Consumer Protections in Colorado Insurance Law

     It is difficult to find a topic more important (and, sadly, more mundane) than insurance coverage.  Most civil attorneys, at some point in their career, are forced to deal with a multitude of insurance issues ranging from coverage to claims handling. My first job out of law school was working for a (to remain nameless) insurance company handling homeowner policy claims during the peak of the “black mold” litigation that began in the early nineties.  I was shocked to see how the sausage was made, and quickly learned that insurance companies make money from collecting premiums, not paying claims.  This is not to say that insurance companies are inherently evil; rather, they serve an important role in our society and enable individuals and entities the ability to quickly recover from a catastrophic loss.  Moreover, the vast majority of people who work in the insurance industry are honest, hard working, honorable professionals that do their best to honor the obligations owed to the insured.

     From a legal perspective, an insurance policy is a contract between the policyholder and the insurance company.  When a loss occurs, the insurance company will send out an adjuster to evaluate the claim and make a determination as to what money, if any, is owed to the insured under the terms of the insurance contract.  This process usually results in a smooth, amicable transaction between the adjuster and the policyholder.  The only time problems occur is when one of the parties engages in some sort of devious practice intending to artificially raise or lower the value of the claim.

     Until recently, Colorado law greatly favored the rights of insurance companies over policyholders.  Claimants that committed insurance fraud were subject to both civil and criminal penalties, while policyholders were left with weak and expensive to litigate civil remedies.  This changed in 2008 when Colorado joined the majority of States that have passed statutory “bad faith” laws that entitle parties who have had insurance claims unjustly delayed or denied the right to recover damages and attorneys fees.  By way of definition, insurance “bad faith” goes far beyond simple breach of contract, as it must involve unreasonable conduct or negligence (usually on the behalf of the insurance adjuster). Under the Colorado “bad faith” statute, insurance companies have an obligation not to unreasonably delay or deny an insurance claim. To comply with the law insurance companies are required to take certain actions when handling a claim.  This includes, but is not limited to, a duty to conduct an unbiased investigation and evaluation of a claim, a duty to pay valid claims, a duty to regularly communicate regarding the status of your claim, a duty to promptly pay any undisputed portion of claim, and a duty to give the policyholder a prompt and reasonable explanation of a claim denial.

     Should an insurance company fail to meet it’s obligations and is found to have committed “bad faith” when handling the claim, the policyholder can recover up to two times the amount of the underlying insurance claim, as well as interest on the unpaid benefit, attorney fees, costs and expert witness fees, and in some cases exemplary damages (designed to deter companies from committing future wrongful conduct).  In reality these available damages are more bark than bite, as it is very rare to see a claimant recover all of the damages available under the law.  The practical and positive effect of the law has been that insurance companies are much more efficient in the processing and adjustment of claims.  From a consumer protection perspective, this is a constructive development in Colorado law because it levels the playing field between big business and individuals and allows for efficient and fair claims handling practices that should lead to fewer disputes clogging the court system.