Arizona’s aggressive bad faith laws flow from the premise that consumer insurance policies are considered contracts of adhesion with boilerplate terms which are not understood by the ordinary consumer. Because of this, insurance policies are to be construed according to their plain and ordinary meaning, but from the viewpoint of one not trained in law.
One of the more sweeping unusual bad faith principles developed by Arizona courts is the “doctrine of reasonable expectations” which holds that although not ambiguous to the court, an insured may be relieved from certain provisions, which had not been negotiated because it is contrary to their reasonable expectations of what would be covered.
There is also the frequent use of what are called Morris
agreements that involve stipulated judgments for large sums of money.
Where an insurer defends under a reservation of rights, an insured may enter into an agreement with the plaintiff whereby the defendant/insured stipulates to the entry of a judgment in exchange for an agreement not to execute on that judgment and an assignment of any claims against the insurer. This is valid as long as the insurer is given notice of the proposed stipulated judgment and the resulting judgment is reasonable.
When an insurer refuses to defend, the insured may enter into a Damron
agreement under which the insured stipulates to a judgment, assigns his rights against the insurer to the claimant, and receives in return a covenant from the claimant not to execute against the insured. The stipulated judgment is enforceable as long as there is coverage under the policy and there is no fraud or collusion involved in entering into the agreement..