Matthew Cavallo v. Phoenix Health Plans Inc

IN THE

SUPREME COURT OF THE STATE OF ARIZONA
MATTHEW CAVALLO, ET AL.,
Plaintiffs/Appellants,

v.

PHOENIX HEALTH PLANS, INC.,
Defendant/Appellee.

No. CV-21-0051-PR
Filed October 20, 2022

Appeal from the Superior Court in Maricopa County
The Honorable Timothy J. Thomason, Judge
No. CV2016-015531
REVERSED AND REMANDED

Opinion of the Court of Appeals, Division One
250 Ariz. 525 (App. 2021)
VACATED IN PART

COUNSEL:

Steven C. Dawson (argued), Anita Rosenthal, Aaron Dawson, Sander
Dawson, Dawson & Rosenthal, P.C., Sedona, Attorneys for Matthew and
Jocelyn Cavallo

Michael W. Sillyman, Paul S. Gerding, Jr., Jonathan S. Schultz (argued),
Jeffrey M. Giancana, Kutak Rock LLP, Scottsdale, Attorneys for Phoenix
Health Plans, Inc.

Erin Rose Ronstadt, Ronstadt Law, PLLC, Phoenix, Peter S. Sessions, Kantor
& Kantor LLP, Northridge, California, Attorneys for Amicus Curiae United
Policyholders
 CAVALLO, ET AL. V. PHOENIX HEALTH PLANS, INC.
Opinion of the Court

David L. Abney, Ahwatukee Legal Office, P.C., Phoenix, Attorney for
Amici Curiae for Arizona Association for Justice and Arizona Trial Lawyers
Association

JUSTICE KING authored the Opinion of the Court, in which CHIEF
JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER, and JUSTICES
BOLICK, LOPEZ, BEENE, and MONTGOMERY joined.

JUSTICE KING, Opinion of the Court:

¶1 This case requires us to evaluate whether the trial court erred
in instructing the jury on waiver and mitigation of damages in the trial of a
tort claim for first-party insurance bad faith. 1 We hold the waiver
instruction was improperly given and we remand for a new trial on that
basis. On the issue of mitigation of damages, we hold that a jury
instruction based on Restatement (Second) of Torts § 918 (Am. L. Inst. 1979)
is appropriate.

I. BACKGROUND

¶2 Matthew Cavallo was diagnosed with multiple sclerosis
(“MS”). In 2007, Cavallo began receiving infusions of Tysabri, a
medication manufactured by Biogen that helps prevent or reduce the
frequency and severity of MS symptoms. Some MS patients who are
regularly administered Tysabri have an increased risk of relapse resulting in
recurring MS symptoms if they do not receive a dose of Tysabri within
ninety days of their last dose. Tysabri may only be administered through

1 “Bad faith actions against insurers are generally classified as either first-
or third-party claims.” Clearwater v. State Farm Mut. Auto. Ins. Co., 164
Ariz. 256, 258 (1990). The classification is “based on the type of insurance
coverage provided by the policy.” Id. “First-party coverage arises when
the insurer contracts to pay benefits directly to the insured,” such as “health
and accident, life, disability, homeowner’s, fire, title, and property damage
insurance.” Id. “[T]hird-party coverage arises when the insurer contracts
to indemnify the insured against liability to third parties.” Id.

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Opinion of the Court

Tysabri Outreach: Unified Commitment to Health (“TOUCH”) certified
clinics. The TOUCH program is a Biogen distribution program that was
developed to promote the safety of Tysabri treatments.

¶3 In 2015, Cavallo purchased a health insurance plan (the
“Plan”) from Phoenix Health Plans (“PHP”) with coverage beginning on
January 1, 2016. The Plan covered Tysabri, but only if the patient received
prior authorization from PHP. The Plan provided no out-of-network
benefits, unless a medically necessary treatment was unavailable in
network. In December 2015, just before the Plan became effective, Cavallo
received an infusion of Tysabri.

¶4 Christina Oth, the MS coordinator for Cavallo’s medical
provider, testified at trial that she was attempting to schedule Cavallo’s next
infusion of Tysabri when she learned Chandler Regional Medical Center
(“Chandler Regional”) was both TOUCH certified and within PHP’s
network. On February 19, 2016, Oth submitted a prior-authorization
request to PHP for Cavallo to receive his next infusion of Tysabri at Chandler
Regional. In response, a PHP representative, Fabian Ruiz, incorrectly
informed Oth that Chandler Regional was not within the Plan’s network and
Cavallo did not have out-of-network benefits under the Plan. Oth was then
provided a list of PHP’s in-network facilities, but those facilities were not
certified to provide Tysabri infusions. Thereafter, Oth purportedly
cancelled Cavallo’s prior-authorization request for the Tysabri infusion.

¶5 Oth pursued a dose of Tysabri for Cavallo through Biogen’s
free drug program. On February 23, 2016, Biogen approved the free dose
of Tysabri for Cavallo, although he would have been responsible for an
administration fee of approximately $150.00. Cavallo declined Biogen’s
offer.

¶6 On March 16, 2016, Cavallo informed PHP that he was
experiencing a recurrence of his MS symptoms. PHP began a medical
necessity review of Cavallo’s requested treatment. PHP concluded it could
not determine whether Tysabri was medically necessary for Cavallo and
requested a physician review. PHP also ascertained that Chandler
Regional was, in fact, in its provider network. PHP’s reviewing physician
initially determined that the treatment was not medically necessary for
Cavallo but later approved it after discussing the treatment with Cavallo’s
neurologist.
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Opinion of the Court

¶7 On March 30, 2016, PHP informed Cavallo that it had
approved coverage for him to receive the Tysabri infusion. On April 4,
2016, 117 days after his last infusion, Cavallo received the Tysabri infusion
at Chandler Regional. But, by that time, Cavallo had allegedly already
experienced a recurrence of his MS symptoms, including loss of fine motor
control, weakness in his arm, numbness, and a reduction in mental
functioning.

¶8 Cavallo sued PHP for insurance bad faith. During trial,
Cavallo argued: (1) PHP unreasonably and intentionally denied and delayed
his claim for Tysabri from February to late March 2016, even after learning
he had experienced a recurrence of his MS symptoms; (2) pursuant to its
policies, PHP purposefully trained its employees to tell providers and
insureds that health plans like Cavallo’s did not permit out-of-network
benefits, and did not educate employees on the medical necessity exception;
(3) PHP designed an overly complex system for processing claims and
trained employees to require an insured to identify an in-network facility
before it would review a claim; and (4) PHP incentivized its employees to
reduce costs by delaying and denying claims. Cavallo alleged PHP
undertook these efforts to avoid paying for covered out-of-network services.

¶9 PHP countered that it handled Cavallo’s claim reasonably,
given the information available to it. In particular, PHP argued: (1) Ruiz
made a good faith mistake regarding Chandler Regional’s network status;
(2) Cavallo relieved PHP of its obligations pertaining to Cavallo’s initial
request for coverage in February 2016 when Oth purportedly cancelled that
prior-authorization request; and (3) Oth then failed to sufficiently
communicate with PHP regarding Cavallo’s claim. PHP also argued
Cavallo failed to mitigate his damages by declining to accept the dose of
Tysabri offered by Biogen.

¶10 PHP asked the trial court to instruct the jury on (1) waiver, in
the form of a contract waiver instruction; and (2) mitigation of damages.
Cavallo opposed the instructions. Cavallo argued waiver is a contract
defense that does not apply to an insurance bad faith claim, and a waiver
instruction would confuse the jury into thinking Cavallo had waived the
implied duty of good faith and fair dealing. Cavallo further claimed a
mitigation instruction was improper because the mitigation doctrine does
not require a party to waive a right, and if Cavallo had accepted the free
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Opinion of the Court

Tysabri dose, he would have waived his right to receive reimbursement
from PHP by failing to obtain prior authorization.

¶11 The trial court granted PHP’s request for both jury
instructions. It gave the Revised Arizona Jury Instructions’ (“RAJI”)
contract waiver instruction:

A party to a contract may waive the other party’s duty to
perform. “Performance” refers to what a party agreed to do
as his part of the contract. Waiver is either the express,
voluntary, and intentional relinquishment of a known right,
or it is conduct that is inconsistent with an intent to assert the
right. By accepting performance known to be deficient, a
party has waived the right to reject the contract on the basis
of that performance. If Mr. Cavallo has waived a promised
performance, then [PHP] is no longer bound to perform on
that promise and Mr. Cavallo is not entitled to damages for
that particular non-performance. [PHP] has the burden of
proving waiver.

See Rev. Ariz. Jury Instr. (Civ.) Contract 13, at 16 (7th ed. 2021). The trial
court also instructed the jury on mitigation of damages:

[PHP] claims that Mr. Cavallo did not make reasonable efforts
to prevent or reduce damages. Mr. Cavallo may not recover
for any damages that could have been avoided without undue
risk, burden or humiliation. [PHP] must prove: A. Mr.
Cavallo did not make reasonable efforts to prevent or reduce
damages; B. If Mr. Cavallo had acted reasonably, Mr. Cavallo
could have prevented or reduced damages; and C. The
amount of plaintiff’s damages that could have been prevented
or reduced through reasonable efforts.

¶12 The jury returned a verdict in favor of PHP. Cavallo moved
for a new trial, arguing the trial court prejudicially erred by instructing the
jury on waiver and mitigation of damages. The court denied the motion.
As to the waiver instruction, the court explained that “any contractual
provision can be waived” and it was “up to the jury to decide” if Cavallo
had waived any of the Plan’s provisions. Further, PHP was not “arguing
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Opinion of the Court

that [Cavallo] waived the covenant of good faith and fair dealing entirely
and that PHP owed no duty of good faith and fair dealing at all.”
Moreover, the mitigation instruction was appropriate because “[a]ny
contracting party has a duty to mitigate damages by avoiding consequences
of known breaches.” And Cavallo was not prejudiced because “[t]he
failure to mitigate instruction dealt ONLY with damages,” which “only
came into play if the defendants were found liable.” Because the jury
rendered a defense verdict, “[t]he jury never reached the issue of damages
and thus never considered mitigation per the instructions.”

¶13 The court of appeals affirmed. Cavallo v. Phx. Health Plans,
Inc., 250 Ariz. 525, 537 ¶ 45 (App. 2021). The court concluded “the superior
court did not abuse its discretion by giving the waiver instruction in this case
because it was not contrary to the law applicable to an insurance bad-faith
claim and did not mislead the jury.” Id. at 532 ¶ 23. The court further
explained it “need not address whether the mitigation instruction was
contrary to the law because even assuming it was erroneous, it caused
[Cavallo] no prejudice,” as the jury returned a defense verdict and therefore
did not consider the mitigation of damages instruction. Id. at 533 ¶ 26.

¶14 Cavallo filed a petition for review. We have jurisdiction
under article 6, section 5(3) of the Arizona Constitution.

II. DISCUSSION

¶15 “We review for abuse of discretion ‘whether the trial court
erred in giving . . . requested jury instructions.’” State v. Dann, 220 Ariz.
351, 363–64 ¶ 51 (2009) (quoting State ex rel. Thomas v. Granville, 211 Ariz. 468,
471 ¶ 8 (2005)). “We review de novo whether jury instructions adequately
state the law.” State v. Tucker, 215 Ariz. 298, 310 ¶ 27 (2007).

A. Insurance Bad Faith and a Waiver Instruction

¶16 The first issue before us is whether the trial court improperly
gave a waiver jury instruction where Cavallo alleged a first-party insurance
bad faith tort claim and there was no breach of contract claim.

¶17 “The law implies a covenant of good faith and fair dealing in
every contract,” which is a duty that “arises by virtue of a contractual

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Opinion of the Court

relationship.” Rawlings v. Apodaca, 151 Ariz. 149, 153 (1986). “The essence
of that duty is that neither party will act to impair the right of the other to
receive the benefits which flow from their agreement or contractual
relationship.” Id. “The covenant of good faith and fair dealing may be
breached even though the express covenants of the contract are fully
performed.” Id. at 163.

¶18 “The breach of contractual covenants ordinarily sounds in
contract.” Id. Nonetheless, “because of the special relationship between
an insurer and its insured, the insured may maintain an action to recover
tort damages if the insurer, by an intentional act, also breaches the implied
covenant by failing to deal fairly and honestly with its insured’s claim or by
failing to give equal and fair consideration to the insured’s interests.” 2 Id.
Indeed, “one of the benefits that flow from the insurance contract is the
insured’s expectation that his insurance company will not wrongfully
deprive him of the very security for which he bargained or expose him to
the catastrophe from which he sought protection.” Id. at 155.

¶19 A bad faith claim “derive[s] from the . . . duty of good faith
and fair dealing.” Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256,
259 (1990). In the insurance context, “[t]he tort of bad faith arises when the
insurance company intentionally denies, fails to process or pay a claim
without a reasonable basis for such action.” Noble v. Nat'l Am. Life Ins. Co.,
128 Ariz. 188, 190 (1981). “To show a claim for bad faith, a plaintiff must
show the absence of a reasonable basis for denying benefits of the policy and
the defendant’s knowledge or reckless disregard of the lack of a reasonable
basis for denying the claim.” Id. (quoting Anderson v. Cont’l Ins. Co.,
271 N.W.2d 368, 376 (Wis. 1978)).

2 “The ‘intent’ required here is an ‘evil hand’—the intent to do the act. Mere
negligence or inadvertence is not sufficient—the insurer must intend the act
or omission and must form that intent without reasonable or fairly
debatable grounds. But an ‘evil mind’ is not required; the insurer need not
intend to harm the insured.” Rawlings, 151 Ariz. at 160. Instead, “[t]o be
liable for tort damages, it need only to have intended its act or omission,
lacking a founded belief that such conduct was permitted by the policy.” Id.

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Opinion of the Court

¶20 We start with an evaluation of whether the record supports a
waiver jury instruction in the trial of Cavallo’s insurance bad faith claim.
“It is reversible error to instruct the jury on a legal theory which is not
supported by the evidence.” Sparks v. Republic Nat’l Life Ins. Co., 132 Ariz.
529, 539 (1982); see also Spur Feeding Co. v. Fernandez, 106 Ariz. 143, 148 (1970)
(“We agree that it is reversible error to instruct upon a theory which is not
supported by facts to be found in the record . . . since the court thereby
invites the jury to speculate as to possible non-existent circumstances.”); see
also Beliak v. Plants, 84 Ariz. 211, 215 (1958) (“[T]he record is devoid of any
evidence, even when considered in the light most favorable to defendant’s
theory of the case, justifying the court in giving the . . . instruction . . . . It
therefore constituted reversible error to give it.”).

¶21 The seminal argument from PHP was that Oth relieved PHP
of its duty with respect to Cavallo’s February 2016 prior-authorization
request by cancelling it, and Cavallo thereby waived his right to
performance on the February 2016 prior-authorization request. Indeed,
PHP made much of this point during its closing argument: “Mr. Cavallo’s
provider[] expressly cancelled the February 2016 prior authorization
relieving [PHP] from any duty to perform on that initial authorization. She
cancelled it.”

¶22 “Waiver is the voluntary and intentional relinquishment of a
known right or such conduct as warrants an inference of the relinquishment
of such right.” City of Tucson v. Koerber, 82 Ariz. 347, 356 (1957); see also
Mohave Cnty. v. Mohave-Kingman Ests., Inc., 120 Ariz. 417, 421 (1978)
(“Waiver is an intentional relinquishment of a known right.”); Societe Jean
Nicolas Et Fils v. Mousseux, 123 Ariz. 59, 61 (1979) (“We find no clear showing
of an intent to waive a right as is required by our case law.”). Thus, as a
starting point, for Cavallo to have waived PHP’s duty to perform under the
contract, Cavallo must have voluntarily and intentionally relinquished a
known right with respect to the February 2016 prior-authorization request.

¶23 For his bad faith claim, Cavallo alleged PHP had a policy of
denying out-of-network claims without exploring whether each claim was
medically necessary and failed to properly train employees on the exception
for medical necessity. Cavallo claimed PHP compounded its error by
incorrectly denying Cavallo’s claim and then causing delay before
approving his claim.

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Opinion of the Court

¶24 The evidence in the record, however, does not demonstrate
that Cavallo voluntarily and intentionally waived a known right when Oth
allegedly cancelled the February 2016 prior-authorization request because
neither Cavallo nor Oth knew at that time that: (1) PHP had an alleged policy
of denying out-of-network claims without exploring whether the claim was
medically necessary; and (2) PHP had incorrectly informed Oth that
Chandler Regional was out of network and Cavallo did not have out-of-
network benefits. To the contrary, Ruiz testified that Oth requested
cancellation of the February 2016 prior-authorization request only after he
told her the Tysabri treatment was outside the Plan’s coverage. PHP was
required “to fully disclose to [Cavallo] all pertinent benefits, coverages or
other provisions of [the] insurance policy or insurance contract under which
a claim is presented.” See Ariz. Admin. Code R20-6-801(D)(1). Thus, the
record does not support that Cavallo voluntarily and intentionally
relinquished a known right pertaining to his February 2016 prior-
authorization request.

¶25 PHP’s claim that we can find a voluntary and intentional
relinquishment of a known right based on Oth’s subsequent pursuit of
Biogen’s free drug program is unavailing. Oth’s conduct does not
demonstrate that Cavallo knew about PHP’s alleged policies and the
inaccuracy of PHP’s statements to Oth, and yet still voluntarily and
intentionally cancelled the February 2016 prior-authorization request.
Oth’s pursuit of the free drug program simply demonstrates she was
exploring an alternative method of obtaining the Tysabri treatment for
Cavallo in the face of PHP’s denial.

¶26 Because the record does not support a conclusion that
Cavallo’s purported cancellation of the February 2016 prior-authorization
request was a “voluntary and intentional relinquishment of a known right,”
Koerber, 82 Ariz. at 356, the waiver jury instruction was improper and
constituted reversible error. See Sparks, 132 Ariz. at 539 (“It is reversible
error to instruct the jury on a legal theory which is not supported by the
evidence.”). The waiver instruction prejudiced Cavallo “since the court
thereby invite[d] the jury to speculate as to possible non-existent
circumstances.” See Spur Feeding Co., 106 Ariz. at 148 (“We agree that it is
reversible error to instruct upon a theory which is not supported by facts to
be found in the record.”).

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Opinion of the Court

¶27 The waiver instruction was reversible error in this case for an
additional reason. Here, neither party contends that the covenant of good
faith and fair dealing can be waived. PHP even points out that it has “never
argued the duty of good faith could be waived.” And in fact, this Court
has determined that parties may not “erase,” “limit,” or “eliminate” the
covenant of good faith and fair dealing in an operating agreement. See In
re Sky Harbor Hotel Props., LLC, 246 Ariz. 531, 532 ¶ 2, 534 ¶¶ 12–14 (2019).
In reaching that decision, we specifically cited Rawlings’ holding that a
“covenant of good faith and fair dealing is implied in every contract . . . . The
covenant . . . may be breached even though the express covenants of the
contract are fully performed.” Id. ¶ 12 (citing Rawlings, 151 Ariz. at 163).
Our conclusion in In re Sky Harbor Hotel Props., 246 Ariz. at 534, that the
covenant of good faith and fair dealing may not be waived applies equally
in the context of an insurance bad faith claim, which was at issue in Rawlings,
151 Ariz. at 161.

¶28 Here, the waiver jury instruction, supra ¶ 11, in combination
with PHP’s closing argument that the cancellation “reliev[ed] [PHP] from
any duty to perform on that initial authorization,” supra ¶ 21, was
misleading and prejudicial to Cavallo because it reasonably could have
caused a jury to incorrectly conclude Cavallo could waive the covenant of
good faith and fair dealing in the context of a tort claim for insurance bad
faith. See In re Sky Harbor Hotel Props., 246 Ariz. at 532, 534. This
constitutes reversible error. See Kwik-Teck, Inc. v. Esper, 107 Ariz. 508, 510
(1971) (“[U]nder the circumstances in the present case, we find that the trial
court committed reversible error by giving the punitive damage instruction
advanced by [plaintiffs’] counsel since the language used tended to obscure
the proper standard to be applied by the jury.”); Noland v. Wootan, 102 Ariz.
192, 194 (1967) (“If an instruction is misleading to the jury and prejudices the
appellant’s rights, then the giving of that instruction constitutes reversible
error,” and “the trial court committed reversible error by giving the
instruction complained of here since the language used tended to obscure
the proper standard to be applied.”).

¶29 We reach this conclusion based on the record before us. To
be clear, however, we are not barring a waiver jury instruction in all bad faith
cases. Depending on the case, a waiver jury instruction could be relevant
to explain the defendant’s conduct and whether the defendant acted
reasonably under the circumstances. But, in such cases, the trial court
should carefully evaluate whether a waiver instruction is supported by
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Opinion of the Court

evidence in the record and relevant to explain the defendant’s conduct, and
whether it would otherwise confuse or mislead the jury. See Ariz. Pub. Serv.
Co. v. Brittain, 107 Ariz. 278, 282 (1971) (concluding the trial court properly
refused a proposed instruction because it would “only heighten the
confusion of the jury in an already sufficiently confused area”).

¶30 The trial court should also consider that Arizona’s bad faith
jury instruction already requires a plaintiff to prove the defendant
“intentionally [denied the claim] [failed to pay the claim] [delayed payment
of the claim] without a reasonable basis for such action.” See Rev. Ariz. Jury
Instr. (Civ.) Bad Faith 1 (First-Party), at 2 (7th ed. 2021) (emphasis added).
By instructing the jury to determine whether there was “a reasonable basis
for [the defendant’s] action,” the jury can already consider the plaintiff’s
entire course of conduct up to the alleged breach, including whether the
defendant’s action was a reasonable response to the plaintiff’s conduct.
The trial court, therefore, should carefully consider whether the RAJI
instruction is the best option to avoid possible juror confusion under the
circumstances.
B. Jury Instruction on Mitigation of Bad Faith Damages

¶31 Because we reverse and remand for a new trial, we need not
determine whether the specific mitigation of damages instruction given was
error. Nonetheless, because the issue was “briefed, argued, and
thoroughly explored,” we provide guidance on a proper mitigation of
damages instruction on remand. Schwab v. Matley, 164 Ariz. 421, 422 n.2
(1990).

¶32 Here, PHP presented evidence and argued at trial that
Cavallo could have prevented most of his damages by paying a $150
administration fee for a free dose of Tysabri from Biogen. The record
supports the theory that, by the time Cavallo rejected the Biogen offer, PHP
had already implemented its alleged improper policy and told Oth that
Tysabri was out of network and Cavallo did not have out-of-network
benefits (events that form the basis of Cavallo’s bad faith claim). Thus, PHP
had already engaged in alleged bad faith conduct when Cavallo rejected the
dose of Tysabri.

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Opinion of the Court

¶33 Based on the record, the basis for a proper jury instruction is
set forth in Restatement § 918(1):

[O]ne injured by the tort of another is not entitled to recover
damages for any harm that he could have avoided by the use
of reasonable effort or expenditure after the commission of
the tort.

See Fulton v. Woodford, 17 Ariz. App 490, 494 (1972) (“The doctrine of
avoidable consequences precludes a plaintiff from recovering damages for
losses he could have avoided by reasonable conduct on his part.”); S.A.
Gerrard Co. v. Fricker, 42 Ariz. 503, 508 (1933) (describing a “duty upon the
person injured to exercise reasonable care to mitigate the injury, according
to the opportunities that may fairly be or appear to be within his reach”
(quoting 17 C.J. 844, § 166)); see also Coury Bros. Ranches, Inc. v. Ellsworth, 103 Ariz. 515, 518 (1968) (explaining that “[t]he obligation to avoid the
consequences of known injuries was recognized” in S.A. Gerrard Co.).
Restatement § 918(1) provides the basis for a proper jury instruction where,
as here, a party has allegedly failed to use “reasonable effort or expenditure
after the commission of the tort” to avoid harm. See Restatement § 918 cmt.
a (explaining that “recovery for the harm is denied because it is in part the
result of the injured person’s lack of care”).

¶34 Cavallo has expressed concern about injecting comparative
fault principles into a mitigation of damages instruction. Restatement
§ 918(1) provides that a plaintiff “injured by the tort of another” may not
“recover damages for any harm that he could have avoided by the use of
reasonable effort or expenditure after the commission of the tort.” This
language properly focuses on whether part of the plaintiff’s injury could
have been reasonably avoided by the plaintiff. See Dan B. Dobbs & Caprice
L. Roberts, Law of Remedies § 8.5(1) (3d ed. 2018) (discussing the “avoidable
consequences rule” and that, for example, the “part of plaintiff’s injury that
occurs because he unreasonably refused medical attention is causally
apportioned to plaintiff, as if he were the only relevant cause of that injury”).
Restatement § 918(1) does not discuss the plaintiff’s fault with respect to the
conduct that constitutes the alleged bad faith. See id. (explaining that
“comparative fault rules attempt to apportion liability by assessing the
respective fault of the relevant actors” and the “comparative fault system

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Opinion of the Court

need only identify the separate conduct of the parties”). 3 Therefore,
Restatement § 918(1) will provide the appropriate guidance to the jury in
this case.

¶35 We note that subsection (1) of Restatement § 918 contains an
exception set forth in subsection (2). Restatement § 918(2) states,

One is not prevented from recovering damages for a
particular harm resulting from a tort if the tortfeasor intended
the harm or was aware of it and was recklessly disregardful
of it, unless the injured person with knowledge of the danger
of the harm intentionally or heedlessly failed to protect his
own interests.

Therefore, if there is evidence in the record supporting the exception in
Restatement § 918(2) for this bad faith action, the trial court should instruct
the jury on both subsections (1) and (2) of § 918.

¶36 On the issue of Restatement § 918(2), it is also worth noting
that, to be liable for tort damages in an insurance bad faith case, it must be
established that the insurer “intended its act or omission, lacking a founded
belief that such conduct was permitted by the policy,” but “the insurer need
not intend to harm the insured.” Rawlings, 151 Ariz. at 160–61 (“Although
the tort of bad faith is founded upon the defendant’s intentional conduct, the
intent need not be an intent to injure, harm or oppress.”). Therefore, not all
bad faith cases will involve an insurer that “intended the harm” to the
insured under Restatement § 918(2).

¶37 Finally, we observe that during closing arguments, PHP told
the jury that if it found Cavallo “did not act reasonably to prevent or mitigate
his damages, you’re going to have to rule with the defendant or, at least, reduce
the damages accordingly.” (Emphasis added). The italicized portion of

3 Cavallo argues the duty to mitigate should not require him to jeopardize
his right to coverage under the Plan by failing to obtain prior authorization
before accepting the free Tysabri dose from Biogen. If true, Cavallo may
be able to present these arguments to the jury. See Restatement § 918(1)
(discussing “harm that [plaintiff] could have avoided by the use of
reasonable effort or expenditure”).

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Opinion of the Court

PHP’s statement was improper. If the jury concludes PHP engaged in bad
faith, but also concludes Cavallo failed to avoid harm “by the use of
reasonable effort or expenditure after the commission of the tort,” this may
result in a reduction in damages. See Restatement § 918(1). But the jury
does not “have to rule with the defendant.” See id. at cmt. a (“[T]he rule
stated in this Section applies only to the diminution of damages and not to
the existence of a cause of action.”); see also Fulton, 17 Ariz. at 494 (stating the
doctrine of avoidable consequences precludes recovery of those “damages
for losses [that plaintiff] could have avoided by reasonable conduct”).
C. Attorney Fees

¶38 Cavallo requested attorney fees but failed to specify a basis
for the award as required by Arizona Rule of Civil Appellate Procedure
21(a)(2) (“A claim for fees under this Rule must specifically state the statute,
rule, decisional law, contract, or other authority for an award of attorneys’
fees. If a party fails to comply with this requirement, the appellate court
may decline to award fees on that basis.”). We deny Cavallo’s request for
attorney fees.

¶39 PHP also requested attorney fees under Rule 21 and A.R.S.
§ 12-341.01. We decline PHP’s request for attorney fees because it was not
the successful party in this action.

III. CONCLUSION

¶40 We vacate ¶¶ 11–23 of the court of appeals’ opinion. We
reverse the judgment of the trial court and remand for a new trial consistent
with this opinion.

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