Chapter 10 - § 10.3 • BAD FAITH ISSUES ARISING OUT OF WORKERS' COMPENSATION CLAIMS

• Jurisdiction: Colorado

§ 10.3 • BAD FAITH ISSUES ARISING OUT OF WORKERS' COMPENSATION CLAIMS

A number of bad faith cases have arisen out of workers' compensation claims. Probably the most significant is Savio, 706 P.2d 1258, which held that the Workers' Compensation Act does not bar a claimant from maintaining an action for bad faith against an insurer that improperly delays or denies payment of benefits.

Six years later, in Scott Wetzel Services, Inc. v. Johnson, 821 P.2d 804 (Colo. 1991), the Colorado Supreme Court concluded that a self-insured employer owes the same duty of good faith and fair dealing to an injured worker as does an independent insurance company. The court stated that it could "discern no principled difference between self-insured employers and insurance companies in the context of workers' compensation law." Id. at 810. In addition, the court held that the duty of good faith extended to independent claims-adjusting services that process workers' compensation claims on behalf of self-insured employers.

Then, in Vaughan v. McMinn, 945 P.2d 404 (Colo. 1997), the court concluded that various amendments that had been made to the Workers' Compensation Act since Savio did not preclude bad faith claims against workers' compensation insurers. Vaughan arose out of common law tort claims for bad faith breach of an insurance contract by two insureds against their workers' compensation carriers. The insureds sued the carriers, alleging that the companies failed to process their claims in a timely manner and failed to pay benefits to which they were entitled. The insurance companies moved to dismiss, asserting that bad faith was no longer a viable cause of action because of a 1991 amendment to the Workers' Compensation Act. The companies argued that the 1991 amendment abrogated the holding in Savio. The district court agreed that Savio was no longer controlling and granted the insurance companies' motions to dismiss. The plaintiffs then sought direct review by the supreme court pursuant to C.A.R. 50. The supreme court granted certiorari and reversed the judgment of the district court. The court held that the 1991 amendment did not abrogate the common law tort of bad faith breach of an insurance contract in workers' compensation cases.

The court first noted that "[e]very insurance contract contains an implied covenant of good faith and fair dealing which imposes upon insurers a duty to act in good faith in their dealings with their insured." Id. at 406. The court further...