Matthew Cavallo v. Phoenix Health Plans Inc, 518 P.3d 759

Matthew Cavallo, an MS patient, required regular Tysabri infusions; his PHP health plan covered Tysabri only with prior authorization and had no out-of-network benefits except for medical necessity.
In Feb 2016 Cavallo’s provider requested prior authorization for a TOUCH‑certified in‑network hospital; a PHP representative incorrectly told the provider the hospital was out-of-network, and the provider then cancelled the February prior‑authorization request.
Biogen offered Cavallo a free Tysabri dose (with an ~ $150 administration fee); Cavallo declined that offer; PHP later approved coverage and Cavallo received an infusion in April, after symptoms recurred and after a significant delay.
Cavallo sued for first‑party insurance bad faith, alleging unreasonable denial and delay and company policies/training that discouraged medical‑necessity exceptions for out‑of‑network care.
At trial the court gave a RAJI contract waiver instruction and a mitigation instruction; the jury returned a defense verdict. The court of appeals affirmed; the Arizona Supreme Court granted review.
The Supreme Court reversed the waiver instruction as unsupported and prejudicial, vacated part of the court of appeals opinion, and remanded for a new trial; it approved use of a mitigation instruction modeled on Restatement (Second) of Torts § 918.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether a contract‑waiver jury instruction was appropriate in a first‑party bad faith tort trial	Cavallo: waiver is a contract defense not applicable to the tort of bad faith and would confuse jurors into thinking the covenant of good faith can be waived	PHP: provider cancelled the Feb prior‑auth, relieving PHP of duty to perform on that request; waiver instruction explains plaintiff conduct	Reversed: waiver instruction was unsupported by the evidence and prejudicial; parties cannot waive the covenant of good faith such that a contractual waiver instruction misleads jurors
Whether mitigation/avoidable‑consequences instruction was appropriate and how framed	Cavallo: mitigation should not force him to forfeit rights (e.g., risk losing coverage by using Biogen free dose without prior auth)	PHP: Cavallo failed to mitigate damages by declining the Biogen dose and paying the minor admin fee	Held: mitigation instruction based on Restatement § 918(1) is appropriate; if record supports, include § 918(2) exception (intent/reckless awareness). Mitigation affects damages only, not liability
Claims for appellate attorney fees	Cavallo sought fees but failed to identify statutory/rule basis; PHP sought fees under § 12‑341.01	Cavallo: N/A; PHP: prevailing party entitlement	Held: Both fee requests denied—Cavallo for procedural deficiency; PHP because it was not the successful party on appeal

Rawlings v. Apodaca, 151 Ariz. 149 (1986) (establishes insurer’s tort duty of good faith and elements of bad faith)
Clearwater v. State Farm Mut. Auto. Ins. Co., 164 Ariz. 256 (1990) (distinguishes first‑ and third‑party bad faith and ties bad faith to breach of implied covenant)
Noble v. Nat'l Am. Life Ins. Co., 128 Ariz. 188 (1981) (defines bad faith as intentional denial or failure to process/pay without reasonable basis)
In re Sky Harbor Hotel Props., LLC, 246 Ariz. 531 (2019) (parties may not eliminate or waive the covenant of good faith and fair dealing)
Sparks v. Republic Nat’l Life Ins. Co., 132 Ariz. 529 (1982) (reversible error to instruct jury on a theory unsupported by evidence)
City of Tucson v. Koerber, 82 Ariz. 347 (1957) (waiver requires voluntary, intentional relinquishment of a known right)
Fulton v. Woodford, 17 Ariz. App. 490 (1972) (avoidable‑consequences doctrine precludes recovery for harm plaintiff could have avoided)