United States District Court, D. Arizona
ORDER AND OPINION
JOHN W. SEDWICK, Senior District Judge.
I. MOTION PRESENTED
At docket 28 defendant State Farm Mutual Automobile Insurance Company ("State Farm") moves for partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure on plaintiffs Maria Rosario Francisco and Catarino Celestino Francisco's ("plaintiffs'") bad faith and punitive damages claims. State Farm's motion also requests an order establishing that it is not bound by the default judgment entered by the Navajo County Superior Court in plaintiffs' underlying liability action. Plaintiffs oppose State Farm's motion at docket 36; State Farm replies at docket 43. Oral argument was heard on July 28, 2015.
Plaintiffs were injured in a motor vehicle accident in 2008 when their car collided with a car owned by Terry Pike ("Pike") that was being driven by Marlan Oliver ("Oliver"), third parties not before the court. According to plaintiffs, Oliver caused the accident by running a red light. The vehicle Oliver was driving was covered by an insurance policy issued by Geico Insurance ("Geico") with liability coverage limits of $15, 000 per person and $30, 000 per occurrence. Plaintiffs were insured by State Farm under a policy that contained underinsured motorist (UIM) coverage (with a limit of $50, 000 per person and $100, 000 per occurrence) and medical payments coverage (with a limit of $5, 000 per person). In 2010 plaintiffs sued Pike and Oliver in Navajo County Superior Court: Francisco, et al. v. Oliver, et al. 
On July 27, 2011, plaintiffs' counsel Eduardo H. Coronado ("Coronado") wrote State Farm a letter in which he stated that "[c]laims have been made now against the party whom we believe caused the harm, " but did not mention that plaintiffs had filed a lawsuit against Pike and Oliver, the court in which that lawsuit was filed, the identities of the defendants, or that they had served defendants with process in June 2011. Coronado's July 27 letter states that plaintiffs believed that "the responsible party" lacked sufficient liability insurance to cover plaintiffs' injuries and that plaintiffs intended to pursue a UIM claim with State Farm if that turned out to be the case. State Farm responded to Coronado's letter on August 8, informing him it appeared that the adverse policy had "accepted liability for the claim and paid for the damages to [plaintiffs'] vehicle, " but plaintiffs' bodily injury claims had not yet settled. The record is unclear regarding the basis of State Farm's understanding as to these facts. State Farm informed Coronado that it would hold the UIM coverage open and, should such coverage be needed, plaintiffs would have to send in vehicle damage photos. State Farm's claim notes from August 8 include the following entries: "Atty letter says he believe OIC has sufficient covg, but wanted to satisfy the laws regarding reporting the UIM, just in case;" "Close file, it does not appear there will be any handling"; and "Potential UIM claim If OIC does not have sufficient covg."
Coronado wrote State Farm again on August 11 stating that plaintiffs were notifying State Farm pursuant to A.R.S. § 12-555 that they intended to pursue a UIM claim. Coronado again failed to mention any details regarding the then-pending lawsuit against Pike and Oliver. State Farm's claim notes from that date contain the following entries: "Rev'd atty letter, it says he is notifying us in accordance w/the ARS statute, Called and LM to explain why our letter says what it does"; "Sec'y will have him call us"; and "Re-Closing file."
Pike and Oliver did not answer plaintiffs' complaint and were defaulted. On June 18, 2012, after reviewing plaintiffs' testimony and exhibits, the superior court issued findings of fact regarding plaintiffs' damages. Judge Michala M. Ruechel found that plaintiff Maria Francisco's injuries "included opening stitches from a prior medical procedure and injuries to her shoulder and arm, " that Ms. Francisco had not regained use of her arm after the accident, and that her disability was likely permanent. Further, Ms. Francisco could no longer continue her previous work making and selling tamales by hand "at the same level, " which would reduce her income by $423, 800 over the remainder of her working life. Judge Ruechel also found that plaintiff Catarino Francisco had suffered an injury to his left leg that would require surgery and rehabilitation. The court awarded Ms. Francisco damages of $550, 000 "for loss of income, loss of use of her harm, medical bills and pain and suffering, " and Mr. Francisco $250, 000 for "past and future medical expenses and pain and suffering." This award was reduced to judgment on September 24, 2012.
Four days later Coronado wrote State Farm stating that plaintiffs had obtained a $800, 000 judgment, that the "party at fault does not have enough coverage to cover the award, " and that plaintiffs were thereby "putting forth their claim against the uninsured or underinsured motorist portion of their insurance policy." Coronado faxed various documents to State Farm, including a copy of the judgment.
In January 2013 Geico offered to pay Pike's liability policy limit of $30, 000 to plaintiffs as full satisfaction of the judgment against Pike and Oliver. Coronado then relayed this offer to State Farm, explaining that it was insufficient to cover plaintiffs' damages and demanding that State Farm pay plaintiffs UIM and medical payments policy limits by February 6. State Farm's lawyer, James E. Ledbetter ("Ledbetter"), responded on February 7, stating that "the apparent default judgment against the third-parties does not provide sufficient documentation" to pay the UIM claims and, based on the information that Ledbetter had reviewed, Geico's payment was sufficient to cover plaintiffs' damages. Ledbetter asked plaintiffs to submit further documentation of their injuries, which they apparently provided over the following months.
In September 2013 State Farm denied plaintiffs' UIM claim. State Farm stated that it was not bound by the default judgment, in part because it did not receive notice of the proceedings until September 2012 and therefore had "no opportunity to participate." Further, State Farm asserted that "based on the extremely limited information that [had] been provided and obtained independently at State Farm's own expense, " plaintiffs' medical damages were "only a few thousand dollars each."
Plaintiffs then filed the present action against State Farm. Plaintiffs' Second Amended Complaint ("Complaint") includes three claims: claim one for breach of contract; claim two for bad faith; and claim three for "bad faith-against the insurance company." Plaintiffs seek punitive damages under their third claim only.
III. STANDARD OF REVIEW
Summary judgment is appropriate where "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The materiality requirement ensures that "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Ultimately, "summary judgment will not lie if the... evidence is such that a reasonable jury could return a verdict for the nonmoving party." However, summary judgment is appropriate "against a party who fails to make a showing ...