In a Colorado insurance claim for breach of the duty of good faith and fair dealing, the plaintiff may recover damages for emotional distress without proving substantial property or economic loss.
Every contract in Colorado contains an implied duty of good faith and fair dealing.1 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.2 Insurance contracts are different because policyholders enter into insurance contracts to protect themselves from future events, not for commercial advantage.3 They are also different because they are unilateral and not a result of bargaining.4
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.5 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.6 Therefore, the fact that an insurer eventually pays a claim will not prevent the insured from filing suit against the insurer based on its conduct prior to the time of payment.
An insurance company’s liability for bad faith depends on whether its conduct was reasonable under the circumstances.7 A first-party claimant must prove that the insurer either knowingly or recklessly disregarded the validity of the insured’s claim.8 This standard of care “reflects a reasonable balance between the right of an insurance carrier to reject a non-compensable claim submitted by its insured and the obligation of such carrier to investigate and ultimately approve a valid claim.”9 The reasonableness of the insurer’s conduct must be determined objectively, based on proof of industry standards.10 The aid of expert witnesses is often required to establish objective evidence of industry standards.11
Compensatory damages for economic and non-economic losses are available to make the insured whole and punitive damages are available to punish the insurer and deter wrongful conduct by other insurers.12 Compensatory damages (non-economic losses) include emotional distress, pain and suffering, inconvenience, fear and anxiety and impairment of the quality of life.13 To recover punitive damages, the insured must establish that the insurer’s breach was accompanied by fraud, malice, or willful and wanton conduct.14 A punitive damages award cannot exceed the amount of actual damages and, in certain situations, may be increased or decreased by the court.15
Insureds have the burden of proving each element of a claim for bad faith by a preponderance of the evidence.16 Punitive damages require a higher burden of proof and require insureds to establish the circumstances beyond a reasonable doubt.17
In Trimble III, the court of appeals upheld Trimble’s award for compensatory damages, which included damages for emotional distress.18 The court held that emotional distress damages are available in an action for bad faith when the emotional distress results from substantial property or economic loss proximately caused by the insurer’s conduct.19 Now, the court imposes the substantial loss requirement.20
The categories of damages available to insureds in bad faith claims are not limited, but a statutory cap limits the damage awards for non-economic injuries.21 Also, the trial court can reduce damage awards that are excessive in light of the evidence.22
People purchase insurance policies to obtain financial security and peace of mind, so emotional distress is a foreseeable consequence of an unreasonable denial of the benefits afforded under the contract. This can cause anxiety, fear, stress, and uncertainty, regardless of if the benefits are eventually paid. Eventual payment does not erase the distress caused by the bad faith conduct. Therefore, damages for emotional distress are available in actions for bad faith breach of insurance contract upon showing the insurer’s liability.23
1 Cary v. United of Omaha Life Ins. Co., 68 P.3d 462, 466 (Colo.2003).
2 Id. at 466.
3 Id. at 467.
4 Huizar v. Allstate Ins. Co., 952 P.2d 342, 344 (Colo. 1998).
5 Cary, 68 P.3d at 466 (citing Trimble II, Farmers Group, Inc. v. Trimble, 691 P.2d 1138,1141 (Colo. En banc 1984).
6 Trimble II, 691 P.2d at 1142.
7 Trimble II, 691 P.2d at 1142.
8 Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1274 (Colo. 1985).
11 See Redden v. SCI Colorado Funeral Services, Inc., 38 P.3d 75, 81 (Colo.2001) (stating that in most cases of professional negligence the applicable standard must be established by expert testimony because it is not within the common knowledge and experience of ordinary persons).
12 Ballow v. Phico Ins. Co., 878 P.2d 672, 677 (Colo.1994); Restatement (Second) of Torts §§ 901–909 (1979).
13 See § 13–21–102.5(2)(b), 5 C.R.S. (2003) (defining non-economic losses); Ballow v. Phico Ins. Co., 878 P.2d 672, 677 (Colo. 1994)(“an insured suing under the tort of bad faith breach of an insurance contract is entitled to recover damages based upon traditional tort principles of compensation for injuries actually suffered, including emotional distress.”); Restatement (Second) of Torts § 905 (1979).
14 § 13–21–102(1)(a), 5 C.R.S. (2003).
15 § 13–21–102(1)–(3), 5 C.R.S. (2003).
16 § 13–25–127(1), 5 C.R.S. (2003) (degree of proof required for civil actions); Kopeikin v. Merchants Mortg. and Trust Corp., 679 P.2d 599, 601 (Colo.1984); CJI–Civ. 4th 25:2.
17 § 13–25–127(2), 5 C.R.S. (2003).
18 Trimble III, 768 P.2d 1243,1247 (1988).
19 Id. at 1246.
20 Id. (A requirement that there be a substantial loss of property or economic loss to recover damages.)
21 § 13–21–102.5, 5 C.R.S. (2003).
22 See C.R.C.P. 59; Jagow v. E–470 Pub. Highway Auth., 49 P.3d 1151, 1157 (Colo.2002) (jury awards can be reduced if excessive and unjust).
23 To the extent Goodson v. American Standard Ins. Co., 89 P.3d 409 (Colo. en banc 2004) conflicts with the court of appeals’ decision in Trimble III, Trimble III is overruled.