Legal Memorandum: Insurer's Liability for Bad Faith Claim

Issue: In Arizona, may an insurer be liable for bad faith when it violates no contract term?

In TA s "Lloyd v. State Farm Mut. Auto. Ins. Co., 189 Ariz. 3" c 1 l "Lloyd v. State Farm Mut. Auto. Ins. Co., 189 Ariz. 369, 943 P.2d 729 (Ct. App. 1996)"Lloyd v. State Farm Mut. Auto. Ins. Co., 189 Ariz. 369, 943 P.2d 729 (Ct. App. 1996), an Arizona appellate court was  State Farm undertook to defend a claim that, as it turned out, the company was not contractually obligated to defend because the vehicle in question was not covered under the plaintiff’s policy.  The trial court held that the insurance company could not be liable for bad faith since there was no underlying contract that required it to defend the claim.  On appeal, the court reversed, holding that “it has consistently been held that an insurer can be held liable for bad faith even when it does not violate any express provision of the insurance contract.”  TA s "Lloyd v. State Farm Mut. Auto. Ins. Co., 189 Ariz. 3" c 1Lloyd, 943 P.2d at 737.  Noting that a contract of insurance provided the “context for the litigation,” the Arizona Appeals Court found that the pertinent question was whether the claims “arose out of that contract.”  TA s "Lloyd v. State Farm Mut. Auto. Ins. Co., 189 Ariz. 3" c 1Id. at 736. 

Similarly, in TA s "Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 5" c 1 l "Deese v. State Farm Mut. Auto. Ins. […]