Everyone knows that insurance coverage law us just as exciting, hard-hitting, and adrenaline infused as the NFL. Colorado’s more recent insurance coverage case law is no exception. The insurance industry’s power lineup pitted some of its hardest hitting power houses, including Allstate, State Farm, and American Family, against some of the hardest working grandmas, small business owners, and families that America has to offer. The gut wrenching, mind blowing battles that ensued made Tebow and the Broncos’ win over the Chicago Bears look like child’s play.

Since 2008, Colorado has put some hits on the insurance industry like James Harrison put the hit on Colt McCoy in the Steelers/Browns game last week. In the words of U2, “It’s A Beautiful Day.” (Play this song now—it will get you even more psyched for the rest of this blog post).


August 5, 2008:
August 5, 2008 was A Beautiful Day in Colorado because on that day, Colorado’s General Assembly enacted two new Colorado statutes, C.R.S. sections 10–3–1115 and –1116. Section 10–3–1115(1)(a) provides that an insurer “shall not unreasonably delay or deny payment of a claim for benefits owed.” Section 10–3–1116(1) provides that a first-party policyholder may bring an action for a breach of the statutory duty set forth in section 10–3–1115 to recover reasonable attorney fees, court costs, and “two times the covered benefit.” On that day Colorado passed legislation with teeth, and Colorado policyholders went wild—exactly like the Denver Broncos’ crowd went insane the day Coach John Fox pulled Orton and put in Tebow.

Keep Your Chin Up Colorado Policyholders—There Is Light At The End Of The Tunnel

For everyone out there who paid thousands or millions in premiums, then had a horrible property loss and was denied coverage under your policy, there is hope.

January 1, 2010:
The insurer must communicate with all parties involved in the claim, including the insured’s chosen contractor regarding covered benefits that will be paid on the claim.

In Dunn v. Am. Family Ins., 251 P.3d 1232, 1238 (Colo. App. 2010), the insureds’ contractor explained that, “without an assurance from either defendant or plaintiffs that one would pay if the other did not, he was hesitant to go forward with the work and made little progress in cleaning up the mold.” Eventually, due to this lack of progress, the insureds retained another contractor, causing further delays in the mold remediation. The insureds claimed that “this delay permitted the mold contamination to worsen and spread, causing more extensive damage to their home and adverse consequences for their health.”

The lower district court improperly granted summary judgment in favor of American Family, finding that the insureds’ claims related to communication and did not state a claim for violation of any good faith duty.

On appeal, the Court considered this issue of first impression. The Colorado Court of Appeal noted that bad faith breach of an insurance contract encompasses the insurer’s entire course of conduct, and that Colorado’s Fair Claims Practices Act (C.R.S. § 10–3–1104(1)(h)(II), (V)) declares that failure to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies is an unfair or deceptive trade practice.

The Court then clarified the scope of people and entities with whom an insurer has a good faith duty to communicate. The Court stated:

The need for prompt communication and investigation is obvious: besides the absence of peace of mind, the untimely adjustment of a claim exposes a claimant to additional loss of property. Thus, we conclude that defendant had a duty to promptly and effectively communicate with anyone it was reasonably aware had or legitimately needed information pertaining to the handling of plaintiffs’ claim.

November 10, 2010:
Insurers can no longer escape statutory and bad faith penalties by simply showing a claim was “fairly debatable.”

In the past, insurance companies have successfully argued that the denial of coverage is not unreasonable where coverage of the claim was “fairly debatable.” For example, in Brennan v. Farmers Alliance Mut. Ins. Co., 961 P.2d 550, 557 (Colo. App. 1998), the court granted summary judgment in favor of the insurer because the coverage decision was complex, fact-intensive, and "fairly debatable." The court concluded the insurer was reasonable in seeking a judicial determination of coverage.

But no more…

In Sanderson v. Am. Family Mut. Ins. Co., 251 P.3d 1213, 1217-18 (Colo. App. 2010), the Colorado Court of Appeals stated:

[W]e respectfully disagree with the district court’s apparent conclusion that “fair debatability,” without more, is necessarily sufficient to defeat a bad faith claim as a matter of law. In this regard, we agree with the Arizona Supreme Court’s statement that “[w]hile it is clear that an insurer may defend a fairly debatable claim, all that means is that it may not defend one that is not fairly debatable. But in defending a fairly debatable claim, an insurer must exercise reasonable care and good faith.”
. . . .
Stated another way, fair debate is not a threshold inquiry that is outcome determinative as a matter of law, nor is it both the beginning and the end of the analysis in a bad faith case.

The good news just keeps coming, like Tebow’s running game. Next week, I will continue this adrenaline soaked insurance coverage bonanza and update policyholders on the amazing feats this year—and what we hope is to come in 2012.