Most insurers doing business in Arizona are well-informed about the threat of bad faith allegations that claimants can raise when the circumstances are right.  Due to a recent opinion by the Arizona Court of Appeals, insurers now have reason to be on the alert for another theory: the tort of Abuse of Process.  On March 31, 2004, the Court handed down a decision affirming judgment against an insurer for committing this tort against third-party claimants, even though the insurer had fully defended the insured and reached a full settlement with the claimants.  Unless and until Crackel v. Allstate Ins. Co. is reversed or depublished by the Arizona Supreme Court, it is important to understand how the insurer in that case wound up in the unhappy situation it now is in.
                                                           
How It Happened
 
The Crackel case arose out of a car accident which caused a combined $1,610 in special damages to two third-party claimants.  From the beginning, there was little real dispute over whether the Allstate insured, Harvey Hamilton, was at fault.  While the claimants were stopped at a red light in Casa Grande, Hamilton rear-ended their vehicle.  The impact was not serious and caused little to no damage to the claimants’ car.  But one of the claimants was 6 months pregnant, and both of them went to an emergency room for immediate treatment of whiplash injuries and abdominal pain.  While at the hospital, emergency room physicians advised the claimants to seek additional treatment.  Ultimately, the claimants had only initial evaluations conducted by doctors, as the emergency room physicians had advised them.  They sought compensation from Allstate for no more than those initial evaluations and their emergency room treatment. 
 
Allstate had adopted a claim-handling policy which became the unfortunate centerpiece of the litigation leading up to the Crackel opinion. This policy assigned all claims concerning so-called “MIST” (minor-impact, soft tissue) injuries, where property damages were less than $1,000 and where the claimants were represented by an attorney, to one claims adjuster.  In the Crackel case, the claims at issue were assigned to Allstate adjuster Shirlee Kopin.  Kopin retained legal counsel to represent the insured, and instructed counsel to serve an offer of judgment for $101.  This amount was based on Kopin’s opinion that the claims against Hamilton were defensible, and that the claimants’ MIST injuries were “suspect,” consistent with Allstate policy.  
                                                           
A Sloppy Settlement Conference Memorandum
 
Litigation over these claims proceeded in a manner that most adjusters in Arizona are familiar with.  The claims were first subject to an arbitration hearing, prior to which Allstate re-evaluated its settlement position and offered the claimants a total of $1,802, which the claimants rejected.  At the arbitration hearing, Allstate defended against by alleging that the value of the claims was zero.  When Allstate lost the arbitration and received a judgment against it for $5,700, it appealed to Superior Court.  Now before the trial court, the judge first ordered the parties to attend a settlement conference.  When counsel for Allstate filed an allegedly sloppy settlement memorandum and refused to modify its previous settlement positions at the conference, the trial judge sanctioned it by ordering that trial be set on the matter solely on the issue of damages.  With trial imminent, Allstate agreed to settle its case with the claimants, for the original arbitration award amount of $5,700. 
 
Game: Not Over 
 
Even though Allstate relied entirely upon the legal process to defend against these claims, and even though all the parties had reached a “full” settlement agreement, these events were not the end of the matter.  After settlement, the claimants sued Allstate in a brand new action alleging that it committed the tort of Abuse of Process.  The case went to a jury trial, after which judgment was entered against Allstate for $15,000.  
 
On appeal of that judgment, the Arizona Court of Appeals rejected Allstate’s arguments that it had not committed any one, specific, identifiable “abuse” of the judicial “process” in which it had participated. The judgment of $15,000 is not a catastrophic amount, but it is almost 3 times the amount of the claimants’ damages, in addition to the substantial attorney fees and litigation costs of defending the second action through the trial and appellate process. 
 
The law on Abuse of Process essentially states that a defendant is liable if it commits a “willful act” during the judicial process, for an “ulterior purpose” that is not proper in the regular conduct of proceedings.  The surprising aspect of the Crackel case is that, at first glance of the summarized facts, it is difficult to spot any one act that was both “willful” and committed for an “ulterior purpose.”  Certainly, Allstate may have taken an exceedingly aggressive position in defending against these tort claims, but it did so in a proper forum (a court of law).  Is mere aggressiveness now enough to expose insurers to liability for Abuse of Process? 
                                                       
What’s the Lesson to Be Learned?
 
The Court’s answer to that question is a troubling one, because no one act by Allstate or its legal counsel clearly stood out as particularly egregious.  The Court, however, was compelled to find one such act because it conceded that, under Arizona law, a plaintiff must prove that “one or more specific judicially sanctioned processes [were] abused to establish an abuse-of-process claim.”  Searching for that one specific “process,” the Court set its sights upon the pre-trial mandatory settlement conference.  Allstate, the Court held, had acted “in a manner contrary to serving the public policy purposes” of mandatory settlement conferences.  Among other things, Allstate’s counsel “refused to participate in the court's efforts to encourage a nontrial resolution by stating that Allstate had ‘decided to draw a line in the sand on all cases like this’ and by informing the court that no observation by the court could have any possible effect on Allstate's settlement position.” 
 
 With this holding, the Court of Appeals established a precedent in Arizona for Abuse of Process claims arising out of the conduct of an insurer -- which was in fact the conduct of its counsel --during a settlement conference.  Because a settlement conference is a non-essential aspect of the litigation process, there is certainly a strong argument that creating liability out of a litigant’s conduct during such a conference is arbitrary.  More importantly, the critical question of what specific steps an insurer should take to avoid falling into a Crackel-type situation is simply left unanswered.  
 
Until these questions are answered by either the Arizona Supreme Court in this case, or by subsequent appellate decisions in other Abuse of Process lawsuits, the best insurers can do when handling such claims is to (1) be mindful of the need to guard against overzealous defense of those personal injury claims where liability is not in serious dispute, and, perhaps most importantly,  (2) when securing a settlement agreement or release of claims from claimants, ensure that the release documents contain language specifically releasing the insurer from any liability for Abuse of Process claims.