Colorado Law Updates

Vaccaro v. American Family Insurance Group

2012 COA 9. No. 10CA2590

In this dispute over underinsured motorist (UIM) insurance benefits, defendant American Family Insurance Group appealed the judgment entered on a jury verdict in favor of plaintiff Charles M. Vaccaro for breach of contract and for unreasonable denial of insurance benefits under CRS §§ 10-3-1115 and -1116 (statutes). The judgment was affirmed, the interest award was vacated, and the case was remanded with directions.

A negligent tortfeasor injured plaintiff in a two-car accident in 2005. The tortfeasor had liability insurance with policy limits of $25,000. Defendant's policy insuring plaintiff provided UIM coverage up to $100,000. Plaintiff settled his claim against the at-fault driver for the policy limit of $25,000. After defendant received plaintiff's independent medical examination (IME) report on September 22, 2008, which opined that extensive medical treatment was necessary and causally related to the accident, defendant denied plaintiff's claim for $75,000 in UIM benefits.

On appeal, defendant asserted that the trial court's submission of plaintiff's statutory claim to the jury was an unconstitutional retroactive application of the statutes. The statutes, which took effect on August 5, 2008, create a right of action separate from the common law tort of bad faith breach of an insurance contract. Although the statutes may not operate retroactively, they may properly apply to new acts of unreasonable denial or delay occurring after their effective date, even where the underlying insurance claim arose before their enactment.

Here, a reasonable jury could find that defendant engaged in new acts of unreasonable denial and delay after August 5, 2008, sufficient to impose liability under the statutes. Accordingly, there was no retrospective application of the statutes in this case, and the trial court properly submitted plaintiff's statutory claim to the jury and properly denied defendant's motions to direct a contrary verdict.

Defendant also contended that there was insufficient evidence of unreasonableness to support plaintiff's statutory claim. Plaintiff provided evidence at trial beyond a merely subjective opinion on whether defendant acted reasonably. Particularly in light of plaintiff's theory that defendant requested-and then ignored-the IME report, a reasonable jury could have found that defendant refused to consider evidence showing plaintiff was entitled to additional compensation. Thus, the court properly denied defendant's motions for a directed verdict, for judgment notwithstanding the verdict, and for a new trial.

Defendant further contended that the trial court erroneously ordered it to pay an additional $40,539 in prejudgment interest because the jury awarded plaintiff the policy limit of $75,000 in contract damages. Because it is part of the compensation awarded for bodily injury, prejudgment interest is comprehended within the bodily injury coverage of an insurance policy and is subject to those policy limits. Therefore, defendant was not liable for prejudgment interest beyond the $75,000 awarded on plaintiff's contract claim.

This decision is in line with the Kisselman opinion we summarized for you previously. Any alleged acts of bad faith occurring after the effective date of the statute, even where the claim is filed before the statute takes effect, will be subject to C.R.S. 10-3-1115 and -1116. We interpret this decision to signify that the courts (and General Assembly) are favoring the rights of the insured in recognizing new causes of action against insurance carriers. Because these cases were remanded with directions for further proceedings, we will continue to monitor the cases to analyze the temperment of Colorado juries.

Kisselman v. American Family Mutual Ins. Co.

'Bad faith' statute applies prospectively (December 08, 2011).

Kisselman was injured in a car accident caused by an underinsured driver. At the time of the accident, Kisselman was insured by an American Family insurance policy that included uninsured/underinsured motorist and umbrella coverage up to $1.1 million. Kisselman settled with the uninsured driver and filed a lawsuit against American Family in district court to avoid having his legal claims barred by the statute of limitations. Kisselman then proceeded to arbitration with American Family pursuant to the terms of the insurance policy. While the arbitration was pending, the General Assembly enacted two new statutes, C.R.S. §§ 10-3-1115 and -1116, creating a cause of action for 'first party claimants,' which entitle them to reasonable attorney fees, court costs, and "two times the covered benefit" damages in the event an insurer is found to have unreasonably delayed or denied payment of a claim for benefits owed. American Family subsequently paid the amount awarded by the arbitrator for these damages to Kisselman.

Kisselman later amended his district court complaint, seeking additional damages under the newly enacted statutes. The district court found them inapplicable to Kisselman's claims because the claims were filed before the effective date of the statutes. Kisselman appealed. In interpreting the statutes, the Court of Appeals found that the General Assembly intended the statutes to apply prospectively to all post-effective date conduct of insurers, even if the claims were filed before the effective date of the statute or concern conduct that occurred before the effective date of the statutes. Therefore, C.R.S. §§ 10-3-1115 and -1116 apply prospectively to all alleged post-effective date acts of unreasonable delay by an insurer.

United Fire & Cas. Co. v. Boulder Plaza Residential, LLC

United States Court of Appeals, 10th Cir. 633 F.3d 951 (Jan. 27, 2011)

Boulder Plaza Residential, LLC ("BPR"), a real estate developer, and McCreary & Roberts Construction Co. ("M&R") entered into a contract in which M&R served as the general contractor of a condominium project by BPR. In turn, M&R entered into a subcontract with Summit Flooring to install hardwood flooring. Summit obtained a Commercial General Liability policy from United Fire & Casualty Company ("UFC") in which M&R was listed as an additional insured. For the additional insured, the scope of coverage was defined to include M&R but only with respect to Summit's liability, which may be imputed to that person or organization directly arising out of [Summit's] ongoing operations performed for M&R.

Shortly after the sale of the condos, the new owners notified BPR of damage to the floors of the units. Eventually, a lawsuit commenced in state court. M&R notified UFC of the complaints and requested defense and indemnification under the CGL policies listing M&R as an additional insured. UFC denied the requests related to the work performed by Summit because the policy covered M&R only with respect to "ongoing operations." While the state court action was pending, UFC filed an action in federal court for declaratory judgment that it had no duty to defend or indemnify M&R in state court.

In ruling on motions for summary judgment, the district court ruled in favor of BPR on both issues holding that (1) the complaint sufficiently alleged damage to the floors during improper installation triggering a duty to defend M&R and (2) UFC was obligated to indemnify M&R for liability under the CGL policies. On a motion to reconsider, the district court reversed itself in light of a recent Colorado state court opinion, General Security Indemnity Co. of Arizona v. Mountain States Mutual Cas. Co., 205 P.3d 529 (Colo. App. 2009).

The 10th Circuit Court of Appeals disregarded the district court's reliance on General Security and declined to address the newly enacted legislative response to General Security, located at C.R.S. §13-20-808. Instead, the Court adopted UFC's "ongoing operations" argument. The Court reasoned that M&R was an additional insured and covered "only with respect to [Summit's] liability which may be imputed to [M&R] directly arising out of [Summit's] ongoing operations performed for [M&R]." The Court concluded based on the plain and ordinary meaning of the policy language, that UFC had no duty to defend since any claimed damage was alleged to have risen after operations were completed.

With respect to the duty to indemnify, the Court refused BPR's argument that because M&R assumed contractual liability to BPR, the contract between BPR and M&R is an "insured contract". The Court reasoned that the policy distinguishes between the named insured and the additional insured and the policy designates "you" and "your" to mean only the named insured. Therefore, Summit's coverage includes its own insured contracts, but M&R's coverage is limited exclusively to the liability of Summit which may be imputed to M&R.

We believe this is a good sign that courts will limit the additional insured coverage to the scope of the named insured. Although the issue of defense costs were not specifically addressed in this case, we believe that courts will rule similarly based upon the policy language. There have been a number of cases filed recently, testing the scope of the additional insured coverage and while this case may not be the end of the discussion, we believe it should be taken as a feather in the insurance carrier's cap!

Zolman v. Pinnacol Assurance

Zolman was employed as a personal companion by Horizon Home Care, LLC (Horizon). She injured her lower back while she was lifting a client's wheelchair up a step. She filed a workers' compensation claim with Pinnacol, which was Horizon's workers' compensation insurance carrier at the time. Zolman subsequently filed a complaint in district court alleging that Pinnacol breached its duty of good faith and fair dealing by unreasonably denying and delaying authorization for her medical care. Pinnacol moved for summary judgment, which was granted by the district court.

On appeal, Zolman contended that the district court erred by granting Pinnacol's motion for summary judgment. In a bad-faith claim against the insurer for its alleged misconduct with its own insured, the insured must prove that (1) the insurer's conduct was unreasonable under the circumstances, and (2) the insurer either knowingly or recklessly disregarded the validity of the insured's claim. An insurer will be found to have acted in bad faith only if it intentionally has denied, failed to process, or failed to pay a claim without a reasonable basis.

The Court of Appeals reviewed the evidence in the record and found it to be uncontroverted that Pinnacol reasonably relied on the medical opinions of four other physicians. Thus, the Court of Appeals held that the district court did not err when it concluded that Zolman failed to establish a triable issue of fact as to either prong of a bad-faith claim with respect to Pinnacol's actions prior to the administrative law judge's (ALJ) order. Also, there were no genuine issues of material fact as to the reasonableness of Pinnacol's conduct after the ALJ's order concerning Zolman's request for a change in physicians and continued treatment after she had reached maximum medical improvement (MMI). Therefore, because Zolman's claim for post-MMI injections and requests for a change in physician were fairly debatable, Pinnacol acted reasonably as a matter of law. Accordingly, Pinnacol was entitled to judgment as matter of law that it did not act in bad faith in handling Zolman's workers' compensation claim.

We believe this decision is evidence that the Colorado Courts are finding favor with the insurance industry. Although this case relates to a workers' compensation claim, we believe the reasoning will be applied to a wider variety of claims made against insurance companies. Applying these standards and the reasoning advanced by the Court of Appeals, we believe plaintiffs will have a more difficult time in establishing bad faith where the insurers reasonably rely on evidence provided to them.

Shelter Mutual Insurance Company v. Mid-Century Insurance Company

(Colorado Supreme Court January 18, 2011)

In September of 2004, while Mark Brown permissively drove his father's automobile, he collided with an automobile driven by a third party. Both drivers sustained injuries. At the time of the accident, Mark Brown had automobile liability insurance coverage with Mid-Century, which covered him as a non-owner operator of the vehicle. Mark Brown's father, Bruce Brown, insured the automobile through Shelter, whose policy covered Mark Brown as a permissive user.

When Bruce Brown initially purchased his policy through Shelter, he elected coverage which was greater than the minimum amounts required by Colorado law. When the time came to renew the policy, Shelter sent him a packet of policy renewal forms which included a "Notice of Automobile Policy Changes;" however, the Notice did not inform him as to what the changes were, nor were the changes marked in the policy.

The changes Shelter made included the following: 1) Shelter sought to limit its liability for permissive drivers to the minimum coverage amounts mandated by law through a "step-down" provision; and 2) Shelter added an excess clause, which sought to shift liability to other applicable insurance. Shelter's excess clause was similar to the excess clause found in Mid-Century's policy. However, neither the renewal notice nor the declarations pages of Shelter's policy explained that the "step-down" provision would result in coverage amounts for permissive drivers that were less than what had been previously elected.

After the accident, Shelter brought a declaratory judgment action, asserting that it had reduced liability through the "step-down" provision, and seeking to compel Mid-Century to contribute on a co-primary basis. The trial court held, on cross-motions for summary judgment, that Shelter's "step-down" provision was valid and enforceable, and that both policies' excess clauses were valid, and consequently, mutually repugnant and void. Accordingly, the trial court held that the insurers were co-primary for covering the loss. The Colorado Court of Appeals reversed the trial court's determination of the validity of the "step-down" provision, concluding the provision was unenforceable because Shelter failed to provide Bruce Brown with sufficient notice of the reduction in coverage, but affirmed the trial court's decision with respect to the excess clauses.

In addressing the validity of the "step-down" provision, the Colorado Supreme Court noted that insurers seeking to avoid liability must do so in clear and unequivocal language, and must call limiting conditions to the insured's attention. The Court observed that in the context of insurance policy renewals, this rule is especially important, requiring an insurer to provide adequate notice to an insured of any reduction in coverage. Accordingly, if an insurer fails to provide adequate notice of a reduction in coverage, it is precluded from relying on the existence of the limitation to avoid liability. Although contracting parties are normally presumed to know the contents of the contracts they enter into, the presumption does not apply in the context of insurance policy renewals, because the purchasers of insurance policies are not expected to be highly sophisticated in the art of reading insurance policies.

In determining the adequacy of notice given to an insured, the court must look to the totality of the circumstances involved in the transaction from the point of view of an ordinary layperson. In applying this test, the Colorado Supreme Court held that Shelter's notification of the reduction in coverage through the "step-down" provision was inadequate. The Notice did not inform Bruce Brown of any specific changes in the policy, nor were those changes marked in the policy or stated in the declarations page. Further, Bruce Brown paid the same amount for his renewal policy as he paid for his original policy, lending support to the assumption that the renewal policy did not reduce coverage. Accordingly, the Court ruled Shelter was bound by the terms of its original policy, since the effect of Shelter's failure to adequately notify Bruce Brown of the "step-down" provision was as if the provision was never adopted. By reaching this result, the Court acknowledged it was not required to address the issue of whether "step-down" provisions are void as a matter of public policy.

In addressing whether Shelter's excess clause was valid and enforceable, the Colorado Supreme Court observed that although Shelter added the excess clause to the renewal policy just as it added the "step-down" provision (without specific notice of the same), it need not analyze whether the excess clause was unenforceable for lack of adequate notice because excess clauses do not reduce coverage. Although the excess clause may effectively reduce the amount for which Shelter is liable under its policy, the policyholder enjoys the same coverage with or without the excess clause, and the policyholder is not adversely affected by its inclusion in the policy.

In addressing Mid-Century's arguments, the Court extended its prior ruling in All-state Ins. Co. v. Avis Rent-A-Car System, Inc. 947 P.2d 341 (Colo. 1997), where, under the No-Fault Act, it upheld the validity of two excess clauses, concluding that Colorado law did not require that either the automobile owner's or operator's policy be primary. In Allstate, the Court declined to designate one of two insurers as primary. Likewise, the Colorado Supreme Court declined to read a primary insurance requirement into Colorado's mandatory insurance laws under the current tort-based system, because how insurers apportion liability through "other insurance" clauses, like excess clauses, does not affect an insured's coverage. Rather, courts must determine which insurer is primary based on the language of the applicable policies.

In determining that Shelter's excess clause was valid, the Court acknowledged that it could not give effect to both Shelter's and Mid-Century's excess clauses, as that would leave Bruce Brown with no insurance coverage. Instead, the Court declared both clauses mutually repugnant and void, rendering both insurers co-primary on a dollar for dollar basis until the limits of one of the policies is exhausted, with the second policy continuing to pay its limits, or until the loss has been fully compensated, whichever occurred first.

Insurers must be mindful to specifically draw their insureds' attention to any reductions in coverage for the reductions to be effective. Insurers should also be aware that the question as to whether "step-down" provisions are void as a matter of public policy is still unresolved. Lastly, there is no presumption that a vehicle owner's policy will be primary if more than one policy applies.

Crossen v. American Family Mutual Insurance Company

2010 WL 2682101 (D. Colo., July 7, 2010)

Premier Specialty Services ("Premier") was insured under a commercial general liability policy issued by American Family Mutual Insurance Company ("American Family"). Premier cleaned the floors of the Crossen's home. Seven months after Premier cleaned the floors, the Crossens sent Premier a letter, claiming that the cleaning process had damaged their floors. Premier forwarded the letter to its liability insurance carrier, American Family, with a request for coverage. American Family denied coverage after receiving the letter, and denied coverage a second time after the Crossens brought suit against Premier. Premier settled with the Crossens, and assigned to the Crossens all of its claims against American Family.

The underlying lawsuit asserted that Premier's work (cleaning the floors) caused a discoloration of the natural stone tile floor, created a hazy and "tacky" appearance, and also resulted in cracked grout. The Crossens also asserted that the flooring needed to be removed, which would result in damage to other portions of the home. The Crossens also claimed loss of use.

The Crossens, as assignees of Premier, subsequently filed an action against American Family, asserting claims for breach of the insurance contract, bad faith, and declaratory relief. American Family maintained its denial of coverage. The Crossens filed for summary judgment, seeking a declaration of American Family's coverage obligations.

American Family argued that it was not obligated to defend or indemnify Premier because there was no "occurrence" as that term is defined under the policy. It also argued that coverage was excluded by application of the Contractual Liability Exclusion, Your Work Exclusion, and the Damage to Property Exclusion.

Judge Miller provided a lengthy opinion discussing the obligations of an insurer to its insured and the coverage exclusions argued by American Family. First, the Court determined that there was an "occurrence" that possibly triggered coverage. Distinguishing General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Company, 205 P.3d 529 (Colo. App. 2009), the Court found that the damage to the tile floor constituted an "occurrence" under the policy. Because Premier cleaned the floor, and did not install the floor, the damage to the tile floor constituted an occurrence not involving the "work" of Premier. Had the claim asserted inadequate cleaning of the floor with no damage to the tiles themselves, then there would not have been an "occurrence" and the Your Work Exclusion would have applied. Because the Court determined that there was an "occurrence," it did not address the effect of the newly enacted statute, C.R.S. 13-20-808(3).

Ultimately, Judge Miller concluded that exclusions j(5) and (6) under the Damage to Property Exclusion applied to preclude coverage. J(5) precludes coverage for, "That particular part of real property on which you ... are performing operations, if the 'property damage' arises out of those operations" while j(6) precludes coverage for "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." Both j(5) and j(6) are limited to "operations in progress."

American Family argued that the damage to the Crossen's floor occurred during the work performed by Premier, and that it was due to Premier's "faulty workmanship." The Court agreed that the damage occurred during Premier's work, and the exclusion for damage during "operations in progress" barred coverage. The Court also concluded that exclusion j(6), known as the "faulty workmanship" exclusion, would also apply. The Court reasoned that without this exclusion, the liability policy would improperly serve as a performance bond, or guaranty of goods or services.

Importantly, Judge Miller noted, "House Bill 10-1394 does not alter my conclusion in this regard, as it expressly does not create or require coverage for damage not otherwise provided in the policy. House Bill 10-1394 at p. 3 (enacting C.R.S. § 13-20-808(3)(a) and (b))." The Court also concluded that, in the alternative, the Your Work Exclusion would apply to bar coverage for damages to the insured's own work, which occurred after the work had been completed.

As you know, the new House Bill 10-1394, enacted as C.R.S. 13-20-808(3), has caused some concern in the insurance industry. Many feared that the new legislation would require insurance providers to guarantee the work of their insureds. However, the Crossen decision reinforces the position that the new legislation does not act to create coverage where coverage was not otherwise owing under the policy. In addition, it provides a basis for insurers to rely on the Your Work Exclusion as well as the Damage to Property Exclusions under j(5) and (6) in denying coverage for faulty workmanship.

Colorado Insurance Guaranty Association v. Philadelphia Insurance Company

Court of Appeals No. 10CA1995

On May 3, 1998, Cornelius Rykaart rented a Dodge Neon from Dollar Rent-a-Car ("Dollar") at DIA. Dollar, who was self-insured, agreed to provide primary basic automobile liability protection to Mr. Rykaart in accordance with the terms and conditions of the rental agreement and Colorado's mandatory minimum liability insurance limits of $25,000.00. Dollar's rental agreement also offered excess liability insurance through an Supplemental Liability Insurance ("SLI") policy issued by Philadelphia Insurance Company ("PIC"), which Mr. Rykaart purchased. The rental agreement and SLI policy contained a criminal acts exclusion, prohibiting driving the vehicle under the influence of alcohol. On May 6, 1998, Rykaart, while driving the vehicle he rented from Dollar, crossed over into oncoming traffic at a high rate of speed colliding with a truck. The driver of the truck was severely injured in the accident. Mr. Rykaart was arrested and subsequently pled guilty to Driving Under the Influence of alcohol.

The injured truck driver filed a workers' compensation claim as a result of the accident, and CIGA later obtained the rights of subrogation against Mr. Rykaart to recover the benefits that were paid on behalf of the injured driver. PIC denied Mr. Rykaart's claim for a defense and indemnity because he was under the influence of alcohol at the time of the accident in violation of the terms and conditions of the rental agreement and PIC's SLI policy. An Order of Default Judgment was entered against Mr. Rykaart on April 8, 2008. On February 13, 2009, CIGA served PIC with a Writ of Garnishment with Notice and Exemption of Pending Levy in the amount of $420,925.85 against Mr. Rykaart as the judgment debtor. At the Boulder District Court garnishment hearing on August 23, 2010, the trial court determined that PIC's SLI policy was excess insurance coverage and that the criminal acts exclusion was valid and enforceable. Therefore, PIC had no duty to pay the judgment entered against Mr. Rykaart. Accordingly, the court quashed CIGA's writ of garnishment.

CIGA appealed the trial court's order arguing that the criminal acts exclusion is void because it violated the reasonable expectations of Mr. Rykaart and is contrary to public policy. The Court of Appeals held that the exclusion did not violate Mr. Rykaart's reasonable expectations because the language that was clear and unambiguous. It further reasoned that, given the inherently dangerous and potentially unlawful nature of driving a car under the influence of alcohol, the average insured renting a car does not expect to use the car while under the influence of alcohol and does not expect to receive protection against claims arising from such use. The Court of Appeals further held that the exclusion does not violate public policy since it is a supplemental, or excess, insurance policy and is not subject to the statutes governing statutorily mandated minimum insurance coverage. Moreover, it determined that the insurer's freedom of contract outweighs the public policy in favor of compensating tort victims. As a result, the Court of Appeals affirmed the trial court's order dismissing the writ of garnishment against PIC.

40 Madison Homeowners Association, Inc. v. Angel's Plastering, Inc., et. al.

Court of Appeals No. 10CA2431

In December 2006, a succession of severe snowstorms caused leaks in five units of a multi-unit residential building. As a result of these leaks, the Homeowners Association ("HOA") contacted an engineer consultant in February 2007 to inspect and evaluate the building's roofs, balconies and stucco. The consultant issued its report in June 2007, indicating the building suffered from defects in the application of stucco, and the original defects caused the leaks. The HOA filed suit against the builder and various subcontractors in April 2009.

Preliminarily, a number of Defendants filed Motions for Summary Judgment based on the statute of limitations and the statute of repose early in the litigation process. The district court denied those Motions, reasoning that outstanding issues of fact precluded judgment at that time. Our office continued in the litigation, deposing the homeowners, property manager, and engineers. At the close of discovery, we submitted a new Motion on the statute of limitations as well as a Motion to Reconsider the earlier Motion for Summary Judgement based on new evidence. As trial approached, other subcontractors settled and only the builder and our client remained as Defendants. On the Friday before trial, the District Court granted our Motion for Summary Judgment based on the statute of limitations. The HOA and builder proceeded to trial where a jury returned a verdict for over $4 million.

The HOA appealed the District Court's grant of summary judgment. The Court of Appeals, after oral argument, unanimously affirmed the District Court's order. The Construction Defect Action Reform Act ("CDARA") sets forth a two-year statute of limitations. The Court reiterated that a CDARA claim accrues "when a physical manifestation of a defect appears, even though its cause is not known at that time." In this case, the homeowners testified that the HOA knew that water was leaking into the units as early as December 2006, damaging the units. In fact, the leaks prompted the hiring of an engineer consultant to investigate the cause. The Court of Appeals held that once an alleged defect appears, a plaintiff has two years to file suit regardless of whether or not the cause of the defect is known or an investigation commences to determine whether or not a defect exists. Based on this reasoning, the Court of Appeals affirmed the trial court's order, granting judgment in favor of our client.

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For more information on these or other cases, please contact any of the attorneys at Lasater & Martin, P.C.

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