Legal Memorandum: Duty of Good Faith

Issue: Do disability insurance carriers have a duty of fair dealing when they undertake to settle policy claims by converting monthly payments to lump sums in Arizona?

The duty of good faith particularly arises in the context of settling claims under insurance policies.  See generally Stephen S. Ashley, Bad Faith Actions § 5:05 (1997 & Supp. 1999).

Several non‑Arizona cases support the existence of the duty and the resulting tort cause of action in this context.  For example, in Trepanier v. Bankers Life & Cas. Co., 167 Vt. 590, 706 A.2d 943 (1997), the Vermont Supreme Court implicitly recognized that a bad faith cause of action can arise in connection with the conversion of a monthly benefit to a lump sum.  In Trepanier, the insurer entered into negotiations with its insured to substitute a lump-sum payment for the $400‑a‑month disability benefit that was specifically set forth in the policy.  Although the insured signed the settlement agreement, the disability insurance company repudiated the settlement agreement because the insured later lapsed into a coma and died, which made the lump-sum settlement a losing proposition for the insurance company.  The insured’s next of kin then sued the insurer for breach of contract and for bad faith arising from its repudiation of the settlement agreement.  While the Vermont Supreme Court disposed of the case on contract grounds, the court remanded for the trial court to address the unresolved bad faith claim, thereby implicitly recognizing the duty of good faith in connection with converting a monthly benefit to a lump-sum payment.  Clearly, any other result would give the insurance company license to abuse its trust and either […]