A recent Colorado Supreme Court opinion in Schultz v. GEICO Casualty Company, clarifies the standard for bad faith in Colorado. In the opinion, the court discusses both claims for common law bad faith and statutory unreasonable delay or denial of benefits.
Most notably, the court concluded that the insurance company’s conduct must be evaluated based on the evidence before it when it made its coverage decision, and that the insurance company may not create new evidence to try to support its earlier coverage decision.
This means that when defending against a bad faith claim by attempting to show it acted reasonably, the insurance company can only present the information it considered at the time it made the decision to delay or deny the claim.
The opinion also restates the standard for common law bad faith, which requires the insured to “establish that the insurer acted unreasonably and with knowledge of or reckless disregard for the fact that no reasonable basis existed for denying the claim.” Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1274 (Colo. 1985).
With regard to a statutory claim, Section 10-3-1115, C.R.S. (2018) provides, in part:
(1)(a) 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 ay first-party claimant.
. . . .
(2)…for the purposes of an action brought pursuant to this section and section 10-3-1116, an insurer’s delay or denial was unreasonable if the insurer delayed or denied authorizing payment of a covered benefit without a reasonable basis for that action.
The court confirmed what both the Colorado Court of Appeals and federal courts interpreting Colorado law have consistently recognized, which is that the proof of a statutory claim differs from the proof required in a common law bad faith claim:
[W]hereas a common law claim requires proof that the insurer acted unreasonably and that it knew or recklessly disregarded the fact that its conduct was unreasonable, ‘the only element at issue in the statutory claim is whether an insurer denied benefits without a reasonable basis.’ (Citations omitted).
This opinion is great for Colorado policyholders, because it limits insurance companies to the information they had at the time they delayed or denied the claim, prohibiting them from hiring “litigation experts” to bolster an unreasonable delay or denial of the claim.