Bad Faith Insurance – Big Business for Insurers at the Expense of Insureds
Article by Lindsay Miller, Esq.
The purpose of life insurance to is provide peace of mind: if something should happen to you or your loved one, your family would be protected from financial ruin.
Employer-offered policies are nearly irresistible, due to the extremely low cost of premiums and the sizeable coverage gained in return. These plans are convenient and often paid for through paycheck deductions. Enrollment is usually a yearly affair, and is overseen by a benefits administrator. Paperwork is completed, premiums are then paid, the employee is informed coverage is in place, and all is well…until a claim is submitted and denied, leaving a bereft family to fight with a major insurance company over coverage that was believed to be in place (and paid for, perhaps over several years). What rights does the claimant have? What exactly is a “bad faith” breach of an insurance contract and what are your potential damages?
ESTOPPEL; EXISTENCE OF COVERAGE
Colorado case law long ago established that if a life insurer has “accepted, retained, and deposited” premium payments, it is estopped to deny acceptance of the application for life insurance. Western Empire Life Ins. Co. v. Wash, 169 Colo. 523 (Colo. 1966). This is also true if the company accepts the premiums under circumstances in which it is entitled to deny coverage. State Compensation Ins. Fund v. Wangerin, 736 P.2d 1246, 1248 (Colo. App. 1986). See American National Insurance Co. v. Cooper, 458 P.2d 257 (Colo. 1969); Western Casualty Co. v. Aarons, 277 P. 811 (Colo. 1929). However, waiver and estoppel do not apply if the insurer conditionally accepts a premium payment, steadfastly denies liability, or accepts a premium payment before receiving notice of the loss. See Simpson v. Millers National Insurance Co., 175 Colo. 196, 486 P.2d 12 (1971); Kansas City Life Insurance Co. v. Johnson, 480 P.2d 122 (Colo.App.1970) (not selected for official publication).
Further, the related rule of “reasonable expectation” is applicable to determine the continuing existence of insurance coverage. Wangerin, 736 P.2d at 1248 citing Leland v. Traveler’s Indemnity Co., 712 P.2d 1060 (Colo. App. 1985); Sanchez v. Connecticut General Life Insurance Co., 681 P.2d 974 (Colo.App.1984). An insurer who wishes to avoid liability upon the acceptance of premium payments must use clear and unequivocal language evidencing its intent to limit coverage, and the insurer must also call such limiting conditions to the attention of the applicant. Sanchez v. Connecticut General Life Insurance Co., supra. Absent proof of such disclosure, coverage will be deemed to be that which would be expected by the ordinary lay person. Sanchez v. Connecticut General Life Insurance Co., supra.
BAD FAITH BREACH OF INSURANCE K
Every contract in Colorado contains an implied duty of good faith and fair dealing. Goodson v. American Standard Life Ins. Co. 89P.3d 409, 414 (Colo. 2004) citing Cary v. United of Omaha Life Ins. Co., 68 P.3d 462, 466 (Colo. 2003). In most contractual relationships, a breach of this duty will only result in damages for breach of contract and will not give rise to tort liability. Id. at 466. But, insurance contracts are unlike ordinary bilateral contracts. Id.; Huizar v. Allstate Ins. Co., 952 P.2d 342, 344 (Colo.1998). First, the motivation for entering into an insurance contract is different. Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo.1984) (“Trimble II ”). Insureds enter into insurance contracts for the financial security obtained by protecting themselves from unforeseen calamities and for peace of mind, rather than to secure commercial advantage. Cary, 68 P.3d at 467; Trimble II, 691 P.2d at 1141. Second, there is a disparity of bargaining power between the insurer and the insured; because the insured cannot obtain materially different coverage elsewhere, insurance policies are generally not the result of bargaining. Huizar, 952 P.2d at 344.
Due to the “special nature of the insurance contract and the relationship which exists between the insurer and the insured,” an insurer’s breach of the duty of good faith and fair dealing gives rise to a separate cause of action arising in tort. Cary, 68 P.3d at 466 (citing Trimble II, 691 P.2d at 1141). The basis for tort liability is the insurer’s conduct in unreasonably refusing to pay a claim and failing to act in good faith, not the insured’s ultimate financial liability. Trimble II, 691 P.2d at 1142. Therefore, the fact that an insurer eventually pays an insured’s claims will not prevent the insured from filing suit against the insurer based on its conduct prior to the time of payment.
To demonstrate first-party insurance bad faith, in addition to proving that the insurer acted unreasonably under the circumstances, the claimant prove that insurer either knowingly or recklessly disregarded validity of insured’s claim; this standard of care reflects reasonable balance between right of insurance carrier to reject a noncompensable claim submitted by its insured and obligation of such carrier to investigate and ultimately approve valid claim. Goodson, supra at 415.
Damages in this instance would be compensatory damages (economic and non-economic losses), plus possible punitive damages, plus damages for emotional distress, even if the insurer eventually made a full payout: “An insured purchases insurance in the first place so as not to suffer [anxiety], fear, stress, and uncertainty. The fact that an insurer finally pays in full does not erase the distress caused by the bad faith conduct. Damages for emotional distress the insured proves are therefore available in actions for bad faith breach of insurance contract upon the showing of the insurer’s liability.” Goodson, supra at 417.
If you believe you are the victim of a Douglas County bad faith breach of insurance contract, please contact our law office at 303-688-3045. We handle bad faith breach of insurance issues in Douglas County and throughout the Denver Front Range Area. We have experienced litigation attorneys who will work hard to assist you in recovering the benefits you are owed.