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BAD FAITH AFTER LITIGATION STARTS

By

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.

I.
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.

II.
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.

III.
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.

CONTINUE ON TO PAGE 07

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.

CONTINUE ON TO PAGE 08

CONCLUSION

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.
___________________________
ENDNOTES

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.
15. Id.
16. Id.
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.
30. Id.
31. 948 P.2d 545 (Colo. 1997).
32. Id. at 551.
33. Id.
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.
46. Id.
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.
54. Id.
55. Id.
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).

HOW TO MAKE 17% INTEREST ON AN UNINSURED MOTORIST CLAIM

By

Stephen C. Kaufman

This article will provide plaintiffs attorneys with a blueprint for arguing that an insured is entitled to 17% prejudgment interest on his or her uninsured motorist claim. Sure, this sounds odd and likely the reader’s eyes are starting to roll off to the left the way they do when something they are hearing is not making sense. Yet, recall that many strange things can happen when it comes to the law. Who would have ever thought there would be a decision which required an insurer to pay all the costs involved in an uninsured motorist arbitration, including the arbitrators’ fees?1 Who could have imagined that an insurer would be liable for uninsured motorist and personal injury protection benefits because someone intentionally shot its insured?2 And, who would have considered it possible that underinsurance limits would be determined by subtracting from uninsured motorist limits the amount of the insured’s settlement with the tortfeasor, rather than the full amount of the tortfeasor’s policy limits?3 With this in mind, it is proposed that 8% interest under C.R.S. § 5-12-102(1) can be added to 9% interest under C.R.S. § 13-21-101, so that total prejudgment interest on an award of uninsured benefits comes to 17%.

An insured, based on Colorado’s uninsured motorist act4 and case law, is entitled to recover C.R.S. § 13-21-101 prejudgment interest, accruing from the date of the accident, as part of an award of uninsured motorist benefits. In addition, pursuant to Bowen v. Farmers Insurance Exchange,5 an insured must be allowed to recover C.R.S. § 5-12-102(1) interest on an award of damages for uninsured motorist benefits from the date an insurer refuses an insured’s settlement demand. This includes C.R.S. § 5-12-102(1) interest on that part of the damage award which is made up of C.R.S. § 13-21-101 interest. Analysis of these issues will demonstrate that an insured is entitled to awards of interest under both statutes inasmuch as such awards are non-duplicative and applicable to different and distinct situations.
I.
COLORADO’S UNINSURED MOTORIST STATUTE REQUIRES THAT C.R.S. 13-21-101 PREJUDGMENT INTEREST BE INCLUDED IN A DAMAGE AWARD OF UNINSURED MOTORIST BENEFITS.

Colorado’s uninsured motorist act was enacted to allow a person injured by an uninsured motorist to recover uninsured motorist benefits from his or her own insurer to the same extent, up to policy limits, as if a direct cause of action had been pursued against the uninsured tortfeasor. To this end, the act states that it is for the protection of insureds “who are legally entitled to recover damages from owners or operators of uninsured motor vehicles because of bodily injury, sickness, or disease, including death.”6 Moreover, it provides that “[u]ninsured motorist coverage shall include coverage for damage for bodily injury or death which an insured is legally entitled to collect from the owner or driver of an underinsured motor vehicle.”7

Included within the damages which an insured can recover in making an uninsured motorist claim is C.R.S. 13-21-101 interest, since such interest is considered to be part of damages when making a claim against a tortfeasor in a personal injury action. In this regard, our Supreme Court has expressly held that C.R.S. 13-21-101 prejudgment interest constitutes damages, stating that there is “a long line of cases treating prejudgment interest as a form of damages”8 and that “such prejudgment interest is an element of compensatory damages in actions for personal injuries, awarded to compensate the plaintiff for the time value of the award eventually obtained against the tortfeasor.”9

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Case law has reiterated the principle that the same damages recoverable in a personal injury action against a tortfeasor, which would include C.R.S. 13-21-101 interest damages, are also recoverable when making a claim for uninsured motorist benefits. Our Supreme Court set forth this tenant of law, stating that uninsured motorist coverage “enables the insured to gain compensation for loss due to the negligent conduct of non-insured motorists in the same manner as the insured would be compensated for loss due to the negligent conduct of insured motorists.”10 On this point it has also been said: “This theme, requiring that a person injured by an uninsured motorist be compensated to the same extent as one injured by an insured motorist, has been followed consistently by the courts of this state.”11

Most insurance policies also follow the uninsured motorist act, as well as case law in providing that uninsured motorist benefits include whatever the insured could recover from the tortfeasor. In this regard, one such policy reads: “We will pay damages for bodily injury an insured is legally entitled to collect from the owner or driver of an uninsured motor vehicle.”
In order to ensure that a person injured at the hands of an uninsured motorist receives the same compensation that he or she would be entitled to in a direct cause of action against an insured tortfeasor, C.R.S.13-21-101 prejudgment interest must be awarded as part of the damages with respect to a claim for uninsured motorist benefits. This is because C.R.S. 13-21-101 makes a tortfeasor in a personal injury action liable for prejudgment interest at the rate of 9%, accruing from the date the tort was committed. On this point, the statute states:

In all actions brought to recover damages for personal injuries . . . , it is lawful for the plaintiff in the complaint to claim interest on the damages claimed from the date the action accrued. When such interest is so claimed, it is the duty of the court in entering judgment for the plaintiff in such action to add to the amount of damages assessed by the jury, or found by the court, interest on such amount calculated at the rate of nine percent per annum . . . .

Thus, if a court or arbitration panel were to fail to award C.R.S. 13-21-101 prejudgment interest, accruing from the date of the accident, to the insured as part of uninsured motorist benefits, the insured would not be receiving compensation equal to that of a person bringing suit directly against a tortfeasor. Such a result would run contrary to the uninsured motorist act and case law which requires compensation with respect to a claim for uninsured motorist benefits to be identical to that which a person would be entitled to in a personal injury action against the tortfeasor. It would also, likely, run contrary to the language of the applicable insurance policy expressly providing for such equality in compensation.

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Furthermore, because the insurer is the drafter of the policy, any ambiguities therein must be resolved against the insurer and in favor of the insured.12 So, if there is an ambiguity in the policy language in terms of whether an insured can recover C.R.S. 13-21-101 interest as part of uninsured motorist benefits, the ambiguity must be resolved against the insurer and in favor of the recovery of such interest. Accordingly, C.R.S. 13-21-101 prejudgment interest at the rate of 9% per annum, accruing from the date of the accident, should be added to any award of uninsured motorist benefits that is rendered in favor of an insured.

II.

THE BOWEN CASE DOES NOT STAND AS GROUNDS TO SUPPORT A DENIAL OF C.R.S. 13-21-101 INTEREST WITH RESPECT TO A CLAIM FOR UNINSURED MOTORIST BENEFITS.

Recently, defendants have been citing Bowen v. Farmers Insurance Exchange13 for the proposition that it is improper to award C.R.S. 13-21-101 interest with respect to a claim for uninsured motorist benefits. This position represents a misreading of Bowen and is not supported by either the facts of the case, or the language of the opinion.

In Bowen, the plaintiff was injured in an automobile accident in 1989. She settled her claim against the tortfeasor and then sought to recover underinsurance benefits from her own insurer. In December of 1993, the plaintiff and her insurer stipulated to both liability and damages. Thereafter, plaintiff sought to recover interest pursuant to C.R.S. 5-12-102(1), which allows for interest “[w]hen money or property has been wrongfully withheld.” Such interest accrues “from the date of the wrongful withholding.” Because the plaintiff’s right to underinsurance benefits derived from her contract of insurance with her insurer, the Court of Appeals held that C.R.S. 5-12-102(1) interest would start to run from the date the insurer breached the contract.14 This was determined to have been at the time it refused to pay underinsurance benefits after demand had been made by the plaintiff.15 In so holding, the court noted that the breach would not be as of the date of the accident “[s]ince this is a suit on the policy, rather than a tort claim,” nor would it be as of the date of the stipulation since that would result in unwarranted delays by insurers in the payment of benefits.16

What Bowen did not do is hold that C.R.S. 13-21-101 interest is not to be included as part of an award of uninsured motorist benefits. First, nowhere in the opinion does the court indicate that it is making a determination between C.R.S. 13-21-101 and C.R.S. 5-12-102(1), as to which prejudgment interest statute is to apply in the calculation of uninsured motorist benefits. Instead, the issue before the court was the date C.R.S. 5-12-102(1) interest would start after uninsured motorist benefits were already determined and then wrongfully withheld.

CONTINUE ON TO PAGE 04

Second, the decision makes clear that suit was brought based, not on tort, but on the insurer’s breach of contract in not paying uninsured benefits when due and that C.R.S. 5-12-102(1) is the interest statute that applies where there is a breach of contract. On the other hand, a determination of the amount of uninsured motorist benefits is based not on a breach of contract, but on what the insured could recover from the tortfeasor in a tort action.

Consequently, C.R.S. 13-21-101 interest is included in the calculation of overall uninsured motorist benefits that are owed. And then, it is only after the insurer refuses to pay the uninsured motorist benefits that have been calculated to be owed — including the portion thereof made up of C.R.S. 13-21-101 interest — that there is a wrongful withholding and C.R.S. 5-12-102(1) interest starts to accrue. Furthermore, when C.R.S. 5-12-102(1) interest begins to accrue it does so with respect to the entire award of uninsured motorist benefits, including that portion thereof that is made up of C.R.S. 13-21-101 interest.

Third, in Bowen, C.R.S. 13-21-101 interest had already been taken into account by virtue of the parties’ stipulation of damages. As discussed in Part I above, damages with respect to a claim for uninsured motorist benefits must include whatever the claimant could have recovered from the tortfeasor in a personal injury action. Because C.R.S. 13-21-101 by its terms entitles a plaintiff in a personal injury action to recover interest from the date of the accident giving rise to the action, so too is a person making claim to uninsured motorist benefits entitled to have C.R.S. 13-21-101 interest calculated as part of those benefits. Accordingly, whenever there is a stipulation of damages made in the context of an uninsured motorist claim, as in Bowen, C.R.S. 13-21-101 interest has already been included in the amount of damages that have been stipulated to.

It is because C.R.S. 13-21-101 interest had already been taken into consideration by way of the stipulation that the plaintiff in Bowen did not file suit seeking an award of interest under C.R.S. 13-21-101. To have done so would have been to ask for a double recovery of C.R.S. 13-21-101 interest. Instead, the Bowen plaintiff sought interest under C.R.S. 5-12-102(1), not as part of a calculation of uninsured motorist benefits, but because the uninsured motorist benefits once calculated were not paid when owed.

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Accordingly, Bowen stands for the proposition that once uninsured motorist benefits are owed, including C.R.S. 13-21-101 interest, an insured is entitled to C.R.S. 5-12-102(1) interest if such benefits are wrongfully withheld by not being paid when due. Bowen in no way stands for the proposition that C.R.S. 13-21-101 interest is not to be included in an insured’s award of uninsured motorist benefits.

III.
UNDER BOWEN, PLAINTIFFS ARE ENTITLED TO C.R.S. 5-12-102(1) INTEREST ON AN AWARD OF UNINSURED MOTORIST BENEFITS THE INSURER DID NOT PAY WHEN OWED, INCLUDING SUCH INTEREST ON THAT PART OF AN AWARD MADE UP OF C.R.S 13-21-101 INTEREST.

As shown in Part I above, C.R.S. 13-21-101 interest is part of the damages which an insured is entitled to recover as part of their claim for uninsured motorist benefits. Therefore, when the amount of uninsured motorist benefits is determined by the fact finder, the court or arbitration panel is obligated to add to that amount C.R.S. 13-21-101 interest. Thereafter, pursuant to Bowen, the court or arbitration panel must make a determination, as a matter of law, of the point back in time when the insurer should have paid its insured the amount of uninsured benefits that have been calculated and award C.R.S. 5-12-102(1) interest on that amount from that point to the date of the award. According to Bowen, this would have been the date that the insurer first refused a demand from its insured for uninsured motorist benefits.17

C.R.S. 5-12-102(1) interest is on the total award of uninsured motorist benefits, including that portion of the award made up of C.R.S. 13-21-101 interest. This is because at that point back in time, the insurer owed to the insured the entire amount of uninsured motorist benefits, not just bits and pieces. This means that the portion of uninsured motorist benefits made up of C.R.S. 13-21-101 interest was just as due and owing at that time as the portion of uninsured motorist benefits made up of pain and suffering or loss of enjoyment of life, and was just as much wrongfully withheld.

A.
An Award of Both C.R.S. 5-12-102(1) and C.R.S. 13-21-101 Interest Does Not Allow for a Double Recovery.

Awarding C.R.S. 5-12-102(1) interest on top of C.R.S. 13-21-101 interest does not constitute a double recovery, but is based on two different and distinct situations. The insurer initially becomes liable for the C.R.S. 13-21-101 interest because as the insurer for uninsured motorist benefits it is stepping into the shoes of the uninsured motorist and must pay to the insured whatever he or she would have been entitled to recover from the tortfeasor. Because the insured would have been able to recover C.R.S. 13-21-101 interest as part of damages from the tortfeasor, so too does the insurer become liable for such interest.

Now, if the insurer had simply paid the uninsured motorist benefits when due, back when the insured had made a demand for such benefits, the only interest the insurer would ever have had to pay would have been C.R.S. 13-21-101 interest. Instead, if the insurer does not pay uninsured motorist benefits at that time, it thereby has wrongfully withheld from its insured those benefits. Accordingly, the insurer additionally becomes liable to its insured for C.R.S. 5-12-102(1) interest at the time it breached the contract of insurance by wrongfully withholding the uninsured motorist benefits, including C.R.S. 13-21-101 interest, from its insured.

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This distinction between C.R.S. 5-12-102(1) interest and C.R.S. 13-21-101 interest was specifically noted by the Court of Appeals in Herod v. Colorado Farm Bureau Mut. Ins. Co.,18 a bad faith action where an insured was allowed to recover interest of both types from his insurer. On the one hand, the insured was allowed to recover C.R.S. 13-21-101 interest on the emotional distress injury resulting from the insurer’s bad faith “[s]ince these damages were for a personal injury,” and, on the other hand, the insured was also allowed to recover C.R.S. 5-12-102(1) interest because this “equaled the benefit realized by CFB’s wrongful withholding of Herod’s insurance benefits.”19 Therefore, it is clear from Herod that to award both C.R.S. 13-21-101 and C.R.S. 5-12-102(1) interest is to render an award based on two separate acts and represents two distinct grounds for recovery, such that there is no double recovery in the award of both C.R.S. 13-21-101 and 5-12-102(1) interest.

Thus, with respect to C.R.S. 13-21-101 interest, the insurer is liable to its insured due to the acts of the uninsured motorist in causing the insured’s damages. On the other hand, the insurer becomes liable for C.R.S. 5-12-102(1) interest, not because of the acts of the tortfeasor in causing the accident or damages, but because of its own act in wrongfully withholding uninsured motorist benefits from its insured. Accordingly, an award by the court or arbitration panel of both C.R.S. 13-21-101 and C.R.S. 5-12-102(1) interest would not result in a double recovery to the insured.

B.
The Insurer Breaches its Contract with the Insured when it Refuses to Respond to the Insured’s Settlement Demand within 10 Days.

Now, the question is when did the insurer breach its contract with the insured by not paying uninsured motorist benefits when due. In determining that the breach in Bowen occurred when the insurer refused the plaintiff’s demand for uninsured motorist benefits, the court first looked to the policy language, which stated: “We will pay all sums which an insured person is legally entitled to recover as damages from the owner or operator of an uninsured motor vehicle because of bodily injury sustained by the insured person…. Determination as to whether an insured person is legally entitled to recover damages or the amount of damages shall be made by agreement between the insured person and us. If no agreement is reached, the decision will be made by arbitration.”20

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The court rejected the insurer’s contention that based on this policy language there was no breach since no benefits were due until either there was an agreement between the parties, or there was an arbitration award. Instead, the court concluded that the policy language was ambiguous and, therefore, had to be “construed against the insurer.”21 In so doing, the court recognized that to adopt the insurer’s interpretation “would tend to encourage insurance companies to stall and delay in the payment of claims, thereby frustrating the purpose of the statute.”22 Thus, the court chose to resolve the ambiguity by holding that the wrongful withholding constituting the breach of contract occurred at the time the insurer refused to pay uninsured motorist benefits after the demand by the plaintiff had been made.23 It was from this point that the court found that C.R.S. 5-12-102(1) interest started to run.

The same ambiguity that existed in the policy at issue in Bowen can be found to exist in the policies issued by most other insurers and these policies are, therefore, just as ambiguous as the one in Bowen in terms of when uninsured motorist benefits are due. Therefore, the Bowen analysis will be controlling, such that the insurer owes its insured uninsured motorist benefits at the time it refuses the demand of its insured. The date that an insurer refuses a demand will ordinarily be easy to fix because the insurer will respond within a reasonable period of time, in writing or verbally, informing the insured that either it is making a counter-offer, or is making no offer at all. However, the date of refusal is harder to find when the insurer does not respond to a settlement demand within a reasonable period of time, or at all. Of course, one way to prevent this issue from arising would make a time limited demand, but when this is not done there are other factors to consider in setting the date of refusal.

Under contract law, an offer once made is considered to have lapsed or to have been rejected if it is not accepted within a reasonable period of time.24 The issue then is what constitutes a reasonable period of time? The offer of settlement statute25 provides guidance as to when an insured’s offer should be considered to have been rejected. By virtue of stating that an offer of settlement not accepted within 10 days shall no longer be open, the legislature has expressed the public policy in this state to the effect that settlement offers should be responded to promptly and that 10 days is a reasonable period to allow for acceptance.

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This public policy encouraging an insurer to respond to the settlement demand of its insured and to pay benefits promptly is further evinced by statute26 which proscribes certain insurer conduct and designates such conduct as “unfair claim settlement practices” which can be used against an insurer to show bad faith.27 For example, an insurer violates this statute by “[f]ailing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies” and by “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”28

Therefore, a finding that the insurer rejected the demand for uninsured motorist benefits within 10 days of it being made ( plus 3 days for service by mail) would be consistent with both the offer of settlement and the unfair claim settlement practices statutes. Such a finding would also further the purpose behind the uninsured motorist act as set forth in Bowen by not allowing an insurer to benefit from stalling and delaying in the payment of uninsured motorist benefits. In the alternative, it is argued that 30 days from the date of demand should be considered the date of rejection.

This certainly would give an insurer adequate time to evaluate the demand and to respond. At the very latest the date of rejection should be no later than the date that suit was filed, or arbitration demanded. The failure on the part of the insurer to accept the demand by that date constitutes a clear rejection of the demand resulting in a change of circumstance for the insured in that the insured is no longer negotiating, but instead is litigating.

III.
THE BOWEN DISSENT DOES NOT INDICATE THAT THE BOWEN MAJORITY HELD THAT C.R.S. 13-21-101 INTEREST WAS NOT RECOVERABLE AS PART OF UNINSURED MOTORIST BENEFITS.

The dissent in Bowen contained a discussion of the interplay between C.R.S. § 5-12-102(1) and C.R.S. § 13-21-101. Defendants have argued that this discussion stands for the proposition that the majority ruled that only C.R.S. § 5-12-102(1) interest would be recoverable with respect to a claim for uninsured motorist benefits. However, a reading of Judge Briggs’ dissent does not bear this out.

The reason for Judge Brigg’s dissent can be found in his disagreement with the majority over when uninsured motorist benefits were wrongfully withheld and had nothing to do with whether C.R.S. § 5-12-102(1) interest was to be allowed to the exclusion of C.R.S. § 13-21-101 interest. On this point, it was Judge Brigg’s opinion that the insurance policy at issue was not ambiguous and that under the terms of the policy, uninsured motorist benefits were not due until there was an agreement as to the amount owed or an arbitration award was rendered. Accordingly, Judge Brigg’s dissent derived from his dispute with the majority’s conclusion that uninsured motorist benefits became due at the time an insurer rejected the demand of its insured for benefits. In this regard, Judge Brigg’s wrote:

Thus, under the express terms of the insurance contract, the insured is not ‘legally entitled’ to any amounts unless and until an agreement has been reached or an arbitration award rendered. No amount can be ‘wrongfully withheld’ under this provision until the insured is so legally entitled.29

In fact, the dissent expressly recognized that C.R.S. § 13-21-101 interest had already been taken into account by the parties and that the C.R.S. § 5-12-102(1) interest was being awarded on top of C.R.S. § 13-21-101 interest. On this point, Judge Briggs stated: “Although the entire policy is not before us, the parties appear to have assumed that prejudgment interest under § 13-21-101 is part of the damages subject to the UM policy limitations.”30 Accordingly, since the parties had stipulated to damages, the only issue before the court was when C.R.S. § 5-12-102(1) interest would apply with respect to an insurer’s wrongful withholding of uninsured motorist benefits. There never was an issue before the court requiring that it make a decision as to whether C.R.S. § 13-21-101 or C.R.S. § 5-12-102(1) interest would be applied as part of damages to be included in an award of uninsured motorist benefits.

CONTINUE ON TO PAGE 09

So it is in this context that the dissent discusses the interplay between C.R.S. § 5-12-102(1) and C.R.S. 13-21-101 interest, merely to explain when each are applicable. As for C.R.S. § 13-21-101 interest the dissent correctly notes that it accrues from the date of the accident, but only to the extent of the uninsured motorist limits.31 And just as correctly, the dissent observes with respect to C.R.S. § 5-12-102(1) interest, that it accrues from the time of the breach of the contract and that recovery of this form of interest is not confined to the policy limits.32 This is a far cry from saying that Judge Briggs was arguing that C.R.S. § 13-21-101 interest should apply in calculating damages for an award of uninsured motorist benefits, while instead the majority held that C.R.S. § 5-12-102(1) interest was the proper measure to use in determining such damages.

This also explains why nowhere in the Bowen majority opinion is C.R.S. § 13-21-101 ever mentioned, since all the majority was attempting to determine was the date that the wrongful withholding of uninsured motorist benefits occurred so that they could hold when interest would begin to run under C.R.S. § 5-12-1-2(1) for the wrongful withholding. Thus, the dispute between the majority and dissent in Bowen was only as to whether the date of the wrongful withholding was the date of the rejection of the insured’s demand for benefits or the date of the arbitration award and there just never was a dispute over what interest statute to apply in calculating prejudgment interest as part of damages for an award of uninsured motorist benefits.

IV.
OTHER ISSUES
In seeking to recover C.R.S. § 5-12-102(1) interest, in addition to C.R.S. 13-21-101 interest, it can be expected that the insurer will raise other arguments to avoid the interest penalty on its withholding of uninsured motorist benefits from its insured. For instance, the insurer may argue that C.R.S. § 5-12-102(1) interest is not owed since there was no bad faith involved in the withholding of benefits, such that there was not a “wrongful” withholding. Or, the insurer might argue that such interest should be reduced by taking into account the amount of the insurer’s offer to settle. The insurer might also argue that it is not obligated to pay C.R.S. § 5-12-102(1) interest if the insured did not receive an award of uninsured motorist benefits which equaled or exceeded the insured’s own settlement demand. It is submitted that each of these contentions lack merit.

A.
The Breach of the Contract by the Insurer in not Paying Uninsured Motorist Benefits When Due Constitutes a Wrongful Withholding and a Party’s Good Faith, if any, in Withholding Payment is not a Defense.

CONTINUE ON TO PAGE 10

C.R.S. 5-12-102(1) interest is triggered whenever money “has been wrongfully withheld.” This simply means that money has been kept by someone who was not entitled to keep it, but was instead obligated to pay it over to someone else. There is nothing that requires that an improper motive be shown and good faith is not a defense.

This is why in Bowen it was only necessary for the plaintiff to prove a breach of the insurance contract by virtue of the insurer not paying underinsurance benefits when demanded by the plaintiff. Thus, the insurer wrongfully withheld money from its insured and was, therefore, ordered to pay C.R.S. 5-12-102(1) interest only because it breached its contract by not paying money to its insured when due and not because the insurer acted in bad faith or had an improper motive.

This is no different from a business loan where the borrower does not pay the loan back when due because of a mistaken good faith belief that the money is not owed for one reason or another. Once it has been determined that the borrower did, indeed, owe the money, the borrower is liable to the lender for C.R.S. 5-12-102(1) interest from the date the loan was due because the borrower has wrongfully withheld money belonging to another and the good faith reasons for doing so are beside the point. The borrower cannot be allowed to have the time benefit of keeping money that did not belong to him or her and must give back that benefit by paying the lender C.R.S. 5-12-102(1) interest accruing from the date the money was due the lender. Likewise, the insurer cannot be allowed the time benefit of keeping money that did not belong to it and must pay that benefit back to its insured in the form of C.R.S. 5-12-102(1) interest.

B.
There Should be no Reduction in C.R.S. § 5-12-102(1) Interest in Consideration for the Insurer’s Offer to Settle.

It has been argued that C.R.S. § 5-12-102(1) interest should be figured based on the total award minus the amount that was offered by the insurer and rejected by the insured. There is no authority known for this and it is contrary to the Bowen decision where interest was allowed on the entire award, without subtraction for any offer to settle that had been made. Furthermore, when the insurer’s offer turns out to be less than the amount of the award of uninsured motorist benefits, it is
in essence illusory. This is because it does not allow an insured to accept the insurer’s less than full value offer and still retain the right to pursue the rest of his or her damages in an action for uninsured motorist benefits. Therefore, as is demonstrated by an award that is greater than the insurer’s offer, the amount offered would not have fairly compensated the insured and could not have been accepted absent forfeiture of substantial benefits to which the insured was entitled. Under these circumstances the effect of making a less than full value offer would be the same as making no offer at all and the insured should not be penalized for not accepting an offer that does not provide for full compensation, nor should the insurer benefit from making such an offer.

More to the point is that the total amount of benefits was wrongfully withheld and the fact that less than full value was offered does not change this, nor would an offer of less than full value have satisfied the insurer’s obligation. Again, in the business context, it is like saying that if someone makes a business loan for a certain amount and then refuses an offer of less than that amount as payment in full, then the lender should only receive interest on the amount loaned less the borrower’s offer to settle once a verdict is returned finding that the full amount loaned is owed.

CONTINUE ON TO PAGE 11

The insurer, just like the borrower, is obligated to pay the full amount owed and cannot avoid the fact that the entire amount has been wrongfully withheld simply by making an offer to pay back part of the amount owed as payment in full. Accordingly, the insurer cannot escape responsibility for having to pay C.R.S. § 5-12-102(1) interest on the full amount of uninsured motorist benefits awarded.

C.
An Insured’s Offer to Settle which Exceeds the Amount of Uninsured Motorist Benefits Awarded Does Not Absolve the Insurer from its Obligation to Pay C.R.S. § 5-12-102(1) Interest.

An insurer may also claim that no C.R.S. § 5-12-102(1) prejudgment interest should be awarded when the insured makes a demand for uninsured motorist limits in excess of what was awarded. Again, authority for this proposition is unknown and in Bowen the determination of a wrongful withholding was not based on whether the amount of uninsured motorist benefits awarded exceeded the offer. Instead it was based on the fact that uninsured motorist benefits were owed by the insurer from the time of the insured’s demand for benefits and the benefits owed were not paid at that time.

A holding that the amount of the insured’s offer is irrelevant to the insurer’s interest obligation would be consistent with Colorado statute. Under Colorado law an insured owes no obligations to its insurer concerning how the insured must conduct settlement negotiations concerning benefits. On the other hand, Colorado statute provides that it is an unfair insurance practice act and evidence of bad faith for an insurer not to make reasonable attempts to settle a claim once liability is reasonably clear and to offer substantially less to settle a claim than would be reasonable.33 These duties imposed on the insurer are independent of anything the insured might or might not do and no corresponding statutory obligation is placed upon the insured.

Regardless of the insured’s offer, the fact is that whatever has been awarded in uninsured motorist benefits must be considered to have been wrongfully withheld by the insurer because it belonged to the insured and was not the insurer’s to keep. Even where the insured offers to settle for more than it is eventually determined that the insurer is obligated to pay, it does not change the fact that the amount awarded was still owed by the insurer at the time it rejected the demand for uninsured motorist benefits and the insurer was not relieved of this obligation simply because the amount of the insured’s demand exceeded what was owed. Therefore, by rejecting the insured’s demand, without offering to provide uninsured motorist benefits in the amount that was owed, the insurer has wrongfully withheld money due to the insured from that point on.

To hold otherwise would be like saying, if there was a dispute over how much was due under a business loan and by verdict it was determined what was owed, that the lender would not be entitled to receive prejudgment interest thereon in the event he had demanded repayment in an amount greater than what was owed. In such a situation the debtor would still be obligated to pay prejudgment interest on the total amount owed even if the lender had demanded more. The amount of the insured’s demand simply does not change the fact that an amount certain was owed and payment of that amount was wrongfully withheld by the insurer.

CONTINUE ON TO PAGE 12

CONCLUSION

An insured is entitled to C.R.S. 13-21-101 interest as part of an award of uninsured motorist benefits. The Bowen decision does not stand as precedent to the contrary, but rather mandates that an insured is entitled to C.R.S. § 5-12-102(1) interest on an award of uninsured motorist benefits, including that part thereof made up of C.R.S. § 13-12-101 interest, from the date of the insurer’s wrongful withholding of such benefits. This does not constitute a double recovery because an award of interest under each of these statutes derives from separate obligations. An accurate reading of the Bowen dissent confirms this and would not support the argument that the majority was deciding that C.R.S. § 5-12-102(1) interest was the only interest applicable to an uninsured motorist claim to the exclusion of C.R.S. § 13-21-101 interest as part of the insured’s damages.

As for C.R.S. § 5-12-102(1) interest, it begins to accrue on the date the insurer refuses the insured’s demand for uninsured motorist benefits and where there is no response from the insurer the date of refusal should be considered to be 10 days after service of the demand. The insurer’s motive in refusing the insured’s demand for benefits is irrelevant to its obligation to pay this interest inasmuch as the insurer has “wrongfully” withheld money from its insured merely by not paying benefits when due. Nor can the insurer reduce or eliminate its obligation to pay C.R.S. § 5-12-102(1) interest based on either its own offer to settle the insured’s uninsured motorist claim or the amount of the insured’s demand.

Now, having worked through the law and logic supporting a recovery of 17% interest on an uninsured motorist claim, it is evident that this proposition is not as off the wall as it may have first seemed. In fact, it would appear to be the law. In the past, an issue like this would have been left to arbitrators to decide and most arbitration panels would probably have ruled against a recovery of both C.R.S. § 5-12-102(1) and C.R.S. § 13-21-101 interest due to their conservative nature in not wanting to extend the law beyond already published opinions. There would have been no right of appeal and even if a favorable decision was rendered, it would only be applicable to that one case. On the other hand, the higher courts of Colorado have not demonstrated the same reluctance to uphold novel arguments and their opinions impact all cases. Thus, ironically, the decision of some insurers to eliminate the arbitration provision applicable to uninsured motorist claims from their policies because they felt they could do better with juries then with arbitrators will allow appeals of legal issues that may turn out to cost these insurers in ways they never imagined. ________________________

Stephen C. Kaufman is a shareholder in the law firm of Kidneigh & Kaufman, P.C., practicing plaintiffs personal injury, medical malpractice, 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.

END NOTES

1.1. Garceau v. Iowa Kemper Ins. Co., 859 P.2d 243 (Colo. App. 1993).
2.2. State Farm Mut. Auto. Ins. Co. v. Tye, 931 P.2d 540 (Colo. App. 1996); State Farm Auto. Ins. Co. v. McMillan, 900 P.2d 1243 (Colo. App. 1994), affirmed 925 P.2d 785 (Colo. 1996); Cung La v. State Farm, 830 P.2d 1007 (Colo. 1992).
3. State Farm Mut. Auto. Ins. Co. v. Tye, 931 P.2d 540 (Colo. App. 1996).
4. C.R.S. § 10-4-609.
5. 929 P.2d 14 (Colo. App. 1996).
6. C.R.S. § 10-4-609(1).
7. C.R.S. § 10-4-609(4).
8. Allstate Ins. Co. v. Starke, 797 P.2d 14, 18 (1990).
9. Id. at 19.
10. Kral v. American Hardware Mut. Ins. Co., 784 P.2d 759, 762 (Colo. 1989).
11.11. Garceau v. Iowa Kemper Ins. Co., 859 P.2d 243, 245 (Colo. App. 1993)(citing in support Barnett v. American Family Mutual Insurance Co., 843 P.2d 1302 (Colo. 1993); Terranova v. State Farm Mutual Automobile Insurance Co., 800 P.2d 58 (Colo. 1990); Newton v. Nationwide Mutual Insurance Co., 197 Colo. 462, 594 P.2d 1042 (Colo. 1979); Alliance Mutual Casualty Co. v. Duerson, 184 Colo. 117, 518 P.2d 1177 (1974); and Morgan v. Farmers Insurance Exchange, 182 Colo. 201, 511 P.2d 902 (1973)).
12. American Family Mutual Insurance Co. v. Johnson, 816 P.2d 952 (Colo. 1991).
13. 929 P.2d 14 (Colo. App. 1996).
14. Id. at 16.
15. Id. at 16-17.
16. Id.
17. Id. at 17.
18. 928 P.2d 834 (Colo. App. 1996).
19. Id. at 838.
20. Bowen, 929 P.2d at 16.
21. Id.
22. Id.
23. Id. at 17.
24.24. Central Invest. Corp. of Denver v. Container Adv. Co., 471 P.2d 647, 648 (Colo. App. 1970).
25. C.R.S. § 13-17-102.
26.26. C.R.S. § 10-3-1104(1)(h).
27.27. C.R.S. 10-3-1113(1),(4).
28. C.R.S. § 10-3-1104(1)(h)(II) and (V).
29. Bowen, 929 P.2d at 17.
30. Id. at 18.
31. Id.
32. Id.
33. C.R.S. § 10-3-1104(1)(h)(VI),(VII); C.R.S. § 10-3-1113.

BIFURCATION AND THE BAD FAITH CLAIM

By

Stephen C. Kaufman

There are certain insurers with policies requiring that the insured sue the insurer when they cannot agree on the amount of uninsured or underinsured motorist (hereinafter UM or UIM) benefits to which the insured is entitled. Often times the dispute over benefits is genuine, with both parties acting in good faith. Sometimes it is not and a claim for bad faith may result. When this happens the insured’s attorney would do well to consider combining the claim for UM or UIM benefits with the bad faith claim in the complaint. This will give the jury a much better appreciation of the basis underlying the bad faith claim and, since the insurer’s acts of bad faith relevant to the UM or UIM claim probably will be continuing throughout trial, joining these claims will enable the jury to view some of the insurer’s acts of bad faith as they occur. Of course, the insurer will move to bifurcate the bad faith claim from the UM or UIM claim, with the idea being to first try the UM or UIM claim and thereafter proceed with the bad faith claim, if necessary, depending upon how the jury rules on the underlying UM or UIM claim. The ability of the insured to defeat that motion may make all the difference in the world relevant to the willingness of the insurer to alter course and resolve the insured’s claims in good faith, short of trial.

Remember that before a court can order bifurcation C.R.C.P. 42(b) requires a showing by the moving party that separate trials are needed “in furtherance of convenience, or to avoid prejudice, or . . . [that] separate trials will be conducive to expedition or economy.” In the absence of such a showing, bifurcation would be inappropriate.1 “Circumstances to be considered include the interrelationships of issues and claims, potential prejudice to any party, potential duplication of evidence, and possible delay in the ultimate resolution of the case.”2 With these standards in mind, bifurcation of the bad faith case from the UM or UIM case would achieve just the opposite result. Because the two claims are substantially intertwined and the evidence and witnesses needed to prove the UM or UIM claim would be nearly identical to that demanded to prove the bad faith claim, bifurcation would result in the unnecessary duplication of trials, together with an unnecessary duplication of expenses. Therefore, bifurcation would be neither feasible, nor warranted.

I.
THE ISSUES INVOLVING CLAIMS FOR UM OR UIM BENEFITS AND BAD FAITH ARE INTERRELATED

An insured’s claim for UM or UIM benefits derives from the contract of insurance issued by the insurer. As such, it is important to note that an insured’s claim for UM or UIM benefits is not grounded in negligence, but rather is based on what benefits the insured is entitled to pursuant to the terms of the contract. In turn, the insured’s claim for bad faith stems from the manner in which the insurer handled the UM or UIM claim under the same contract and its breach of that contract. Thus, both the claim for UM or UIM benefits and the bad faith claim are interrelated inasmuch as all issues revolve around the terms of the contract of insurance and the insurer’s obligations under the law with respect to that contract.

CONTINUE TO PAGE 02

Analogously, C.R.C.P. 20 permits the joinder of parties in the same action where the claims being made by or against each of them “are in respect of or arising out of the same . . . series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action.” The purpose of allowing joinder under these conditions is to promote the efficiency of the judicial system and lessen the expense involved with litigation. As to both the UM or UIM claim and the bad faith claim there is a “series of transactions or occurrences” all arising from the same contract of insurance and all requiring for their resolution a determination of what each of the parties’ rights and duties are under those contracts. Furthermore, as will be discussed below, a multitude of significant questions of fact will be common to both the claim for UM or UIM benefits and the claim for bad faith. Therefore, because of the interrelatedness of the issues involved with these claims, bifurcation would be inappropriate and result in the inefficient and expensive treatment of the insured’s causes of action.

II.
THE SAME EVIDENCE WILL BE REQUIRED TO PROVE BOTH THE CLAIM FOR UM OR UIM BENEFITS AND THE CLAIM FOR BAD FAITH

In order to prevail on a UM or UIM claim, an insured must establish that the other driver’s negligence caused the collision and the nature and extent of the insured’s damages resulting therefrom vis-a-vis preexisting conditions. For an insured to succeed on a claim for bad faith it must show that the insurer acted in bad faith by not dealing fairly with the insured in that it negligently or unreasonably handled, delayed, or denied Plaintiffs’ uninsured motorist claims.3 This has been codified in C.R.S. 10-3-1113(1)-(3). Furthermore, pursuant to subsection (4) of that statute, any “unfair claim settlement practice” engaged in by the insurer, as set forth in C.R.S. 10-3-1104(1)(h)(I)-(XIV), constitutes evidence of its bad faith. Analysis of an insured’s claims for UM or UIM benefits and for bad faith, in this context, will demonstrate that the evidence needed to prove each of these claims will be virtually identical.

First, there is the need to deal with the liability issue. If the insurer has denied that the uninsured or underinsured motorist was negligent, the insured will have to call witnesses at trial to establish this. This will likely involve eliciting testimony from the insured, the other driver, any eyewitnesses, and the investigating police officer. So too with respect to the bad faith claim since it is evidence of bad faith when an insurer does “[n]ot attempt… in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”4 Thus, the same evidence that will be used to prove the liability issue with respect to the UM or UIM claim which will be utilized for the bad faith claim to show that liability was clear and that the insurer did not make reasonable attempts to fairly settle once it became aware of this.

CONTINUE ON TO PAGE 03

As for the damage issue with respect to the UM or UIM claim, the insured will have to rely on his or her own testimony, the testimony of doctors and friends, the medical records and other extrinsic evidence, such as the damage to the involved vehicles, to prove what injuries and damages, or portions thereof, were caused by the collision as compared to other incidents. This same evidence, all going to the issues of apportionment and extent of damages, will be necessary to prove whether: the insurer acted in bad faith in not making a response to a settlement offer from the insured or in making a late response; in compelling its insured to institute a lawsuit “by offering substantially less than the amounts ultimately recovered”; and by “[a]ttempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled.”5

In other words, without there being the medical and lay testimony, and the accompanying medical records and exhibits, to determine extent of the insured’s injury and apportionment issues, an insured would be unable to prove whether the insurer’s delay in responding to offers was reasonable, whether the offer that the insurer made was “substantially less” than was reasonable, and less than what a reasonable man would feel entitled to. Thus, the same evidence that goes to proving damages in the claim for uninsured motorist benefits is essential to proving whether the insurer acted in bad faith with respect to its handling of the UM or UIM claim.

The truth of this is further demonstrated in looking at some specific instances of misconduct that an insurer might engage in when dealing with the claims of its insured for UM or UIM benefits. For example, an insurer may have already obtained IME’s in the context of the insured’s PIP claim which turned out favorable to the insured. Nevertheless, the insurer may seek an additional IME once suit is filed, not for the purpose of truly evaluating the insured’s UM or UIM claim, but solely to obtain a contrary opinion in order to defeat the insured’s claim. So, while the testimony of the favorable IME doctors will be required to establish damages for the UM or UIM claim, this same testimony will be needed to show that the insurer acted unfairly towards its insured in compelling an unnecessary IME . In other words, the testimony of the favorable IME doctors will demonstrate that the insurer already had IME opinions covering the same issues it sought to have the new IME doctor address, but that the insurer then retained another doctor, not for the purpose of ensuring that the pay out of benefits was fair, but instead for the sole purpose of obtaining testimony at trial in an effort to unfairly diminish the amount of benefits its insured would receive.

So too with respect to the insurer’s taking of inconsistent positions with respect to its handling of the insured’s PIP claim and the insured’s UM or UIM claim. On the PIP claim the insurer may well have paid benefits based on the opinions of the treating doctors and the IME reports. Again, the same doctors that will be needed at trial to prove the insured’s claim for UM or UIM benefits will have to be called to prove the correctness in the way the insurer adjusted the PIP claim in order to show that the insurer then turned around and took an inconsistent position as to the UM or UIM claim. This will aid in establishing that the insurer intentionally took inconsistent positions so as to unreasonably and unfairly preclude the insured from recovering the full amount of benefits to which the insured was entitled.

CONTINUE ON TO PAGE 04

Because the evidence that will be used to prove the UM or UIM claim will be the same as the evidence presented on the issue of bad faith, it would be extremely inefficient to bifurcate these claims. The end result would be to litigate the case twice. Furthermore, the ultimate resolution of the case will be delayed by one to two years should the insured be forced to try the bad faith claim after trial of the UM or UIM claim. In this same vein, the insured will be forced to incur duplicative expenses in trying the same case a second time, particularly in having to pay the same expert medical witnesses twice for appearing at two trials to testify to the same thing. Taking all this into consideration requires the conclusion that bifurcating claims for UM or UIM benefits and bad faith claims would be improper.

III.
NO UNFAIR PREJUDICE WILL INURE TO THE INSURER IF THE INSURED’S CLAIMS ARE NOT BIFURCATED

Insurers tend to make the conclusory allegation that if the insured’s UM or UIM claim is tied together with the bad faith claim, the insurer will be unfairly prejudiced. Often times the insurer makes no effort to explain exactly how this would be the case. In any event, to analyze this issue the focus must be on the key term “unfairly” since any evidence favorable to one party is, of course, going to be prejudicial to the opposing side.

On the one hand, if the insurer has not committed and will not commit acts of bad faith then there obviously can be no unfair prejudice to it in trying these claims together. Under such circumstances the jurors could then not possibly be incited by the insurer’s conduct in the handling of the UM or UIM claims so as to induce them to award an amount of UM or UIM benefits in excess of what the insured would be entitled to on that claim alone. Therefore, the motion of an insurer to bifurcate on that basis would in fact be inconsistent with its denial of the bad faith allegations in the complaint. If the insurer has denied the allegations in good faith, then there should really be no fear on its part of being unfairly prejudiced. Under equitable principles, the insurer’s denial of the bad faith allegations should certainly estop them from making any claim that they will be unfairly prejudiced.

On the other hand, if the evidence at trial does prove that the insurer acted in bad faith, the insurer still will not be subject to unfair prejudice. First, an instruction should be given making clear the differences in the insured’s claims for relief and directing the jury to award damages on the bad faith claim relating to the insured’s wrongful handling of the UM or UIM claim. The jury should also be instructed not to increase the award on the insured’s claim for UM or UIM benefits due to the manner in which the insurer has dealt with the UM or UIM claim, since that conduct is to be properly addressed with respect to its award on the bad faith damage claim, and would, therefore, constitute a double recovery. Given the propensity of juries to avoid awards that double the recovery for the same element of damages, the chance of that happening in this case would be practically non-existent. To argue to the contrary would be to presume that the jury failed to follow the court’s instructions designed to preclude a double recovery, which is something a court will not do.

CONTINUE ON TO PAGE 05

It is also important to note that any act of bad faith on the part of the insurer derives from its own wrongful conduct and it is not unfair to make the insurer bear the consequences of that conduct. What would be unfair, however, would be to punish the insured for the insurer’s acts of bad faith by bifurcating claims which would delay the ultimate resolution of insured’s case and force the insured to try the same case twice while doubling the insured’s expenses in doing so.

The insurer may also contend that the insured will argue that the insurer’s bad faith is continuing right through trial. Again, if the insurer is not continuing to act in bad faith, it has nothing to be concerned about. But if acts of bad faith show up at trial, the jury should be allowed to see it as it occurs, rather than to have it sanitized through the filter of a separate trial. The court, though, should not facilitate the insurer’s acts of bad faith and enhance their unfair impact on the insured by way of an order for bifurcation. Instead, the jury should be allowed to see exactly what the insurer is trying to do in the overall context of all claims and the insurer’s wrongful acts should not thereby be buried under cover of bifurcation.

IV.
SEPARATION OF CLAIMS FOR UM OR UIM BENEFITS AND BAD FAITH DOES NOT FIND SUPPORT IN CASE LAW

There are no Colorado appellate cases directly on point involving the issue of whether claims for uninsured motorist benefits and bad faith should be bifurcated. However, the Colorado Supreme Court decision in Sutterfield v. District Court7 does provide guidance with reference to a comparable situation. In Sutterfield, the plaintiff was injured in two separate motor vehicle accidents and he brought suit against both drivers in the same case. Our Supreme Court reversed the trial court’s decision to order separate trials against each defendant. In doing so, the court stated:

Proper apportionment can be more justly accomplished by one jury than by two juries sitting separately, each faced with the argument that the greater portion of the injury was caused by the defendants other than the one in the case at trial. The situation of two juries faced with the task of apportioning liability for a single injury could very well result in the plaintiffs’ receiving aggregate verdicts for much less than the admitted amount of permanent injuries, or, on the other hand, for much more than the admitted amount of permanent injuries. Justice would not be well served by either of such results.8

Obviously, the public policy that our Supreme Court sought to advance in Sutterfield was one whereby an injured person would receive full and fair compensation for injuries sustained. In its ruling the Court would not allow this policy to be thwarted by way of legal tactical devices such as bifurcation which would have given the defendants the opportunity in each separate case to attribute the plaintiff’s damages to the incident underlying the other case not then being tried.

Similarly, if the court were to bifurcate a UM or UIM claim from a bad faith claim the insurer could attempt to wrongfully diminish the insured’s overall recovery for damages on all claims for relief by playing off each of the insured’s claims against the other. To illustrate, in the trial for UM or UIM benefits the insurer would have the option of trying to attribute the insured’s emotional damages to problems the insured had with the insurer in collecting benefits rather than as damages caused by the collision with the uninsured or underinsured motorist.

Then in the bad faith trial the insurer could turn around and inconsistently contend that the insured’s emotional damages were not caused by its conduct, but instead were caused by the accident. By not allowing bifurcation, the insurer, in keeping with the rationale underlying the Sutterfield decision, will be precluded from improperly taking inconsistent positions with respect to the insured’s claims and, thus, the insurer will be frustrated in trying to unfairly deny its insured a full and fair recovery on all of the insured’s claims for relief.

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At the trial court level in Colorado, the Denver District Court in the case of Glenn v. State Farm Mut. Auto Ins. Co., et al.9 expressly rejected the insurer’s attempt to bifurcate the insured’s UM and bad faith claims. In Glenn the insured was injured in two collisions and the tortfeasor was uninsured on both occasions. An arbitration award was returned in favor of the insured as to the first accident and, because of a change in the insured’s policy, suit was filed for UM benefits relevant to the second accident.

The insured also included a bad faith claim in that action alleging that the insurer acted improperly by engaging in a scheme whereby an attempt would be made to attribute all damages at the arbitration to the second accident and then the insurer would inconsistently attempt in the law suit to attribute all damages to the first accident so as to improperly deprive the insured of a full recovery for all damages sustained from the combination of accidents. The insured also alleged that the insurer had an unnecessary IME done to unfairly defeat his claim for benefits, that the insurer took contradictory positions in its handling of his PIP and UM claim, and that the insurer failed to make a settlement offer on one of the UM claims, failed to make a fair or timely offer on the other, and failed to respond on a timely basis to correspondence from the insured. The insurer filed a motion to bifurcate claiming it would be prejudiced if the claims were tried together since evidence on the bad faith issue would corrupt the jury’s determination of the UM claim. The insurer also argued that the insured might call the insurer’s present attorneys as witnesses since they would be involved in acts during the course of the litigation and at trial which would further what the insured had asserted to be bad faith. The court rejected the insurer’s motion 10 and the insurer then filed a Petition for Writ of Prohibition and Mandamus which was denied.

In so ruling, the district court set forth the rationale underlying its decision as follows:
State Farm concludes in its motion that to allow Plaintiffs to try their claims together would create a prejudicial and procedurally unwieldy situation. The court does not agree. With respect to the presentation of the breach of contract evidence [i.e. the UM claim] concurrent with the bad faith evidence, the Court has the utmost faith in a jury’s ability to separate the two and make independent decisions on the claims. Moreover, the parties will be able to draft jury instructions mandating that the jury decide the claims separately, without regard for the other claims.

With respect to State Farm’s attorney being called as a witness, the trial in this matter is too far away for Plaintiffs to have designated witnesses yet. The Court will not sever the trial based on a possibility. Furthermore, current counsel can affiliate now, at the outset of this litigation, with another attorney who defends State Farm cases in the event that he is called to testify at trial. If and when current counsel is called to testify, then the affiliate counsel can assume the defense duties and there will be no prejudice to State Farm.12

Courts from other states, when confronted directly with the issue of whether to bifurcate a claim for uninsured motorist benefits from a claim for bad faith, have declined to do so as well. In Motors Insurance Corporation v. Fashing13 the court affirmed the denial of an insurer’s motion to bifurcate claims for uninsured motorist benefits and bad faith, ruling that possible problems that might arise over discovery of the insurers’ file were insufficient to justify separate trials.

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Likewise, in Buzzard v. McDaniel14 the insureds brought an action against their carrier for underinsured motorist benefits and also alleged that their insurer had acted in bad faith with respect to their claim for such benefits. The trial court denied the insurer’s request to bifurcate and the Supreme Court of Oklahoma affirmed, holding that it would not be necessary for the insureds to first address in a separate trial whether they were entitled to underinsurance benefits by proving the liability of the underinsured motorist. The court set forth its rationale as follows:

Farmers actions, in this regard, must be assessed in light of all the facts known and knowable concerning the claim at the time petitioners requested Farmers to perform its contractual obligations. Thus, the issue of whether, in fact, petitioners had a legal right to recover from the City of Norman is not separable from the question of whether Farmers had a good faith belief, at the time its performance was requested, that it had a justifiable reason for withholding payment under the policy.

Although not dealing specifically with a claim for uninsured motorist benefits, courts in other jurisdictions also have held that bifurcating claims made under a contract of insurance and bad faith claims arising therefrom would be improper. In Liberty National Fire Insurance Company v. Akin16 the insured made a claim for damage to the foundation of her home and payment was denied. The insured brought suit against her insurer making claims for her policy benefits and for bad faith. The insurer argued that the claims should be separated with the insured being precluded from pursuing her bad faith claim until after the underlying claim for benefits was resolved. The court affirmed the denial of the insurer’s motion, holding that the “claims are largely interwoven, most of the evidence introduced will be admissible on both claims, and any prejudicial effect can be reasonably ameliorated by appropriate limiting instructions to the jury.”17 Furthermore, the court noted that judicial economy would not be served by separation since even if the insurer prevailed on the claim for benefits, the bad faith case would still have to be litigated by virtue of the insured not having “limited her bad faith allegations to mere bad faith denial of her claim.

In this same vein, in Britton v. Farmers Insurance Group19 the insured made a claim under his policy for property destroyed by fire. His insurer refused to pay contending that arson was involved. The insured then asserted claims for the policy benefits and for bad faith. The trial court refused to bifurcate and the Montana Supreme Court affirmed, noting that the issues “were inextricably intertwined” so that it would have been error to order separate trials. In so ruling the court observed that “[t]he policy of the law is to avoid multifariousness in litigation and to resolve all issues and lawsuits in one trial.

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V.
CASE LAW RELIED UPON BY INSURERS IN SUPPORT OF BIFURCATION IS UNPERSUASIVE

It is unlikely that an insurer will cite to a case in which a court has ordered bifurcation of an insured’s claims for uninsured motorist benefits and for bad faith. Instead, an insurer may rely upon the Colorado Court of Appeal’s case of Martin v. Minnard22 which did not even involve an insurance claim. In Martin, the plaintiff alleged that he was injured due to the negligence of a bus driver. Suit was also brought against the driver’s employer on grounds of negligent hiring.

The court found bifurcation of the claims to be proper since the driver’s driving record would be admissible on the negligent hiring claim, but not on the claim of negligence, such that unfair prejudice would result to the driver. This is not the case with a UM or UIM claim and a bad faith action where the evidence needed to prove the two claims is the same and where no unfair prejudice will result. Also, in Martin, if the plaintiff failed to prevail on his claim of negligence, there would be no reason to try the negligent hiring claim, which would not be the result with respect to a bad faith claim which can be based on more than just a failure to pay benefits on a timely basis.

An insurer’s citation to the Colorado Supreme Court case of Prudential Property, Etc. v. District Court23 would also fail to advance its position. In that case the insured and another person became involved in a physical altercation in which the other person was injured, resulting in him filing suit. The insurer also filed a declaratory judgment action contending that there was no coverage under a policy of homeowners insurance because the insured had acted intentionally. The trial court ordered that the two cases be combined for trial, that the insurer’s attorney be allowed to participate in the trial, but that the insurer would not be identified, and that the jury would be given a special instruction asking them whether the insured intended to cause bodily injury. The court reversed, noting that while a decision not to bifurcate is discretionary, an abuse of that discretion occurs when the failure to separate trials “virtually assures prejudice to a party.”24

The court then held that the insurer would, indeed, be unfairly prejudiced because the trial court’s order denied the insurer an expedited ruling on whether it had an obligation to defend its insured and thereby reduced the insurer “to a handicapped observer,” “stripped of any adversary role” at trial, without the right “to call witnesses and present evidence, to examine and cross-examine witnesses, and to argue the evidence.”25 Furthermore, the court concluded that to have “a mysterious attorney” present at trial would result in the jury realizing that there was insurance involved which would be irrelevant to the issue of negligence and, therefore, unfairly prejudicial as well. Such unfair prejudice, however, could not occur if a court refused to bifurcate a UM or UIM claim from a bad faith claim.

The insurer would not be deprived of its adversarial rights if the claims were not bifurcated and the fact that there is insurance present could not be hidden from the jury even if separate trials were granted since the insured’s UM or UIM claim is a claim for benefits under a policy of insurance.

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This then leaves us to address the out of state case of Bartlett v. John Hancock Mutual Life Insurance Co.26 In that case the beneficiary of a life insurance policy brought suit against the insurer for the policy benefits and also made a claim in bad faith. The issue was not whether the two claims should be bifurcated, but whether the insurer had to produce certain documents in response to a motion to compel. The court ruled that the documents did not need to be produced since, although they were relevant to the bad faith allegations, there could be no bad faith absent a showing that the insurer was liable to pay benefits under the policy.27

The Bartlett case simply will not justify bifurcation of the UM or UIM case from the bad faith action on the basis of speculation. In fact, an issue concerning the production of documents may never even come up in any particular case. Should one arise, however, the court can address it at that time in the context of the bad faith case having been combined with the UM or UIM claim and make appropriate rulings, if necessary, to prevent the insurer from being unfairly prejudiced. This is exactly what the Bartlett court did, rather than bifurcate, which clearly demonstrates that claims for UM or UIM benefits and bad faith can be fairly managed without having to be severed. On this point, it also must be noted that our Supreme Court in Hawkins v. District Court28 has already held, contrary to Bartlett, that an insured is entitled to the production of the insurer’s file when he has “sued the company [in the same action] for breach of the insuring agreement, bad faith in refusing to pay his claim, and outrageous conduct.” Therefore, since our Supreme Court has held that the insured would be entitled to the insurer’s documents, there can be no real argument that the documents the insurer must produce in a bad faith claim necessitates its bifurcation from the claim for uninsured motorist benefits.

Bartlett has also been cited for the proposition that bifurcation is warranted since a trial on the bad faith claim will be unnecessary if the insured does not prevail on the UM or UIM claim. In Colorado this is simply not true as it has been previously shown above that a bad faith cause of action can result from the insurer’s delay alone in responding to communications from its insured.29

CONCLUSION
For an insurer to be successful in its attempt to bifurcate the claims of its insured for UM or UIM benefits and bad faith, it will be necessary for the insurer to satisfy the criteria set forth in C.R.C.P. 42(b). Without proof that separate trials would enhance convenience, be more expeditious, or lessen expense, or a showing of unfair prejudice, separate trial should not be granted. Considering that bifurcation would result in two nearly identical trials involving the same witnesses and the same evidence and that the insured would be unfairly prejudiced due to the substantial delay in the ultimate resolution of his or her case and by the doubling of expenses, the argument against separate trials is a strong one. Furthermore, bifurcation might very well enable the insurer to continue to act in bad faith to the insured’s detriment and thereby permit the insurer to cover it up under the auspices of the court. Such a result lacks support in Colorado case law, as well as the case law from other jurisdictions. Accordingly, it is suggested that courts cast a wary eye on an insurer bifurcation motion and take into account what the insurer is really trying to accomplish with its motion and the harmful impact the granting of such a motion would have on the insured.

ENDNOTES
1. Gaede v. District Court, 676 P.2d 1186, 1188 (Colo. 1984); Sutterfield v. District Court, 438 P.2d 236 (Colo. 1968).
2. Gaede, id. at 1188.
3. Farmers Group, Inc. v. Trimble, 691 P.2d 1138 (Colo. 1984).
4. C.R.S. 10-3-1104(1)(h)(VI).
5. C.R.S. 10-3-1104(1)(h)(II), (VI), (VII), (VIII).
6. Lexton-Ancira Real Estate Fund v. Heller, 826, P.2d 819, 824 (Colo. 1992).
7. 438 P.2d 236 (1968).
8. Id. at 240.
9. 97 CV 2835 (Judge Markson’s Order of Oct. 2, 1997).
10. Id.
11. State Farm Mutual Automobile Insurance Company, et al. v. The District Court, Second Judicial District,97SA422 (Order of Nov. 26, 1997).
12. Supra. note 9.
13. 747 S.W.2d 13 (Tex. App. 1988).
14. 736 P.2d 157 (Okla. 1987).
15. Id. at 159.
16. 927 S.W.2d 627 (Tex. 1996).
17. Id. at 630.
18. Id. at 631.
19. 721 P.2d 303 (Mont. 1985).
20. Id. at 320, 321.
21. Id. at 321.
22. 862 P.2d 1014 (Colo. App. 1993).
23. 617 P.2d 556 (Colo. 1980).
24. Id. at 558.
25. Id.
26. 538 A.2d 997 (R.I. 1988).
27. Id. at 1000-1002.
28. 638 P.2d 1372, 1374 (Colo. 1982).
29. C.R.S. 10-3-1104(1)(h)(II).

THOUGHTS FOR DISCOVERY IN THE BAD FAITH CASE

By

Stephen C. Kaufman

This article is written to give the practitioner some thoughts concerning areas for inquiry in a bad faith case involving a delay or failure to pay uninsured motorist or personal injury protection benefits. In this regard, the focus here will be on questions to ask in interrogatories and documents to request for production.

Because these are complicated cases and there is much the insurer would like to hide, it is suggested that a motion first be made to ask for unlimited discovery. It can be expected that the insurer will disclose next to nothing in making its Rule 26 disclosures, so whether discovery can be extended to whatever is relevant or reasonably calculated to lead to the discovery of admissible evidence may make all the difference in the world to the ultimate outcome of the case.

Begin by reviewing the pattern discovery and utilize whatever is applicable to your case. You will then want to know the legal relationship of all the defendants and the identities of certain people. This would include all adjustors, supervisors, and other personnel involved in anyway with respect to the claim – handling, decision making, or otherwise – at the local, regional, national, or home office level, or any other level. Get your client’s file as well. Don’t just get the claims file and be happy that you have it all. Be sure they give you every document relating to this particular claim, regardless of what the insurer calls the file it is kept in, including, but not limited to, all notes, log entries, correspondence, internal memos, e-mail, evaluations, and investigations. You will also want to know the names of the CEO, the person in charge of claims at each level, and who is in charge of marketing, advertising, public relations, customer service, management and supervision of agents, and policy content.

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Discovery should also be directed at other complaints and court cases, both prior and subsequent to your claim, and to finding out whether the insurer has a depository where it keeps documents relating to bad faith litigation and whether there is an index of the documents contained in the depository. If possible you will want to find out if the insurer has violated standards so look towards obtaining claims manuals, training manuals, and any other guidelines, instructions, memos, protocols, and handbooks issued to claims personnel, supervisors, and management personnel, whether on paper or in video, audio, or other form, or stored on computer or disc or otherwise.

Other places to look for statements that might place the insurer in a bad light are the insurer’s own slogans, television, radio, newspaper, and magazine advertising, materials distributed to their agents, materials distributed to insureds in general and your client in particular, and documents distributed to schools or the public for educational purposes. In this regard, it might be helpful to do a copyright and trademark search and request with specificity whatever the insurer has protected including intra-company newsletters, manuals, and magazines. These materials are the insurer’s own representations as to how a claim should be handled and the failure of the carrier to act in conformity therewith is evidence of its violation of its own standards.

More specifically, ask the insurer if the claim was handled in a routine manner for that type of claim. If the answer is no, it indicates that the insurer did something wrong by treating your client differently. If the answer is yes, it is evidence of a pattern of bad faith conduct relevant to exemplary damages. As to treating doctors and favorable IME doctors ask whether the insurer had reason to believe they were incompetent, whether their exams or evaluations were insufficient, or whether they rendered opinions based on ulterior motives.

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If the answer is no, it discredits the delay or denial of payment of benefits. In this same vein, ask how the insurer considered the records and opinions of these physicians in making decisions with respect to the claim.

Seek out information showing that action taken on the claim was unjust, such as finding out whether adjustors or supervisors receive payment or bonuses based on how little they pay out on claims in total amount, or as a percentage against reserves. On this point compare what is happening in your client’s case to how the insurer has treated others by asking about the number and percentage of other claims in which there is a denial of benefits, or where less than the full amount of bills submitted are paid, or inquire about the average length of time between offers to settle from insureds and the insurer’s counteroffer, or the number and percentage of times an insured has went to arbitration or trial and received an award that was greater than the insured’s last offer. In addition, try to determine if anyone has been disciplined or criticized with respect to the manner in which the claim has been handled and, comcommittantly ask if anyone questioned the fairness of the decisions made on your client’s claim or suggested alternative ways in which to handle the claim. Along these same lines ask about discipline the company has received from the Colorado Division of Insurance and from the insurance divisions of other states.

Get the insurer to establish the standards for handling claims. Ask interrogatories like whether the insurer believes that it is reasonable to have an insurer undergo an IME when it already has sufficient and credible information and documentation from treating medical personnel to evaluate the claim, or whether under such circumstances the insurer believes it is proper to compel its insured to undergo an IME for the sole purpose of obtaining an opinion contrary to opinions of treating physicians in order to utilize the opinion of the IME doctor against your client in litigation. Depending upon the answer, the insurer either establishes a standard by agreeing, or casts itself in a bad light by disagreeing.

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Another way to have the insurer establish standards is to ask it whether it agrees as a general principle with statements of law set forth in the unfair practices statute, C.R.S. 10-3-1104(1)(h)(I)-(XV). For example: “Please state whether you agree as a general principle that an insurer is not obligated to attempt in good faith to effectuate prompt, fair, and equitable settlements of uninsured motorist claims in Colorado in which liability has become reasonably clear.” How can an insurer disagree with something like that? Although the insurer can be expected to agree, it would maybe even be better if it didn’t insofar as jury appeal goes. Again, look at the statute and ask the same type of question as it relates to investigations, coverage issues, responses to communications from insureds, compelling insured’s to institute litigation, settlement, and the like.

The same carrier on a UM claim will in most cases be the same as the insurer that handled PIP benefits. Use this to your advantage. Find out how much in PIP benefits the insurer has paid, the reasons for payment, the basis for any apportionment, and then use this information against the insurer when it attempts to take an inconsistent position while litigating the UM claim.

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Delve into the insurer’s mind set. Ask it to set forth all of its reasons for its delay or denial and to produce all documents relating to its decision in this regard or that support the position taken. Look for whether the insurer has a policy of forcing insureds to fully litigate certain kinds of cases – like soft tissue cases where there is little visible property damage – regardless of whether liability is clear and the carrier knows that its insured sustained injuries as a result of the collision. Where it is obvious that the insurer knows your client is entitled to benefits in some amount, but has refused to offer anything in settlement because the carrier thinks the insured’s offer is too high, or simply due to mean spiritedness ask interrogatories that get to the heart of the matter. Determine if the insurer is contending that your client is not entitled to any UM benefits and, if not, ask the carrier to set forth its reasons as to why no offer has been made, and to indicate on what authority it is relying for the proposition that an insurer has no duty to make an offer to settle until the insured makes a reasonable (or what the carrier considers to be a reasonable) offer. Ascertain what reserves the insurer had set, whether there were any changes to the amount reserved and the reasons therefor, and ask why an offer was not made in the amount the insurer had reserved. If the defense seems to be “we need more information,” require the insurer to set out with specificity what else it has to investigate and what other documentation is needed before an offer can be made, and have the carrier explain why all this was not done earlier.

Try to figure out the approach the insurer had in handling the claim and also the approach it will take in litigation. Have the carrier list all publications it, or anyone involved with the claim, subscribes to, including publications relating to bad faith litigation. See what training or instruction – apart from that provided by counsel with respect to the instant case – each person you plan to depose has been given as it relates to testifying at depositions, arbitrations, and trial.

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Furthermore, we know that some insurance companies engage in dishonest tactics when it comes to producing documents. So ask the carrier about documents that have been destroyed and the reasons therefor, ask that documents be produced in their original, unaltered state and to advise if any have been altered, rewritten, or otherwise changed and for the names of who was involved with respect thereto and the reasons therefor. Insist that any post-its, or stickums, or other notes that were paper clipped, stapled, or otherwise attached to the document be produced and, if they cannot be, find out why they were destroyed or discarded and at whose direction.

Obviously discovery in a given case has to be tailored to the particular specifications of that case. However, I hope the foregoing may aid the practitioner in forming discovery relevant to his or her own case. In closing I wish to leave attorneys representing insureds in bad faith actions with the following interrogatory which best sums up an insurer’s obligations towards its insureds and, in the asking, capsulizes why the insurer’s non-conforming treatment of your client has landed it in court:

Please state whether you agree as a general principle that it is and has always been your policy that the handling of a claim is not a game and that your role as an insurer is to pay claims on a just and fair basis according to the terms of the policy, rather than to utilize gamesmanship in an attempt to pay out as little as possible on a claim. If you disagree, please set forth your basis for disagreeing and list what authority you are relying on.

Stephen C. Kaufman is a shareholder in the law firm of Kidneigh & Kaufman, P.C., practicing plaintiffs personal injury, medical malpractice, products liability, and bad faith 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.

Med Pay Coverage

Med PayAlthough no-fault is long gone in Colorado, you can still buy auto insurance that will cover your medical bills if you are hurt in an accident. 

This coverage is called Med Pay and you have it as part of your policy unless you specifically reject it.  You pay an added premium for this coverage, so if you have health insurance you may not want to do this because it will be duplication in many respects.  However, if you don’t have health insurance it is probably a good idea and you also may want it because it covers some things that your health insurance may not, such as treatment with a chiropractor, or with a dentist if, for example, your jaw gets out of line in an accident and you start hearing clicking or popping and get headaches. 

Also, if you get a settlement on your case, you do not have to pay back your insurance company for the med pay benefits it paid out, whereas if your health insurer paid your bills, your policy will likely require that you pay your health insurer back out of the settlement. 

The minimum Med Pay limit you can purchase is $5,000, but you will probably want more coverage since in many cases that amount will only cover the ambulance, the emergency room doctors, the initial x-rays, and some minimal follow-up care. 

It won’t be enough if you need surgery and it will be very hard to get a doctor and hospital to do the surgery if you have no insurance.  Also, keep in mind that it pays to purchase more coverage because this is coverage that provides a benefit directly to you, your family members, and anyone else injured in the insured vehicle regardless of who is at fault, and the bulk of the cost for Med Pay is in the first $5,000 in coverage and the cost per $1,000 for each incremental increase in coverage is less than the cost per $1,000 for the first $5,000 in coverage.

If you have any questions about Med Pay coverage, please feel free to give us a call at (303) 393-6666 and we will be happy to answer them for you.

 

     Everyone thinks they know that there are too many frivolous lawsuits because too many unscrupulous lawyers are looking for an easy way to get rich.  Yet, if you were to stop and think about this logically, you would realize there is no way that this even makes sense.  This is because lawyers that handle personal injury cases work on a contingent fee basis, meaning they get paid a percentage of their client’s recovery.  However, if the client receives nothing, then the lawyer gets nothing.  Consequently, because the lawyer is not getting paid by the hour no matter whether the case is a meritorious one or not, there is no reason for an attorney to take a frivolous case since he will have ended up putting in a lot of time for no money when he cannot achieve a settlement for his client.

      But you say the insurance companies will just pay to get rid of the case, even if it is frivolous.  The truth is, insurance companies and corporations fight these cases like crazy, which is why people hire lawyers in the first place!  Think about it, when is the last time you can remember an insurance company or corporation ever doing anything for anyone voluntarily where there was not an underlying profit motive, especially when it involves money.

 

      Of course, everyone’s poster child for the frivolous case is the McDonald’s hot coffee case.  But it pays to know the facts, and the facts are that

 

  • McDonald’s coffee was heated to 180 to 190 degrees, which was at least 40 degrees hotter than the coffee most people drink at home.
  • Full thickness 3rd degree burns to skin will occur in 2 to 7 seconds when liquid contacts skin.
  • The injured lady suffered suffered full thickness burns to her inner thighs, perineum, buttocks, and genital and groin areas, which required skin grafting.
  • More than 700 coffee burns had been made against McDonald’s prior to this incident.
  • McDonald’s never warned about its coffee’s extremely high temperature or that its coffee when coming into contact with skin can cause 3rd degree burns.
  • The lady was willing to settle for $20,000, an offer which McDonald’s rejected.
  • The jury’s award of $200,000 for injuries and pain suffering was reduced by the judge to $160,000.
  • The jury’s punitive damage award of $2.7 million was reduced by the judge to $480,000.

 

      As a result of this lady bringing her so called “frivolous lawsuit,” McDonalds reduced the temperature of its coffee, which has lessened the risk of 3rd degree burns for all of us when we drink McDonalds’ coffee.  So the lesson is, when someone starts going on about all the frivolous lawsuits, ask yourself what their agenda is, because it just doesn’t make sense.

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