In a victory not only for homebuilders but for all policyholders, the Arizona Court of Appeals recently rejected an attempt by several liability insurers to dramatically expand Arizona's "fair debatability" defense to policyholder bad faith claims. Lennar Corp. v. Transamerica Ins. Co., No. 1 CA-CV 10-0141 (April 14, 2011) ("Lennar II"). Our client, Lennar, a Fortune 500 homebuilder, sued several insurers for breach of contract and bad faith after they denied coverage for a multi-plaintiff construction defect lawsuit. After several years of litigation, the trial court summarily dismissed Lennar's bad faith claim on the basis that a prior trial court ruling in the case validating the insurers' "no occurrence" coverage defense established that coverage was "fairly debatable," even though the trial court's "no occurrence" ruling was subsequently reversed on appeal. See Lennar Corp. v. Auto-Owners Ins. Co., 214 Ariz. 255 (2007) ("Lennar I" ). In Lennar II, the Court of Appeals rejected the insurers' "erroneous ruling" theory.
In doing so, the Court of Appeals reached two conclusions which are game-changers for policyholders. First, the Court of Appeals expanded the scope of extraneous evidence which may be relevant in determining the reasonableness of an insurer's coverage position. This evidence includes, among other things, the interpretation given disputed policy terms by the defendant insurer, other insurers and other courts in other cases, as well as by the insurance industry generally. This means that insurers must now disclose how they have handled similar claims in various jurisdictions. And it also means that if an insurer takes an outlier position that is inconsistent with positions that it knows other insurers typically take in similar claims, or that are contrary to well-established interpretations other courts have adopted, these facts are admissible to show that the insurer's conduct is unreasonable.
Second, the Court of Appeals held that an insurer's duty to reasonably investigate, evaluate and process a claim continues unabated while the insurer and its insured engage in coverage litigation. Indicting the insurer's conduct in this case, the Court observed that "the saga of this litigation illustrates the injury an insured may suffer when (as Lennar alleges here) an insurer sues over the meaning of a disputed policy term and effectively ignores its obligation to investigate the claim during ensuing protracted legal proceedings."
Scott S. Thomas, J. Kelby Van Patten and Jeffrey M. Hayes represented Lennar in the appeal.