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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