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Clearwater v. State Farm Mutual Automobile Insurance Co.5/1/1990
We granted review to examine the applicable standard of conduct in a third-party bad faith claim against an insurer for failure to accept a reasonable settlement offer within policy limits. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3), and A.R.S. § 12-120.24.
Facts
On August 30, 1980, Alfred B. Clearwater was killed in a traffic accident when his motorcycle collided with a car driven by Edward Francis. Francis was insured by petitioner State Farm Mutual Automobile Insurance Company, and carried liability coverage of $50,000.00. Annette and Alfred Clearwater, decedent's parents, filed a wrongful death action against Francis. Pursuant to terms of the liability insurance policy, State Farm defended the claim. During the course of the litigation, State Farm refused three offers of settlement within the policy limits. Mr. Francis was not notified of these offers due to State Farm's internal policy not to inform insureds of settlement offers less than the policy limit. The jury returned a verdict in favor of the Clearwaters for $125,000.00 and judgment was entered against Francis in that amount. State Farm paid the policy limit of $50,000.00 and Mr. Francis assigned any bad faith claims against State Farm to the Clearwaters in return for their covenant not to execute the judgment against him personally.
The Clearwaters filed this third-party bad faith action against State Farm on May 3, 1984. On July 11, 1986, the jury returned a verdict in their favor for $75,000.00, the amount by which the wrongful
death judgment exceeded policy limits. The trial court entered judgment for that amount plus attorneys' fees of $25,237.75. State Farm timely appealed, alleging that the trial court's refusal to give one of its requested jury instructions constituted reversible error. State Farm requested a "fairly debatable" instruction stating:
An insurance company may challenge claims which are fairly debatable and is not guilty of bad faith in so doing.
The trial court refused that instruction and instructed the jury on the tort of third-party bad faith with an "equal consideration" instruction, as follows:
In determining whether the State Farm Mutual Automobile Insurance Company breached its duty of good faith and fair dealing, you must consider the comparative hazards to which it exposed itself and its policyholder, Edward Francis, in rejecting offers of settlement. In doing so, you must consider:
1. The amount of financial risk to which each party is exposed in the event of a refusal to settle;
2. The strength of the injured claimants' case on the issues of liability and damages;
3. The failure of the insurance company to inform the insured of offers of settlement; and
4. The failure of the insurance company to properly investigate the circumstances so as to ascertain the evidence against the insured.
In every insurance policy there is a duty imposed by law of good faith and fair dealing. This obligation requires an insurance company, such as the defendant, State Farm Mutual Automobile Insurance Company, to deal in good faith and fairly with its insured in handling a claim against its insured.
This duty of good faith and fair dealing requires the insurance company to give equal consideration to the interests of its insured as it gives its own interests.
The court of appeals found State Farm's argument persuasive and reversed the judgment. The court held, inter alia, that the "fairly debatable" instruction applies to third -party
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