Arizona Court of Appeals Division One Holds That Action Against Insurer for Payment of Uninsured Motorist Benefits Arises Out of a Contract for Purposes of Attorneys’ Fee Award Under A.R.S. § 12-341.01.

Insured filed suit against her insurer, State Farm, for allegedly failing to compensate her fully for injuries she had suffered in an auto accident.  State Farm initially defended the suit, but later agreed to pay policy limits under the applicable uninsured motorist coverage.  The parties then submitted to the superior court the question of the insured’s entitlement to fees, costs, and sanctions under Rule 68, Ariz. R. Civ. P.

The trial court ruled that the insured was the successful party to a dispute arising out of a contract and awarded her attorneys’ fees and costs but denied the Rule 68 sanctions request.  State Farm appealed the award of costs and fees. 

The Court of Appeals affirmed.

The appellate court first rejected State Farm’s argument that the action sounded in tort and not contract.  An action sounds in contract when the duty at issue is created by the contractual relationship and would not exist but for the contract.

State Farm contended that the action sounded in tort because it was the equivalent of a negligence claim by the insured against the uninsured motorist, with State Farm serving as the functional equivalent of a liability carrier for the uninsured motorist.  But the tort committed by the uninsured driver was simply the trigger for State Farm’s contractual duty.  State Farm would have had no duty to pay but for the insurance contract; the action, therefore, arose out of a contract.

The appellate court also found it immaterial that State Farm had not been found in breach of contract.  The issue on appeal was whether the action was a “contested action arising out of a contract,” A.R.S. § 12-341.01(A), not whether the contract was breached.  The action was contested because State Farm filed an answer denying liability, even though it later paid the full policy limits.  State Farm also contested the insured’s request for an award of costs and fees.

State Farm also argued that the contract, by limiting the amount State Farm would owe for uninsured motorist benefits, precluded an award of fees on top of those policy limits.  But the contractual limit only capped State Farm’s obligation to pay damages.  It did not prohibit a court from awarding fees authorized by statute.  A valid statute is automatically part of any contract affected by it.

The insured’s “hybrid” fee agreement with her counsel did not render the fee award unreasonable.  The fee agreement provided for payment of the greater amount of $400 per hour or a percentage of recovery if the court awarded fees.   Nothing in the record suggested that the insured did not owe the greater amount as calculated by the hourly rate she had agreed to pay.

Finally, the insured was entitled to an award of costs, despite that the matter was resolved by settlement because she was the “successful party to a civil action.”  A.R.S. § 12-341.

Judge Downie authored the opinion; Presiding Judge Norris and Judge Timmer concurred.