Chapter 7 - § 7.7 • INSURER'S DUTY TO INVESTIGATE — WHAT CONSTITUTES A "REASONABLE INVESTIGATION"

• Jurisdiction: Colorado

§ 7.7 • INSURER'S DUTY TO INVESTIGATE — WHAT CONSTITUTES A "REASONABLE INVESTIGATION"

Peden v. State Farm Mutual Automobile Insurance Co., 841 F.3d 887 (10th Cir. 2016), involved claims for common law bad faith and statutory bad faith under C.R.S. §§ 10-3-1115 and -1116 arising out of an underinsured motorist claim. The district court granted summary judgment in favor of the insurer, State Farm, but the Tenth Circuit reversed, concluding that a reasonable jury could determine that State Farm had unreasonably delayed or denied payment of UIM benefits.

Terrill Graf (Graf) bought his fiancée a van as a birthday present. To celebrate the event, Graf consumed alcohol and brought together four friends, including the plaintiff, Wendy Peden (Peden), to gather in the van. Peden only expected Graf to take photos of the friends in the van, but, instead, he drove off, crashed, and caused serious injuries to Peden. After recovering from Graf's liability insurer, which, coincidentally, was also State Farm, Peden brought a claim for UIM benefits against State Farm under two separate policies, the fiancée's policy, which had UIM limits of $250,000, and her own State Farm policy, which had limits of $100,000. Peden demanded payment of the full policy limits, and, as support for her demand, Peden claimed she had incurred economic damages of approximately $130,000 and non-economic damages of at least $468,010, the statutory cap under C.R.S. § 13-21-102.5. State Farm initially denied the claim, contending that Peden had been fully compensated by the $240,000 she had received under Graf's liability policy. After Peden initiated her bad faith litigation, State Farm obtained new information and paid Peden the total available UIM policy limits of $350,000. 841 F.3d at 888-89. State Farm moved for summary judgment on both of Peden's bad faith claims, asserting that its handling of her UIM claim was reasonable as a matter of law. Peden filed a cross-motion for summary judgment on her statutory bad faith claim.

In reversing the district court's summary judgment order in favor of State Farm, the Tenth Circuit focused on State Farm's duty to investigate. The court recognized several basis principles:

The duty of good faith requires the insurer to reasonably investigate an insured's claim. [Citation omitted.] The reasonableness of an investigation is determined objectively under industry standards. [Citation omitted.] These standards may be established through expert opinions or state law.

Id. at 890. Here, the court found that industry standards were established both by expert opinion and by statute. Id. Pursuant to C.R.S. § 10-3-1104(1)(h)(IV), an insurer must conduct "'a reasonable investigation based upon all available information.'" Id. at 891. Citing Dunn v. American Family Insurance, 251 P.3d 1232, 1238 (Colo. App. 2010), the court noted that in conducting an investigation, an insurer "must 'promptly and effectively communicate with anyone it was reasonably aware had . . . information pertaining to the handling of [a plaintiff's] claim.'" 841 F.3d at 891. In addition, Peden's expert witness stated that in investigating a claim an insurer "'should look for facts which support coverage with at least as much diligence as the insurer expends in any attempt to deny or limit coverage.'" Id. In the expert's opinion, "'[a] reasonable insurer should try to find all facts essential to an understanding of claimant medical conditions'" including their "'effects upon employment and future earning capacity.'" Id. Based upon these industry standards, the court then considered whether a jury could infer that State Farm had breached its duty to reasonably investigate Peden's UIM claim. The court held that a reasonable...