BAD FAITH AFTER LITIGATION STARTS
Stephen C. Kaufman
Once litigation is commenced by an insured against an insurer with a demand for arbitration or the filing of suit in an attempt to collect uninsured or underinsured motorist benefits, the insurer oftentimes has the strange idea that it can treat its insured in whatever manner it likes, regardless of how awful, and that under no circumstances can the insurer be held liable pursuant to a claim for bad faith. The thought underlying this arrogant attitude is that with litigation an adversarial relationship has developed between insurer and insured, such that the insurer no longer owes its insured a duty to act in good faith.
In support of this incorrect concept of law, the insurer will gladly refer you to the 1988 Colorado Court of Appeals case of Bucholtz v. Safeco Ins. Co. of America.1 On a superficial level, Bucholtz may appear to bolster the insurer’s proposition, however, an analysis of Colorado law demonstrates that the initiation of a legal action does not give an insurer license to treat its insured in an unconscionable manner.
AN INSURED’S CLAIMS OF BAD FAITH COMMITTED BY AN INSURER DURING LITIGATION MUST BE VIEWED WITHIN THE CONTEXT OF THE HISTORY OF BAD FAITH LAW IN COLORADO
To fully understand the validity of an insured’s bad faith claim for acts committed by the insurer during the course of litigation and why the Bucholtz case would not support their dismissal, such claims must be looked at within the context of the history of bad faith law in Colorado.
The tort of bad faith was first recognized in Colorado by our Court of Appeals in 1970, in the case of Aetna Casualty & Surety Co. v. Kornbluth.2 In Kornbluth, an excess judgment had entered against the insured, who then brought suit alleging that his insurer had acted in bad faith by not settling within policy limits. The court held that the insured had stated a claim for relief and that whether the insurer had acted in bad faith would depend on whether it had acted negligently.
In 1982 the Court of Appeals extended the tort of bad faith so that it would apply in cases where there was no excess judgment. In Farmers Group, Inc. v. Trimble3 the insured was sued on claims of negligence and negligent entrustment as a result of injuries a third-party had sustained when struck by the insured’s motor vehicle. The insurer defended under a reservation of rights and eventually settled the claims against its insured. Yet, the insured brought an action in bad faith against his insurer for damages resulting from the manner in which the insurer had handled the claim against him and for exposing him to the possibility of an excess judgment for over two years. The court held that the insured’s bad faith claim constituted a valid cause of action, although the court indicated that for the insured to prevail, he would have to “establish the absence of any reasonable basis for the conduct complained.”4
The insured had also alleged that his insurer was liable for committing several acts constituting unfair claim settlement practices as set forth in C.R.S. 10-3-1104(1)(h). The court held that the insured had failed to state a claim in this regard since the legislature had not created a private cause of action with respect to the statute and since the statute contemplated enforcement by the division of insurance.
The Trimble case was then appealed to our Supreme Court and the court affirmed that the insured’s bad faith claim stated a valid claim for relief, based upon the following rationale:
By obtaining insurance, an insured seeks to obtain some measure of financial security and protection against calamity, rather than to secure commercial advantage. [Citations omitted] The refusal of the insurer to pay valid claims without justification, however, defeats the expectations of the insured and the purpose of the insurance contract. It is, therefore, necessary to impose a legal duty upon the insurer to deal with its insured in good faith. [Citations omitted]5
In so holding, the Supreme Court also reduced the insured’s burden of proof to that of negligence. In other words, the standard for “whether an insurer has breached its duties of good faith and fair dealing with its insured is one of reasonableness under the circumstances.”6
One year later, the Supreme Court extended the reach of the tort of bad faith in the case of Travelers Insurance Co. v. Savio.7 In Savio, the insured brought a first party action against his insurer for delaying and denying the payment of workers compensation vocational rehabilitation benefits. Although the insurer eventually paid this claim, the court held that it was the nature of the insurer’s conduct that gave rise to a claim for bad faith and not how the claim was eventually resolved.8 The court also held that the insured’s claim was valid even though the workers compensation act provided a vehicle for resolving any dispute between the insured and insurer.9
In upholding a first-party bad faith cause of action, the Savio court recognized that the insured had the same interest in having the insurer deal fairly and in good faith as in the third-party context. On this point, the court noted that the insured had the same concern in being protected from economic calamity due to injury10 and in not being pressured to accept an unfair settlement due to economic pressure and pressure from creditors resulting from an insurer’s unreasonable delay in paying a claim.11 However, because the insured in a first-party claim is not as dependent on the insurer to protect the insured’s interests, the court held that the standard of proof would be increased. This meant that in the context of a first-party claim “an insurer acts in bad faith in delaying the processing of or denying a valid claim when the insurer’s conduct is unreasonable and the insurer knows that the conduct is unreasonable or recklessly disregards the fact that the conduct is unreasonable.”12
In 1987, the legislature enacted C.R.S. 10-3-1113 in order to statutorily define bad faith. In this regard subsection (1) of the statute provides, in part, that “the trier of fact may be instructed that the insurer owes its insured the duty of good faith and fair dealing, which duty is breached if the insurer delays or denies payment without a reasonable basis for its delay or denial.” Subsection 2 created the same negligence standard of proof as established in the second Trimble case for bad faith claims arising out of the insurer’s handling of a third-party claim against its insured, while subsection 3 retained the knowing or reckless disregard standard that Savio had applied to a first-party bad faith claim.
However, in one very important respect, C.R.S. 10-3-1113 radically departed from Colorado’s bad faith common law. In this regard, subsection (4) of this statute reads:
In determining whether an insurer’s delay or denial was reasonable, the jury may be instructed that willful conduct of the kind set forth in section 10-3-1104(1)(h)(I) to (1)(h)(XIV) is prohibited and may be considered if the delay or denial and the claimed injury, damage, or loss was caused by or contributed to by such prohibited conduct.
Whereas, the first Trimble case had precluded the insured’s utilization of unfair claims settlement practices to prove the insured’s case, this statute expressly allows the fact finder to consider an insurer’s conduct in a particular case of the kind described as unfair claims settlement practices in determining whether the insurer had acted in bad faith. Also, the statute’s definition of bad faith made no attempt to limit a bad faith cause of action only to an insurer’s conduct occurring prior to litigation and, thus, by incorporating the unfair claims settlement practices act into the statute, the legislature clearly evinced its intent to make an insurer liable for the bad faith acts it committed following the institution of litigation.
The following year brought still another appeal of the Trimble case before the Court of Appeals.13 This time the court ruled that emotional distress, even if not severe, would be recoverable as part of bad faith damages without the insured having to show that the insurer intended to cause the distress.14 The court reasoned that where the insured is faced with an economic or property loss due to the insured’s conduct, “the threat of fictitious claims is sufficiently reduced to obviate the need for a showing of intent to inflict severe emotional distress or bodily injury.”15 In this regard, the court held that the insured’s having to pay attorneys fees was sufficient to constitute a substantial economic loss.16
This then brings us to Bucholtz v. Safeco Insurance Company of America.17 Although, this opinion was announced one year following the enactment of C.R.S. 10-3-1113, the insurer’s conduct giving rise to the insured’s cause of action took place during the years 1981 through 1985. Therefore, because the facts involved in Bucholtz took place prior to the legislature’s codification of bad faith law, the Bucholtz court neither relied on, nor considered C.R.S. 10-3-1113 or C.R.S. 10-3-1104(1)(h) in rendering its decision.
In Bucholtz, the insured was injured in a motor vehicle accident and brought an uninsured motorist claim against her insured. The insured made an offer to settle her claim for $95,000.00. When the insurer made a counter-offer of $20,000.00, the insured demanded arbitration under the terms of the policy. In the midst of the arbitration hearing the insured refused to discuss a “settlement inquiry” from the insurer in the amount of $40,000.00 to $45,000.00. The arbitrators then determined that the insured’s damages amounted to $300,000.00, which resulted in the insurer paying its $100,000.00 policy limits into the registry of the court in order to satisfy the arbitrators’ award. The insured then brought a bad faith cause of action against her insurer for not continuing to engage in settlement negotiations or make a reasonable offer after she had demanded arbitration.
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In holding that the insured did not state a claim for relief under these circumstances, it is significant to note that the court found that the duty of an insurer to act in good faith continued even after arbitration had been demanded. In this regard, the court stated that the “duty of good faith and fair dealing continues unabated during the life of the insurer-insured relationship.”18
However, the court held that an exception existed solely with respect to the duty to engage in settlement negotiations once arbitration had been demanded, where “there was a genuine disagreement as to the amount of compensable damages.”19 In that situation the court reasoned that this was “the very issue the arbitration clause was intended to resolve.20 In so holding, the court made no attempt to extend the reach of its decision so as to abrogate an insurer’s obligation to negotiate in good faith prior to a demand for arbitration. Nor did the court seek to eliminate an insurer’s duty to act in good faith and deal fairly after arbitration was demanded with respect to any aspect of the insurer’s relationship with its insured other than with respect to settlement negotiations, and then only if there was a “genuine disagreement” over what was owed.
The case of Southerland v. Argonaut Insurance Company21 followed and dealt precisely with the issue of whether an insurer’s duty to act in good faith and to deal fairly continued after its insured filed an action seeking policy benefits. In Southerland, the insured was injured on the job and filed a claim with the Workmen’s Compensation Division and her insurer filed a General Admission of Liability. Thereafter, the insurer filed a petition to terminate the insured’s rehabilitation benefits and delayed and underpaid wage loss benefits while the insured was in the midst of “dire economic circumstances.”22 On this basis the insured brought a bad faith claim against her insurer which our Court of Appeals upheld. In so doing, the court rejected the insurer’s argument that the fact that it had acted within its legal rights when it sought to terminate the insured’s rehabilitation benefits by petitioning the division barred the insured’s bad faith claim. As the court stated:
Here, a prima facie case was presented. The numerous instances of misconduct by defendant, including chronic late payments, filing a petition to terminate compensation benefits, continuous underpayment of benefits due plaintiff, refusal to provide information requested by plaintiff so she could properly evaluate the amount of benefits she was entitled to receive, general uncooperativeness, and delays in commencing rehabilitation, constitute evidence sufficient to support the jury’s verdict.23
The court also held that it was proper for the jury to have heard evidence of the insurer’s bad faith conduct that occurred after the insurer had filed her law suit alleging bad faith. This not only included the insurer’s actions with respect to wage loss benefits, but also included the insurer’s action in exercising its legal right to attempt to terminate rehabilitation benefits. On this point, the court observed:
The admission of this evidence did not state a new cause of action, change the theory of the action, or cure a defective pleading. Indeed, the continued late payments and ongoing difficulties in securing rehabilitation were merely a continuation of the same difficulties that preceded the filing of the complaint, and were relevant as evidence of defendant’s habitual pattern in dealing with plaintiff. Accordingly, we determine that introduction of the subsequent evidence of misconduct was not an abuse of the court’s discretion.24
After Southerland, an attempt was made in Bailey v. Allstate Insurance Company25 to expand the obligations an insurer owed to its insured beyond that of good faith and fair dealing to those of a fiduciary. In Bailey, the insured was injured in a pedestrian-motor vehicle collision in which the tortfeasor was uninsured. The insurer paid $750.00 to its insured in settlement of her uninsured motorist claim. The insured, believing that the settlement was grossly inadequate, brought claims of bad faith and breach of fiduciary duty against her insurer. The insured prevailed at trial only on the breach of fiduciary duty claim, so that the issue of whether the insurer had acted in bad faith was not before the court on appeal.
The court held that an insurer in a first-party claim is not a fiduciary since a fiduciary must “act principally for the benefit of another” which is inconsistent with a first-party claim that is adversarial in nature.26 Accordingly, the court held that the insured had not stated a claim for relief. However, the court noted that this did not mean that the insurer in a first-party claim had been relieved of its obligation to act in good faith and to deal fairly with its insured. On this point, the court’s decision reads:
While an insurer is required to deal with the insured in good faith and fair dealing concerning every aspect of the contract, good faith and fair dealing is not enough to place the broad and substantial duties of a true fiduciary upon the insurer.27
Next came the Court of Appeals decision in Peterman v. State Farm Mut. Auto. Ins.28 in which the insured brought suit against an uninsured motorist, took a default judgment, and then sought to collect on the judgment from its insurer under her uninsured motorist coverage. The insured maintained that the insurer was obligated to intervene and since it did not do so, the insurer was bound by the judgment against the uninsured motorist pursuant to the doctrine of collateral estoppel.
The court held that the insurer was not obligated to intervene since there was a clause in the policy to resolve disputes by way of arbitration.29 Accordingly, the court also held that the insurer could not be liable in bad faith for the delay in payment of uninsured motorist benefits stemming from its decision not to intervene since the insurer was entitled to rely on its arbitration clause.30
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Finally, there is the recent and most significant case of Dale v. Guaranty National Insurance Company.31 In Dale, our Supreme Court made abundantly clear, in accord with Colorado’s prior case law, that an insurer’s obligation to act in good faith and to deal fairly with its insured applied to all its dealings with its insured and that an insurer could be held liable for its bad faith acts committed even after the insured had instituted legal proceedings to obtain policy benefits.
The insured in Dale was injured in a motor vehicle collision. She demanded arbitration when her insurer refused to pay her medical bills under the PIP portion of her policy, which prevented her from obtaining medical treatment. She filed a court action grounded in bad faith, as well. Thereafter, the insured prevailed in arbitration with the arbitrators finding the insurer had acted wrongfully, but that its conduct had not been willful and wanton for purposes of the insured’s claim for treble damages under the No-Fault statute. Following the arbitration, the insurer issued a 9 party check to satisfy the award, including the insured’s medical providers as payees.
This further delayed the insured’s receipt of medical treatment because she was unable to obtain all the necessary endorsements, such that the insurer had to issue a new draft. In turn, the insured sought to include the insurer’s post-arbitration conduct with respect to issuing a 9 party check as part of her bad faith claim. On these facts, the trial court granted the insurer’s motion for summary judgment concluding that the arbitrators’ finding that the insurer’s conduct had not been willful and wanton collaterally estopped the insured from claiming that the insurer’s failure to pay medical benefits was in bad faith. In addition, the trial court concluded that the insurer’s post-arbitration conduct concerning the check was irrelevant to whether the insurer had acted in bad faith.
In reversing, our Supreme Court held that while an insurer’s willful and wanton conduct in a first-party claim for PIP benefits would certainly prove bad faith, an insurer could be found liable in bad faith for committing wrongful acts that went beyond the insurer’s refusal to pay a bill when due.32 As the court stated:
However, because willful and wanton conduct under the No-Fault Act is a subset of insurance bad faith, a finding that the insurer’s conduct was not willful and wanton is not the equivalent of a finding that the insurer did not act in bad faith. While a willful and wanton claim under the No-Fault Act is limited to the circumstances concerning the refusal to pay insurance benefits when due, the tort of bad faith breach of an insurance contract encompasses an entire course of conduct and is cumulative.33
More to the point, the court expressly held that an insurer could be held liable for its bad faith acts committed even after an adversarial relationship had developed between the insured and insurer due to the insured’s demand for arbitration.34 In this regard, the court held that an insurer’s duty to act in good faith “permeates all of the dealings between the parties.”35 The court then made it even clearer that the tort of bad faith was not limited to an insurer’s wrongful acts committed before arbitration is demanded in saying that “claims of insurance bad faith may encompass all of the dealings between the parties, including conduct occurring after the arbitration procedure.”36
In so holding, the court noted its approval of the Court of Appeals’ decision in Southerland to allow an insured to include in a bad faith action, an insurer’s wrongful conduct committed after the insured had filed a complaint.37 On the other hand, nowhere in the court’s opinion is Bucholtz cited for the proposition that an insured’s bad faith claim for relief can be restricted in any respect, let alone limited to include only those acts of the insurer that took place prior to a demand for arbitration or the filing of a complaint.
APPLYING COLORADO LAW ESTABLISHES THAT AN INSURED STATES A BAD FAITH CLAIM FOR RELIEF BASED ON THE ACTS OF AN INSURER COMMITTED AFTER THE INITIATION OF LITIGATION, INCLUDING ACTS RELATING TO SETTLEMENT
After reviewing Colorado bad faith law it is clear that the Dale and Southerland decisions are the ones most on point. Both unequivocally stated that an insurer owes a duty of good faith and fair dealing to its insured even after litigation is commenced and in both cases the insurer was found to have acted in bad faith with reference to its conduct after litigation started. Furthermore, the court in Dale expressly held that the tort of bad faith was not limited to just the refusal to pay a claim, but included other conduct. Thus, in Dale, the insurer was found to have acted in bad faith not for refusing to pay, but because it issued a 9 party check. Similarly, an insured would state a claim for bad faith, for example, where the insurer in handling an uninsured motorist claim takes a position inconsistent with an action it took in processing the insured’s claim for PIP benefits, or where it obtains an unnecessary IME, or where it seeks to acquire irrelevant personal information from the insured, even though such conduct goes beyond a mere refusal to pay benefits.
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Inasmuch as the Supreme Court in Dale expressly voiced its approval of the Southerland decision, that case takes on an added importance to this issue. This is because not only did the Southerland court find bad faith in the insurer’s continued delay and underpayment of benefits after the insured had filed her claim – which is akin to an insured’s delay or failure in making a reasonable settlement offer after arbitration has been demanded or suit filed – but the insurer was held to have acted in bad faith for utilizing the judicial system in accord with its legal rights to effectuate its delay and underpayment of benefits. In this regard, the insurer had petitioned the workers compensation division to terminate the insured’s rehabilitation benefits. Even though the insurer had the legal right to so petition, the court held that such conduct was evidence of bad faith since it resulted in a continuation of the same difficulties the insured had experienced before filing the complaint and was part of the insurer’s “habitual pattern” in dealing with its insured.
Likewise, although an insurer may have been acting within its legal rights in doing such things as opposing motions made by an insured, moving to compel an IME, taking inconsistent positions in various legal forums or in the handling of claims made by the insured or others involved in an accident, such conduct certainly establishes a prima facie claim of bad faith if it was done in order to unfairly defeat or diminish an insured’s claim for uninsured or underinsured motorist benefits. To argue to the contrary based on the contention that once litigation starts the relationship between insured and insurer becomes adversarial in nature would be without merit.
The truth is nothing changes with litigation because the relationship is adversarial from the moment a claim is made since the insured desires to recover as much as possible on the claim as soon as possible, while it is in the insurer’s interest to thoroughly investigate and pay out as little as possible to conclude the matter. Thus, litigation does not make the relationship any more adversarial than it already is, rather it simply provides for a method of resolution when two adversaries cannot reach an agreement with respect to a claim.
The Dale and Southerland decisions are certainly in accord with public policy. If the conduct of an insurer committed after litigation starts cannot be considered on the issue of bad faith, an insurer would have every reason to force its insured into litigation as soon as possible since then the insurer could act towards its insured in any manner it wanted, without having to risk liability for wrongful conduct. Even citation to the out-dated Bucholtz case, the one decision out-of-step with the rest of the Colorado cases on bad faith, will not support such a rule of law. In fact, Bucholtz made clear that the insurer’s duty of good faith and fair dealing would be suspended after litigation started only with respect to an insurer’s duty to engage in settlement negotiations where there was a “genuine disagreement.” Because Bucholtz held that the insurer’s duty to act in good faith and to deal fairly remained intact in all other respects once litigation started, it in actuality stands as grounds for sustaining an insured’s claim of bad faith arising from the conduct of an insurer occurring after litigation begins, including conduct pertaining to settlement negotiations where the disagreement over what is owed is not a “genuine” one.
Furthermore, even the decision of the Bucholtz court to suspend the duty of good faith and fair dealing as it related to settlement negotiations once litigation started is understandable when realizing that Bucholtz was decided on facts that occurred prior to the enactment of the bad faith statute, C.R.S. 10-3-1113, and, therefore, was in accord with the first Trimble case, which was the law at the time. However, the substance of this statute and the fact that it expressly incorporated the unfair settlement practices contained in C.R.S. 10-3-1104(1)(h) therein so that they could be considered as evidence of bad faith, make clear the law has changed and that the legislature intended that the insurer’s conduct relating to settlement is also to be included within the scope of bad faith, even if such conduct occurs after the commencement of litigation.
In this regard, neither statute by its terms makes any attempt to limit bad faith to only pre-litigation conduct. C.R.S. 10-3-1113(1) provides that an insurer acts in bad faith when it “delays or denies payment without a reasonable basis.” A failure on an insurer’s part to make a good faith settlement offer when warranted would certainly contribute to a delay or denial of payment without a reasonable basis. Of course, when the insurer has acted unreasonably in this respect on a pre-litigation basis, the mere filing of suit or a demand for arbitration does not thereby make such unreasonable conduct reasonable. Accordingly, there is no provision in the statute which would allow an insurer to escape bad faith liability simply because it continues to act unreasonably. In fact, as Southerland indicated, such continuing conduct would be admissible on the issue of bad faith.
Furthermore, conduct which might not have been unreasonable before litigation started, may become unreasonable thereafter due to information the insurer acquires in discovery. Yet, the statute does not allow for an exemption to bad faith liability when an insurer acts unreasonably under such circumstances, nor should it since the delay resulting from an insurer unreasonably compelling an insured to maintain an action can be considerably greater than the unreasonable delay which resulted in the bringing of the legal action in the first place. Therefore, since this statute encompasses an insurer’s conduct relating to settlement, an insurer can be held liable in bad faith for its wrongful conduct relating to settlement occurring after the start of litigation.
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This point is made in even greater detail when looking at what specifically establishes an unfair settlement practice under C.R.S. 10-3-1104(1)(h)(II), (VI), (VII), (VIII), and (XIV). This would include a failure “to acknowledge and act reasonably promptly upon communications with respect to claims.” A settlement offer from the insured would be such a communication and there is nothing in the statute that states that it only applies to communications before litigation or that the duty to respond with respect to pre-litigation communications is alleviated by the start of litigation. An insurer would also commit an unfair settlement practice by “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements in which liability has become reasonably clear.” Naturally, there will be cases where liability will only become clear after suit is filed or arbitration demanded and discovery takes place. However, the statute does not exempt the insurer from bad faith liability simply because liability becomes clear after litigation starts.
Similarly, there is bad faith liability under the statute where the insurer compels its insured “to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered” in litigation. Logically, if it is wrong for an insurer to compel its insured to institute litigation under such circumstances, it cannot be any better for an insurer to compel its insured to continue to prosecute such action by offering an amount which is substantially less than that which is eventually recovered. Thus, conduct of this nature occurring after litigation starts would be evidence of bad faith. The statute further supports this conclusion in saying that it is an unfair settlement practice for an insurer to attempt “to settle a claim for less than the amount to which a reasonable man would have believed he was entitled.” In this regard, an insurer can make such an unreasonable settlement offer just as easily after litigation starts, as before, such that there is no reason to draw a distinction for bad faith liability purposes that depends on when the offer was made.
Likewise, an insurer commits an unfair settlement practice by “[f]ailing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.” Again, a failure of the insurer to explain its denial of a claim or its settlement offer can happen just as readily after litigation starts, as before, and the statute says nothing about letting an insurer escape liability simply because its failure to explain occurred after litigation began.
Therefore, with the discussion of Colorado’s bad faith statute in mind, the fact that the statute was not applicable to Bucholtz because it was enacted after the facts giving rise to Bucholtz occurred, and considering that the unfair settlement practices act is now such an integral part of Colorado bad faith law that it has been incorporated into Colorado’s pattern jury instructions,38 it is evident that an insurer can be held liable for its bad faith acts with respect to settlement committed not only before the start of litigation, but for those acts committed after, as well. The fact that Bucholtz was decided outside the context of the bad faith statute would also explain why the Supreme Court in Dale chose to rely on Southerland and not Bucholtz in holding that an insurer’s conduct after litigation starts can be grounds for bad faith. It would also explain why in Dale and Southerland, neither court saw fit when stating that an insurer owed a duty of good faith and fair dealing at all stages of its relationship with its insured to refer to Bucholtz as an exception with respect to settlement. Accordingly, it is evident that an insurer’s conduct after arbitration is demanded or suit filed in not responding to settlement offers, in making an unreasonable offer, in making no offer at all, and in making an offer that is substantially less than that which its insured ultimately recovered does provide a valid basis for a bad faith claim and Bucholtz does not stand as authority to the contrary.
This result is also consistent with the rest of Colorado’s case law on bad faith. For example, in Savio the concern that resulted in the establishment of a bad faith cause of action with respect to a first party claim was that the insured needed protection from economic calamity resulting from an insurer’s delay or denial, as well as protection from being pressured to settle for an unfair amount due to economic necessity stemming from the insurer’s delay or denial. On this point, it is important to realize that an insured needs even greater protection once litigation starts since that will drag out the claim even longer, thereby causing the insured even greater economic difficulties, and will increase the pressure on the insured to approve an unfair settlement. Added to this pressure will be the cost the insured must bear in pursuing the claim through court or the arbitration process and the fact that an insured must pay certain or all of the insurer’s costs and expenses if the insurer prevails or if the insured receives less by way of verdict than the amount the insurer offers in an offer of settlement.39
Therefore, under the logic of Savio, an insurer should not be protected from liability for its bad faith acts committed after the start of litigation since the mere fact of litigation only increases the harm an insured faces that the tort of bad faith was designed to protect the insured from in the first place.
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In this same vein, the court in the third Trimble case held that an insured stated a claim for emotional distress caused by an insurer’s bad faith where the insured could demonstrate a resulting economic loss. In that case the economic loss was attorneys fees incurred in defending a claim. In pursuing an uninsured or underinsured motorist claim the economic loss comes from having to pursue claims in arbitration or court. In both instances litigation is involved, as well as the expense to the insured associated therewith. Thus, the third Trimble case stands for the proposition that an insurer can be held liable for its bad faith conduct when there is litigation and that there is no basis for distinguishing the insurer’s obligations based upon whether the insured is being sued by a third party or is involved in litigation with the insurer. In either case the economic difficulties to the insured, relevant to the litigation, are the same.
Therefore, it is clear that under Colorado law, an insured states a bad faith claim for relief relevant to an insurer’s acts committed both before and after the commencement of litigation, including acts relevant to settlement. Nevertheless, besides the Bucholtz decision which has been shown to be inapplicable, the other Colorado cases an insurer may raise in argument to the contrary include Bailey and Peterman. However, Bailey has no relevance to a bad faith claim since the issue before the court was not one of bad faith, but whether the insurer owed a fiduciary duty to its insured in a first party context. Because Colorado case law has made clear that a bad faith claim does not depend upon a breach of a fiduciary duty since an insurer owes a duty to its insured to at all times act in good faith and to deal fairly, an insurer’s attempt to overextend the holding of Bailey is without merit.
Likewise, Peterman is of no value where it is not being claimed that the insurer acted in bad faith solely by not intervening in an action against an uninsured motorist, or where the insured is not contending that it is bad faith, in and of itself, for an insurer to choose to litigate rather than to arbitrate when the policy provides for a choice. However, it does constitute bad faith when an insurer does make such choices, in conjunction with its other conduct, in order to unfairly defeat or diminish an insured’s claim for benefits. This is an issue that Peterman did not address, but as shown in Southerland, even a proper exercise by an insurer of its legal rights can be grounds for bad faith when it is intended to unreasonably reduce or delay an insured’s receipt of benefits.
CASE LAW FROM OTHER JURISDICTIONS DOES NOT SUPPORT THE DISMISSAL OF A BAD FAITH CLAIM BASED ON AN INSURER’S CONDUCTED OCCURRING AFTER THE START OF LITIGATION
Aside from a misplaced reliance on Bucholtz, insurers have had to go outside Colorado to find a case that will support the contention that an insurer cannot be held to have acted in bad faith based on its acts committed after litigation starts. In particular, citation has been made to the Montana Supreme Court case of Palmer by Diacon v. Farmers Ins.40 Of course, the biggest problem with this is Montana is not Colorado and Palmer is neither Dale, nor Southerland. In any event, the Palmer decision does not stand as good grounds to support a dismissal of an insured’s bad faith case founded on an insurer’s conduct occurring after litigation begins.
In Palmer the insured made a claim for uninsured motorist benefits which the insurer denied. The insured then brought suit for these benefits and prevailed. Thereafter, the insured brought a bad faith action against the insurer and the trial court admitted the insurer’s litigation strategy and tactics used in defending the claim for uninsured motorist benefits into evidence in the bad faith case. This evidence included: reimbursing key witnesses for expenses incurred in returning to the accident scene; having other witnesses view the scene; the fact that a claims supervisor when testifying as to his investigation did not indicate that a witness had changed his story; the fact that the claims supervisor could not explain the reasons for the actions the defense attorney took with respect to discovery, the taking of depositions and statements, and the calling of witnesses; and the attorney’s role in meeting with witnesses, cross-examining witnesses, and in hiring an investigator. It was the insured’s contention that these acts, in and of themselves, amounted to bad faith.41
In holding that the trial court erred in allowing these tactics into evidence, the Palmer court ruled they were inadmissible not because an insurer’s conduct after suit is filed can never be grounds for bad faith, but simply on the basis that any minimal probative value these tactics had towards proving that the insurer had no reasonable basis for denying the claim was outweighed by the unfair prejudice that would inure to the insurer.42 In this regard, the Montana court stated, in direct contradiction to what insurers maintain is the law, “that an insurer’s duty to deal fairly and not to withhold payment of valid claims does not end when an insured files a complaint against the insurer.”43 The court added: “In some instances, however, evidence of the insurer’s post-filing conduct may bear on the reasonableness of the insurer’s decision and its state of mind when it evaluated and denied the underlying claim. Therefore, we do not impose a blanket prohibition on such evidence.”44
Thus, in Palmer, the court did engage in a balancing test, weighing probative value in proving the basis for the denial vs. prejudice to the insurer, and concluded that because these tactics had little relevance to the basis for the denial, the evidence would be inadmissible.45 Moreover, there was other evidence relating to the conduct of the insurer’s attorney that occurred after the complaint had been filed which the insured had sought to introduce to prove bad faith. Rather than simply hold such evidence inadmissible, the court remanded to the trial court so that it could resolve the issue after performing the appropriate balancing test.46
Similarly, in Timberlake Construction Co. v. U.S. Fidelity and Guaranty Co.,47 the 10th Circuit, in applying Oklahoma law, followed Palmer in holding inadmissible the insurer’s joinder of a party, its counterclaim against the insured, and a letter from the insurer’s attorney to its adjuster on grounds that such evidence was irrelevant to whether the insurer had acted in bad faith in delaying payment on a fire damage claim. As in Palmer, however, the court indicated that whether an insurer’s conduct after suit was filed would be admissible in a bad faith action would have to be analyzed on a case-by-case basis to determine if the probative value of such evidence outweighed the unfair prejudice to the insurer.48
In contrast to Palmer and Timberlake, an insurer’s conduct after litigation starts will likely be relevant to proving, for example, whether the insurer had a reasonable basis for not offering to pay benefits, in delaying payment or the making of an offer, or in never making a reasonable offer. Thus, the bad faith claim is not grounded on the contention that the conduct of the insurer or its attorneys amounted to bad faith, in and of itself, because it was legally inappropriate, but that the acts of the insurer and its attorneys, committed after litigation began, were acts and evidence of bad faith because they were inextricably bound up with the insurer’s scheme to unfairly deprive its insured of uninsured motorist benefits to which the insured was entitled.
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An insurer’s further reliance on Palmer and Timberlake for the proposition that an insurer cannot be held liable in bad faith once litigation starts, if an insurer acts in defending itself in a permissible manner as allowed for by the rules of court and case law, is again misplaced. This is because what is being proved and the standard for proving that a litigant did something improper for purposes of the court imposing sanctions is different from that which is necessary to prove a bad faith cause of action.
For the court to impose sanctions it must be shown that the act complained of was “substantially frivolous, substantially groundless, or substantially vexatious,”49 whereas to prove bad faith it must be shown that an insurer knew, or recklessly disregarded the fact, that its delay or denial with respect to a claim was unreasonable. Thus, while something can be entirely appropriate within the boundaries of the court rules, it can also be part of a plan to deprive an insured of benefits without a reasonable basis. In essence, what insurers are confusing is the their legal right to use the judicial system in a way that is in accord with the rules, with the wrongful purpose underlying that use.
Furthermore, the Palmer and Timberlake decisions are not in accord with the case law from other foreign jurisdictions. For example, in White v. Western Title Insurance50 the California Supreme court held that an insurer’s settlement offers made after suit was filed were admissible as being relevant to the insured’s bad faith claim since they were probative of the insurer’s failure to process the claim fairly and in good faith,51 and as such constituted “proof of the instrumentality of the tort.”52 In so holding, the court rejected the argument that this would make it difficult for an insurer to defend a claim brought by its insured.53 Instead, the court recognized that to not hold an insurer accountable for its bad faith acts committed after suit had been filed “would encourage insurers to induce the early filing of suits, and to delay serious investigation and negotiation until after suit was filed when its conduct would be unencumbered by any duty to deal fairly and in good faith.”54 The court also noted that “[t]he policy of encouraging prompt investigation and payment of insurance claims would be undermined,” as well.55
There are several other cases on point directly or analogously. In Home Insurance Company v. Owens56 an insurer’s answer and response to a request for admission denying coverage was held admissible where the bad faith claim was based on an unreasonable denial of coverage. In Journal Publishing Co. v. American Home Assurance Co.57 the insured was allowed to amend the complaint for bad faith to include “the manner in which defendants have conducted their defense.” Similarly, in Oren Royal Oaks Venture v. Greenberg, Bernhard, Weiss & Karma, Inc.58 the court held that settlement negotiations from a prior suit were admissible in an abuse of process action because “when allegations of misconduct properly put an individual’s intent at issue in a civil action, statements made during the course of a judicial proceeding may be used for evidentiary purposes in determining whether the individual acted with the requisite intent.” The court found the same to be true in Fassola v. Montgomery Ward Ins.59 when it upheld a finding of “vexatious delay” based on an insurer’s post complaint settlement offers. These offers were held to be admissible to show, “considering the totality of the circumstances,” that the insurer intended to make offers before suit was filed with respect to property damage that were “ludicrously low.” And in the case of T.D.S. Inc. v. Shelby Mut. Ins. Co.60 the insurer’s litigation conduct was held to be admissible as being relevant to the insured’s claim for punitive damages.
In view of the foregoing, it is more than evident that the case law from other jurisdictions supports a bad faith claim based on an insurer’s conduct following the initiation of litigation, notwithstanding the insurer citation to case law for the contrary proposition.
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Colorado case law conclusively establishes that an insurer’s duty of good faith and fair dealing applies at all stages of its dealings with its insured. If there ever was any limitation on this placed by the Bucholtz decision, it has been eliminated by the legislature’s passage of the bad faith statute. This statute classified as unfair settlement practices certain conduct on the part of an insurer, including acts pertaining to settlement, and mandated the admissibility into evidence of such behavior in a bad faith action. Nor can Bucholtz stand up to scrutiny in view of the Supreme Court’s decision in Dale and that court’s approval of Southerland. This is further buttressed by the case law from foreign jurisdictions with holdings in accord with Dale and Southerland.
In the end what we have is a very good body of case and statutory law that rejects the contention of the insurance industry that insurers can freely act, without fear of liability, in whatever manner they so choose once litigation is filed or arbitration is demanded, regardless of how unfair their conduct and how much harm it causes their insureds. What is disheartening in all this is that the actions of insurers have necessitated the development of this body of law in the first place.
Stephen C. Kaufman is a shareholder in the law firm of Kidneigh & Kaufman, P.C., practicing plaintiffs personal injury, medical malpractice, bad faith, and products liability law.
Those wishing to submit articles for publication in the Tort and Insurance section of Trial Talk should send them to Stephen C. Kaufman, 650 South Cherry Street, Suite 820, Denver, Colorado 80246.
1. 773 P.2d 590 (Colo. App.).
2. 471 P.2d 609.
3. 658 P.2d 1370.
4. Id. at 1376.
5. Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo. 1984).
6. Id. at 1142.
7. 706 P.2d 1258 (Colo. 1985).
8. Id. at 1270.
9. Id. at 1267-1268, 1270.
10. Id. at 1273-1274.
11. Id. at 1273.
12. Id. at 1274, 1275.
13. Farmers Group, Inc. v. Trimble, 768 P.2d 1243 (Colo. App. 1988).
14. Id. at 1246.
17. 773 P.2d 590 (Colo. App. 1988).
18. Id. at 592.
19. Id. at 593, 594 (emphasis added).
20. Id. at 593.
21. 794 P.2d 1102 (Colo. App. 1990).
22. Id. at 1104.
23. Id. at 1105.
24. Id. at 1106.
25. 844 P.2d 1336 (Colo. App. 1992)(there was no appearance on behalf of the insured on appeal).
26. Id. at 1339.
27. Id. at 1341 (emphasis added).
28. 948 P.2d 63 (Colo. App. 1997).
29. Id. at 68.
31. 948 P.2d 545 (Colo. 1997).
32. Id. at 551.
34. Id. at 552.
35. Id. (emphasis added).
36. Id. (emphasis added).
37. Id. at 552 (Supreme Court quoted with approval same language from Southerland as quoted herein).
38. C.J.I.-Civ. 3d 25:3.
39. C.R.C.P. 54(d); C.R.S. 13-17-202.
40. 861 P.2d 895 (Mont. 1993).
41. Id. at 914.
42. Id. at 916.
43. Id. at 913 (emphasis added).
44. Id. at 915.
45. Id. at 916.
47. 71 F.3d 335 (10th Cir. 1995)
48. Id. at 341.
49. C.R.S. 13-17-102(4).
50. 710 P.2d 309 (Cal. 1985).
51. Id. at 317, 318.
52. Id. at 318 (quoting Fletcher v. Western National Life Ins. Co., 10 Cal. App.3d 376, 396 (1970).
53. Id. at 317.
56. 573 So.2d 343 (1990).
57. 771 F. Supp. 632 (S.D.N.Y. 1991).
58. 728 P.2d 1202, 1208-1209 (Cal. 1986).
59. 433 N.E.2d 378, 383 (1982).
60. 760 F.2d 520 (11th Cir. 1985).
Filed under: Articles by Steve Kaufman
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