A claim for bad faith generally arises out of the handling of some claim under the policy of insurance purchased by or for the benefit of the insured and issued by the defendant/insurer. Following Ballow v. PHICO Ins. Co., 875 P.2d 1254 (Colo. 1993) it seems clear the existence of a contract of insurance is not a necessary predicate to pursue a bad faith claim. For most of us, though, it will be a rare instance when the dispute does not involve the handling of a claim under an existing policy.
Acts of Conduct Giving Rise to Bad Faith Claims
The particular acts of conduct giving rise to a claim for bad faith are probably as varied as one's imagination can make them. However, they will almost surely revolve around a failure to provide (or to adequately or promptly provide) a benefit described in the policy. Policies are usually divided into four sections:
- Definitions, and
The benefits are described in the Coverage section. If a claimant feels that he/she has been subjected to bad faith claims handling, it will usually mean that the Coverage section is implicated.
The insurer will often raise a defense based upon one of the other sections of the policy. For instance, it may claim that the claimed benefit does not exist because it fails to fit within a definition (in the Definition section) which more fully describes the benefit, the person entitled to the benefit, or the limitations of the benefit. More often, the carrier will claim the benefit is not available, or the claimant may not be entitled to the benefit, because of an Exclusion or a failure to satisfy a condition.
Limitations by Exclusions
We are all probably familiar with the concept of policies being limited by exclusions. In bad faith litigation, there are a few that appear regularly. If an issue arises over an exclusion, then it is likely a claim or benefit is being denied in its entirety. Or, the insurer is defending under a reservation of rights while claiming it may later deny coverage or pursue a declaratory relief action. Policy exclusions in such cases include:
- intentional act;
- business pursuits;
- professional services;
- child care services;
- household exclusion.
When an exclusion is at issue, the insurer will defend factually. That is, the insurer will attempt to prove that the exclusion is applicable. Thus, the benefits are not available, and there is no bad faith in denying the benefits.
When an exclusion is at issue, the burden of proof is upon the insurer. The bad faith claimant carries the burden of going forward and proving the existence of the policy and its coverages, but the burden of proof is on the insurer to establish the applicability of an exclusion to coverage. Surdyka v. DeWitt, 784 P.2d 819 (Colo. App. 1989).
Additional policy defenses come from the Conditions portion of the policy. Every policy contains conditions. These are requirements governing the conduct of any insured seeking coverage under the policy. Conditions usually appear toward the back of the policy or at the back of the section on a particular coverage. When a condition is at issue, then the insurer is arguing that the claimant failed to meet a condition precedent to coverage. If the claimant insured violated the condition, then he arguably has voided his right to claim coverage. Again, this is often a factual dispute. But some conditions can be resolved as a matter of law. The more important conditions for bad faith litigation include:
- Concealment or Fraud;
- Duties after a Loss (Notice of accident);
- Duties after a Loss (Notice of Suit);
- Cooperation with the Carrier (including: submit sworn Statement of Loss, attendance at an IME, assist in the defense, protect subrogation rights, and do not make payments (enter into settlements) without carriers approval.)
Claimants often argue that their "reasonable expectations" of coverage will defeat an insurers defense based on definitions, exclusions, or conditions. Colorado appellate courts have recognized the doctrine of "reasonable expectations". State Farm Mutual Automobile Ins. Co. v. Nissen, 851 P.2d 165 (Colo. 1993); Davis v. M.L.G. Corp., 712 P.2d 985 (Colo. 1986); Tepe v. Rocky Mountain Hospital, 893 P.2d 1323 (Colo. App. 1994); and Leland v. Travelers Indemnity Co., 712 P.2d 1060 (Colo. App. 1985). However, the reasonable expectations test has not developed into a regularly-used doctrine. Rather, it appears to be used on an infrequent basis. The appellate courts resort to "reasonable expectations" where there is an ambiguity in the policy, or where there appears to be an objectively unfair result.
Long-Standing Rules of Law
In response to arguments about reasonable expectations, insurers rely upon long-standing and often-repeated rules of law:
- An insurance contract is to be construed pursuant to established principles of contract law. American Family Mut. Ins. v. Johnson, 816 P.2d 952 (Colo. 1991);
- Unless there is an ambiguity in the terms of the policy, a court will enforce the insurance contract as written. Republic Ins. Co. v. Jernigan, 753 P.2d 229 (Colo. 1988);
- Courts should avoid strained interpretations and enforce an insurance contract as written. Northern Insurance Co. of New York v. Ekstrom, 784 P.2d 320 (Colo. 1989); Chacon v. American Family Mut. Ins. Co., 788 P.2d 748 (Colo. 1990);
- Mere disagreement between the parties about the meaning of a provision in a policy does not create or establish an ambiguity. National Cas. Co. v. Great Southwest Fire Ins. Co., 833 P.2d 741 (Colo. 1992).
- An agents oral representations cannot impose liability on the insurer (or create coverage) where they contradict the terms of the insurance contract. Pete's Satire, Inc. v. Commercial Union Ins. Co., 698 P.2d 1388 (Colo. 1985); and
- Ignorance of the provisions of one's policy is no excuse, and does not relieve the policyholder of its limitations. Graton v. United Security Ins. Co., 740 P.2d 533 (Colo. App. 1987).
Comparative Bad Faith
Colorado does not have a case specifically recognizing "comparative bad faith." It is likely the courts would approve such a defense if it were challenged. The Colorado courts have recognized from the beginning of bad faith law that each party to an insurance contract owes the other a duty of good faith and fair dealing. Farmers Group, Inc. v. Trimble, 691 P.2d 1138 (Colo. 1984); Bailey v. Allstate Ins. Co., 844 P.2d 1336 (Colo. App. 1992). If each owes that duty to the other, then clearly an insured can breach that obligation. If that breach leads, in whole or part, to the damages alleged in the bad faith suit, then it seems only logical that the tort claim can be subject to the comparative fault rules which are at the heart of the Colorado tort system. It should be no different than a comparison of fault in an auto accident.
In the absence of a specific affirmative defense, however, the thrust of comparative bad faith still permeates every suit. Even if the focus is on the conduct of the insurer, there is no fair way to gauge it without also considering the conduct of the insureds. A factual determination whether the insurer acted appropriately would normally take into account whether the insured properly submitted the claim, fairly assisted in its investigation, and cooperated as required by the policy.
If the insured failed in these obligations, the insurer may fairly argue its conduct cannot be in bad faith. It was prevented from meeting its obligations by the conduct of the claimant. This defense may appear in various forms, such as "unclean hands," waiver and estoppel, or a defense using language from the Savio case that the insurer has an obligation not to pay unwarranted or unfounded claims.
Lack of a Contractual Relationship
Not all claims are brought directly against the insurer by an insured. Some may be brought against the adjuster, the insurance agent, an outside claims adjusting company, or an administrator. Colorado has some apparently contradictory decisions on whether bad faith claims may be brought against these various actors. Schnacker v. State Farm Mutual Automobile Ins. Co., 843 P.2d 102 (Colo. App. 1992) (a third party claimant has no contractual relationship with the liability carrier for the tortfeasor and may not sue in bad faith); Gorab v. Equity General Agents, Inc., 611 P.2d 1196 (Colo. App. 1983) (no contractual relationship between claimant and the agent); Munoz v. Prudential Ins. of America, 633 F.Supp. 564 (D.Colo. 1986) (Prudential was the administrator and had no contractual relationship with the insured). But see, Scott Wetzel Services, Inc. v. Johnson, 821 P.2d 804 (Colo. 1991) (the extensive involvement of the claims adjusting service made it appropriate to apply good faith obligations to them); Jordan v. City of Aurora, 876 P.2d 38 (Colo. App. 1993) (the adjusting service stood in the shoes of the insurer); and Ballow v. PHICO, 875 P.2d 1254 (Colo. 1993) (anything goes...everyone associated with insurance may be sued for bad faith).
Statute of Limitations
Bad faith is a tort. It is governed by the general statute of limitations for tort claims, C.R.S. 13-80-102. The claim must be filed within two years after it accrues. Harmon v. Fred S. James & Co. of Colo., 899 P.2d 258 (Colo. App. 1994). One may debate when the claim actually accrued, since accrual requires an injury and knowledge or constructive knowledge of its cause. See C.R.S. 13-80-108(1). Insurers will claim the accrual was at the earliest time a claim was disputed or denied.