Before August 2008, property policyholders in Colorado who were wrongfully denied insurance benefits largely relied on lawsuits alleging claims for breach of contract, breach of the covenant of good faith and fair dealing (the common law tort of bad faith), and requests for exemplary damages as a means of redress against their insurance companies. In August 2008, Colorado House Bill 08-1407 became effective. The Prompt Payment statutes are codified at CRS §§ 10-3-1115 and –1116 and provide remedies to certain first-party insurance claimants, including recovery of two times the covered benefit, attorney fees, and court costs.
The statutes are noteworthy to insurance companies because, for the first time in Colorado, insurers may be liable for twice the covered amount and their insured’s attorney fees, even if the insured cannot show willful and wanton actions that are required for punitive damages. Policyholders who formerly would have only broke even—that is, spending $50,000 on attorney fees in litigation only to recover $50,000 in insurance proceeds on the original covered claim—may have decided to forego litigation. Now, suits against insurers for unreasonable denial of covered benefits make more economic sense. Insureds can recover double the claim amount owed and recoup costs and attorney fees incurred in the process.
CRS § 10-3-1115 defines a "first-party claimant" as:
[A]n individual, corporation, association, partnership, or other entity claiming an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy. A first-party claimant includes property insurance policyholders denied covered benefits under their property insurance policy.
Claims Under the Statutes vs. Bad Faith
The standard contained in § 1115 is less onerous on the insured, and the remedies contained in § 1116 are more financially threatening to the insurer than a traditional common law bad faith claim. Claims for common law bad faith require proof of unreasonable denial or delay in payment of a claim, with the added requirement that the insurer knew or recklessly disregarded the unreasonableness of its actions. Even if an insured succeeds on a bad faith claim, he or she can recover more than the original covered benefit only by proving other damages that resulted from an insurer’s bad faith. This was often difficult for entities that could not allege claims for noneconomic damages suffered as a result of the insurer’s bad faith. Moreover, an award of exemplary or punitive damages (often paired with a bad faith claim) against an insurance company is appropriate only if "the injury complained of is attended by circumstances of fraud, malice, or willful and wanton conduct." The insured receives exemplary damages only by showing "willful and wanton conduct," which is defined as "conduct purposefully committed [that] the actor must have realized as dangerous, done heedlessly and recklessly, without regard to consequences, or of the rights and safety of others."
CRS § 10-3-1115 carves out a standard different from common law bad faith based only on reasonableness. The statute specifies:
Notwithstanding section 10-3-1113(3), an insurer’s delay or denial was
unreasonable if the insurer delayed or denied authorizing payment of a covered benefit without a reasonable basis for that action.
The insured does not have to prove the insurer knew or recklessly disregarded the unreasonableness of its actions. In addition, “fair debatability” of a claim is no longer enough for the insurer to defeat an “unreasonable” delay or denial claim. (See my July 6, 2011 blog post regarding “fair debatability” and Sanderson v. Am. Family Mut. Ins. Co., 251 P.3d 1213, 1217-18 (Colo. App. 2010).)
The remedies of § 1116 do not require any additional showing beyond the unreasonableness of the delay or denial of benefits. Unlike common law bad faith, the insured does not have to prove damages that resulted from the insurer’s bad faith or that the insurer’s conduct was willful or wanton. The insured need only prevail on the § 1115 claim to receive twice the covered benefit.
Section 1116 also states:
The action authorized in this section is in addition to, and does not limit or affect, other actions available by statute or common law, now or in the future. Damages awarded pursuant to this section shall not be recoverable in any other action or claim.
The statute allows a successful plaintiff to recover damages for breach of contract, plus damages resulting from bad faith, punitive damages, and damages pursuant to the statutes.
How Colorado Courts May Calculate Damages and Penalties Under the Statutes
Because the Prompt Payment statutes have only been in effect for three years, very few cases applying the new law have made it through the lower courts, and even fewer have made it to the appellate level. Recently however, State District Court Judge Enquist issued an order assessing damages and penalties under the statutes as follows:
The jury awarded the plaintiff $75,000 on his breach of contract claim and $75,000 on his statutory claim. Pursuant to C.R.S. 10-3-1116, Judge Enquist doubled the statutory award to $150,000.
The Judge also awarded the policyholder $40,539.07 in prejudgment interest, $14,906.59 in costs, and $52,830.45 in attorney fees.
(Source, West’s Jury Verdicts – Colorado Reports).
This is only one lower court decision, and as Colorado’s Prompt Payment statutory claims make their way through the courts, we will receive more and possibly different information regarding how courts will calculate penalties under these Statutes. Regardless, it is clear the Prompt Payment Statutes provide a considerable penalty to insurers who wrongfully delay and deny claims; policyholders finally have significant recourse when they are treated unfairly.