Chapter 20 - § 20.2 • APPLICATION OF THE "FAIRLY DEBATABLE" STANDARD TO STATUTORY BAD FAITH CLAIMS

• Jurisdiction: Colorado

§ 20.2 • APPLICATION OF THE "FAIRLY DEBATABLE" STANDARD TO STATUTORY BAD FAITH CLAIMS

§ 20.2.1—Common Law Legal Standards, Including "Fairly Debatable" Standard, Do Not Necessarily Govern C.R.S. §§ 10-3-1115 and -1116 Claims

In Vaccaro v. American Family Insurance Group, 275 P.3d 750 (Colo. App. 2012), the court affirmed the judgment in favor of the insured, Charles Vaccaro, on his claim for breach of contract and unreasonable denial of insurance benefits under C.R.S. §§ 10-3-1115 and -1116. Although Vaccaro's accident occurred in 2005, long before the August 5, 2008 effective date of the statutes, the court held that the statutes were properly applied retroactively to the case because there were distinct acts of delay and denial by the insurer after the effective date. However, the court vacated an award of prejudgment interest in favor of Vaccaro because it exceeded the available policy limits.

Vaccaro was injured in a two-car accident in 2005. The tortfeasor was insured under an auto policy with a liability limit of $25,000, and Vaccaro was insured by American Family under a UM/UIM policy with a limit of $100,000. In 2007, after settling with the tortfeasor, Vaccaro submitted a UIM claim to American Family and demanded payment of the remaining policy limit of $75,000. Initially, American Family valued Vaccaro's claim at less than the $25,000 he had already received from the tortfeasor. However, in January 2008, following requests from Vaccaro's attorney to reconsider, American Family valued the claim at up to $30,000 and made a "full and final" settlement offer of $5,000 on January 30, 2008.

Asserting that Vaccaro's injuries resulted in permanent impairment, in June 2008, Vaccaro's attorney again asked American Family to reconsider its evaluation. American Family responded by stating that there was no evidence of permanency and that it would need an opinion from a medical provider to document permanent impairment. Vaccaro's attorney then arranged for an independent medical examination (IME) by an orthopedic surgeon, Dr. Steven Nadler. American Family received Dr. Nadler's report on September 22, 2008. Dr. Nadler offered the opinion that Vaccaro suffered from a permanent facet joint injury and needed spinal injections costing $7,000 to $10,000 per year for the rest of his life. Dr. Nadler's report also stated that Vaccaro would need radiofrequency rhizotomy procedures costing $16,548 every 422 days for the rest of his life. American Family reviewed the IME report but refused to reassess its settlement position.

Vaccaro then commenced an action against American Family on May 26, 2009, asserting claims for breach of contract and violation of C.R.S. §§ 10-3-1115 and -1116. The court rejected Vaccaro's attempt during trial to add a claim for common law bad faith on the ground that the statutory claim and the common law bad faith claim involved different standards and were not interchangeable. The court also rejected American Family's motion for a directed verdict based on the argument that the statutes could not be applied retroactively to a claim arising before their effective date. However, in jury instructions, the trial court directed the jury to limit its consideration regarding the statutory claims to events occurring after August 5, 2008.

The jury returned a verdict in favor of Vaccaro and awarded him $75,000 on the breach of contract claim. The trial court then awarded Vaccaro double this amount, $150,000 on his statutory claim for unreasonable denial of insurance benefits. The court of appeals noted that the propriety of the trial court's decision to double the award was not an issue involved in the appeal.

The trial court rejected American Family's motion for a new trial and motion for judgment notwithstanding the verdict. It concluded that the statutory claim was properly submitted to the jury. The trial court also awarded Vaccaro $14,907 in costs, $52,830 in attorney fees, and prejudgment interest of $40,539, resulting in a total judgment of $333,276 in Vaccaro's favor.

The court of appeals rejected American Family's argument that the trial court's submission of the statutory claim to the jury amounted to an unconstitutional retroactive application of the statutes. It also held that the trial court did not err by instructing the jury to consider American Family's conduct only after August 5, 2008, in deciding the statutory claim. Like the court in Kisselman, 292 P.3d 964, the Vaccaro court concluded "the Statutes create a new right of action, separate from common law bad faith, which is available for acts occurring after August 5, 2008." Vaccaro, 275 P.3d at 757. Reaching this conclusion, the court felt it unnecessary to "analyze the constitutionality of retroactive application." Id.

The court of appeals held "a reasonable jury could find that defendant engaged in new acts of unreasonable denial and delay after August 5, 2008, sufficient to impose liability under the Statutes." Id. Specifically, a "reasonable jury could have concluded . . . that it was unreasonable for defendant to request additional information and then ignore the IME findings by refusing to reassess its settlement position." Id. at 758. This refusal, which occurred after August 5, 2008, was alone "sufficient to establish liability under the Statutes." Id.

The court of appeals rejected American Family's argument that it was reasonable to be skeptical of Dr. Nadler's opinions because he was a doctor hired solely for litigation. Issues such as witness credibility and the sufficiency and weight of evidence, "and the inferences and conclusions to be drawn...