Rowland v. Great States Ins. Co.

• Decision Date: 13 March 2001
• Docket Number: No. 2 CA-CV 00-0082.,2 CA-CV 00-0082.
• Citation: 199 Ariz. 577,20 P.3d 1158
• Parties: Lane ROWLAND, an individual, on his own behalf and as representative of a class of individuals similarly situated, Plaintiff/Counterdefendant/Appellant/Cross-Appellee, v. GREAT STATES INSURANCE COMPANY, a corporation, and Patti Marsillo, an individual, Defendants/Counterclaimants/Appellees/Cross-Appellants.
• Court: Arizona Court of Appeals

20 P.3d 1158

199 Ariz. 577

Lane ROWLAND, an individual, on his own behalf and as representative of a class of individuals similarly situated, Plaintiff/Counterdefendant/Appellant/Cross-Appellee, v. GREAT STATES INSURANCE COMPANY, a corporation, and Patti Marsillo, an individual, Defendants/Counterclaimants/Appellees/Cross-Appellants.

No. -0082.

Court of Appeals of Arizona, Division 2, Department A.

March 13, 2001.

As Corrected May 24, 2001.

Herman, Goldstein & Forsyth, P.C., Scottsdale by Keith B. Forsyth and Grabb & Durando, Tucson by Robert M. Grabb, Attorneys for Plaintiff/Counterdefendant/Appellant/Cross-Appellee.

Steven C. Lester, P.C. by Steven C. Lester, Phoenix Attorney, for Defendants/Counterclaimants/Appellees/Cross-Appellants.

PELANDER, Judge.

¶ 1 Appellees/cross-appellants Great States Insurance Company and Patti Marsillo (collectively, Great States) included independent medical examination (IME) expenses in Great States's workers' compensation lien against appellant/cross-appellee Lane Rowland's third-party tort settlement. Rowland objected and sued Great States on various theories. The trial court granted summary judgment in favor of Great States but denied its request for attorney's fees. The court also denied Rowland's subsequent motion to amend his complaint to include a claim for declaratory relief. Rowland appeals from the trial court's grant of summary judgment and its denial of the motion to amend his complaint. Great States cross-appeals from the trial court's denial of attorney's fees. We affirm in part, reverse in part, and remand the case for further proceedings.

BACKGROUND

¶ 2 The underlying facts are undisputed. In December 1996, Rowland sustained a work-related injury allegedly caused by a third-party tortfeasor. Rowland received workers' compensation benefits from Great States, his employer's insurer, and also pursued a claim against the third-party tortfeasor. In March 1997, Rowland attended an IME Great States had arranged to evaluate his need for further treatment. When Rowland later settled the third-party claim, Great States claimed a lien, pursuant to A.R.S. § 23-1023(C), in the amount of $1,140.38, consisting of $704.12 for the IME cost and $436.26 for other benefits it had paid.

¶ 3 Between January and October 1998, the parties disputed whether Arizona law permitted Great States to include the IME expense in its lien. Apparently aware of that dispute, the third-party tortfeasor's insurer did not release settlement funds to satisfy the lien until August 31, 1998, when it issued two checks payable to Rowland, his attorney, and Great States. One check covered the undisputed benefits of $436.26, and the second (IME check) was for the disputed IME expense of $704.12.

¶ 4 On September 22, Rowland and his attorney endorsed the first check and forwarded it to Great States. They did not endorse the IME check, however, but forwarded it to Great States and demanded that it endorse and return that check to them. When Great States did not promptly do so, Rowland filed this action, alleging claims for bad faith breach of the covenant of good faith and fair dealing, breach of contract, fraud, bad faith for having threatened to seek sanctions against Rowland's attorney if he filed this action, and unjust enrichment. Rowland also alleged that he filed the action on behalf of a class of similarly situated individuals.

¶ 5 Great States endorsed the IME check and returned it to Rowland after he had filed the complaint, but before it was served on Great States. Thereafter, Great States filed an answer and a counterclaim for abuse of process. Following some discovery, Rowland moved for partial summary judgment, contending § 23-1023(C) precluded Great States from including the IME expense in its lien. Great States moved for summary judgment on all of Rowland's claims, contending he had failed to allege any colorable claim for relief. The trial court granted Great States's motion, denied Rowland's, and later denied his subsequent motion to amend the complaint to add a claim for declaratory relief. This appeal and cross-appeal followed the trial court's entry of judgment, pursuant to Rule 54(b), Ariz. R. Civ. P., 16 A.R.S., dismissing Rowland's complaint with prejudice and denying Great States's request for attorney's fees.

DISCUSSION

I. Summary Judgment

¶ 6 Rowland challenges the trial court's summary judgment on two of his claims: bad faith breach of the covenant of good faith and fair dealing and breach of contract.¹ Because the underlying facts are undisputed, we determine de novo whether the trial court correctly applied the law. Bills v. Arizona Property & Cos. Ins. Guar. Fund, 194 Ariz. 488, ¶ 6, 984 P.2d 574, ¶ 6 (App.1999). We will affirm if the trial court's ruling is correct on any ground, Glaze v. Marcus, 151 Ariz. 538, 540, 729 P.2d 342, 344 (App.1986), and if the facts produced in support of Rowland's claims "have so little probative value, given the quantum of evidence required, that reasonable people could not agree with the conclusion [he] advanced." Orme School v. Reeves, 166 Ariz. 301, 309, 802 P.2d 1000, 1008 (1990).

A. Breach of Covenant of Good Faith and Fair Dealing

¶ 7 We first consider Rowland's bad faith claim for breach of the covenant of good faith and fair dealing. Section 23-1023(C), provides, in pertinent part:

If [the employee] proceeds against such other person, compensation and medical, surgical and hospital benefits shall be paid as provided in this chapter and the insurance carrier ... shall have a lien on the amount actually collectable from such other person to the extent of such compensation and medical, surgical and hospital benefits paid....

According to Rowland, the statute does not permit an insurer to recover IME expenses and, therefore, Great States's protracted attempt to do so constituted bad faith. Conversely, Great States contends no actionable bad faith exists because Rowland did not allege that Great States had intentionally and unreasonably failed to process or pay his workers' compensation claim.

¶ 8 Great States's restrictive view of bad faith is too narrow and inconsistent with Arizona law. "In Arizona, insurance contracts include an implied covenant of `good faith and fair dealing,' whereby each party is `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.'" Voland v. Farmers Ins. Co., 189 Ariz. 448, 451, 943 P.2d 808, 811 (App.1997), quoting Rawlings v. Apodaca, 151 Ariz. 149, 154, 726 P.2d 565, 570 (1986). "The core of the duty of good faith and fair dealing is that the insurer act reasonably towards its insured," Deese v. State Farm Mutual Automobile Insurance Co., 172 Ariz. 504, 508, 838 P.2d 1265, 1269 (1992), "`giving equal consideration in all matters to the insured's interest.'" Id. at 507, 838 P.2d at 1268, quoting Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 715 P.2d 1133, 1136 (1986).

¶ 9 It is undisputed that Rowland was a third-party beneficiary of the workers' compensation insurance contract between his employer and Great States. "[B]ad faith tort actions are based in the underlying contract." Lloyd v. State Farm Mut. Auto. Ins. Co., 189 Ariz. 369, 377 n. 4, 943 P.2d 729, 737 n. 4 (App.1996). See also Taylor v. State Farm Mut. Auto. Ins. Co., 185 Ariz. 174, 176, 913 P.2d 1092, 1094 (1996); Rawlings, 151 Ariz. at 153, 726 P.2d at 569. An insurer, however, "can be held liable for bad faith even when it does not violate any express provision of the insurance contract." Lloyd, 189 Ariz. at 377, 943 P.2d at 737. See also Deese; Rawlings. As Great States correctly notes, "[t]he 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." Noble v. National American Life Ins. Co., 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981). Such acts or omissions, however, are not the sole or exclusive bases for a bad faith claim.

¶ 10 For example, the insurer in Rawlings unquestionably satisfied its contractual obligations to the insureds but refused to provide them an investigative report that implicated another policyholder. Rawlings, 151 Ariz. at 152,726 P.2d at 568. Our supreme court concluded that "[f]ailure to perform the express covenant to pay the claim is not the sine qua non for an action for breach of the implied covenant of good faith and fair dealing." Id. at 157, 726 P.2d at 573. Rather, the implied covenant "entitle[s] the insured to insist that, to serve its own interests, the insurer not provide the promised protection with one hand while destroying the very objects of the relationship with the other." Id. at 155, 726 P.2d at 571. Thus, an insurer may be found liable for bad faith whenever it unreasonably "`seeks to gain financial advantage of its insured through conduct that invades the insured's right to honest and fair treatment.'" Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, ¶ 20, 995 P.2d 276, ¶ 20 (2000), quoting Rawlings, 151 Ariz. at 156, 726 P.2d at 572. And, although a contractual nexus is required, failure to pay or process a claim is not a necessary element of bad faith. Deese; Rawlings; Lloyd.

¶ 11 The common law cause of action for breach of the covenant of good faith and fair dealing extends to claims against workers' compensation insurers. See Hayes v. Continental Ins. Co., 178 Ariz. 264, 274, 872 P.2d 668, 678 (1994); Boy v. Fremont Indem. Co., 154 Ariz. 334, 337, 742 P.2d 835, 838 (App.1987); Franks v. United States Fidelity & Guar. Co., 149 Ariz. 291, 295-97, 718 P.2d 193, 197-99 (App.1985). In addition, that this action stems from an insurer's assertion of a workers' compensation lien does not necessarily negate Rowland's bad faith claim. As Great States points out, an insurer has a right to protect its valid interest so long as it does not give that interest paramount...