Understanding Insurance Bad Faith: A Comprehensive Guide for Colorado Policyholders

Insurance is supposed to help you bounce back from certain unforeseen disasters. The kind, oaken voice on the television commercials promises as much. However, some find that the protection they’ve paid for isn’t there when they need it. The helping hands hold back. The friendly neighbor turns nosy and suspicious. The reassuring voice from the ad isn’t the one waiting at the end of a wearisome, automated phone maze.

If you’re a policyholder who has been further harmed by your insurer breaching your insurance contract, an attorney can help you assert your rights as a policyholder. This comprehensive guide to understanding insurance bad faith in Colorado will help you get started.

In this Legal Guide:

• What is Insurance Bad Faith?
• Delivering Results for Clients in Bad Faith Matters
• Understanding the Insurance Contract
• How Insurance Companies Act in Bad Faith
• First-Party and Third-Party Bad Faith Claims
• How to Establish a Bad Faith Claim
• Damages and Compensation in Insurance Bad Faith Claims

What is Insurance Bad Faith? 

When an insurance company attempts to renege on its obligations, it acts in bad faith. This means that if your insurer unreasonably…

• denies your claim,
• delays investigating or processing your claim, or
• refuses to defend and indemnify you against claims by others,

… they could be violating Colorado law, which states:

“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.” — Colorado Revised Statutes 10-3-1115 (1) (a).

The key word in the statute is unreasonably. Insurers have a responsibility to verify the legitimacy of policyholder claims. Reasonableness requires, among other things, that an insurer promptly:

• review policy coverage and limits
• investigate and determine the cause of the loss or damage
• request documentation or evidence to support the claim
• verify compliance with policy terms and conditions
• apply deductibles

The Importance of Understanding Bad Faith 

It’s important to keep in mind that your insurance company is a for-profit business. It makes money by collecting premiums from policyholders like you. And it loses money when it pays claims. So, despite its public face, your insurance company won’t pay a cent more than it has to.

Insurers will avoid paying on a claim whenever feasible. Although insurance adjusters are supposed to look for coverage, they often  look for loopholes in your policy.  Insurance policies contain a litany of confusing, awkwardly worded and frequently conflicting exclusions. This is intentional. A skilled attorney, however, knows how to interpret these provisions and use them against an insurer to obtain the benefits you deserve.

What Constitutes Bad Faith?

An insurance company’s actions are in bad faith when they try to thwart legitimate claims with shady tactics, including:

• intentionally misrepresenting policy language
• making arbitrary demands for proof of loss
• failing to properly investigate claims
• causing unacceptable delays
• unjustifiably denying claims
• underpaying on claims
• refusing to defend a policyholder against a lawsuit
• failing to communicate with the policyholder
• resorting to abuse or intimidation

These actions breach the insurer’s obligations to its insured and can lead to a bad faith lawsuit. We’ll discuss these tactics in greater detail later, and how an experienced attorney can help you fight back.

Delivering Results for Clients in Bad Faith Matters 

Generally, insurance companies act in good faith to resolve legitimate claims. Sometimes, an insurer even goes that extra mile for a policyholder. We applaud these efforts.

However, there have been enough insurance bad faith cases along the Front Range to keep my team busy. I’d like to share a recent success story.

Understanding the Insurance Contract 

An insurance policy is a written contract between the insured and the insurer. Each party must adhere to certain standards and obligations.

It is important to read and understand the conditions section of your insurance policy. This describes your duties under the agreement. Your insurer may deny you coverage if you fail to abide by these duties.

Obligations of the Insured 

Generally speaking, a policyholder’s duties include:

• Disclosing material information,
• Avoiding dishonesty or concealment,
• Protecting the insured property from unnecessary loss,
• Reporting losses or damage to the authorities when necessary,
• Timely providing a notice of claim to the insurer,
• Preparing an inventory of property damaged or stolen, and
• Providing proof of loss to the insurer

For example: Your homeowner’s insurance policy required two smoke detectors, provided by the insurer. You neglected to install them. Now, after fire damage, you omit mentioning the detectors in your claim. This may lead to denial due to disregarding precautions and concealing the truth.

Obligations of the Insurer 

By paying regular premiums, you secure coverage and protection from your insurance company for listed accidents. This means your insurer must:

• Allow you access to file claims,
• Investigate your claims,
• Cover the cost of coverage-eligible damage or losses,
• Defend and indemnify you against lawsuits from people claiming you caused them harm in an accident,
• Respond to your claim within a reasonable time

For example: After your home is damaged by a storm, you document the destruction and provide a repair estimate. However, your insurer delays the investigation for six weeks. The prolonged wait causes you even more financial losses. You have grounds to file a breach of contract and civil bad faith claim against them.

How Insurance Companies Act in Bad Faith

Insurance companies sometimes try to assert dominance over policyholders during claims. They exploit the power balance in their favor to pay less, delay payment or even to deny claims altogether.

Don’t be fooled. Because of the contractual relationship, you and your insurance company are equals under Colorado law. As long as you fulfill your obligations, you have the right to have your policy terms honored.

Let’s look more closely at some of the ways insurers act in bad faith.

Unreasonable Denial of a Claim 

Your insurance provider cannot deny your claim without investigating, and providing a reason specified in the policy conditions. — (C.R.S 10-3-1104 (1) (h) (IV))

This is a fairly blatant form of bad faith, yet it happens. You submit a claim with all the necessary evidence and documentation. Later, the insurer sends you a denial letter, but never specifies why you can’t get coverage.

Insurers might not be liable for bad faith if their denial was a mistake. However, it’s hard for them to use the “mistake” defense if they never give a reason. You must prove they had no reasonable basis for the denial.

Unreasonable Delay in Processing a Claim

Insurers must avoid unreasonable claim processing delays, including responses to your inquiries. — (C.R.S 10-3-1104 (1) (h) (V))

A significant delay could qualify as bad faith, warranting a lawsuit. In fact, this is a matter the law takes seriously. Even if your insurer finally pays up, they can still be sued for not doing so in “a reasonably prompt” time.

The law provides two remedies for this act of bad faith:

• The first addresses an insurer’s refusal to pay, requiring the policyholder to initiate a contract lawsuit. This action is a prerequisite for the statutory right to recover unpaid benefits, attorney fees, and prejudgment interest.
• The second remedy grants double (2x) damages for the insurer’s willful and wanton delay in paying. This remedy applies even when the insurer pays benefits late, including before the lawsuit. Thus, a statutory willful and wanton breach of contract claim can be pursued for overdue benefits.

Review the contract provisions with your attorney to enforce the insurer’s deadlines and terms.

Misrepresenting Contract Terms 

Misrepresenting policy terms, limits, or exclusions when entering the contract can lead to an actionable bad faith claim. — (C.R.S 10-3-1104 (1) (h) (I)).  Typically these misrepresentations result in unreasonable delays and denials of insurance benefits.

Failure to Fully Investigate the Claim

Insurers must promptly and fully investigate claims. They must engage all necessary resources to do so. — (C.R.S 10-3-1104 (1) (h) (III))

An adjuster or investigator can visit your home, confirm the damage, and leave without determining the cause. This creates a sense that your insurer is doing its job. However, as weeks pass and no follow-up inquiry occurs, evidence can get muddled or lost. This sets the stage for your insurer to wrongly deny the claim or pressure you to take a low-ball offer.

Even worse, such laxness could expose you to significant personal liability. If your liability insurer fails to thoroughly investigate a third-party claim against you, you’re left defenseless. In these circumstances, a bad faith claim against your insurer may be justified.

Failure to Defend Despite Coverage

Depending on your insurance coverage, your insurer may be obligated to defend you in related legal actions. — (C.R.S 10-3-1104 (1) (h) (VI))

For example: A liability insurer is supposed to defend your business if a customer files a personal injury lawsuit. However, some insurers try to shirk their responsibilities, refusing to defend you even when the contract’s terms are clear. In such cases, their refusal could be grounds for a bad faith claim, except when there’s genuine ambiguity in the coverage.

Insurance isn’t purchased for the joy of paying premiums. If your insurer refuses to provide the protection you paid for without reason, talk to an experienced attorney.

Failure to Notify You of Required Information 

Insurers must inform policyholders of necessary information for claim processing. — (C.R.S 10-3-1104 (1) (h) (VI))

Your insurance provider should be more than happy to help you process your claims. This includes helping you gather all the necessary information, or even assisting with the paperwork.

Failure to do so can cause confusion and the neglect of valid claims. Insurers may attempt to avoid disclosure, so evaluate whether everything needed was provided. A claim denial without prior notice of evidence requirements may indicate bad faith conduct.

Underpaying a Claim 

Insurance companies should not undervalue claims, forcing policyholders to sue them for the full amount they owe. — (C.R.S 10-3-1104 (1) (h) (VII))

Sometimes, an insurer will process your claim quickly, then deliberately issue a lowball offer. This is acting in bad faith. Here, the insurance company hopes you will be desperate enough to accept the first offer. This practice could deny you more than half of what you should get.

Never rush to accept the first offer, especially if you suspect it undervalues the damages. Insurers may try to persuade you into accepting low offers before realizing the true worth of your claim.

So be patient. If your insurer is pressuring you to accept a bad offer, call an insurance bad faith attorney.

Using Intimidation to Suppress Claims 

Insurers must never threaten or intimidate policyholders. If you face threats, call a bad faith insurance lawyer promptly.

The provisions in C.R.S. 10-3-1104 do not specifically address threats or intimidation by insurers. However, using threats, insinuation, and intimidation to suppress valid claims would fall under “unreasonable behavior” as defined in C.R.S. 10-3-1115.

Example: After a house fire, your insurer acts suspicious of you, accuses you of fraud, and threatens police involvement if you pursue your claim.

Other Bad Faith Tactics 

Just when you thought you had read every underhanded tactic an insurance company could use to avoid paying your claim, we give you more.

Devious ingenuity in the service of higher profits knows no limits. Thus, any list of “bad faith tactics” cannot hope to be exhaustive. Still, we can add a few more:

• Altering applications without the policyholder’s knowledge or consent to settle claims.
• Making claims payments without providing a statement of the coverage under which the payments are made.
• Delaying prompt settlement when liability is clear in one coverage area to influence settlements in other coverage areas of the insurance policy.
• Changing the policy without giving notice to the policyholder(s)
• Favoring evidence that supports the insurance company’s reasons for denying a claim while ignoring evidence that supports the policyholder.
• Demanding unreasonably burdensome paperwork when the policyholder files a claim
• Requiring the policyholder to undergo unnecessary medical testing
• Abruptly canceling the policy without notice or reason

Always Ask for the Reason 

A mere difference in opinion between you and your insurer on the loss amount doesn’t necessarily indicate bad faith. If your insurance adjuster denies you the full amount of coverage you expected, ask for the reason in writing. If the adjuster fails to provide a reason for their findings, it could suggest potential bad faith.

Once you have cause to suspect insurance bad faith, contact an experienced attorney.

First-Party and Third-Party Bad Faith Claims 

Bad faith in insurance claims can generally be divided into two categories: first-party insurance bad faith and third-party insurance bad faith.

Knowing the difference can help you decide how to proceed after an accident or loss.

First-Party Claims

First-party insurance bad faith occurs when your own insurer unreasonably attempts to delay or deny your claim.

Example: Your house is severely damaged in a mud slide after persistent storms. Your homeowner’s policy covers this loss, but your insurer won’t investigate the claim or respond to your attempts at communication. This is potential grounds for a first-party insurance bad faith lawsuit.

First-party claims can include:

• Medical bills
• Collision repairs
• Property Damage
• Reimbursement for a rental car or towing
• Repayment for a hotel or other costs

Third-Party Claims 

Third-party insurance bad faith concerns liability insurance. The insurer must defend and pay defense costs, even if only part of the lawsuit is covered. They may also have to indemnify. This means paying up to the policy limits for damages you caused.

Note: The indemnification duty may not apply if your policy has a “burning limits” provision restricting the payout to defense costs.

While first-party claims are between you and your insurer, third-party claims involve three different entities:

• The insured first-party,
• their insurance company, and
• a third party or individual.

These claims protect the insured from liability for damages or loss to someone not part of the insurance contract.

Third-party claims can include:

• Auto, truck, and motorcycle accidents
• Product liability matters
• Animal liability
• Slip-and-fall accidents

Some examples of third-party insurance bad faith include:

• Failing to defend a lawsuit if the first-party insured is sued
• Not adequately investigating a claim
• Delaying any action or decision on a claim without any reason
• Failing to make a reasonable settlement offer to an injured person
• Misinterpreting an insurance policy provision in order to deny or delay coverage

In Summary 

First-party claims are claims you make against your own insurance whereas third party claims involve your insurer defending and indemnifying you against claims made against your insurance..

How to Establish a Bad Faith Claim 

You might feel like David approaching Goliath when contemplating a lawsuit against a national insurance corporation. But if you have a case and the determination to see it through, you absolutely can prevail.

Of course, it helps to have the right legal representation as your slingshot.

The Types of Bad Faith Claims You Can File 

Documentation is everything when it comes to holding an insurance company accountable. Thus, your best strategy is to plan ahead before you even suspect you’ll need to file civil action. Take nothing for granted from the moment you file your insurance claim.

To make sure you cover all your legal bases while establishing grounds for litigation, follow these seven steps:

• Step 1: Review your insurance contract for any violations before filing a bad faith lawsuit. Make sure your specific claim is covered and then start gathering evidence.
• Step 2: Keep a log of your claim’s progress, including all calls and meetings with the insurance company. Your insurance company’s adjustor will also be keeping a log. You should do the same.
• Step 3: If your claim is denied, make sure you are provided with that denial in writing.  After receiving a written denial, ask for a review and consider appealing to your state’s insurance regulatory agency. Again, document all interactions. If your insurer gives no specific reason for declining coverage in the denial letter, that’s your first red flag.
• Step 4: Make a final demand in writing, and give your insurance company enough time to respond. Enough time can be at least a week. Save a copy of your final demand letter and add it to your documentation files.
• Step 5: File a complaint with the Colorado Division of Insurance if necessary, but take into account that it may limit settlement options.
• Step 6: Retain an experienced insurance litigation attorney with a track record of success handling insurance bad faith matters.
• Step 7: Initiate a bad faith lawsuit, considering jurisdiction and additional claims like fraud and breach of contract. Pursue compensation and damages.

In Colorado, bad faith cases typically involve three legal claims: Breach of Contract, Common-law Bad Faith, and Statutory Bad Faith.

Breach of Contract 

You can claim breach of contract when an insurer fails to pay a valid claim despite your fulfillment of contract terms. To prove breach of contract, you must show:

• that an insurance contract (policy) existed,
• that you fulfilled your contractual duties,
• your insurer’s failure to perform their duties, and
• the resulting damages.

Recovery may include denied insurance proceeds.

Note: This is a distinct legal action involving the insurer’s violation of express and implied contract provisions. In other words, Breach of Contract is separate from any bad faith claims.

Common-law Bad Faith 

Common-law Bad Faith says your insurer acted unreasonably without a valid basis. Chapter 25 of the Colorado legislature lays out the elements of a first-party common-law claim as:

• You sustained damages,
• the insurance company acted unreasonably,
• the insurance company knew it was being unreasonable or recklessly disregarded the fact that their conduct was unreasonable, and
• You sustained losses as a result of the insurer’s unreasonable conduct. — (Chapter 25.2)

Elements of a third-party common-law claim are:

• You sustained damages,
• The insurer acted unreasonably, and
• You sustained losses as a result of the insurer’s bad faith conduct. — (Chapter 25.1)

If your common-law claim prevails, you can recover economic damages and non-economic damages like compensation for emotional distress. Willful wrongdoing by the insurer can lead to punitive damages equal to actual damages.

Statutory Bad Faith

Colorado Revised Statutes 10-3-1116(1) allows insured car owners or homeowners to file a statutory bad faith claim.

An insurer’s unreasonable delay or denial of payment without a valid reason qualifies under this statute. It enables you to bring an action in district court to recover attorney fees, court costs, and double the covered benefit.

Statutory bad faith provides remedies in addition to, not in place of, common-law bad faith remedies.

Establishing Unreasonable Denial or Delay 

In Colorado, reasonableness is a question answered by a jury. As plaintiff, you must convince a jury that your insurer’s delay, denial, or bad faith conduct was unreasonable.

However, you can succeed by proving any or all of the following:

• the insurer’s total failure to investigate your (first-party, or third-party) claim,
• their failure to conduct a reasonable investigation based on available information,
• their not providing a proper explanation for denying your claim,
• evidence of the insurer’s in-house policies rewarding adjustors for thwarting claims

And while we’re on the subject of insurance company adjustors …

Can an Individual Adjustor be Held Liable? 

The Colorado Supreme Court says no.

In a 2022 opinion, the court clarified that a bad faith claim can be made against an insurance company — but not against individual adjustors, saying:

“Throughout Colo. Rev. Stat. §§ 10-3-1115 and –1116 (2021), the context makes clear that first-party claimants whose insurance claims have been unreasonably delayed or denied may bring suit against their insurers, but not against individual claims adjusters.” — Skillett v. Allstate Fire & Casualty Insurance (Colorado, 2022)

Damages and Compensation in Insurance Bad Faith Claims 

I have touched on damages and potential compensation while discussing how to establish bad faith claims. Now, I’ll bring compensation more into focus.

Types of Damages in Bad Faith Matters 

Should you prevail in a bad faith claim, compensation will come in the form of both economic damages and non-economic damages.

Economic damages compensate you for direct financial loss as the result of the insurer’s bad faith conduct.

Non-economic damages compensate you for any harm you endured that isn’t measured financially. These can include:

• The frustration caused by your insurer denying your claim
• Inconvenience caused due to the insurer’s failure to provide needed financial support;
• Emotional distress

Punitive damages may apply when insurers act willfully in bad faith, not just unreasonably. Punitive damages awards take into account both the insured’s losses and the insurer’s financial status.

How Compensation is Determined

Damages recoverable for a statutory bad faith claim are spelled out in Colorado Revised Statute 10-3-1116(1). If you prevail against your bad faith insurer, you may recover “reasonable attorney fees and court costs and two times the covered benefit.”

But what does that actually look like? Here’s a common scenario:

A portion of a home sustains $80,000 in damages from a violent storm. The insurance company misrepresents a portion of the policy to get out of paying the claim. The homeowner challenges the denial, and eventually prevails in court on breach of contract and statutory bad faith claims.

Common Law Bad Faith Damages are not as easily calculated. The value attributable for these types of damages (emotional distress, inconvenience, etc) are not spelled by law.  A judge or jury is ultimately responsible for determining these amounts if an agreement cannot be reached with the insurance carrier.

Adding Up the Damages 

Using the scenario from above, the jury awards the homeowner $80,000 in their breach of contract claim. Next, it awards them the same amount in their statutory bad faith lawsuit. Observing the statute (C.R.S. 10-3-1116(1)), the judge doubles the statutory award to $160,000. So it is:

• $80,000 for breach of contract, plus
• $160,000 for statutory bad faith,
• $100,000 for common law bad faith

That’s a total of $340,000 on a claim that the insurer must pay when it could have only paid $80,000 if it had acted in good faith. .

But that’s not all. The judge also adds to the homeowner’s award:

• $13,600 in costs,
• $62,000 in attorney fees, and
• $41,350 in prejudgment interest accrued, for a total of
• $116,900

Altogether, the homeowner receives $456,900.

If the jury or judge tacks on punitive damages, it could add at least an additional $340,000 to the sum, which could raise the total to nearly a million dollars on an $80,000 claim.

However, prevailing on a bad faith claim is no guarantee of being entitled to punitive damages (Chapter 25.11).

We Hold Bad Insurance Companies Accountable 

Your insurance company is always there to collect your premiums. So when they use shady tactics to deny or delay your coverage, fight back. You deserve the prompt and reliable peace of mind your premiums paid for. State law says so, and so do we. If you believe your insurer is acting in bad faith, let’s talk. Call 303-688-0944 to begin your case assessment with an insurance litigation attorney.