Voland v. Farmers Ins. Co. of Arizona

• Decision Date: 11 February 1997
• Docket Number: No. 2,CA-CV,2
• Citation: 943 P.2d 808,189 Ariz. 448
• Parties: , 236 Ariz. Adv. Rep. 40 Kim VOLAND, Plaintiff/Appellant, v. FARMERS INSURANCE COMPANY OF ARIZONA; and State Farm Mutual Automobile Insurance Company, Defendants/Appellees. 96-0202.
• Court: Arizona Court of Appeals

Page 808

943 P.2d 808

189 Ariz. 448, 236 Ariz. Adv. Rep. 40

Kim VOLAND, Plaintiff/Appellant, v. FARMERS INSURANCE COMPANY OF ARIZONA; and State Farm Mutual Automobile Insurance Company, Defendants/Appellees.

No. 2 CA-CV 96-0202.

Court of Appeals of Arizona Division 2, Department A.

Feb. 11, 1997.

Review Denied Sept. 16, 1997.

[189 Ariz. 450] Risner & Graham by Kenneth K. Graham, Tucson, for Plaintiff/Appellant.

Chandler, Tullar, Udall & Redhair, L.L.P. by D.B. Udall, Tucson, for Defendant/Appellee Farmers Insurance Company of Arizona.

O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A. by Ralph E. Hunsaker and Christopher Robbins, Phoenix, for Defendant/Appellee State Farm Mutual Automobile Insurance Company.

OPINION

PELANDER, Presiding Judge.

This case presents an issue of first impression in Arizona: does the implied covenant of good faith and fair dealing require an insurance carrier to pay undisputed portions of uninsured motorist (UM) benefits to its insured/claimant before the latter executes a release or obtains an arbitration award? Concluding that defendants/appellees Farmers and State Farm (the carriers) had no such obligation in this case, the trial court granted summary judgment for them and against their insured, plaintiff/appellant Kim Voland. For the reasons stated below, we affirm.

The parties stipulated to the following facts. In March 1992, plaintiff was injured in an accident caused solely by a negligent uninsured motorist. She made a claim for UM benefits under her State Farm and Farmers auto insurance policies, which had UM limits of $25,000 and $100,000 respectively. In April 1993, plaintiff made a settlement demand for the combined limits of $125,000. By that time plaintiff had submitted to both carriers medical records and bills totalling $5,587.14 and verification for lost wages totalling $5,130.62. Neither carrier disputed that the medical bills were reasonable and causally-related to the accident or that the lost wages were caused by the accident.

By late April 1993, both carriers had determined that the value of plaintiff's UM claim was between $30,000 and $40,000. Farmers' representative (on behalf of both carriers) wrote to plaintiff's counsel in May, stating "we feel this claim has a fair value of $30,000" and offering to settle for that amount. A few days later plaintiff's counsel wrote to the carriers, demanding arbitration under their policies ¹ and requesting them to pay plaintiff the $30,000 which they had offered. Relying in his letter on Borland v. Safeco Ins. Co., 147 Ariz. 195, 709 P.2d 552 (App.1985), and Filasky v. Preferred Risk Mut. Ins. Co., 152 Ariz. 591, 734 P.2d 76 (1987), plaintiff's counsel requested the carriers to send "drafts totalling the amount of $30,000.00," stated "[w]e can arbitrate the difference," and concluded: "Although I believe that your evaluation of this claim at $30,000.00 is without foundation and itself is evidence of bad faith, it is clear that failure to pay the undisputed amount would be bad faith."

At no time during negotiations did the carriers pay the $30,000 plaintiff's counsel had requested, nor did they pay plaintiff for her undisputed medical expenses or lost wage claim. Plaintiff or her counsel, however, never specifically requested the carriers to pay only the amount of the medical bills and lost earnings. After the carriers increased their joint offer to $50,000 and plaintiff reduced her settlement demand to $80,000 in October 1993, the matter proceeded to arbitration in December and the arbitrators awarded plaintiff $60,000. Plaintiff accepted that award, conditioned on her right to bring this action. Plaintiff's complaint alleged both carriers had an obligation "to pay undisputed amounts owed to her" under their policies, and their failure to do so "constitutes breach of contract and bad faith." This appeal followed the trial court's summary judgment ruling which rejected plaintiff's claims.

Because the material facts in this case are undisputed, we determine de novo whether the trial court correctly applied the substantive law to those facts. DeSzendeffy v. Threadgill, 178 Ariz. 464, 465, 874 P.2d 1021, 1022 (App.1994). We will affirm if the trial court's disposition is correct for any reason. Glaze v. Marcus, 151 Ariz. 538, 540, 729 P.2d 342, 344 (App.1986).

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." Rawlings v. Apodaca, 151 Ariz. 149, 154, 726 P.2d 565, 570 (1986). " '[T]he relevant inquiry always will focus on the contract itself, to determine what the parties did agree to.' " Id., quoting Wagenseller v. Scottsdale Memorial Hosp., 147 Ariz. 370, 385, 710 P.2d 1025, 1040 (1985). However,

one of the benefits that flow from the insurance contract is the insured's expectation that his insurance company will not wrongfully deprive him of the very security for which he bargained or expose him to the catastrophe from which he sought protection. Conduct by the insurer which does destroy the security or impair the protection purchased breaches the implied covenant of good faith and fair dealing implied in the contract.

Rawlings, 151 Ariz. at 155, 726 P.2d at 571.

We have neither been cited to nor found any reported Arizona decisions addressing bad faith allegations relating to a carrier's handling of a UM claim. ² We see no reason why the implied covenant of good faith and fair dealing should not apply to the UM context. In that regard, we generally agree with the following observations by the Alabama Supreme Court:

Uninsured motorist coverage ... is a hybrid in that it blends the features of both first-party and third-party coverage. The first-party aspect is evident in that the insured makes a claim under his own contract. At the same time, however, third-party liability principles also are operating in that the coverage requires the insured to be "legally entitled" to collect--that is, the insured must be able to establish fault on the part of the uninsured motorist and must be able to prove the extent of the damages to which he or she would be entitled. The question arises: when is a carrier of uninsured motorist coverage under a duty to pay its insured's damages?

There is no universally definitive answer to this question or to the question when an action alleging bad faith may be maintained for the improper handling of an uninsured or underinsured motorist claim; the answer is, of course, dependent upon the facts of each case. Clearly, there is a covenant of good faith and fair dealing between the insurer and the insured, as with direct insurance, but the insurer and the insured occupy adverse positions until the uninsured motorist's liability is fixed....

LeFevre v. Westberry, 590 So.2d 154, 159 (Ala.1991). Although a UM carrier may assert all defenses which would be available to the uninsured motorist, it still owes a duty of good faith and fair dealing to its insured/claimant. State Farm Mut. Auto. Ins. Co. v. Shrader, 882 P.2d 813, 826-27 (Wyo.1994), quoting 2 Alan I. Widiss, Uninsured and Underinsured Motorist Insurance § 20.4 at 161-62 (2nd ed. 1992).

Plaintiff primarily contends the carriers breached the implied covenant by failing to pay her, in advance, the acknowledged $30,000 "fair value" of her claim. Seizing on the language in the carriers' written settlement offer, plaintiff claims "$30,000.00 was the minimum 'fair value' of the claim as determined jointly by their adjusters." Based on that premise, she maintains the carriers acted in bad faith by withholding that sum from her while the parties followed the policies' arbitration procedure to resolve their dispute about value, or until she executed a release.

Plaintiff's argument is flawed because it overstates the significance of the carriers' choice of the term "fair value" in their $30,000 settlement offer. Contrary to plaintiff's contention, that the carriers considered her claim's "fair value" to be $30,000 and therefore offered to settle for that amount does not mean they acknowledged that was "the minimal amount the insurer's own adjuster ha[d] evaluated as being owed to the insured." Rather, the settlement offer was simply a proposal to compromise and resolve the claim, nothing more and nothing less. It represented the carriers' evaluation or best estimate, at that point in time, of what the trier (here, the arbitrators) might award.

The carriers' settlement offer did not bind them if, as it turned out, the claim could not be settled and had to be arbitrated. Nor did it set a "floor" on what the arbitrators had to award or what the carriers ultimately would have to pay. As State Farm correctly notes, "an unaccepted settlement offer does not liquidate the amount of damages or constitute an admission of 'undisputed amounts' owed."

If, in order to avoid a bad faith claim, UM carriers were obligated to pay the amount of their lowest settlement offer without obtaining any release and before any arbitration hearing or award, they would have little if any incentive to settle. Imposing such a requirement would have a chilling effect on genuine settlement evaluations and negotiations. The effect would be to deter settlement and foster litigation, whereas our system of justice encourages settlement and discourages litigation. See State Farm Mut. Auto. Ins. Co. v. Peaton, 168 Ariz. 184, 194, 812 P.2d 1002, 1012 (App.1990).

As she did during pre-arbitration negotiations, plaintiff relies on Borland and Filasky to support her position. In Borland, the insured made a theft claim under her homeowner's policy for twelve jewelry items stolen during a burglary of her home. On appeal from a jury verdict for the insured, Division One of this court held that the homeowner's insurer's delay in adjusting the...