Troubling Issues in Insurance Bad Faith
| Publication year | 1991 |
| Pages | 1849 |
| Citation | Vol. 09 No. 1991 Pg. 1849 |
1991, September, Pg. 1849. Troubling Issues in Insurance Bad Faith
Insurance bad faith has been the topic of a number of seminars and publications.(fn1)Rather than reviewing in detail the insurance bad faith tort---for example, its development and alternative legal theories--- this article summarizes the new tort and discusses several recurring or unresolved issues.
§ 10-3-1113. Information to trier of fact in civil actions
(1)(a) In any civil action for damages founded upon contract, or tort, or both against an insurance company, the trier of fact may be instructed that the insurer owes its insured the duty of good faith and fair dealing, which duty is breached if the insurer delays or denies payment without a reasonable basis for its delay or denial.
(b) Under a policy of liability insurance, the determination of whether the insurer's delay or denial was reasonable shall be based on whether the insurer's delay or denial was negligent.
(c) Under a policy of first-party insurance, the determination of whether the insurer's delay or denial was reasonable shall be based on whether the insurer knew that its delay or denial was unreasonable or whether the insurer recklessly disregarded the fact that its delay or denial was unreasonable.
(d) In determining whether an insurer's delay or denial was reasonable, the jury may be instructed that willful conduct of the kind set forth in section 10-3-1104(h)(I) to (1)(h)(XIV)) is prohibited and may be considered if the delay or denial and the claimed injury, damages, or loss was caused by or contributed to by such prohibited conduct."(fn2)
If an expert witness applies only the standard of reasonableness in a first-party bad faith case, a proper instruction on the additional elements (reckless disregard) or failure of the insurer's attorney to object to the testimony will render the testimony harmless error.(fn3)
The Unfair Claim Settlement Statute referred to above, CRS § 10-3-1104(h)(I) to (XIV), is set forth below:
(h) Unfair claim settlement practices: Committing or performing, either in willful violation of this part 11 or with such frequency as to indicate a tendency to engage in a general business practice, any of the following:
(I) Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue; or
(II) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies; or
(III) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies; or
(IV) Refusing to pay claims without conducting a reasonable investigation based upon all available information; or
(V) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed; or
(VI) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear; or
(VII) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds; or
(VIII) Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled by reference to written or printed advertising material accompanying or made part of an application; or
(IX) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of, the insured; or
(X) Making claims payments to insured or beneficiaries not accompanied by statement setting forth the coverage under which the payments are being made; or
(XI) Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration; or
(XII) Delaying the investigation or payment of claims by requiring an insured or claimant, or the physician of either of them, to submit a preliminary claim report, and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information; or
(XIII) Failing to promptly settle claims, where liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage; or
(XIV) Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement....
Although a 1985 Colorado Court of Appeals case had suggested that the Unfair Claim Settlement Statute might not be available for use in a jury instruction on faith per se,(fn4) CRS § 10-3-1113 now makes it clear that the jury may consider, if causally related, activities which are prohibited by the statute set forth above.(fn5)With these two statutes in mind, readers now can turn to the more troublesome issues in the insurance bad faith tort.
Insurance bad faith is a tort. Although the tort duty arises from the implied covenant of good faith and fair dealing in the insurance contract, a claim for "bad faith breach of insurance contract" is not a contract claim.(fn6) This means that privity of contract should not be a requirement, although it remains a consideration. Suit may be brought not only by the named insured, but also by other persons or entities within the definition of "additional insureds."(fn7) The sole shareholders of a closely held corporation may sue, as may jointly insured spouses.(fn8) Express beneficiaries of liability coverage also may sue.(fn9) In tort law analysis, these are foreseeable victims of the insurer's bad faith.
Traditionally, the insurance bad faith tort has been available only against parties to the contract---that is, the insurer.(fn10) However, even if it is not a party to the contract, the insurer's parent or affiliate company also may be liable if that company is responsible for bad faith acts or omissions.(fn11) A time limit on actions against the insurer, which is contained in the policy, does not apply to an insurance bad faith, tort claim.(fn12)
Until recently, Colorado appeared to be aligned with the majority rule that agents and adjusters could not be sued for insurance bad faith.(fn13) Immunity from suit also had been extended, in other jurisdictions, to adjusters and claims supervisors(fn14) and to outside investigators and in-house or outside counsel who may have advised the insurer to deny a claim.(fn15) However, the Colorado Court of Appeals this year extended the reach of this tort to an outside adjusting entity.(fn16)
The question becomes one of whether the insurer should be able to avoid responsibility by delegating its good faith obligation duties. If immunity of outside adjusters is allowed based on lack of privity, insurers should do away with claim departments and transfer all adjusting responsibilities...
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