Chapter 10 - § 10.8 • INSURER'S DUTY OF GOOD FAITH TO SUPERVISE REPAIR CONTRACTORS AND COMMUNICATE WITH INSURED

• Jurisdiction: Colorado

§ 10.8 • INSURER'S DUTY OF GOOD FAITH TO SUPERVISE REPAIR CONTRACTORS AND COMMUNICATE WITH INSURED

In Dunn v. American Family Insurance, 251 P.3d 1232 (Colo. App. 2010), the court held that a homeowners insurer had no duty of good faith to monitor and supervise contractors who were repairing the plaintiffs' home and no duty of good faith to protect the plaintiffs' home from mold contamination and freezing conditions during the period of repair. However, the court held that the insurer owed a duty of good faith to communicate promptly in connection with the repairs to the plaintiffs' home.

The Dunns owned a home that suffered damage when a sewer backup caused sewage to flood the basement. Their insurer, American Family, gave the Dunns contact information for a remediation service (ICA), but ICA failed to correct the problem, resulting in mold growth. The Dunns then hired a second contractor, Western Restoration, and a third contractor, Quest Environmental, but they also failed to complete the job. Finally, they hired a fourth contractor, Hayhurst. The house remained vacant during the winter, and pipes froze because the furnace was not working. Mold spread throughout the house, necessitating replacement of the entire contents. American Family paid the Dunns $340,000 for their losses.

Despite receiving payment, the Dunns brought a bad faith action against American Family, alleging that it acted in bad faith by (1) failing to screen ICA for competence and insurance coverage and failing to monitor ICA; (2) failing to advise them of the dangers of mold and the need to protect the home against freezing conditions; and (3) failing to communicate with them and Western about the claims and insurance coverage. The Dunns alleged that as a result of this bad faith conduct, they suffered extreme mental and emotional distress.

American Family moved for summary judgment on the ground that it owed no duty of good faith to the Dunns regarding the alleged tortious conduct. The trial court agreed and dismissed the Dunns' claims. The court of appeals reversed and remanded, holding that the insurer owed a duty to communicate promptly and effectively. However, it affirmed the trial court's order dismissing the Dunns' first two claims.

The court of appeals reviewed the issue of legal duty de novo. The appellate court recognized that all aspects of claim adjustment "fall within an insurer's good faith duty to its insured." Dunn, 251 P.3d at 1235. The court noted that "Colorado...