Noble v. National American Life Insurance , 128 Ariz. 188 ( 1981 )

HOLOHAN, Vice Chief Justice.

Appellant, Rosemarie Noble, purchased a health insurance policy from appellee, National American Life Insurance Company. Subsequently, she had surgery which resulted in surgical and hospital expenses of $1,503.53. A claim under the health insurance policy was submitted to the insurance company, but it refused to pay the claim. Appellant filed an action in the superior court alleging in count I, breach of contract and in count II, the tort of bad faith refusal to pay an insurance claim.

The superior court granted the defendant insurance company’s motion to dismiss count II for failure to state a claim for relief. The superior court, pursuant to Rule 54(b), Arizona Rules of Civil Procedure, entered judgment dismissing count II. A timely appeal was filed.¹ The court of appeals reversed the judgment of the superior court. Noble v. National American Life Insurance Co., 128 Ariz. 196, 624 P.2d 874 (App.1979). We accepted review. Opinion of the court of appeals is vacated. The judgment of the superior court is reversed.

The issue presented is whether Arizona recognizes as a tort an insurer’s bad faith refusal to pay a valid claim submitted by its insured under a policy of insurance.

While there are no Arizona cases precisely on point,² a number of other jurisdictions recognize the existence of tort liability for the willful refusal of an insurance company to pay a valid claim by its insured. See Santilli v. State Farm Life Insurance Co., (1977), 278 Or. 53, 562 P.2d 965, n.4, and cases cited therein.³ In some instances the tort has been created by statute and in others the liability has been developed by case decision.

The leading case on this issue is the California Supreme Court’s decision in Gruenberg v. Aetna Insurance Co., 9 Cal.3d 566, 510 P.2d 1032, 108 Cal.Rptr. 480 (1973). In Gruenberg the court extended the duty of good faith owed by an insurance company to settle the claims of third parties against an insured to include a duty of acting in good faith in paying the valid claims of the insured. The Supreme Court of California stated:

It is manifest that a common legal principle underlies all of the foregoing decisions; namely, that in every insuranee contract there is an implied covenant of good faith and fair dealing. The duty to so act is imminent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort. Gruenberg, supra, 9 Cal.3d at 575, 510 P.2d at 1038, 108 Cal.Rptr. at 486.

A few jurisdictions have criticized the Gruenberg rationale and have refused to follow it. See Santilli v. State Farm Life Insurance Co., supra; Lawton v. Great Southwest Fire Insurance Co., 118 N.H. 607, 392 A.2d 576, 580-81 (1978). It appears, however, that a majority of jurisdictions considering the issue have followed the decision in Gruenberg.

We are persuaded that there are sound reasons for recognizing the rule announced in Gruenberg. The special nature of an insurance contract has been recognized by courts and legislatures for many years. A whole body of case and statutory law has been developed to regulate the relationship between insurer and insured. An insurance policy is not obtained for commercial advantage; it is obtained as protection against calamity. Egan v. Mutual of Omaha Insurance Co., 24 Cal.3d 809, 820, 598 P.2d 452, 457, 157 Cal.Rptr. 482, 487 (1979). In securing the reasonable expectations of the insured under the insurance policy there is usually an unequal bargaining position between the insured and the insurance company. Craft v. Economy Fire & Casualty Co., 572 F.2d 565, 569 (7th Cir. 1978). When the loss insured against occurs the insured expects to have the protection provided by his insurance. Often the insured is in an especially vulnerable economic position when such a casualty loss occurs. The whole purpose of insurance is defeated if an insurance company can refuse or fail, without justification, to pay a valid claim. We have determined that it is reasonable to conclude that there is a legal duty implied in an insurance contract that the insurance company must act in good faith in dealing with its insured on a claim, and a violation of that duty of good faith is a tort.

A final point raised by the parties and Amici is that the elements of this tort are not really defined. We disagree. Probably the best exposition on this point is the Wisconsin Supreme Court’s decision in Anderson v. Continental Insurance Co., 85 Wis.2d 675, 271 N.W.2d 368 (1978). The Anderson Court states:

To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. It is apparent, then, that the tort of bad faith is an intentional one.

The tort of bad faith can be alleged only if the facts pleaded would, on the basis of an objective standard, show the absence of a reasonable basis for denying the claim, i. e., would a reasonable insurer under the circumstances have denied or delayed payment of the claim under the facts and circumstances. 271 N.W.2d at 376-77.

Under the Anderson standard an insurance company may still challenge claims which are fairly debatable. The tort of bad faith arises when the insurance company intentionally denies, fails to process or pay a claim without a reasonable basis for such action.

Although the allegations of count II of the complaint leave much to be desired, the plaintiff should be allowed to amend the complaint to set forth, if possible, sufficient ultimate facts to state a claim. It is evident, however, that the superior court dismissed count II because it believed that Arizona did not recognize the tort of bad faith failure or refusal to pay a first party insurance claim. The judgment of the superior court dismissing count II is reversed with directions to reinstate count II of the complaint and proceed consistent with the views expressed in this opinion.

CAMERON and GORDON, JJ., concur.

1 . Count I was dismissed pursuant to stipulation of the parties soon after plaintiff filed this appeal.

2 . In the only Arizona case mentioning this issue, the court of appeals implied in dicta that they might recognize the tort of insurer bad faith refusal to pay reasonable claims. John Hancock Mutual Life Insurance Co. v. McNeill, 27 Ariz.App. 502, 508, 556 P.2d 803, 809 (1976).

3 . See also Corwin Chrysler-Plymouth, Inc. v. Westchester Fire Insurance Co., 279 N.W.2d 638, 643 (N.D.1979); Christian v. American Home Assurance Co., 577 P.2d 899, 904 (Okl. 1978).