Rawlings v. Apodaca
Decision Date | 22 July 1986 |
Docket Number | No. 18333-PR,18333-PR |
Citation | 726 P.2d 565,151 Ariz. 149 |
Parties | , 55 USLW 2086 David L. RAWLINGS and Elizabeth Rawlings, his wife, Plaintiffs-Appellees, v. Joseph APODACA and Jane Doe Apodaca, his wife; Farmers Insurance Company of Arizona, an Arizona corporation, Defendants-Appellants. William RANEY, Jr., Pamela Kay Raney, his wife; and Jara Enterprises, an Arizona corporation, Plaintiffs-Appellees, v. Joseph APODACA and Jane Doe Apodaca, his wife, Defendants-Appellants. |
Court | Arizona Supreme Court |
Meyer, Hendricks, Victor, Osborn & Maledon, P.A., by R. Douglas Dalton, Ron Kilgard, Phoenix, for plaintiffs-appellees Rawlings.
Jennings, Strouss & Salmon by Jefferson L. Lankford, Phoenix, for plaintiffs-appellees Raney and Jara Enterprises.
Dake, Hathaway, Fritz & Swan, P.A. by Milton W. Hathaway, Jr., Teresa Goering, Phoenix, for defendants-appellants, Apodaca and Farmers Ins. Co.
Mariscal, Weeks, McIntyre & Friedlander, P.A. by Gary L. Birnbaum, Daniel R. Drake, Phoenix, for amicus curiae First American Title Ins. Co.
Langerman, Begam, Lewis and Marks by Amy G. Langerman, Phoenix, for amicus curiae Arizona Trial Lawyers Ass'n.
David and Elizabeth Rawlings petitioned this court to review an opinion of the court of appeals which reversed the trial court's judgment in their favor. Rawlings v. Apodaca, 151 Ariz. 180, 726 P.2d 596 (App.1985). We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S § 12-120.24. We granted review to clarify the law of this state with regard to the "tort of bad faith." Rule 23, Ariz.R.Civ.App.P., 17A A.R.S. The issues we consider involve analysis of the type of conduct by an insurer that will support a tort action for "bad faith". We also consider what type of conduct will justify the imposition of punitive damages.
The case was tried to the court, which made findings of fact and conclusions of law. Taken in the light most favorable to sustaining the judgment, the facts are as follows. On July 25, 1979 a fire near Laveen in Maricopa County caused extensive damage to the dairy farm owned by plaintiffs, David and Elizabeth Rawlings (Rawlings). They believed that the Apodacas, who lived nearby, started the fire by negligently burning trash in violation of Arizona law. Farmers Insurance Co. of Arizona (Farmers) insured Rawlings under a homeowners policy that provided only $10,000 coverage for their haybarn, which was destroyed in the fire along with the hay and seed in it, and nearby farm equipment.
Soon after the fire, Rawlings filed their insurance claim, and Farmers commissioned a private investigating firm to determine the cause of the fire. When the fire investigators came to Rawlings' farm on August 3, Mr. Rawlings told them that he had sizeable uninsured losses 1 and that he was interested in pursuing a claim against the Apodacas. Rawlings specifically asked whether he should have his own investigation done or whether he would have access to the report. They told him that he would receive a copy of their report and need not undertake his own investigation. Rawlings also suggested that Farmers might want to join its subrogation claim with Rawlings' claim against Apodacas. Based on the assurances that they would have access to the investigative report, the Rawlings did not hire their own investigator.
The report was prepared August 17, 1979. The investigators verified that the Apodacas had started the fire. They also learned that the Apodacas had a $100,000 insurance policy covering their liability for the damages sustained by Rawlings. This policy had also been written by Farmers, which found itself in the unhappy position of having insured both a small portion of Rawlings' fire loss and all of Apodacas' liability exposure for that loss.
Both before and after the report was prepared, Mr. Rawlings spoke with Darrell Schultz, the Farmers representative who had retained the fire investigators, and was told that he would receive the report as soon as it was ready. In later conversations, however, Farmers referred Rawlings to the investigative firm, which in turn referred them back to Farmers. Farmers did not tell Rawlings that it already had the report nor that it was Apodacas' liability insurer.
On August 28, 1979 Farmers sent Rawlings a check for $10,000, their policy limit. Having failed to obtain the report, in September Rawlings retained an attorney to pursue the matter. The lawyer contacted Schultz, who said that the report had been received, refused to provide it and said that it contained nothing of interest to Rawlings. The trial judge specifically found that Schultz knew this to be false. (Findings of Fact Nos. 5 and 6.) Rawlings' attorney then filed a complaint with the Arizona Department of Insurance. Farmers finally agreed to give Rawlings the report, but only if Rawlings paid half its cost. Rawlings refused and instead brought suit against both the Apodacas and Farmers. Rawlings alleged that the Apodacas negligently caused the fire and that Farmers "... breached its obligation of good faith and fair dealing with its insureds...." Rawlings also sought punitive damages and attorneys' fees. Having filed a lawsuit against Farmers, Rawlings was finally able to obtain the report through deposition of the custodian of records of the investigative firm.
During trial, James Richardson, an expert witness on insurance practices, testified that when an insurer is faced with a conflict of interest, such as that which faced Farmers, the proper procedure is not to "betray" one insured to protect the company's own purse, but to represent each insured independently. Because the report was prepared for Farmers when it was acting as Rawlings' insurer, the expert testified, Farmers should have cooperated with the Rawlings.
The trial court found that the Apodacas had negligently caused the fire and that Farmers had breached its duty of good faith and fair dealing. The court also found that Rawlings was damaged by Farmers' conduct. The court found the Apodacas liable to Rawlings for compensatory damages and awarded Rawlings $1,000 in compensatory and $50,000 in punitive damages against Farmers. Apodacas and Farmers appealed. The court of appeals affirmed the judgment against the Apodacas, having concluded there was ample evidence to support the finding that they had caused the fire. No review was sought on this issue. However, the court of appeals reversed the trial court judgment on the bad faith claim. It agreed with Farmers that the tort of bad faith was inapplicable to this case. Relying on Noble v. National American Life Insurance Co., 128 Ariz. 188, 624 P.2d 866 (1981), the court held that because Farmers had paid Rawlings' claim in full (the policy limits) and without delay, it could not be liable for the tort of bad faith.
This case involves the covenant of good faith and fair dealing which was recognized by Arizona law in Noble v. National American Life Insurance Co., supra. The facts of this case, in which the first-party insurer is also the tortfeasor's liability insurer, present an issue of first impression in Arizona. The question is whether an insurer violates the covenant of good faith and fair dealing when, for the purpose of protecting its own interests, it acts improperly to impede its insured's recovery of the uninsured portion of the loss. The parties have not cited and our research has not brought to light any reported case that has examined this issue.
Farmers argues that actionable bad faith by an insurer facing a first-party claim 2 is limited to the unfounded refusal or delay in payment of a valid claim. Plaintiffs argue that such a rule grants insurance companies license to abuse their relationship with and power over their insured. They urge that bad faith claims are not limited to situations involving breach of the express promise to pay covered claims.
The issues raised by the foregoing facts cannot be resolved without a brief analysis of the nature of the so-called "tort of bad faith" and the related implied covenant of good faith and fair dealing. Only in this way can we ascertain, first, whether Farmers breached some obligation which it owed to Rawlings and, if so, whether the remedy for the wrong sounds in contract or in tort.
The law implies a covenant of good faith and fair dealing in every contract. Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 383, 710 P.2d 1025, 1038 (1985); see also Restatement (Second) of Contracts § 205 (1981); 5 WILLISTON ON CONTRACTS § 670 at 159 (3rd ed., Jaeger ed. 1961). The duty arises by virtue of a contractual relationship. The essence of that duty is that neither party will act to impair the right of the other to receive the benefits which flow from their agreement or contractual relationship. Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. at 383, 710 P.2d at 1038; Noble v. National American Life Insurance Co., supra; Fortune v. National Cash Register Co., 373 Mass. 96, 104, 364 N.E.2d 1251, 1257 (1977); Comunale v. Traders & General Insurance Co., 50 Cal.2d 654, 658, 328 P.2d 198, 200 (1958).
Thus, firmly established law indicates that the insurance contract between plaintiffs and Farmers included a covenant of good faith and fair dealing, implied in law, whereby each of the parties was bound to refrain from any action which would impair the benefits which the other had the right to expect from the contract or the contractual relationship. We commented upon this in Wagenseller, where we stated that "the relevant inquiry always will focus on the contract itself, to determine what the parties did agree to." Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. at 385, 710 P.2d at 1040. In Wagenseller we held that the nature of the employment-at-will contract was such that a termination...
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