Recently, in Zolman v. Pinnacol Assur., 09CA1954 (Colo. App. Mar. 3, 2011), the Colorado court of appeals reviewed the judge-made law on the tort of bad faith breach of insurance contract. Below is a nice summary of bad faith law:
Colorado has a well-developed body of appellate case law dealing with insurance bad faith claims. An insurer must deal in good faith with its insured. Am. Family Mut. Ins. Co. v. Allen, 102 P.3d 333, 342 (Colo.2004). “Due to the ‘special nature of the insurance contract and the relationship which exists between the insurer and the insured,’ an insurer's breach of the duty of good faith and fair dealing gives rise to a separate cause of action arising in tort.” Goodson v. Am. Standard Ins. Co., 89 P.3d 409, 414 (Colo.2004) (quoting Cary v. United of Omaha Life Ins. Co., 68 P.3d 462, 466 (Colo.2003)). This tort of bad faith breach of an insurance contract may arise in either a third-party or first-party context, but each context requires proof of a different standard of conduct. See Allen, 102 P.3d at 342.
The first-party context, as here, involves a bad faith claim against the insurer for its alleged misconduct with its own insured. Id. The insured must prove that (1) the insurer's conduct was unreasonable under the circumstances, and (2) the insurer either knowingly or recklessly disregarded the validity of the insured's claim. Goodson, 89 P.3d at 415 (citing Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275 (Colo.1985)).
This standard “reflects a reasonable balance between the right of an insurance carrier to reject a non-compensable claim submitted by its insured and the obligation of such carrier to investigate and ultimately approve a valid claim.” Id. (quoting Savio, 706 P.2d at 1275).In assessing a bad faith claim, the reasonableness of an insurer's conduct is measured objectively based on industry standards. Allen, 102 P.3d at 343. Under Colorado law, it is reasonable for an insurer to challenge claims that are “fairly debatable.” See Savio, 706 P.2d at 1275 (quoting Anderson v. Cont'l Ins. Co., 271 N.W.2d 368, 377 (Wis. 1978)); Pham v. State Farm Mut. Auto. Ins. Co., 70 P.3d 567, 572 (Colo. App. 2003) (affirming summary judgment for insurers on insured's bad faith claim and holding insured's claim was fairly debatable where insurers had a reasonable belief they were not obligated under the applicable statute to pay UIM benefits during the pendency of a related case); Brennan v. Farmers Alliance Mut. Ins. Co., 961 P.2d 550, 556-57 (Colo. App. 1998) (affirming dismissal of insured's bad faith claims because insured's claims for PIP benefits were fairly debatable); Brandon v. Sterling Colo. Beef Co., 827 P.2d 559, 561 (Colo. App. 1991) (reversing a jury verdict in favor of an insured and holding as a matter of law that the insurer's actions in appealing an award of workers' compensation benefits to the Industrial Commission and to the Court of Appeals did not constitute bad faith because the insured's claims were fairly debatable and the insurer had reasonably relied on its own experts in pursuing the appeals); see also Sanderson v. Am. Family Mut. Ins. Co., --- P.3d ----, ---- (Colo. App. No. 09CA1263, Nov. 10, 2010) (affirming summary judgment for the insurer as a matter of law because the insured failed to show that a reasonable jury could have found that the insurer acted in bad faith).
Thus, an insurer will be found to have acted in bad faith only if it has intentionally denied, failed to process, or failed to pay a claim without a reasonable basis. Savio, 706 P.2d at 1275; Brandon, 827 P.2d at 561. Indeed, even if an insurer possesses a mistaken belief that a claim is not compensable, it may be within the scope of permissible challenge. Savio, 706 P.2d at 1275-76; Brandon, 827 P.2d at 561.
What constitutes reasonableness under the circumstances is ordinarily a question of fact for the jury. However, in appropriate circumstances, as when there are no genuine issues of material fact, reasonableness may be decided as a matter of law. Bankr.Estate of Morris v. COPIC Ins. Co., 192 P.3d 519, 524 (Colo.App.2008).
Has your insurer acted unreasonably in handling your claim or by denying your claim? Remember this one general rule: insurance companies are in the business of collecting premiums and denying claims. Call my office any time about problems with how your insurance company is handling your claim.
