Noble v. National American Life Ins. Co., 14531-PR

• Citation: 624 P.2d 866,128 Ariz. 188
• Decision Date: 17 February 1981
• Docket Number: No. 14531-PR,14531-PR
• Parties: Rosemarie NOBLE, Appellant, v. NATIONAL AMERICAN LIFE INSURANCE COMPANY, Appellee.
• Court: Supreme Court of Arizona

Page 866

624 P.2d 866

128 Ariz. 188

Rosemarie NOBLE, Appellant, v. NATIONAL AMERICAN LIFE INSURANCE COMPANY, Appellee.

No. 14531-PR.

Supreme Court of Arizona, In Banc.

Feb. 17, 1981.

Cox & Cox by Randall R. Douglas, Phoenix, for appellant.

Fennemore, Craig, von Ammon & Udall by Ruth V. McGregor, Stacy Olliphant, Phoenix, for appellee.

Hofmann, Salcito & Stevens by James W. Fritz, Phoenix, for amici curiae State Farm.

Jones, Teilborg, Sanders, Haga & Parks, by William R. Jones, Jr., Phoenix, for amici curiae National Association/American Insurance.

Snell & Wilmer by Warren E. Platt, Richard K. Mahrle, Phoenix, for amici curiae American Council of Life Ins./The Health Insurance Association of America.

Miller, Pitt & Feldman by Stanley G. Feldman, Nanette M. Warner, Tucson, for amici curiae Arizona Trial Lawyers Association.

HOLOHAN, Vice Chief Justice.

Appellant, Rosemarie Noble, purchased a health insurance policy from appellee, National American Life Insurance Company. Subsequently, she had surgery which resulted in surgical and hospital expenses of $1,503.53. A claim under the health insurance policy was submitted to the insurance company, but it refused to pay the claim. Appellant filed an action in the superior court alleging in count I, breach of contract and in count II, the tort of bad faith refusal to pay an insurance claim.

The superior court granted the defendant insurance company's motion to dismiss count II for failure to state a claim for relief. The superior court, pursuant to Rule 54(b), Arizona Rules of Civil Procedure, entered judgment dismissing count II. A timely appeal was filed. ¹ The court of appeals reversed the judgment of the superior court. Noble v. National American Life Insurance Co., 128 Ariz. ---, 624 P.2d 874 (1 CA-CIV 4006 filed June 28, 1979). We accepted review. Opinion of the court of appeals is vacated. The judgment of the superior court is reversed.

The issue presented is whether Arizona recognizes as a tort an insurer's bad faith refusal to pay a valid claim submitted by its insured under a policy of insurance.

While there are no Arizona cases precisely on point, ² a number of other jurisdictions recognize the existence of tort liability for the willful refusal of an insurance company to pay a valid claim by its insured. See Santilli v. State Farm Life Insurance Co., (1977), 278 Or. 53, 562 P.2d 965, n.4, and cases cited therein. ³ In some instances the tort has been created by statute and in others the liability has been developed by case decision.

The leading case on this issue is the California Supreme Court' decision in Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 510 P.2d 1032, 108 Cal.Rptr. 480 (1973). In Gruenberg the court extended the duty of good faith owed by an insurance company to settle the claims of third parties against an insured to include a duty of acting in good faith in paying the valid claims of the insured. The Supreme Court of California stated:

It is manifest that a common legal principle underlies all of the foregoing decisions; namely, that in every insurance contract there is an implied covenant of good faith and fair dealing. The duty to so act is imminent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. Gruenberg, supra, 9 Cal.3d at 575, 510 P.2d at 1038, 108 Cal.Rptr. at 486.

A few jurisdictions have criticized the Gruenberg rationale and have refused to follow it. See Santilli v. State Farm Life Insurance Co., supra; Lawton v. Great Southwest Fire Insurance Co., 118 N.H. 607, 392 A.2d 576, 580-81 (1978). It appears, however, that a majority of jurisdictions considering the issue have followed the decision in Gruenberg.

We are persuaded that there are sound reasons for recognizing the rule announced in Gruenberg. The special nature of an insurance contract has been recognized by courts and legislatures for many years. A whole body of case and statutory law has been developed to regulate the relationship between insurer and insured. An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity. Egan v. Mutual of Omaha Insurance Co., 24 Cal.3d 809, 820, 598 P.2d 452, 457, 157 Cal.Rptr. 482, 487 (1979). In securing the reasonable expectations of the insured under the insurance policy there is usually an unequal bargaining position between the insured and the insurance company. Craft v. Economy Fire & Casualty Co., 572 F.2d 565, 569 (7th Cir. 1978). When the loss insured against occurs the insured expects to have the protection provided by his insurance. Often the insured is in an especially vulnerable economic position when such a casualty loss occurs. The whole purpose of insurance is defeated if an insurance company can refuse or fail, without jurisdiction, to pay a valid claim. We have determined that it is reasonable to conclude 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.

A final point raised by the parties and Amici is that the elements of this tort are not really defined. We disagree. Probably the best exposition on this point is the Wisconsin Supreme Court's decision in Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978). The Anderson Court states:

To show a claim for 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. It is apparent, then, that the tort of bad faith is an intentional one.

The tort of bad faith can be alleged only if the facts pleaded would, on the basis of an objective standard, show the absence of a reasonable basis for denying the claim, i. e., would a reasonable insurer under the circumstances have denied or delayed payment of the claim under the facts and circumstances. 271 N.W.2d at 376-77.

Under the Anderson standard an insurance company may still challenge claims which are fairly debatable. The tort of bad faith arises when the insurance company intentionally denies, fails to process or pay a claim without a reasonable basis for such action.

Although the allegations of count II of the complaint leave much to be desired, the plaintiff should be allowed to amend the complaint to set forth, if possible, sufficient ultimate facts to state a claim. It is evident, however, that the superior court dismissed count II because it believed that Arizona did not recognize the tort of bad faith failure or refusal to pay a first party insurance claim. The judgment of the superior court dismissing count II is reversed with directions to reinstate count II of the complaint and proceed consistent with the views expressed in this opinion.

CAMERON and GORDON, JJ., concur.

STRUCKMEYER, Chief Justice, dissenting.

Appellant, Rosemarie Noble, brought this action alleging in one count of her complaint a breach of contract, and in a second count a breach of implied warranty of good faith and fair dealing by her insurer, the National American Life Insurance Company. After a voluntary dismissal of count one, leaving only count two, the Superior Court dismissed appellant's complaint for failure to state a claim upon which relief could be granted. Both parties to this action urge this Court to decide whether Arizona recognizes a claim in tort for an insurer's refusal to deal fairly and in good faith with its insured. It is my opinion that the issue is not properly presented for decision because appellant's complaint did not allege sufficient facts to state a claim of an insurer's refusal to deal fairly and in good faith. I also believe that the creation of a cause of action where none previously existed is best left to the legislative branch of government.

We said in Phoenix Professional Hockey Club, Inc. v. Hirmer, 108 Ariz. 482, 483, 502 P.2d 164 (1972): "the existence of a duty to the plaintiff is a prerequisite to tort liability." But the duty, the breach of which gives rise to a tort claim, must be a general duty imposed by law apart from a contract rather than a contractual duty imposed by consent. See, e. g., Felder v. Great Am. Ins. Co., 260 F.Supp. 575, 578 (D.S.C.1966). If the duty is private, created by the terms of a contract, no remedy in tort is available for its breach. "The relation between the remedies in contract and tort presents a very confusing field, still in process of development, in which few courts have made any attempt to chart a path. The earliest cases arising in the borderland were those of negligence on the part of persons engaged in a public trade or calling, as where a ferryman overloaded his boat and drowned the plaintiff's horses, or a Smith lamed a horse while shoeing it. The action was on the case, and the underlying theory seems to have been at first one of pure tort. In the course of time the defendant's 'assumpsit,' or undertaking, came to be regarded as the real foundation of the action; and with the development of the action of assumpsit and the idea of consideration, the obligation of the contract became recognized as in itself a basis of liability. The tort remedy survived, however, in the situations where it had already existed; and the more or less inevitable efforts of lawyers to turn every breach of contract into a tort forced the English courts to find some line of demarcation." Prosser, The Law of Torts (4th ed. 1971) § 92, p. 614. (Footnotes omitted.)

Heretofore, only if a duty is owed independent of the contract, although arising from a contractual relationship and imposed by law on the relationship, has a tort remedy been available. See McClure...