Arizona Requires Defense of Insured While Coverage Action Is Pending

Post 205 of 228

Summary:  Insureds receive a jury trial about bad faith of insurers in not defending them while coverage action was pending and then decided against insurers.

Lennar Corp. v Transamerica Ins. Co., 251 P.3d 421 (Ct. of Ap. AZ 2011)

The plaintiff insureds in the underlying case were a group of related companies that developed and built 105 homes in a suburb of Phoenix. Several homeowners filed suit and Lennar, the developer/builder, tendered the claims to multiple insurers. The insurers denied coverage. The insurers then filed a declaratory judgment action on the coverage issue and the insureds countersued for breach of the duty of good faith and fair dealing (i.e., bad faith) against the insurers.

The trial court granted summary judgment in favor of the insurers on the basis that the defects in the homes were not “occurrences” within the meaning of the policy. The Court of Appeals reversed that determination holding that the homeowners allegations of damage resulted from defective construction constituted an “occurrence.” After going back to the trial court, the insurers again moved for summary judgment on the basis that as a matter of law they had a reasonable basis for denying coverage since the trial court had initially ruled in their favor. The trial court agreed and again entered summary judgment.

On appeal the second time the court ruled that it was a question of fact as to whether the insurers had acted reasonably in denying coverage and whether their arguments were fairly debatable and accordingly the court reversed the summary judgment. The court suggested that evidence of how other insurers in general interpreted “occurrence” language could be relevant to a determination of whether they acted reasonably. The duty of good faith and fair dealing required that the insurers reasonably investigate Lennar’s claim for damages while the coverage issue was unresolved. In a notable break from the law in most jurisdictions the court disagreed with the insurers’ argument that filing a declaratory judgment action was sufficient to also fulfill its obligations to handle and investigate the claim.

Accordingly, to prevent being sued for bad faith an insurer must investigate the claim and then presumably defend it while at the same time proceeding with the coverage action against the insured.

If the insurers here act like most insurers there will not be a third appeal because the insurers will settle since they will not want to explain to the jury how they were wrong but reasonable in not defending the insureds.

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