My August 10, 2011 post, How Will Colorado Courts Calculate Damages and Penalties Under Colorado’s Prompt Payment Statutes? discussed the relatively new statutes in Colorado which provide penalties against insurers including two times the covered insurance benefit, attorney’s fees, and costs to first party policyholders whose insurance benefits were unreasonably delayed or denied. The post specifically discussed the Vaccaro v. American Family Insurance Group district court opinion because it is one of the few cases where a court calculated damages and penalties under C.R.S. 10-3-1115 and 10-3-1116 (“the Statutes”).
The Colorado Court of Appeals recently issued its opinion affirming the lower district court on all issues raised except the assessment of prejudgment interest. The Vacarro opinion is excellent for policyholders because it confirms the method by which the lower court calculated damages and penalties under the Statutes.
Following trial, the jury returned a verdict for plaintiff, awarding him $75,000 [policy limits] on the contract claim, and $75,000—doubled to $150,000—for unreasonable denial of insurance benefits [pursuant to the Statutes].
. . .
After adding $14,907 in costs, $52,830 in attorney fees, and $40,539 in prejudgment interest to the damages awarded by the jury, the court entered judgment against defendant for $333,276.
See Vacarro, No. 10CA2590, 2012 WL 150068, at *2-3 (Colo. App. Jan. 19, 2012).
Although the Court of Appeals overturned the award of prejudgment interest, it remains a significant verdict, given the insurer will end up paying $292,737.00 on a claim that could have been limited to the $75,000 policy limits, had the insurer paid the claim timely.
The Vaccaro opinion is also beneficial to policyholders because the Court specifically noted that, a legal standard derived from common law bad faith cases does not necessarily govern plaintiff’s claim under the Statutes.
Defendant contends that the evidence at trial established at most a genuine disagreement over its valuation of plaintiff’s UIM claim. Because such a claim would necessarily be “fairly debatable,” defendant asserts that its conduct was reasonable as a matter of law. It argues, therefore, that the trial court erred by sustaining the jury’s verdict on plaintiff’s statutory claim and not entering JNOV or ordering a new trial. We disagree.
. . .
we note that a legal standard derived from common law bad faith cases does not necessarily govern plaintiff’s claim under the Statutes. This is particularly true because the “fairly debatable” defense goes as much to the knowledge or recklessness prong of common law bad faith as it does to unreasonable conduct. . . By contrast, the only element at issue in the statutory claim is whether an insurer denied benefits without a reasonable basis. Even if plaintiff’s claim for UIM benefits were “fairly debatable” in the common law context, that would not alone establish that defendant’s actions here were reasonable as a matter of law.
Id. at *9. [emphasis added]
The Vaccaro Court went even further on the “fairly debatable” issue, commenting on the absurdity of the insurer’s position with regard to justification of the denial of benefits to insureds in general. The Court stated,
We also conclude that defendant reads too much into the meaning of “fairly debatable” by suggesting that an insurer can avoid liability for unjustified denials of benefits simply by framing each denial as a valuation dispute. Bucholtz, Zolman, and Sanderson stand for the proposition that a genuine difference of opinion over the value of an insurance claim weighs against a finding of bad faith. But every lawsuit over insurance coverage is a valuation dispute to the extent that the parties disagree about how much should be paid under a policy, or whether the policy provides for coverage at all. If every such claim is “fairly debatable” as a matter of law, the exception would swallow the rule, and insurers could refuse to pay any claim where money is at issue. We decline to reach that conclusion.
Id. [emphasis added]
The Vaccaro opinion is beneficial to policyholders because it confirms that the penalties under the Statutes are separate from breach of contract damages, and must be calculated (two times the covered benefit) and then added to breach of contract damages. The opinion also clarifies that the “fairly debatable” defense applicable to bad faith claims is not similarly applicable to claims under the Statutes. Finally, and perhaps most significantly, the opinion restricts insurers’ use of the “fairly debatable” defense in every case where the parties disagree about how much should be paid under a policy.