After the trial court determined the insurers had no coverage obligations for alleged construction defects, a ruling that was subsequently reversed, it was still possible to demonstrate the insurers acted in bad faith.  See Lennar Corp. v. Transamerica Ins. Co., 2011 Ariz. App. LEXIS 123 (Ariz. Ct. App. July 5, 2011).

   Lennar oversaw construction of a large housing development.  In September 1998, several homeowners sued Lennar for construction problems in their homes. 

   Lennar tendered the claims to several insurers.  Transamerica Ins. Co. (TIG) and United States Fidelity & Guaranty Company (USF&G) filed for a declaratory judgment that they had no duty to defend or indemnify Lennar.  Lennar answered and counter-claimed for bad faith.

   In July 2003, the trial court granted summary judgment in favor of the insurers.  It decided that the defects did not constitute an "occurrence" within the meaning of the policies.  The Arizona Court of Appeals reversed, however, holding the homeowners' allegations of damage resulting from faulty construction were sufficient to allege an "occurrence" under the policies. (Lennar I). 

   The insurers eventually filed a second motion for summary judgment on the bad faith claim.  They argued that, as a matter of law, the trial court's initial ruling that there was no occurrence meant the insurers had a reasonable basis for denying coverage.  The trial court agreed and entered summary judgment in the insureds favor.  Lennar appealed.

    The appellate court reasoned that the fair debatability of the insurers' coverage positions turned, in large part, on the interpretation of the standard language in the form policies issued to Lennar.  While the trail court's initial determination that there was no occurrence may be relevant to the reasonableness of the insurers' coverage position, the appellate court's contrary conclusion and reversal was also relevant. Further, when the policies were written on a standard industry form, evidence of how these insurers, other insurers and other courts have interpreted the policy language could bear on whether these insurers acted reasonably in disputing coverage.

   Therefore, whether the insurers acted reasonably was for a jury to resolve.  The trial court could admit extrinsic evidence such as judicial decisions interpreting the policy language and evidence of the understandings of these insurers and of the insurance industry in general concerning the meaning of the disputed policy language.

   The court also considered whether the insurer reasonably investigated and handled the claims.  The insurers argued they fulfilled their duty of good faith and fair dealing by filing a declaratory judgment action on the disputed policy interpretation issue, but they could otherwise disregard their continuing claims-handling obligations. The appellate court disagreed.  Beyond the meaning of "occurrence," the insurers argued other coverage questions existed about the nature of the defects and when damage occurred. 

   In response to the summary judgment action, Lennar offered evidence the insurers breached their duty to investigate those issues and handle its claims in a reasonable fashion while the declaratory judgment action proceeded.  For example, TIG and USF&G did not offer any amount toward Lennar's defense or settlement, instead contending that coverage under the policies appeared remote.  The insurers conceded they did not independently investigate the homeowners' claims.

   Therefore, summary judgment granted to the insurers on the bad faith issue was reversed and remanded.