Insurance companies can no longer stubbornly postpone or refuse to pay legitimate claims or to fully protect their policyholders. The courts of many states, including Colorado, are now in the process of formulating an entirely new body of law designed to guard against insurance carrier inattention.
The Colorado Court of Appeals has named the fledgling legal concept "bad faith breach of insurance contract." Farmers Group, Inc. v. Trimble, 658 P.2d 1370 (Colo. App. 1982), aff'd 691 P.2d 1138 (Colo. 1984). In that case, the court ruled that a policyholder might be entitled to recover for his actual out-of-pocket expenses as well as damages for mental anguish because his liability insurance carrier refused to defend a suit against him.
More recently, the Colorado Court of Appeals held that a workman's compensation insurance carrier may be held liable to an injured employee for bad faith delay in the payment of his claim for rehabilitation benefits. Savio v. Travelers Ins. Co., 678 P.2d 549 (Colo. App. 1983), aff'd in part 700 P.2d 1258 (Colo. 1985)(3 dissents).
This new area of law has been fashioned to overcome what the courts perceive as a means of providing relief against insurance companies who refuse to pay claims or defend their policyholders without reasonable justification. The penalties for such refusals can be severe.
An insurance company found liable for bad faith breach may be subjected to damages for resulting mental anguish and consequential damages beyond mere payment under the terms of the policy. If extreme, insurance carriers may be liable for punitive damages as well.
Examples of consequential damages would include a recovery of attorney's fees incurred by the policyholder in defending against claims of third parties, payment of judgments exceeding the amount of policy coverage, damages for economic chaos resulting from the refusal to pay legitimate claims, and for damages for mental anguish and suffering.
The two cited Colorado court decisions, as well as those from courts of other states, establish the blueprint for the future: Insurance companies must give very careful attention to their obligation and exercise good faith in meeting their policy obligations in the approval and payment of claims and in providing defenses to claims against their policyholders.
This new area of the law being fashioned by the courts also demonstrates that law is not stagnant but does react to contemporary problems. The Colorado Supreme Court has now reviewed and affirmed the principal issues decided in both of the above-cited cases, following the modern trend in placing greater pressures on insurance carriers to meet their policy commitments.
The good faith obligation imposed upon insurance carriers under this developing law decidedly favors policyholders and those having claims covered by insurance policies.
Policyholders and claimants take note! Insurance companies beware!