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Arizona Court of Appeals emphasizes third-party administrators have no direct liability to insureds for bad faith

4/14/26

By: Gabriella Ahles

In Wagner v. Arizona Municipal Risk Retention Pool, the Arizona Court of Appeals has reiterated that third party administrators are not liable to insureds for bad faith where there is no contractual nexus between the third party administrator and the insured. — P.3d —, No. 1 CA-CV 24-0562, 2026 WL 41176 (Ariz. Ct. App. Jan. 7, 2026).

This case arose from a workers’ compensation claim against an Arizona liability insurer (“Carrier”) and the third-party administrator (“Administrator”) handling Plaintiff’s claim. Plaintiff filed suit alleging bad faith against both entities. The trial court granted Administrator’s motion for summary judgment on the basis that Plaintiff’s claim was time-barred by the statute of limitations, and the Plaintiff appealed.

On appeal, the Arizona Court of Appeals considered whether the trial court erred in dismissing Administrator from the suit. Plaintiff contended that Administrator, in its role as the third-party administrator of Plaintiff’s claim, had direct liability to Plaintiff for bad-faith conduct arising from its handling of the claim.

Plaintiff argued that Administrator had a “special relationship” with Plaintiff, such that a duty was owed to him by Administrator. However, the Court found that special relationships exist in the context of negligence claims—not in the context of bad-faith claims. The Court stated that a bad-faith claim is not a negligence claim, but rather it is an intentional tort arising from a contractual relationship.

Plaintiff further argued that Administrator was acting as the Carrier’s agent when it denied his claim, and as such, Administrator would be directly liable to Plaintiff for bad faith. Citing Arizona Supreme Court precedent, the Court reiterated that an insurer cannot escape liability for a breach of the duty of good faith by delegating it to another entity, “regardless of how the relationship of that third party is characterized.”

Ultimately, the Court of Appeals held that “a contractual nexus is a necessary element to any bad faith claim.” As Administrator’s contract was with the Carrier alone—and not with the Plaintiff—there is no contractual nexus between the Plaintiff and Administrator.

This case makes clear that plaintiffs in Arizona bad‑faith actions cannot succeed on claims against third‑party administrators absent a contractual relationship.

For any questions or further clarification, please contact Gabriella Ahles at gabriella.ahles@fmglaw.com or your local FMG attorney.

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