Chapter 4 - CHAPTER 4 BASIS OF THE BAD FAITH CLAIM

• Jurisdiction: Colorado

Chapter 4 BASIS OF THE BAD FAITH CLAIM

SYNOPSIS

§ 4.1 INSURANCE CONTRACT AS SOURCE OF THE DUTY OF GOOD FAITH

§ 4.2 DUTY OF GOOD FAITH OUTSIDE OF INSURANCE CONTRACT

§ 4.3 BAD FAITH CLAIMS WHEN NO BREACH OF CONTRACT OCCURRED

§ 4.3.1—Breach of Contract Not a Prerequisite
§ 4.3.2—Breach of Contract Is a Prerequisite
§ 4.3.3—The General Rule Appears to Be That Where There Is No Coverage for a Claim and No Breach of Contract for Its Denial, There Is No Bad Faith
§ 4.3.4—A Statutory Bad Faith Claim Fails if No Coverage Exists or if No Benefits Are Owed Under the Insurance Contract
§ 4.3.5—A Manner-of-Dealing Claim May Go Forward Even if Coverage Does Not Exist, So Long as There Is Evidence to Support Both Liability and Damages
§ 4.3.6—Time-Barred Breach of Contract Claim Does Not Preclude Statutory Bad Faith Claim

§ 4.4 CONCLUSION

This chapter explores the legal basis of common law and statutory bad faith claims under Colorado law. As will be shown, when the courts initially recognized the tort of common law bad faith, the justification for the claim was the special nature of the contractual relationship between an insured party and an insurance company. The underpinning of the claim was the existence of an insurance contract, specifically the "implied covenant of good faith and fair dealing" within the contract.

This chapter addresses a number of questions, including whether a common law bad faith claim lies even where there is no contractual relationship to provide a foundation for the claim, or where the insurer is found not to have breached the insurance contract or has acted in compliance with its express terms. A number of cases support the conclusion that common law bad faith claims are broad in scope and encompass more than the mere unreasonable failure to pay benefits due under an insurance policy. In Dale v. Guaranty National Insurance Co., 948 P.2d 545 (Colo. 1997), the court noted that "claims of insurance bad faith may encompass all of the dealings between the parties," and "[a] pattern of delay or denial of payments may serve as a basis for a bad faith claim." Id. at 552 & n. 10. The court also commented that "evidence of a consistent pattern of delaying payments due, including arbitration awards, is relevant for an insurance bad faith claim and would tend to prove bad faith on the part of the insurance company." Id. Likewise, Colorado courts have long held that bad faith is not limited to the unreasonable failure to pay a claim, but also can arise...