Insurance Bad Faith in Colorado
| Publication year | 1985 |
| Pages | 1157 |
| Citation | Vol. 14 No. 7 Pg. 1157 |
1985, July, Pg. 1157. Insurance Bad Faith In Colorado
This article is written by J. Kent Miller, Denver, who, for thirteen years, defended insureds and insurance companies. He is now a shareholder in Gerash, Robinson, Miller & Miranda, P.C., limiting his practice to representing the plaintiff in personal injury and insurance claims.
In the last two years, the Colorado courts have defined and expanded a new tort known as the bad faith breach of insurance contract. While insurers and insurance lawyers are usually well-informed on bad faith issues, the general practitioner in this specialized area of the law faces a confusing, often overwhelming problem of sorting through the legal, ethical and tactical issues involved in the bad faith case. Therefore, this article addresses the bad faith doctrine from the perspective of the general practitioner, rather than from the standpoint of specialized insurance defense counsel. The article analyzes the origin and expansion of this new tort in Colorado with special attention to discovery and strategy.
Bad faith breach of an insurance contract is a tort, not an action in contract. The distinction is significant because of the greater damages allowed in tort and, in Colorado, the longer statute of limitation for most torts than for contract claims.(fn1)
The first element in a tort action is legal duty. The duty in the bad faith tort is said to be "grounded in a contractual relationship."(fn2) The courts have distinguished the insurance relationship from the usual commercial contract. The insurer enjoys a superior bargaining position to the extent that it dictates the terms of the contract. The insured does not contract for profit, but rather to obtain financial security or peace of mind. Finally, the insured places trust and confidence in the insurer because the insurer has marketed its product on this expectation. The breach of this common law duty of good faith and fair dealing is now known simply as the bad faith claim.
Although Colorado has recognized the bad faith doctrine in circumstances involving contracts other than for insurance,(fn3) by far the most common occurrence and certainly the most reported cases involve insurance.
In Colorado, the federal courts first addressed bad faith in the context of the insurer's duty to settle a case within the policy limit. As early as 1964, the Tenth Circuit noted the absence of a Colorado decision on the duty of an insurer in an "excess" case(fn4) and adopted the standard of good faith, requiring at least "equal consideration to the interests of the insured."(fn5)
The first Colorado appellate court decision, Aetna Cas. & Surety Co. v. Kornbluth,(fn6) was in 1970, also arising out of an "excess" judgment. Both the bad faith and equal consideration rules presumed by the Tenth Circuit were rejected. Also rejected were the two extremes of strict insurer liability (for failing to accept any limits-or-less offer) and no insurer duty ever (settlement within sole discretion of insurer). Instead, Colorado adopted the negligence standard: the decision to settle or go to trial "must be preceded by the exercise of that degree of care and diligence which a reasonably prudent person would use under the same or similar circumstances."(fn7)
The court observed that in many discussions of bad faith, other courts had made the analysis in terms of negligence or lack of due care. The Kornbluth court concluded that the terms in this context were interchangeable and approved an instruction given by the trial court judge assessing the insurer's conduct on the basis of bad faith.
Proof of negligence should be an easier burden than proof of bad faith, which suggests moral laxity or callous disregard. Simple negligence, or absence of reasonableness, remains the standard and the definition by which the acts or omissions of insurers are recognized today.(fn8)
In Steen v. Aetna Cas. & Surety Co.,(fn9) the Colorado Supreme Court held that the holder of an excess judgment had no direct action against the insurer, whether by garnishment or otherwise. The third party claimant(fn10) lacks privity to the insurance contract and has no standing to present a tort claim. The duty is to the insured, not the tort victim.(fn11)
In Colorado, one case is of special significance. It is the only-reported case approving a complex arrangement between tort victim and the insured in which the holder of an excess judgment takes control of the bad faith claim against the insurer. Bashor v. Northland Ins. Co.(fn12) yielded the Colorado formula for creating the necessary relationship between the tort victim and the insured to present an excess case.
Now known as the "Bashor Agreement," the arrangement was not an assignment, but more a joint venture agreement for pursuit of the insured's bad faith claim for the mutual benefit of both the
insured and the excess judgment holder. The Bashor facts and the Agreement should be carefully analyzed and followed by an attorney representing either the judgment debtor or the tort victim.
The Bashor Agreement contained provisions for a partial payment on the judgment and then a sliding scale reimbursement of that payment to the extent that the bad faith suit was successful. It also provided for selection of counsel in the excess case, conditional release of liens on the judgment debtor's property, placement of a satisfaction of judgment in escrow and provisions for how an appeal of the bad faith claim would be handled.(fn13)
The Bashor Agreement was reviewed in both the Colorado Court of Appeals and the Supreme Court, which determined the following issues. The courts rejected the insurer's argument for reduction of the prayer to the partial payment for which the insured was out-of-pocket. The Court of Appeals also found the agreement not offensive to Colorado's champerty and maintenance statutes. The judgment holder was not an indispensable party; to the contrary, Steen had held that the judgment creditor had no standing to make such a claim against the insurer.(fn14) Finally, the agreement itself was held inadmissible because it was irrelevant on the bad faith issues.(fn15)
Several specific components of the Bashor Agreement made the difference between the court's approval or rejection of the agreement. Especially significant was the initial payment of some amount by the insured to the judgment holder, coupled with the pro-rata refund of this amount dependent upon success of the total claim. An attorney should not approve an agreement for an excess suit without including the Bashor-approved provisions.
Ten years after Bashor, the Colorado Court of Appeals decided Trimble,(fn16) a case of great impact on the insurer's extra-contractual exposure in Colorado. A careful analysis of Trimble is required to understand and evaluate bad faith legal issues. It involves multiple issues common in insurance litigation: intentional act exclusion, conflict of interest for the defense attorney, use of the "reservation of rights" by the insurer, possible stacking or co-primacy of insurance coverages, duty of the insurer to defend and settle, recovery of attorney's fees, non-coverage of punitive damages and advisability of the declaratory judgment action.(fn17)
Trimble was an unexpected and surely unintended result of an insurer's declaratory judgment action instituted to resolve coverage issues. The bad faith claim was presented in a counterclaim to the declaratory judgment complaint. The primary claim, which was the subject of the coverage dispute, was then settled. The insurer moved to dismiss the declaratory judgment action as moot, but the insured had responded with counterclaims which were not dismissed. When the trial judge entered summary judgment on all counterclaims, the Trimble appeal followed.
Trimble is perhaps most significant because it approved the bad faith claim when there had not been an excess judgment. The insurance company argued that, absent actual exposure of an insured to a judgment in excess of policy limits, there could be no breach of the duty of good faith by the insurer. An actual judgment in excess of policy limits was, for the first time in Colorado, not essential to the bad faith action.
The Court of Appeals identified the following as possible jury questions on either negligence or bad faith: rejection of the first policy limit demand, given the insurer's early evaluation at the policy limit; exposing the insured to risk of excess judgment for over two years; unavailability of the insurance lawyer; no reasonable basis for reliance upon its intentional act exclusion; the summary judgment request on negligent entrustment resulting in reduction of insurance coverage; opposing the reinstatement of the negligent entrustment claim; concealment of offers of settlement; and concealment of conflict of interest.(fn18)
The Colorado Court of Appeals approved four distinct claims against the insurer: negligence, bad faith breach of insurance contract, willful breach of contract and outrageous conduct. A cause of action based solely upon Colorado's Unfair Claims Practices Act ("UCPA")(fn19) was rejected. Two years later, the Colorado Supreme Court affirmed, clarifying the legal claims but not addressing the potential confusion on...
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