Chapter 11 - § 11.2 • CASES EXPANDING LIABILITY BEYOND THE SCOPE OF THE CONTRACT

• Jurisdiction: Colorado

§ 11.2 • CASES EXPANDING LIABILITY BEYOND THE SCOPE OF THE CONTRACT

On the other hand, in several cases, Colorado courts have held that a bad faith action could be brought in the absence of an insurance contract between the plaintiff and defendant. In Farmers Group, Inc. v. Trimble, 768 P.2d 1243 (Colo. App. 1988) (Trimble III), Farmers argued that it could not be held liable for bad faith because it was not a party to the insurance contract with Trimble. As support for its position, Farmers relied on Gorab. However, because of the "unique relationship" between Farmers and the contracting insurance companies, the court of appeals disagreed with Farmers' position. The court noted that "Farmers was the attorney-in-fact and management company for all of its subsidiary and affiliated insurance companies." Id. at 1247. As the court stated:

Under these circumstances, strict adherence to the general rule that liability for bad faith breach may be imposed only against a party to an insurance contract would permit Farmers to shield itself from liability through the device of a management company and would deny defendant recovery from the party primarily responsible for his damages. Thus, we conclude that, here, Farmers is liable for bad faith breach of insurance contract.

Id. (citation omitted).

Likewise, in Scott Wetzel Services, Inc. v. Johnson, 821 P.2d 804 (Colo. 1991), the supreme court held that an independent claims adjusting service, which handled workers' compensation claims on behalf of a self-insured employer, did owe a duty of good faith and fair dealing to an injured claimant in its investigation and processing of a workers' compensation claim. The case before the supreme court arose out of two appeals by Scott Wetzel, a claims administration service utilized by Safeway, of two adverse decisions in the court of appeals, Johnson v. Scott Wetzel Services, Inc., 797 P.2d 786 (Colo. App. 1990), and Tozer v. Scott Wetzel Services, Inc., No. 88CA1723 (Colo. App. Apr. 19, 1990) (not selected for official publication).

Although Wetzel was not a party to any contract with Safeway's employees, it actually did most of the work in processing workers' compensation claims against Safeway. Wetzel investigated claims and made an initial determination of whether claims were compensable. It also received the first report of injury from the employer, set up the files, requested medical reports, made filings with the division of labor, and paid medical bills and other benefits with checks drawn on its own account with money supplied by Safeway. In addition, Wetzel held monthly meetings with Safeway to discuss claims. Safeway made the ultimate decision as to how to handle controversial claims, selected medical providers for injured employees, and chose the attorneys to represent it in contested claims. Scott Wetzel, 821 P.2d at 805-06.

The plaintiff, Johnson, worked in a frozen food warehouse for Safeway in a job that required him to lift tons of frozen food each day. In February 1981, he suffered a groin injury while lifting boxes of orange juice. He missed two days of work, and Wetzel issued a check for temporary disability. The file was then closed. Johnson returned to work and continued working until December 1981, when ongoing pain forced him to stop. Safeway sent him to a Dr. Derebury, who indicated Johnson's condition was not work-related. However, Dr. Derebury referred Johnson to a urologist, Dr. Pelander, who made a diagnosis of bilateral epididymitis. In a letter dated January 21, 1982, Dr. Pelander stated that the condition was the result of strenuous physical labor. Despite receiving this letter, Wetzel refused to...