Cavallo v. Phoenix Health Plans (2/23/2021)

March 3, 2021

Arizona Court of Appeals Division One holds that (1) an insurer can raise a limited contract-based defense to show the elements of insurance bad faith are not met under the circumstances and (2) an erroneous instruction about mitigation damages will not automatically merit reversal when the jury does not reach damages because the defendant is not liable.

A patient with an autoimmune disease was treated with a drug that requires regular doses that must be administered by infusion within 90 days, lest the patient suffer a relapse.  The patient’s new insurer required prior authorization before it would cover the drug’s cost and infusion; while the insurer did not cover out-of-network benefits, it did if the insured could not obtain medically necessary service in network.  The patient’s medical provider submitted a preauthorization request 72 days after the last injection, the first under the new insurer, and was incorrectly informed that the provider was an out of network facility, and gave a list of in-network facilities, none of which performed the injection.  This led to a communications quagmire that included (1) the provider canceling the prior authorization request and (2) the patient turning down a partial dose under a free drug program.  The full injection was finally approved 117 days after the last injection.  The patient had a significant relapse in the meantime.  He then sued the insurer for, among other things, insurance bad faith.  At trial, the insurer raised a contractual waiver defense.  It also introduced evidence that the patient failed to mitigate his damages pursuant to a mitigation jury instruction.  The jury returned a verdict finding the insurer did not act in bad faith.  The patient appealed.

The Court of Appeals affirmed.  Examining in-state and out-of-state authority, the Court of Appeals determined that while waiver cannot be an absolute defense to insurer bad faith, a contract defense such as waiver may properly inform a limited defense that undermines the bad faith elements by showing the insurer acted reasonably under the circumstances.  Neither the jury instruction nor the insurer’s arguments suggested that the jury could find for the insurer merely because it found waiver; rather, the insurer argued that its claim processing was not unreasonable in part because the provider canceled the preauthorization request.  Under these circumstances, an instruction describing waiver was not improper.

The patient also argued a mitigation instruction was improper.  The court determined that even assuming it was, there was no reversible error because the instruction correctly stated that mitigation applied to damages, not liability.  Since the jury found the insurer not liable, the error was not prejudicial even though the insurer’s lawyer incorrectly stated in closing argument that the jury should issue a defense verdict if it found that the patient did not reasonably mitigate damages.

Presiding Judge McMurdie delivered the unanimous opinion of the court.  Judge Bailey and Judge Winthrop joined.