Chapter 5 - § 5.1 • INTRODUCTION

• Jurisdiction: Colorado

§ 5.1 • INTRODUCTION

All Colorado contracts contain an implied duty of good faith and fair dealing.¹ In most contractual relationships, a breach of this duty will result in damages for breach of contract only and will not give rise to tort liability.² However, bad faith breach of an insurance contract is a tort action.³ Although it requires the existence of a valid insurance contract, a bad faith claim exists independently from the liability imposed by an insurance contract.⁴

Insurance contracts are unlike ordinary bilateral contracts.⁵ An individual or business purchasing coverage, commonly referred to as an "insured" (or the "policyholder"), enters into insurance contracts for financial security and peace of mind, rather than to secure commercial advantage.⁶ Because the insured cannot obtain materially different coverage elsewhere, there is a disparity of bargaining power between insurer and insured.⁷ Therefore, under common law, "due to the special nature of the insurance contract and the relationship which exists between the insurer and the insured, an insurer's breach of the duty of good faith and fair dealing gives rise to a separate cause of action arising in tort."⁸ "It is the nature of the relationship created by the insurance contract, rather than the activity involved, which determines if the duty of good faith and fair dealing exists."⁹ Bad faith actions can encompass the conduct of the insurer in handling a claim,¹⁰ refusing to investigate a claim,¹¹ failing to defend or settle a liability claim against its insured,¹² or cancelling an insured's policy.¹³ The duty of good faith and fair dealing is a "broad and wide-ranging one, extending to 'everything pertaining' to the provision of insurance services to the public."¹⁴

This chapter is divided into four sections. Section 5.2 discusses common law bad faith, explains the difference between first- and third-party bad faith claims, and introduces the reader to Colorado's Unfair Competition - Deceptive Practices Act (UCDPA). Section 5.3 discusses Colorado's statutory bad faith claims under the UCDPA. Section 5.4 addresses defenses to a bad faith action. Section 5.5 addresses remedies available in a bad faith action. Lastly, the Exhibit to this Chapter provides sample claims for breach of an insurance contract, common law bad faith breach of an insurance contract, statutory bad faith breach of an insurance contract, and declaratory judgment.

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Notes:

^[1] Cary v. United of Omaha Life Ins. Co., ...