Torts: Insurance Bad Faith Defenses of Waiver & Mitigation of Damages

Cavallo v. Phoenix Health Plans, Inc., No. CV-21-0051-PR (October 20, 2022) (J. King) https://www.azcourts.gov/Portals/0/OpinionFiles/Supreme/2022/CV210051PR.pdf

WAIVER IS GENERALLY NOT A DEFENSE TO THE TORT OF INSURANCE BAD FAITH/MITIGATION OF DAMAGES MAY APPLY TO PLAINTIFF'S CONDUCT IN BAD FAITH TO DIMINISH AMOUNT OF DAMAGES AWARDED BUT NOT TO ELIMINATE CLAIM

Plaintiff brought this first party insurance bad faith case against his health insurer Phoenix Health Plans, Inc. [PHP] claiming the insurer had a policy of denying out of network claims without making a fair determination as to whether each claim was medically necessary and failed to properly train its employees how to do so. He alleged this conduct resulted in denials and delays in the approval of claims for treatments and drugs which were medically necessary to treat is Multiple Sclerosis [MS] specifically Tysabri treatments at Chandler Regional Hospital. He alleged these delays and denials caused him physical harm. 

The insurer denied it had committed bad faith and asserted the defenses of waiver and failure to mitigate. It claimed that during the claims process, plaintiffs' MS Coordinator cancelled a preauthorization for Tysabri having found an alternative source with Biogen. This cancellation it argues constituted a waiver of benefits. Further, the insurer claimed plaintiff failed to mitigate his damages by declining to accept the dose of the drug offered by the Biogen.  Over plaintiff's objection the jury was instructed on these defenses and returned a defense verdict. The trial court denied plaintiff's motion for new trial and he appealed. The Arizona Court of Appeals affirmed.  The Arizona Supreme Court reversed and remanded the trial court and vacated the court of appeals in part.

Because neither the plaintiff nor his MS coordinator knew that the defendant insurer had a routine policy of denying out of network claims without investigating medical necessity and nor that it had incorrectly informed them that Chandler Regional Hospital was outside of network, they could not have voluntarily and intentionally waived the right to secure treatment there through PHP. The facts did not support the defense of waiver going to the jury.

Further, the duty of good faith and fair dealing arising in tort cannot be waived. Arizona law is that “parties may not ‘erase,' ‘limit,' or ‘eliminate' the covenant of good faith and fair dealing in an operating agreement.”

Finally, Restatement (Second) of Torts § 918 (Am. L. Inst. 1979) properly states the law regarding mitigation of damages in the insurance bad faith context:

Restatement § 918(1) provides that a plaintiff “injured by the tort of

another” may not “recover damages for any harm that he

could have avoided by the use of reasonable effort or

expenditure after the commission of the tort . . . .”

One is not prevented from recovering damages for a

particular harm resulting from a tort if the tortfeasor intended

the harm or was aware of it and was recklessly disregardful

of it, unless the injured person with knowledge of the danger

of the harm intentionally or heedlessly failed to protect his

own interest. . . . This Section applies only to the diminution of

damages and not to the existence of a cause of action.