TIME-LIMITED DEMAND AND BAD FAITH TOOLKIT - ARIZONA

JURISDICTION NOTE: Arizona has one of the most robust and well-developed bad faith frameworks in the country. The Arizona Supreme Court recognized the tort of bad faith for both first-party and third-party claims in Noble v. National American Life Insurance Co., 128 Ariz. 188 (1981), and dramatically expanded available remedies in Rawlings v. Apodaca, 151 Ariz. 149 (1986), allowing emotional distress and punitive damages. Arizona recognizes that insurance contracts are more than commercial transactions -- they provide "protection and security from economic catastrophe." The standard for first-party bad faith was further refined in Zilisch v. State Farm, 196 Ariz. 234 (2000), establishing the insurer's affirmative obligation to promptly investigate, evaluate, and pay legitimate claims.

TABLE OF CONTENTS

1. Third-Party Time-Limited Settlement Demand Letter
2. First-Party Bad Faith Demand Letter
3. Arizona Bad Faith Elements Checklist
4. Damages Calculation Framework
5. Bad Faith Conduct Documentation Checklist
6. Pre-Suit Requirements
7. Arizona-Specific Practice Notes
8. Sample Time-Limited Demand Conditions
9. Sources and References

1. THIRD-PARTY TIME-LIMITED SETTLEMENT DEMAND LETTER

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED
AND VIA EMAIL TO: [____________________________________]

Date: [__/__/____]

To:
[________________________________] (Claims Adjuster)
[________________________________] (Insurance Company)
[________________________________] (Address)
[________________________________] (City, State, ZIP)

Re: Time-Limited Settlement Demand
Claimant: [________________________________]
Insured/Tortfeasor: [________________________________]
Claim Number: [________________________________]
Policy Number: [________________________________]
Date of Loss: [__/__/____]
Policy Limits: $[________________________________] per occurrence / $[________________________________] aggregate

Dear Claims Professional:

This firm represents [________________________________] ("Claimant") for injuries and damages arising from [________________________________] [describe incident] that occurred on [__/__/____] in [________________________________] County, Arizona, involving your insured, [________________________________] ("Insured").

A. LIABILITY SUMMARY

Liability against your Insured is clear based on the following:

[________________________________]
[________________________________]
[________________________________]

[Insert specific facts. Note: Arizona applies pure comparative fault (A.R.S. section 12-2505) -- each party is liable for its percentage of fault. Address the insured's degree of fault and the claimant's minimal or zero fault.]

Supporting documentation is attached as Exhibit A.

B. DAMAGES SUMMARY

Supporting documentation is attached as Exhibit B.

C. COVERAGE

The applicable liability policy provides bodily injury coverage with limits of $[________________] per occurrence. No known exclusions or coverage defenses apply.

D. DEMAND

Claimant demands payment of $[________________] (the full per-occurrence policy limits) to settle all claims against the Insured.

E. TIME LIMIT

This demand expires at 5:00 p.m. Arizona Time on [__/__/____], which is [____] days from the date of this letter. Time is of the essence. (Note: Arizona does not observe Daylight Saving Time.)

F. CONDITIONS FOR ACCEPTANCE

1. Written acceptance delivered to the undersigned by the deadline.
2. Payment of the full demanded amount within [____] business days of acceptance.
3. Release of the Insured only -- standard form, no confidentiality, no indemnification beyond customary release, no release of the insurer from independent claims.
4. No additional conditions. Any variation is a counteroffer and rejection.

G. NOTICE OF EXCESS LIABILITY EXPOSURE UNDER ARIZONA LAW

Under Arizona law, an insurer has a duty to give equal consideration to the insured's interests when evaluating settlement demands. See Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256 (1990). The Arizona Supreme Court has identified eight factors for evaluating third-party bad faith:

1. The strength of the claimant's case on liability and damages
2. Attempts by the insurer to induce the insured to contribute to settlement
3. Failure to properly investigate the claim
4. Rejection of the advice of the insurer's own attorney or agent
5. Failure to inform the insured of a compromise offer
6. The amount of financial risk to which each party is exposed
7. The fault of the insured in inducing the insurer's rejection of the demand
8. Any other factors tending to establish or negate bad faith

In this case, liability is clear, damages substantially exceed the policy limits, and the demand is within limits. An insurer acting in good faith with equal consideration of its insured's interests would accept this demand.

Failure to accept this demand may expose [________________________________] Insurance Company to:
- The full excess judgment against the insured
- Compensatory damages including emotional distress (Rawlings v. Apodaca)
- Punitive damages upon proof by clear and convincing evidence of "evil mind"
- Attorney fees and costs

We urge you to notify the Insured of this demand immediately.

H. DOCUMENTATION ENCLOSED

☐ Exhibit A: Liability Evidence Package
☐ Exhibit B: Damages Package
☐ Exhibit C: Photographs / Video Evidence
☐ Exhibit D: Expert Reports (if applicable)

Respectfully submitted,

________________________________________
[________________________________] (Attorney Name, Firm, Address, Phone, Email, Bar No.)

Counsel for [________________________________], Claimant

2. FIRST-PARTY BAD FAITH DEMAND LETTER

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED
AND VIA EMAIL TO: [____________________________________]

Date: [__/__/____]

To:
[________________________________] (Claims Manager / General Counsel)
[________________________________] (Insurance Company)
[________________________________] (Address)
[________________________________] (City, State, ZIP)

Re: Demand for Payment and Notice of Bad Faith -- Arizona Claim
Insured/Policyholder: [________________________________]
Policy Number: [________________________________]
Claim Number: [________________________________]
Date of Loss: [__/__/____]

Dear [________________________________]:

This firm represents [________________________________] ("Insured") regarding the above-referenced claim under [________________________________] Policy No. [________________________________].

A. CLAIM HISTORY AND COVERAGE

On [__/__/____], the Insured suffered a covered loss consisting of [________________________________]. The claim was timely reported on [__/__/____], and the Insured has fully cooperated with all investigation and documentation requests. The policy provides coverage under [________________________________] with limits of $[________________________________].

B. COMPANY'S IMPROPER CLAIMS HANDLING

☐ Denied the claim without reasonable basis on [__/__/____]
☐ Unreasonably delayed investigation or payment for [____] days
☐ Underpaid: offered $[________________] when the covered loss is $[________________]
☐ Failed to conduct a prompt and adequate investigation
☐ Used outcome-oriented or biased experts/consultants
☐ Failed to attempt a good faith settlement when liability was reasonably clear
☐ Forced the Insured through "needless adversarial hoops" to recover benefits
☐ Lowballed the claim or delayed hoping the Insured would accept less
☐ Misrepresented policy provisions to the Insured
☐ Failed to inform the Insured of all available coverages
☐ Other: [________________________________]

[Detailed factual narrative:]
[________________________________]
[________________________________]

C. ARIZONA BAD FAITH STANDARDS -- APPLICATION TO THIS CLAIM

Under Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 995 P.2d 276 (2000), the Arizona Supreme Court established that:

"The carrier has an obligation to immediately conduct an adequate investigation, act reasonably in evaluating the claim, and act promptly in paying a legitimate claim. It should do nothing that jeopardizes the insured's security under the policy. It should not force an insured to go through needless adversarial hoops to achieve its rights under the policy. It cannot lowball claims or delay claims hoping that the insured will settle for less. Equal consideration of the insured requires more than that."

The first-party bad faith standard requires proof that: (1) the insurer acted unreasonably toward the insured, AND (2) the insurer knew or was conscious of the fact that its conduct was unreasonable. Clearwater v. State Farm, 164 Ariz. 256 (1990).

The Company's conduct in this case violates these standards because:
[________________________________]
[________________________________]

D. DEMAND

1. Immediate payment of covered benefits owed: $[________________]
2. Consequential damages from the unreasonable delay/denial: $[________________]
3. Written explanation of any continued denial within [____] days
4. Preservation of the complete claim file and all related documents

E. NOTICE OF BAD FAITH CLAIM

If the Company fails to resolve this claim within [____] days, the Insured will pursue all remedies available under Arizona law:

• Breach of contract
• Breach of the implied covenant of good faith and fair dealing (tort)
• Compensatory damages including emotional distress (Rawlings v. Apodaca)
• Punitive damages (clear and convincing evidence of "evil mind")
• Attorney fees under A.R.S. section 12-341.01 (contractual dispute)
• All other available relief

Under Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986), "tort remedies, including compensatory damages for emotional distress and punitive damages, should be available in the insurance setting because in buying insurance an insured usually does not seek to realize a commercial advantage but, instead, seeks protection and security from economic catastrophe."

Respectfully submitted,

________________________________________
[________________________________] (Attorney Name, Firm, Address, Phone, Email, Bar No.)

Counsel for [________________________________], Insured

3. ARIZONA BAD FAITH ELEMENTS CHECKLIST

A. First-Party Bad Faith (Clearwater/Zilisch Standard)

Under Clearwater v. State Farm, 164 Ariz. 256 (1990), and Zilisch v. State Farm, 196 Ariz. 234 (2000), the Insured must prove:

☐ A valid insurance contract existed
☐ The Insured submitted a covered claim under the policy
☐ The insurer denied, delayed, or underpaid the claim
☐ The insurer acted unreasonably in handling the claim
☐ The insurer knew or was conscious of the fact that its conduct was unreasonable (or acted with reckless disregard as to the reasonableness of its conduct)
☐ The Insured suffered damages as a proximate result

Key Standard (Two-Part Test):
1. The insurer's conduct was objectively unreasonable
2. The insurer subjectively knew or recklessly disregarded that its conduct was unreasonable

Zilisch Obligations: The insurer must:
- Immediately conduct an adequate investigation
- Act reasonably in evaluating the claim
- Act promptly in paying a legitimate claim
- Not jeopardize the insured's security under the policy
- Not force the insured through needless adversarial hoops
- Not lowball claims or delay hoping the insured will settle for less

B. Third-Party Bad Faith (Failure to Settle)

Under Clearwater and the eight-factor test, the Insured (or assignee) must prove:

☐ A valid liability policy covered the insured
☐ A third-party demand was made within policy limits
☐ The insurer failed to accept the demand
☐ The insurer's failure was in bad faith, considering:

Eight-Factor Test for Third-Party Bad Faith:

☐ Factor 1: The strength of the claimant's case on liability and damages
☐ Factor 2: Whether the insurer attempted to induce the insured to contribute to settlement
☐ Factor 3: Whether the insurer failed to properly investigate the claim
☐ Factor 4: Whether the insurer rejected the advice of its own attorney or agent
☐ Factor 5: Whether the insurer failed to inform the insured of a compromise offer
☐ Factor 6: The amount of financial risk to which each party was exposed
☐ Factor 7: Whether the insured was at fault for inducing the insurer's rejection
☐ Factor 8: Any other factors tending to establish or negate bad faith

☐ An excess judgment was entered against the insured
☐ The insured suffered damages (the excess judgment + other damages)

Assignment: Arizona permits assignment of bad faith claims from the insured to the third-party claimant. See Clearwater, 164 Ariz. at 270.

C. Common Defenses

☐ The claim was "fairly debatable" -- a genuine coverage dispute existed
☐ The insurer conducted a reasonable investigation and relied on its results
☐ The insurer's position was objectively reasonable, even if ultimately incorrect
☐ The insured failed to cooperate or provide requested information
☐ Statute of limitations has expired (2 years -- A.R.S. section 12-542)

4. DAMAGES CALCULATION FRAMEWORK

A. Contract Damages

B. Compensatory Tort Damages

Note: Under Rawlings v. Apodaca, emotional distress damages are fully available in insurance bad faith actions because "insurance is not like other commercial contracts -- it provides security and peace of mind."

C. Attorney Fees

Note: A.R.S. section 12-341.01 allows the court to award reasonable attorney fees to the successful party in any contested action arising out of a contract. Insurance bad faith claims arise from the insurance contract, and courts have awarded fees under this statute.

D. Punitive Damages

Arizona Punitive Damages Standards:
- Burden of Proof: Clear and convincing evidence
- "Evil Mind" Standard: The insured must prove that the insurer's "evil hand was guided by an evil mind." This requires showing either:
- (1) The insurer intended to injure the insured, OR
- (2) The insurer consciously pursued a course of conduct knowing it created a substantial risk of significant harm to the insured
- No Statutory Cap: Arizona does not impose a statutory cap on punitive damages. However, constitutional due process limits apply per BMW of North America v. Gore, 517 U.S. 559 (1996).
- Financial Condition: The insurer's financial condition and net worth are relevant to the punitive damages determination.

E. Total Damages Summary

5. BAD FAITH CONDUCT DOCUMENTATION CHECKLIST

A. Zilisch Obligations Compliance

☐ Did the insurer immediately conduct an adequate investigation? ☐ Yes ☐ No
☐ Did the insurer act reasonably in evaluating the claim? ☐ Yes ☐ No
☐ Did the insurer act promptly in paying a legitimate claim? ☐ Yes ☐ No
☐ Did the insurer jeopardize the insured's security? ☐ Yes ☐ No
☐ Did the insurer force the insured through needless adversarial hoops? ☐ Yes ☐ No
☐ Did the insurer lowball the claim? ☐ Yes ☐ No
☐ Did the insurer delay hoping the insured would settle for less? ☐ Yes ☐ No

B. Investigation and Evaluation

☐ Date investigation commenced: [__/__/____]
☐ Was investigation prompt (within days, not weeks)? ☐ Yes ☐ No
☐ Was investigation thorough and unbiased? ☐ Yes ☐ No
☐ Did the insurer use outcome-oriented or "hired gun" experts? ☐ Yes ☐ No
☐ Were the insured's submissions and evidence fairly considered? ☐ Yes ☐ No
☐ Did the insurer's own adjuster or attorney recommend payment? ☐ Yes ☐ No
☐ Was the recommendation overridden by management? ☐ Yes ☐ No
☐ Did the insurer apply the correct policy provisions? ☐ Yes ☐ No
☐ Did the insurer inform the insured of all available coverages? ☐ Yes ☐ No

C. "Evil Mind" Evidence for Punitive Damages

☐ Insurer knew its denial was unreasonable but denied anyway
☐ Insurer had a practice or pattern of denying similar claims
☐ Insurer's conduct was motivated by corporate profit at the insured's expense
☐ Insurer's employees testified or documented that the claim should have been paid
☐ Insurer consciously disregarded a substantial risk of harm to the insured
☐ Insurer's conduct reflected a company-wide practice, not an isolated error

D. Documents to Preserve and Obtain

☐ Complete claim file (paper and electronic)
☐ All internal adjuster notes, diaries, and activity logs
☐ Reserve history and reserve-setting documentation
☐ All expert reports, estimates, and consultant communications
☐ Claims handling manuals and guidelines
☐ Corporate training materials
☐ Prior bad faith complaints, lawsuits, and regulatory actions
☐ Financial statements and net worth information (for punitive damages)

6. PRE-SUIT REQUIREMENTS

Arizona Pre-Suit Requirements

Arizona does not have a mandatory pre-suit notice or administrative filing requirement for bad faith claims.

Pre-Suit Checklist:

☐ Confirm the statute of limitations:
- Bad faith tort: 2 years from accrual (A.R.S. section 12-542)
- Breach of insurance contract: 6 years (A.R.S. section 12-548)
- First-party bad faith accrues when the insurer finally denies the claim
- Third-party bad faith accrues when the underlying judgment becomes final/non-appealable

☐ Send a pre-suit demand letter (recommended) establishing notice and opportunity to cure

☐ File a complaint with the Arizona Department of Insurance and Financial Institutions (optional): 100 N. 15th Ave., Suite 261, Phoenix, AZ 85007

☐ Confirm venue: Superior Court in the county where the insured resides or where the loss occurred

☐ Preserve evidence -- send a litigation hold letter

☐ For third-party claims: Confirm whether an excess judgment has been entered and whether an assignment of the bad faith claim has been obtained

☐ Arizona Rule 26.1 considerations: Arizona's broad mandatory disclosure rules (Ariz. R. Civ. P. 26.1) will require early disclosure of all relevant documents and witnesses

7. ARIZONA-SPECIFIC PRACTICE NOTES

A. Key Arizona Bad Faith Cases

1. Noble v. National American Life Ins. Co., 128 Ariz. 188, 624 P.2d 866 (1981)
   - First recognized the tort of bad faith in Arizona for first-party claims
   - Established that insurance contracts create a special relationship

2. Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986)
   - Landmark decision expanding bad faith remedies
   - Held that emotional distress and punitive damages are available
   - Reasoned that insurance provides "protection and security from economic catastrophe," not mere commercial advantage
   - Overruled prior limits on tort damages in insurance bad faith

3. Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256, 792 P.2d 719 (1990)
   - Established the two-part test for first-party bad faith: (1) unreasonable conduct, (2) knowledge or reckless disregard of unreasonableness
   - Adopted the eight-factor test for third-party bad faith
   - Recognized assignability of bad faith claims

4. Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 995 P.2d 276 (2000)
   - Established affirmative obligations of the insurer: investigate immediately, evaluate reasonably, pay promptly
   - Prohibited "needless adversarial hoops," lowballing, and delay tactics
   - One of the strongest policyholder-protective decisions in the country

5. Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 504, 838 P.2d 1265 (1992)
   - Addressed bad faith in the context of UM/UIM claims
   - The insurer owes the same duty of good faith to its own insured in UM/UIM claims

B. A.R.S. Section 20-461 -- Unfair Claim Settlement Practices

The statute prohibits:
- Misrepresenting pertinent facts or policy provisions
- Failing to acknowledge and act reasonably promptly on communications
- Failing to adopt and implement reasonable standards for prompt investigation
- Refusing to pay claims without conducting a reasonable investigation
- Not attempting in good faith to effectuate prompt, fair, and equitable settlements
- Compelling litigation by offering substantially less than ultimately recovered
- Compelling the insured to litigate when coverage is clear and the insurer's offer lacks an objectively reasonable basis

No Private Right of Action: A.R.S. section 20-461 does NOT create a private cause of action. Only the Director of the Arizona Department of Insurance may enforce the statute. However, its standards are highly relevant to establishing the common law bad faith tort and are admissible as evidence.

C. Arizona's "Evil Mind" Punitive Damages Standard

Arizona's punitive damages standard is demanding but achievable in bad faith cases:

1. The "Evil Hand Guided by an Evil Mind" Test:
   - The insurer must have either intended to injure the insured OR consciously pursued a course of conduct knowing it created a substantial risk of significant harm
   - Mere negligence or even gross negligence is insufficient
   - Reckless disregard of a known risk satisfies the standard

2. Clear and Convincing Evidence Required: The burden is higher than preponderance but lower than beyond a reasonable doubt.

3. No Statutory Cap: Arizona is one of the more favorable jurisdictions for punitive damages because there is no statutory cap. Constitutional limits still apply.

4. Evidence of Pattern: Evidence that the insurer has a practice or pattern of similar conduct against other insureds is admissible and powerful.

D. Unique Arizona Considerations

1. Arizona's Mandatory Disclosure Rules: Arizona Rule of Civil Procedure 26.1 requires both sides to disclose all relevant documents and witnesses early in the litigation -- more demanding than the federal rules. This can be advantageous in bad faith cases because it forces early production of the claim file.

2. No Pre-Suit Notice Required: Unlike Florida, Arizona does not require a pre-suit administrative filing. The bad faith claim can be filed immediately.

3. Pure Comparative Fault: Arizona's comparative fault system (A.R.S. section 12-2505) applies to the underlying tort claim. In the third-party demand context, assess how fault allocation affects the demand.

4. UM/UIM Bad Faith: Arizona recognizes bad faith in UM/UIM claims. The insurer owes the same duties to its insured as in any first-party claim.

5. Assignability: Bad faith claims are assignable in Arizona, which facilitates settlement agreements between the insured and the third-party claimant.

E. Statute of Limitations

Accrual:
- First-party: Accrues when the insurer finally denies the claim
- Third-party: Accrues when the underlying judgment against the insured becomes final or non-appealable

8. SAMPLE TIME-LIMITED DEMAND CONDITIONS

A. Payment and Release

☐ Full payment within [____] business days of written acceptance
☐ Check payable to "[________________________________] and [________________________________], as Trustees"
☐ Standard release of the named insured only
☐ No confidentiality, indemnification, or hold-harmless provisions
☐ No release of the insurer from independent bad faith claims
☐ No admission or denial of fault

B. Arizona-Specific Conditions

☐ The insurer must disclose all available policy limits including umbrella/excess
☐ The insurer must inform the insured of this demand within [____] business days (per Clearwater Factor 5)
☐ The insurer must advise the insured of the right to retain personal counsel
☐ The insurer must advise the insured of the potential excess exposure
☐ The insurer must disclose any coverage disputes or reservations of rights
☐ Failure to disclose this demand to the insured will be treated as evidence of bad faith under the Clearwater eight-factor test

C. Communication Requirements

☐ Written acceptance received at counsel's office by the deadline
☐ Email acceptance acceptable if confirmed in writing
☐ Any modification constitutes a counteroffer and rejection

9. SOURCES AND REFERENCES

Arizona Statutes

• A.R.S. section 20-461 -- Unfair Claim Settlement Practices
• A.R.S. section 12-542 -- Statute of Limitations (Personal Injury/Tort)
• A.R.S. section 12-548 -- Statute of Limitations (Contract)
• A.R.S. section 12-341.01 -- Attorney Fees in Contract Actions
• A.R.S. section 12-2505 -- Comparative Fault

Key Cases

• Noble v. National American Life Ins. Co., 128 Ariz. 188, 624 P.2d 866 (1981)
• Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986): https://law.justia.com/cases/arizona/supreme-court/1986/18333-pr-2.html
• Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256, 792 P.2d 719 (1990): https://law.justia.com/cases/arizona/supreme-court/1990/cv-89-0175-pr-2.html
• Zilisch v. State Farm Mut. Auto. Ins. Co., 196 Ariz. 234, 995 P.2d 276 (2000): https://caselaw.findlaw.com/court/az-supreme-court/1458148.html
• Deese v. State Farm Mut. Auto. Ins. Co., 172 Ariz. 504, 838 P.2d 1265 (1992)

Additional Resources

• Arizona Bar Association -- Bad Faith Jury Instructions (2022): https://www.azbar.org/media/gwsng4vq/7-bad-faith-instructions_2022.pdf
• ALFA International -- Arizona Insurance Law: https://www.alfainternational.com/compendium/insurance-law/arizona/
• Chartwell Law -- Arizona Bad Faith: https://www.chartwelllaw.com/bad-faith-claims-map/arizona

This template is provided by ezel.ai for informational purposes only. It does not constitute legal advice and should not be used as a substitute for consultation with a qualified attorney licensed in Arizona. Always verify current law and confirm all citations before use.

Last updated: 2026-02-26