Chapter 16 - § 16.3 • ATTORNEY FEES AS AN ELEMENT OF DAMAGES — ATTORNEY FEES NOT RECOVERABLE IN PURSUIT OF A COMMON LAW BAD FAITH CLAIM

• Jurisdiction: Colorado

§ 16.3 • ATTORNEY FEES AS AN ELEMENT OF DAMAGES — ATTORNEY FEES NOT RECOVERABLE IN PURSUIT OF A COMMON LAW BAD FAITH CLAIM

The issue of attorney fees as an element of damages recoverable in a bad faith action has arisen in several cases. In Hiatt v. Schreiber, 599 F. Supp. 1142 (D. Colo. 1984), the court rejected a motion to dismiss the plaintiffs' claim for attorney fees. The court held that "attorney fees necessary to collect insurance proceeds when an insurer breaches the insurance contract in bad faith can be compensable as ordinary damages." Id. at 1147.

Likewise, in Trimble III, the court held that when "an insured is reasonably compelled to hire an attorney to obtain benefits tortiously denied by his insurer, the attorney fees so incurred constitute economic loss caused by the tort and are recoverable as damages." Trimble III, 768 P.2d at 1246. The court also stated that "attorney fees incurred in defending the underlying tort action are recoverable as damages if they are proximately caused by the insurer's bad faith breach." Id.

Although attorney fees may be recoverable as an element of damages in a bad faith action when the fees are incurred as a direct result of the insurer's bad faith, attorney fees generated in pursuing the bad faith claim itself are not recoverable. In Martin v. Principal Casualty Insurance Co., 835 P.2d 505 (Colo. App. 1991), rev'd on other grounds, 855 P.2d 1377 (Colo. 1993), the plaintiffs brought a bad faith action due to an insurer's failure to pay PIP benefits. A jury trial resulted in an award in favor of the plaintiffs for $12,491.53 in unpaid PIP benefits, $33,934.59 in treble damages, and $1,460,000 for bad faith. One of the issues on appeal was whether the trial court had erred in awarding attorney fees to the plaintiffs' former counsel. The court noted that under C.R.S. § 10-4-708(1) (1987 Repl. Vol. 4A), the plaintiffs were entitled to attorney fees on their statutory claim for recovery of unpaid PIP benefits. However, the court held that "[t]his entitlement . . . does not extend to fees incurred in the prosecution of plaintiffs' claim of bad faith." Id. at 512.

While the court held that plaintiffs' former counsel was entitled to an award of fees, it determined that the defendant should be granted a hearing on the reasonableness of the amount of fees incurred in pursuit of the statutory claims. The court also held that a hearing was necessary on the claim for attorney fees by the plaintiffs' present counsel. The...