Insurance Claim Denial: Is My Insurer Acting in Bad Faith?
By: Anthony B. Vanicek, Esq.
While Colorado recognizes the common law tort of bad faith breach of an insurance contract, Colorado also provides insureds with separate statutory basis for recovery found in C.R.S. § 10-3-1115 and § 10-3-1116. When an individual makes an insurance claim, the insurance company has various obligations including acknowledging your claim, the duty to properly and promptly investigate the claim, respond to your communications, and to make sure the claim is not unreasonably denied or delayed. Bad faith claims can be broken down into two types: (1) first-party insurance bad faith claims and (2) claims under a liability policy.
First Party Insurance Bad Faith Claims
Under C.R.S. § 10-3-1115(1)(b)(i) a “’First-party claimant’ means an individual, corporation, association, partnership, or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy.” This would include many common claims such as money owed to the insured after an automobile accident. The statute specifically excludes a “person asserting a claim against an insured under a liability policy” § 10-3-1115(b)(ii)(B).
The statute directs that “[a] person engaged in the business of insurance shall not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of any first-party claimant.” C.R.S. § 10-3-1115 (1)(a). The statute will deem an insurer’s delay or denial to be unreasonable “if the insurer delayed or denied authorizing payment of a covered benefit without a reasonable basis for that action.” C.R.S. § 10-3-1115(2). Wrongful denial of a claim can come with harsh penalties for the insurance provider. A First-party claimant whose claim is “unreasonably delayed or denied” is permitted to recover reasonable attorneys’ fees and two times the covered benefit. § 10-3-1116(1). This usually provides insurance companies with incentive to diligently investigate claims and do right by their obligations in the policy.
Unlike a liability policy (discussed below), to show that an insurance company has acted unreasonably depends on “whether the insurer knew that its delay or denial was unreasonable or whether the insurer recklessly disregarded the fact that its delay or denial was unreasonable.” C.R.S. § 10-3-1113(3). C.R.S. § 10-3-1104(h) provides the following examples of conduct that constitutes “unreasonable delay or denial” of payment:
- Misrepresenting pertinent facts or insurance policy provisions;
- Failing to acknowledge and act reasonably promptly upon communications regarding the claim;
- Failing to adopt and implement reasonable standards for the prompt investigation of claims;
- Refusing to pay claims without conducting a reasonable investigation;
- Failing to affirm or deny coverage of claims within a reasonable time;
- Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear;
- Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled; or
- Making known to insureds or claimants a policy of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements
Claims involving Liability Contract
These claims typically involve an insurance company’s failure to defend, indemnify or settle a claim as per the policy limits. As with First-party claims, it can also involve the insurance company’s failure to reasonably investigate a claim.
Unlike the First-party claims where “unreasonableness” requires proving that the insurer either “knew” or “recklessly disregarded” the fact that its denial was unreasonable, proving unreasonable conduct under a liability policy only requires showing of “whether the insurer’s delay or denial was negligent.” C.R.S. § 10-3-1113(2).