The Civil Litigator
| Publication year | 1980 |
| Pages | 1173 |
| Citation | Vol. 9 No. 6 Pg. 1173 |
1980, June, Pg. 1173. The Civil Litigator
1173
An important, unique and fairly recent innovation in tort law has been the emergence of the so-called "tort of bad faith."(fn1) This new tort is aimed exclusively at insurance companies and allows recovery for a wide range of injuries whenever insurance policy benefits are wrongfully withheld without a legitimate excuse.
Although the tort of bad faith has not been directly recognized in Colorado, the groundwork for its application exists. United States Fidelity Guaranty Company v. Lembke,(fn2) a Tenth Circuit case applying Colorado law, suggested that Colorado recognizes the general rule that the insurer has the "duty to exercise diligence, intelligence, good faith, and conscientious fidelity to the common interest of the parties."(fn3)
In Aetna Casualty and Surety Company v. Kornbluth,(fn4) an insured brought an action against Aetna to collect a judgment against the insurer in excess of the policy limits. The complaint alleged that Aetna was guilty of gross negligence and bad faith in failing to settle the claims for amounts within the policy limits.
Although the Colorado Court of Appeals held that the complaint stated a cause of action only for negligence, the following affirmative duty was imposed as a matter of law on the insurance company:
. . . [to] ascertain all facts upon which a decision to settle or compromise a given claim against its insured can be based if the asserted claim falls beyond the policy limits. The duty imposed stretches beyond this and requires . . . the full ascertainment of facts upon which to base a judgment or the making of a judgment . . . ascertaining the facts, learning the law and appraising the damages to the insured. . . . (Emphasis added.)(fn5)
Based upon these extended statements of an insurer's duty to its insured, the Colorado Supreme Court could, therefore, when presented with the appropriate case, rule that the tort of bad faith exists as a cause of action in Colorado. Thus, claims agents and plaintiffs' counsel alike may soon be confronted with a case involving this new tort.
The tort of bad faith was first recognized by the Supreme Court of California in Gruenberg v. Aetna Insurance Company,(fn6) where an insured was allowed to recover damages for mental distress, economic loss and legal fees suffered as a result of the insurance company's bad-faith denial of insurance benefits. Since Gruenberg, bad faith has been recognized as a separate and
1174
distinct tort in such disparate jurisdictions as Alaska, Connecticut, Florida, Illinois, New Mexico, Nevada, Oklahoma and Wisconsin.(fn7)
The basis for the bad faith tort is the widely recognized rule that every insurance policy contains an implied covenant of good faith and fair dealing on the part of the insurance company which exists independent of any contractual duty.(fn8) From that rule, only a slight gap in logic need be bridged in order to impose tort liability on an insurer when that insurer breaches its duty of good faith by any action which unreasonably denies an insured benefits under an insurance policy.
It is difficult to articulate the precise elements for recovery under bad faith claims; by its very nature, the existence of bad faith is necessarily determined on a case-by-case basis. However, the legal parameters of a bad faith cause of action have begun to coalesce in a number of recent cases. In general, two elements must be shown for recovery: (1) absence of a reasonable basis for denying benefits due under an insurance policy;(fn9) and (2) knowledge of the lack of a reasonable basis for denying the claim.(fn10)
An objective standard is used to determine the existence or non-existence of a reasonable basis for denying the claim; i.e., would a reasonable insurer have denied or delayed payment of the claim under the same facts and circumstances?(fn11) As yet, an honest mistake in judgment has not been held to be an unreasonable basis for denying benefits, but adherence to an industry-wide custom has been held to be no defense to the tort.(fn12) The second element of the test, knowledge, has been inferred from the extremity of the circumstances,(fn13) denial of benefits without probable cause(fn14) or the defendant's reckless disregard for the lack of...
To continue reading
Request your trial