In Colorado, insurers have a legal duty to defend and indemnify their policyholders. This duty is triggered if you accidentally hurt someone and they sue you. If your policy covers the risk, your insurance company has to defend you. If they do not, you can sue them for breaching the insurance contract. This lawsuit can recover:
- Attorneys’ fees,
- Court costs,
- Emotional distress, and
- Punitive damages.
In this article, our Colorado personal injury lawyers explain:
- 1. The insurance contract and an insurer’s “good faith” obligation
- 2. When does an insurer act in “bad faith”?
- 3. Bad faith and the duty of an insurance company to defend you
- 4. What can you do if your insurance company refused to defend you?
1. The insurance contract and an insurer’s “good faith” obligation
Your insurance policy is a binding contract. You agree to regularly pay your insurance company a premium. In return, your insurance company agrees to cover the costs of the accidents listed in the policy and protect you. This includes:
- Providing a way for you to file a claim,
- Investigating claims that the insurance company receives,
- Paying for the costs of accidents that are covered under the policy,
- A duty to defend you against lawsuits for compensation from people you are accused of hurting in an accident, and
- Acting in a reasonably timely manner.
All contracts come with an implied duty of good faith and fair dealing.1 This includes insurance policies in Colorado.
The duty of good faith means both sides in the agreement will take their obligations seriously. It forces each side of an agreement to strive towards the “justified expectations” of the other side by performing their obligations under the contract.2 It prevents one side from acting dishonestly or depriving the other side of the benefits of the contract.3
This duty to act in good faith is implied. It does not have to be expressly stated in the contract.4 The duty cannot be written out of a contract, though it can be defined by the contract.5
2. When does an insurer act in “bad faith”?
If a party to a contract breaks their duty to act in good faith, they are acting in bad faith. Acting in bad faith breaches the contract.
In the context of an insurance policy, an insurance company can act in bad faith if they:
- Unreasonably delay the payment of benefits covered by the insurance policy,6
- Do not pay an undisputed part of a claim,7
- Misrepresent facts of an accident or the scope of a policy’s coverage,8
- Refuse to pay a claim before conducting a reasonable investigation,9
- Force people to sue to recover a judgment obtained against the insurance company,10
- Forge documents in order to settle a claim for less than it is worth,11
- Do not settle certain claims in order to gain leverage over other claims,12 or
- Do not explain why an insurance claim has been denied.13
Courts judge a decision made by an insurance company based on what the insurance company knew at the time of the decision. Insurance companies are not allowed to gather new evidence in an attempt to support a decision it already made.14
Insurance companies can act in bad faith if they do not take their duty to defend you seriously.
3. Bad faith and the duty of an insurance company to defend you
Insurance companies can also act in bad faith if they do not take their duty to defend you seriously.
Insurance policies cover certain risks. If one of those risks leads to an accident that hurts someone else, your insurance company is supposed to defend you if you get sued by the injured party.15
This duty gets triggered if you are sued. It arises even if it is unclear whether the accident is covered by the insurance policy. Insurers have a duty to defend their customers if the claim could potentially or arguably be covered.16 They have to defend all claims against a policyholder, even if only one of them is within the policy.17
Example: Ted’s car slides on ice and hits Mary’s car. Mary gets hurt. She sues Ted for negligence. Ted’s insurance company has a duty to defend him.
Where it is unclear whether the accident falls under the policy, insurance companies are supposed to defend their policyholder. If the case reveals that the accident is outside the policy’s coverage, the insurance company can demand reimbursement for their defense.18
4. What can you do if your insurance company refused to defend you?
If you think your insurance company is acting in bad faith by not defending you, you can write the company a Bad Faith Letter. This Letter demands that your insurance company uphold its duty to defend. If the insurance company does not change its course, you can file a lawsuit.
Bad Faith Letters should include the following:
- A statement that the Letter is a formal demand that the insurance company act,
- An explanation of why the insurance company has a duty to defend you,
- Notice that the insurance company’s refusal to defend you constitutes bad faith,
- A warning that you are considering a lawsuit for bad faith insurance, and
- A time limit for the insurance company to respond.
Bad Faith Letters should be written by an attorney. They can also communicate that you have legal representation.
If your insurance company continues to refuse to defend you, you can file a lawsuit. This lawsuit can recover compensation. That compensation aims to cover the attorney fees and court costs you have incurred while defending yourself.19 You are entitled to more compensation if you can show the breach of the duty to defend was willful or wanton. In these cases, you can also recover compensation for:
- Emotional distress, and
- Punitive damages.20
Call us for help…
Contact us for help with any personal injury matter.
You pay your insurance premium precisely so your insurance company will cover your losses and protect you. When they refuse to defend you from a lawsuit, it can feel like a betrayal.
Our personal injury lawyers in Colorado can help you keep your insurance company accountable. Contact us online to get started on your case. (For cases in California or Nevada, please see our pages on insurance bad faith in California and insurance bad faith in Nevada).
References:
- C.R.S. § 4-1-304 (formerly C.R.S. § 4-1-203 until 2006). See also Cary v. United of Omaha Life Ins. Co., 68 P.3d 462 (Colo. 2003).
- Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P. 2d 1359 (Colo. App. 1994).
- Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., Supra.
- Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., Supra.
- C.R.S. § 4-1-302(b) (“The obligations of good faith, diligence, reasonableness, and care prescribed by this title may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable”).
- C.R.S. § 10-3-1115(1)(a). See also State Farm Mutual Automobile Insurance Company v. Fisher, 418 P.3d 501 (Colo. 2018).
- See note 6.
- C.R.S. § 10-3-1104(1)(h)(I).
- C.R.S. § 10-3-1104(1)(h)(IV).
- C.R.S. § 10-3-1104(1)(h)(VII).
- C.R.S. § 10-3-1104(1)(h)(IX).
- C.R.S. § 10-3-1104(1)(h)(XIII).
- C.R.S. § 10-3-1104(1)(h)(XIV). See also Etherton v. Owners Ins. Co., 829 F.3d 1209 (10th Cir. 2016).
- Schultz v. GEICO Casualty Company, 429 P.3d 844 (Colo. 2018).
- Hecla Mining Co. v. New Hampshire Insurance Co., 811 P.2d 1083 (Colo.1991).
- See Douglass v. Hartford Insurance Co., 602 F.2d 934 (10th Cir. 1979) and Compass Insurance Co. v. City of Littleton, 984 P.2d 606 (Colo. 1999) (“Where the insurer’s duty to defend is not apparent from the pleadings in the case against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense of the claim”).
- Fire Insurance Exchange v. Bentley, 953 P.2d 1297 (Colo. App. 1998).
- Hecla Mining Co. v. New Hampshire Insurance Co., Supra.
- Giampapa v. American Family Mutual Insurance Co., 64 P.3d 230 (Colo. 2003).
- See Vanderbeek v. Vernon Corp. 50 P.3d 866 (Colo. 2002).