## Facts

- Bobby Sid Taylor held an automobile liability policy with State Farm that included \$15,000 in uninsured motorist (UM) coverage.
- Taylor was involved in a three-car accident involving, among others, an uninsured vehicle driven by Douglas Wistrom; Taylor and other occupants were injured.
- Anne Ring, her husband, and James Rivers sued Taylor and Wistrom; the matters were consolidated, and Taylor became the primary target after Wistrom reached a stipulated judgment and covenant not to execute.
- A jury returned verdicts against Taylor totaling about \$2.5 million in excess of his liability limits; the judgment was affirmed on appeal.
- After the excess judgment, Taylor sought UM benefits based on Wistrom’s uninsured status; State Farm later paid \$15,000 in UM benefits.
- In exchange for the UM payment, Taylor signed a broadly worded release stating he released “all contractual rights, claims, and causes of action” he had or might have against State Farm under the policy “in connection with the collision … and all subsequent matters.”
- A State Farm representative requested use of “general release language” that did not expressly mention bad-faith claims.
- Taylor later sued State Farm for insurance bad faith, alleging failure to settle Rivers’s claim within policy limits and mishandling connected to the release.

## Issues

1. Whether the trial court properly admitted extrinsic evidence to interpret the 1981 release.
2. Whether, properly construed, the release barred Taylor’s subsequent bad-faith failure-to-settle claim against State Farm.

## Decision

- The Arizona Supreme Court held that the trial court properly considered extrinsic evidence to determine whether the release language was reasonably susceptible to Taylor’s interpretation.
- The Court held the release did not bar Taylor’s bad-faith claim as a matter of law.
- The Court vacated the court of appeals’ decision and reinstated the jury verdict for Taylor, remanding for further proceedings consistent with its opinion.

## Legal Principles

- In interpreting a written agreement, a court may consider proffered extrinsic evidence to determine the parties’ intended meaning and whether the contract language is reasonably susceptible to the interpretation advanced.
- Only after that interpretive inquiry does the parol evidence rule operate to exclude evidence offered to contradict or vary the agreement’s meaning as determined through interpretation.
- A broadly phrased release of “contractual rights” under an insurance policy may be interpreted, in context, not to include a qualitatively different bad-faith claim arising from the implied covenant of good faith and fair dealing.
- Where contract language is reasonably susceptible to competing meanings, intent may be resolved using admissible extrinsic evidence, and an appellate court should not replace a jury’s supported finding with its own construction.

## Conclusion

The court adopted a context-based approach to contract interpretation that permits consideration of extrinsic evidence to assess whether release language supports a claimed meaning, and it held that Taylor’s UM-benefits release, viewed in context, did not extinguish his later bad-faith failure-to-settle claim.


Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 854 P.2d 1134 (Ariz. 1993)