. 17, 1992.

Review Denied May 18, 1993.

[174 Ariz. 499] Patten & Montague, P.C. by W. Dea Montague, Gary Patten, Tempe, for plaintiff-appellant.

Bess & Dysart, P.C. by Leon D. Bess, Brad K. Keogh, Timothy R. Hyland, Phoenix, for defendant-appellee Western Sec. Life Ins. Co.

Gust, Rosenfeld & Henderson by Richard A. Segal, Phoenix, for defendant-appellee Valley Nat. Bank of Arizona.

OPINION

LANKFORD, Judge.

Scott Ness brought this appeal from the entry of summary judgment against him and in favor of defendants Western Security Life Insurance Company ("WSLIC") and Valley National Bank of Arizona ("VNB"). Ness raises four issues on appeal:

1. Did the superior court err in entering summary judgment finding that plaintiff's claim for breach of the duty of good faith and fair dealing was barred by the statute of limitations?

2. Did the superior court err in entering summary judgment against Ness based on the lack of evidence of the elements of fraud?

3. Did the superior court err in entering summary judgment against Ness on his claim of intentional infliction of emotional distress based on the statute of limitations?

4. Did the superior court err in entering summary judgment against Ness based on lack of evidence of the elements of racketeering?

I.

In 1984, Ness and another person borrowed money from VNB. In connection with the transaction, Ness purchased a WSLIC credit life and disability insurance policy through the VNB loan officer. The policy is not a part of the record on appeal.

On January 1, 1985, Ness was seriously injured in an accident which left him unable to work for a period of time. WSLIC paid approximately two months' disability benefits under the policy while Ness was unable to perform any work. Thereafter, WSLIC stopped its payments even though Ness was not working. WSLIC asserted that because he was unemployed on the date of the accident, Ness had no occupation and therefore was qualified for payments under the disability policy only if he were disabled from any occupation. Instead, WSLIC contended, Ness had been disabled only from the occupation he held just prior to the accident and was capable of performing some other kind of work. Therefore, WSLIC reasoned, Ness was not entitled to any further payments under the disability policy.

Ness did not file this action until April 14, 1988. He admits that on August 28, 1985, his attorney warned VNB that the claim was being denied unfairly. However, Ness's counsel received a letter dated May 9, 1986, from WSLIC which states, in part, as follows:

We also would be pleased to receive an update of the medical treatment Mr. Ness has received since June 24, 1985. This will help keep his entire claim file current.

We too wish to see a speedy and final determination of your client's claim. We still feel however that such determination cannot be made until an evaluation of Mr. Ness's ability or inability to perform work is made.

(Emphasis added.)

Ness's claim was finally and unequivocally denied in writing by another letter from WSLIC dated August 28, 1987. That letter stated: "After reviewing the report in conjunction with the medical information already contained in our claim file, we have concluded that Mr. Ness does not qualify for additional disability benefits."

The complaint thereafter filed by Ness raised these claims: Count I, insurance bad faith (breach of duty of good faith and fair dealing); Count II, breach of contract; Count III, common law fraud; Count IV, intentional infliction of emotional distress; and Count V, scheme or artifice to defraud and racketeering (false representation). The parties ultimately stipulated to dismiss the breach of contract claim. We will discuss the remaining counts in the same order as presented in the complaint. Because the trial court has ruled that a question of fact exists as to whether VNB and WSLIC are equally liable as joint venturers, we will address all issues as applying to both VNB and WSLIC.

On review of summary judgment, we view the facts and evidence in a light most favorable to the party against whom summary judgment was granted and draw all reasonable inferences in favor of that party. United Bank of Ariz. v. Allyn, 167 Ariz. 191, 193, 195, 805 P.2d 1012, 1014, 1016 (App.1990). Summary judgment was granted against Ness, and we review the record accordingly.

On appeal, both plaintiff and defendants rely on matters outside the record of proceedings in the superior court. We cannot consider any evidence not contained in the record. GM Dev. Corp. v. Community Am. Mortg. Corp., 165 Ariz. 1, 4, 795 P.2d 827, 830 (App.1990).

II.

We first consider the bad faith claim. The trial court dismissed this claim as to both defendants. It ruled that the statutory two-year period began on August 28, 1985, when Ness's attorney informed VNB that WSLIC was unfairly refusing to pay the claim. Because Ness did not file his complaint until April 14, 1988, the trial court ruled that the two-year limitations period fixed by A.R.S. § 12-542 had expired.

Ness concedes that the bad faith claim is subject to the two-year limitations period in A.R.S. § 12-542. Because Ness did not file his complaint until April 14, 1988, his action can survive summary judgment only if evidence exists that the cause of action arose on or after April 14, 1986.

In Arizona, an insurance company commits bad faith when it (1) intentionally (2) denies, fails to process, or fails to pay a claim (3) without a reasonable basis for such action. Brown v. Superior Court, 137 Ariz. 327, 336, 670 P.2d 725, 734 (1983) (casualty policy); Noble v. National American Life Ins. Co., 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981) (health insurance policy); Borland v. Safeco Ins. Co. of Am., 147 Ariz. 195, 199, 709 P.2d 552, 556 (App.1985) (homeowners' policy). The cause of action arises only when all three elements are present. A limitations period starts when the cause of action arises. Norton v. Steinfeld, 36 Ariz. 536, 288 P. 3 (1930). Therefore, Ness's cause of action did not arise, and the limitations period did not begin to run, until WSLIC had intentionally denied, failed to process, or failed to pay his claim without a reasonable basis.

The question presented in this appeal is whether any genuine dispute exists as to when WSLIC denied or failed to pay this claim. We believe such a dispute exists, which renders entry of summary judgment error. Ness's claim may not have arisen until WSLIC provided him with the unequivocal written denial of the claim on August 28, 1987. Prior to that time, WSLIC had treated its failure to pay benefits as non-final. For example, in the letter dated May 9, 1986, addressed to Ness's counsel, WSLIC stated as follows:

Since Mr. Ness was unemployed at the time he was injured, the question of total disability still rests upon a determination of what jobs, if any, your client may be reasonably qualified for by reason of education, training, or experience, given the limitation of his present physical condition. In order to make such a vocational determination, we propose again that Mr. Ness be seen by Mr. Lane Hall of Crawford Risk Management Services.

We also would be pleased to receive an update of the medical treatment Mr. Ness has received since June 24, 1985. This will help keep his entire claim file current.

We too wish to see a speedy final determination of your client's claim. We still feel however that such determination cannot be made until an evaluation of Mr. Ness's ability or inability to perform work is made.

WSLIC thus held out some hope to Ness that additional benefits might be paid. This evidence creates a genuine dispute of material fact as to when the insurer denied the claim. The cause of action does not accrue until the insurer breaches, and the insurer does not breach until it denies the claim:

[T]he better reasoned rule is that the cause of action [for insurance bad faith] accrues at the time all settlement negotiations end and not at the time of the original casualty

....

[T]he cause of action should accrue only when the insurer terminates all negotiations with the insured because only at that point can the nature and extent of insurer's breach of the covenant of good faith and fair dealing and of the damages that were proximately caused by this breach be determined.

WILLIAM M. SHERNOFF, et al., INSURANCE BAD FAITH LITIGATION, § 20.07[b], at pp. 20-46 (1991).

In this case, the record includes evidence that WSLIC did not definitively deny the claim for disability insurance benefits until it sent the letter dated August 28, 1987. The earlier statement by Ness's counsel that WSLIC was unfairly denying the claim could be viewed by a jury as an attempt to induce the insurer to pay, rather than as a recognition that the insurer had finally and irrevocably denied the claim. On this record, we cannot say that no genuine dispute of material fact exists regarding the timeliness of the complaint. We therefore reverse the trial court's summary judgment against Ness on the bad faith claim.

III.

Ness's complaint also alleged common law fraud. On appeal, he alleges two fraudulent acts by the defendants. First, Ness alleges that VNB misrepresented the disability insurance coverage sold to him, and second, he alleges that after the accident, WSLIC misrepresented to Ness the coverage available under the policy.

The motion for summary judgment asserted Ness had not pleaded his fraud claim with particularity as required pursuant to Rule 9(b), Arizona Rules of Civil Procedure and that "[n]o honest allegation supporting the so-called fraud can be made by Mr. Ness or his lawyers. The sworn...