Chapter 7 - § 7.3 • BAD FAITH CLAIMS IN ARBITRATION PROCEEDINGS OR IN CONNECTION WITH CONTRACTUAL APPRAISAL OF LOSS

• Jurisdiction: Colorado

§ 7.3 • BAD FAITH CLAIMS IN ARBITRATION PROCEEDINGS OR IN CONNECTION WITH CONTRACTUAL APPRAISAL OF LOSS

§ 7.3.1—Bad Faith Claims in Context of Arbitration Proceedings

Insurance disputes frequently result in arbitration, which may be required either by contract or statute. Often the insurance contract gives either the insurer or the insured the right to demand arbitration of a disputed claim. If the insured eventually obtains an arbitration award, months or perhaps years may have passed since the initiation of the claim. During the pendency of the claim, the insured may have received no insurance benefits.

Ordinarily, of course, if an insurer denies or delays payment of a claim without a reasonable basis, an action for bad faith may lie against the insurer. If, however, the delay in payment occurs because the insurer has exercised a contractual option to arbitrate, the insured may not succeed in pursuing a claim for bad faith, as in Bucholtz v. Safeco Insurance Co. of America, 773 P.2d 590, 593 (Colo. App. 1988).

In Bucholtz, the issue was whether an insurer was liable for bad faith in failing to negotiate a settlement of an uninsured motorist claim after the insured had made a demand for arbitration under the policy. Bucholtz was involved in an automobile accident on February 23, 1981. She was insured by Safeco and had UM policy limits of $100,000 per person and $300,000 per accident. In April 1982, Bucholtz made a demand under the policy for payment of $95,000. However, at that time her medical expenses were only $11,000 and her lost wages only $7,000. In addition, her medical prognosis looked promising. Safeco made a counteroffer of $20,000. Bucholtz renewed her demand for $95,000 and immediately requested arbitration.

The arbitration hearing was not held until June 20, 1984. The day after the hearing, Bucholtz refused to consider a settlement proposal from Safeco in the range of $40,000 to $45,000. On January 21, 1985, the arbitration panel decided that Bucholtz had suffered $300,000 in damages due to the accident. On March 4, 1985, Safeco tendered its $100,000 policy limit to Bucholtz, but the tender was refused. Safeco then paid the $100,000 into the registry of the court. In November 1985, Bucholtz commenced an action against Safeco, claiming that it had breached its duty to deal with her in good faith. She also claimed Safeco was guilty of willful and wanton breach of contract and outrageous conduct. The trial court granted summary judgment in favor...