Chapter 11 - § 11.1 • CASES HOLDING NO BAD FAITH CLAIM LIES AGAINST A NON-PARTY TO THE CONTRACT

• Jurisdiction: Colorado

§ 11.1 • CASES HOLDING NO BAD FAITH CLAIM LIES AGAINST A NON-PARTY TO THE CONTRACT

A number of Colorado cases have adopted the position that without a contractual relationship between the parties, no claim of bad faith is possible. In Gorab v. Equity General Agents, Inc., 661 P.2d 1196 (Colo. App. 1983), Gorab, a real estate broker, sued Equity General Agents, Inc., his insurance agent, and the California Union Insurance Company, his errors and omissions carrier. The lawsuit arose because Gorab had been previously sued regarding a transaction covered by his Cal Union E&O policy. Gorab alleged that Equity General and Cal Union had a legal duty to settle this suit before judgment, and claimed that they breached this duty by failing to respond to and accept a settlement proposal recommended by the attorney Cal Union had retained to defend the case.

Because of this alleged breach of duty, Gorab asserted that he had been forced to accept the settlement offer without the prior consent of Cal Union. Gorab claimed he had been compelled to do this because of the danger of adverse publicity and exposure to judgment in excess of policy limits. In response, Equity General had advised Gorab that his acceptance of the settlement offer without prior consent had resulted in nullification of his E&O coverage. Gorab asserted that the conduct of Equity General and Cal Union was a bad faith breach of insurance contract. He also claimed damages for intentional infliction of emotional distress.

Equity General moved for summary judgment on both of these claims. The trial court granted the motion, and the court of appeals affirmed. The court held that because Equity General was the agent of Cal Union and was not a party to the contract between Gorab and Cal Union, it was not bound by any duties arising from the contract. Therefore, Equity General could not be held liable for breach of these duties, "whether the breach be contractual or tortious in nature." Id. at 1198. On the other hand, the outrageous conduct claim against Equity General did not rest upon the existence of a contractual relationship. Nevertheless, the court held that the trial court had properly dismissed this claim because there were no allegations of conduct against the agent "which reasonable persons could characterize as atrocious and utterly intolerable in a civilized community." Id.

In Munoz v. Prudential Insurance Co. of America, 633 F. Supp. 564 (D. Colo. 1986), the principal issue was whether an...