Colorado

Under Colo. Rev. Stat. § 10-3-1104 (1) (h), “[t]he following are defined as unfair methods of competition and unfair or deceptive acts or practices in the business of insurance: [u]nfair claim settlement practices: [c]omitting or performing, either in willful violation of this part 11 or with such frequency as to indicate a tendency to engage in a general business practice, any of the following: . . . (IV) [r]efusing to pay claims without conducting a reasonable investigation based upon all available information; or . . . (VI) [n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.”

Colorado courts have indicated that the basis for liability in tort for the breach of an insurer’s implied duty of good faith and fair dealing is grounded upon the special nature of the insurance contract and the relationship which exists between the insurer and insured. Farmers Group, Inc. v. Trimble, 691 P.2d 1138 (Colo. 1984).  The motivation of the insured when entering an insurance contract differs from that of parties entering into an ordinary commercial contract. Id.  Furthermore, it is the affirmative act of the insurer in unreasonably refusing to pay a claim and failing to act in good faith, and not the condition of nonpayment, that forms the basis for liability in tort. Id.  Thus, an actual judgment in excess of the policy limits is not a necessary prerequisite to a claim for bad faith breach of an insurance contract. Id.  In addition, Colorado courts have adopted the “judgment rule”, which states that an insured who has suffered a judgment in excess of policy limits, even if the judgment is confessed and the insured is protected by the covenant not to execute, has suffered damages and will be permitted to maintain an action against its insurer for bad faith breach of the duty to settle. Nunn v. Mid-Century Ins. Co., 244 P.3d 116 (Colo. 2010).

In the third-party context, Colorado courts have ruled that the insurance company’s duty of good faith and fair dealing extends only to the insured, not to the third-party.  Farmers Group, Inc. v. Trimble, 691 P.2d 1138 (Colo. 1984).  Furthermore, an insurance company stands in a position of trust with regard to its insured, thus creating a quasi-fiduciary relationship between the insurer and the insured. Id. at 1141.  

Lastly, it should be noted that in any civil action for damages founded upon contract, or tort, or both against an insurance company, the trier of fact may be instructed that the insurer owes its insured the duty of good faith and fair dealing, which duty is breached if the insurer delays or denies payment without a reasonable basis for its delay or denial. C.R.S. 10-3-1113 (1).  Moreover, under a policy of liability insurance, the determination whether the insurer’s delay or denial was reasonable shall be based on whether the insurer’s delay or denial was negligent. C.R.S. 10-3-1113 (2).