Several weeks ago, I analyzed the Defense Bar’s latest attempt to increase the costs of litigation for policyholders. In my December 13, 2012, post, Winning a Discovery Battle in Bad Faith and C.R.S. 10-3-1115 Cases Against Insurers, I noted the Colorado Defense Bar’s latest litigation tactic—attempting to designate nonparties at fault and apportioning damages resulting from the insurer’s bad faith onto other nonparties such as vendors, contractors, or public adjusters.
With regard to the tort claim, bad faith breach of insurance contract, an insurance company’s duty of good faith is a non-delegable duty.
Insurance contracts are not ordinary commercial contracts. Every insurer owes its insured a non-delegable duty of good faith and fair dealing. Because of the ‘special nature of the insurance contract and the relationship which exists between the insurer and the insured,’ an insurer’s breach of this duty gives rise to a separate cause of action sounding in tort. Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo.1984). The duty is non-delegable so that insurers cannot escape their duty of good faith and fair dealing by delegating tasks to third parties.1
The Colorado Designation of Non Parties at Fault statute specifies, at C.R.S. 13-21-111.5(6)(f)(I), that a Defendant cannot use a Designation of Nonparties when its duty is non-delegable. In addition, the U.S. District Court of Colorado and the Colorado Court of Appeals have already spoken on this subject:
For instance, in an ordinary claim for bad faith breach of an insurance contract, where the plaintiff seeks damages for the insurance company’s bad faith refusal to pay benefits, it would be incongruous for the jury to be instructed to apportion fault to a non-party independent medical examiner.2
Last week, another Colorado District Court Judge agreed that an insurer’s duty of good faith cannot be delegated to third parties and shot down this litigation tactic.
In Traupe/Diamond T Enterprises v. Le Mars Insurance Company,3 the Court stated,
“Because of the ‘special nature of the insurance contract and the relationship which exists between the insurer and the insured,’ an insurer’s breach of this duty gives rise to a separate cause of action sounding in tort.” Cary v. United of Omaha Life Ins. Co., 68 P.3d 462, 466 (Colo. 2003) (quoting Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo.1984)). “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.” Goodson v. Am. Standard Ins. Co. of Wisconsin, 89 P.3d 409, 414 (Colo. 2004).
The Court went on:
Because a bad faith breach of insurance contract claim requires Plaintiffs to prove Defendant was unreasonably in refusing to pay a claim, it would be absurd to instruct the jury to apportion fault to a non-party who had no duty to act in good faith regarding Plaintiffs’ insurance contract with Defendant.
Although the above are Colorado cases, many states recognize the tort of bad faith breach of insurance contract, and similar arguments likely apply in those states. Lawyers for policyholders have to continually squash these kinds of litigation tactics and keep discovery costs down so policyholders can still afford to access the court system.
1 Cary v. United of Omaha Life Ins. Co., 68 P.3d 462, 466 (Colo. 2003).
2 Cherry Creek Mortg. Co., Inc. v. Chiu, No. 08CV01166, 2008 WL 5216263, *3 (D. Colo. Dec. 11, 2008) (citing Martinez v. Lewis, 942 P.2d 1219 (Colo. App., 1996).
3 Traupe/Diamond T Enterprises v. Le Mars Insurance Company, case no. 12cv410 (District Court, Adams County, Colo. Jan. 24, 2013).