State Farm Sued for Bad Faith Processing of "Debatable" Claim

Where State Farm repeatedly refused to pay the policy limit on an insured's claim, and an arbitrator later awarded her almost four times that amount, she can sue for bad faith - even though the claim was "fairly debatable," says the Arizona Supreme Court in reversing the Court of Appeals.

The insured filed a claim after she suffered a permanent eye injury in a car accident. State Farm took 10 months to process her claim and then offered only about half the policy limit. Following the arbitrators award, she sued for bad faith, and a jury awarded her $1 million in damages.

State Farm appealed, arguing that it didn't act in bad faith because the amount of the claim was "fairly debatable."

But the court said, "[W]hile fair debatability is a necessary condition to avoid a claim of bad faith, it is not always a sufficient condition. The appropriate inquiry is whether there is sufficient evidence from which reasonable jurors could conclude that...the insurer acted unreasonably and...knew...that its conduct was unreasonable...[The insurer] should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less."

Here, "[t]here was sufficient evidence...from which a jury could find that State Farm acted unreasonably and knew it. There was evidence that State Farm set arbitrary goals for the reduction of claims paid. The salaries and bonuses paid to claims representatives were influenced by how much [they] paid out on claims...Reasonable jurors could also find that State Farm took an unreasonable length of time to evaluate [the insureds] claim."

Arizona Supreme Court. Zilisch v. State Farm Mutual Automobile insurance Co., No. CV-98-0535-PR. March 3, 2000.

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