Arizona Court of Appeals Division One holds that an insurer’s unreasonable investigation and denial of a claim does not warrant punitive damages where there is no evidence that its policies caused the arbitrary reduction or denial of claims to promote profits at the expense of its insureds.

A motorcyclist was injured when he crashed into a car in front of him that stopped abruptly.  The driver of the car was uninsured.  The motorcyclist’s insurance found him to be 100% at fault and denied his claim under an uninsured motorist policy.  The insurer reconsidered and reviewed the claim but again denied it without a full or accurate investigation.

The motorcyclist sued the insurer and an arbitrator found the car driver 40% at fault.  The insurance company then paid its policy limits.  The motorcyclist sued for breach of the duty of good faith and fair dealing and was awarded additional compensatory damages and one million dollars in punitive damages.  The trial court denied the insurer’s post-judgment motions, and the insurer appealed.

The Court of Appeals affirmed the denial of the post-judgment motions based on evidence of an unreasonable investigation but reversed the punitive damages award.  Punitive damages require an evil hand guided by an evil mind and must be proven with clear and convincing evidence.  The motorcyclist relied on Nardelli v. Metropolitan Group Property & Casualty Insurance, 230 Ariz. 592 (App. 2012), in which the Court of Appeals affirmed punitive damages against an insurer that unreasonably denied a claim.  In Nardelli, the insurer had publicized an aggressive $155 million profit goal and assigned the claims department a significant role in achieving that goal. 

Here, the Court of Appeals found no similar improper emphasis on the arbitrary reduction and denial of claims to promote profits at the expense of insured.  Although the business plans had some references to payout levels, they did not impose an overriding mandate to boost profits by reducing payouts.  The claims employees’ compensation was not based on limiting payouts.  There was no evidence that management encouraged arbitrary and unreasonable denials or that the company trained its managers to short-change claimants.  Finally, a policy of taking comparative fault into appropriate consideration is not improper.  The Court emphasized that the application of punitive damages is fact specific but must be supported by clear and convincing evidence of the requisite “evil mind.”   

Presiding Judge Johnsen authored the opinion; Judges Orozco and Jones concurred.