Filing a Declaratory Judgment Action -- even successfully obtaining a favorable Declaratory Judgment in the Trial Court -- in many jurisdictions effectively is or can be a shield of immunity against Bad Faith Claims. See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 3:5 (West Publishing Co., Third Edition scheduled for publication in July, 2011). Further, obtaining a favorable Declaration, even if it is later overruled or reversed on appeal, can in some jurisdictions give rise to a Defense of Fairly Debatable Coverage as a matter of law. See generally Wall, id., §§ 5:16, 5:51, 11:17.
Not so in Arizona. The Arizona Court of Appeals has held that "under the circumstances presented, an insurer that seeks a judicial interpretation of a disputed policy term may not ignore its claim-handling responsibilities while the declaratory judgment action proceeds." In such a case, filing a Declaratory Judgment Action does not suspend Duties of Good Faith and Fair Dealing. Download Lennar Corp. v. Transamerica Insurance Co. (Ariz. Ct. App., Div. 1, Dept B, Case No. 1 CA.CV 10.0141, Opinion Filed July 5, 2011) PUBLIC ACCESS, also published as 2011 WL 2673156 *1 ¶1 (Ariz. Ct. App., Div. 1, Dep't B, July 5, 2011)(authorized password required to access Westlaw).
"'It makes no sense that an insurer who asserts a coverage issue that, for any reason, withstands summary judgment, but ultimately fails, would be excused from all the good faith obligations imposed on the insurer who admits coverage.'" Robinson v. State Farm Fire & Casualty Co., 583 So. 2d 1063, 1066 (Fla. 5th DCA 1991), quoted in Lennar Corp. v. Transamerica Insurance Co., 2011 WL 2673156 at *4, ¶ 17. As the heading written by the Arizona Court of Appeals declared preceding this quotation: "An Erroneous Grant of Summary Judgment Does Not Conclusively Establish That Coverage Is Fairly Debatable". Id. at *3 - *4, ¶¶ 14 - 17.
The law of Insurer Good Faith may or may not be similar in neighboring jurisdictions. See, for example, "Kansas Still Recognizes Robust Bad-Faith Law, a Thing of the Past in Texas" posted on April 20, 2010 on "Law and Insurance / An Eye on What's Developing in Insurance Law and Practice" Blog.
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