Colorado Supreme Court Finds One-Year Statute of Limitations Inapplicable to Statutory Bad Faith Claims

Jessica C. Collier and Kayla D. Dreyer | Wilson Elser | June 7, 2018

The Colorado Supreme Court has provided some much-needed certainty as to the statute of limitations period for statutory bad faith claims. Chief Justice Nancy Rice, the author of the court’s May 29, 2018, opinion in Rooftop Restoration, Inc. v. American Family Mutual Insurance Company, determined the one-year statute of limitations reserved for penalty-type statutes to be inapplicable to statutory bad faith claims made against insurance carriers.

Background

A homeowner experienced hail damage to the roof of her house, which was insured by American Family. The insurance carrier and insured disagreed about the cost to repair the hail damage, leading the insured to assign any potential claims against the carrier to the insured’s roofing contractor, Rooftop Restoration. A lawsuit against American Family for breach of contract and unreasonable delay or denial of insurance benefits pursuant to section 10-3-1116(1) C.R.S. followed. American Family moved to dismiss the statutory bad faith claim as barred by a one-year statute of limitations. Recognizing that the limitations period was an open question of law, the court certified it for consideration to the Supreme Court.

As an initial matter, the Colorado Legislature regulates the claims-handling practices of insurance carriers by providing insureds with a private right of action against their insurer. Insurance carriers may not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of any first-party claimant. Should a claimant be aggrieved pursuant to section 10-3-1115, then she is entitled to bring a claim and recover reasonable attorneys’ fees and court costs and two times the covered benefit. C.R.S. § 10-3-1116(1).

The bad faith statute previously lacked any explicit direction from the Legislature as to which limitations period should apply. Cf. Gargano v. Owners Ins. Co., No. 12-cv-01109-CMA—BNB, 2014 WL 1032303, at 3 (D. Colo. Mar. 18, 2014), aff’d 623 F. App’x 921 (10th Cir. 2015) (holding that the two-year limitation applied to both bad faith breach of an insurance contract claims and statutory bad faith claims); Mascarenas v. Am. Family Mut. Ins. Co., No. 14-cv-02799-KLM, 2015 WL 8303604, at 8 (D. Colo. Dec. 8, 2015) (explaining that statutory bad faith claims are subject to a one-year statute of limitations because such claims are penal in nature, and do not contemplate an award of actual damages).

Insurance carriers championed a one-year limitations period, which in Colorado applies to “all actions for any penalty or forfeiture of any penal statutes.” C.R.S. § 13-80-103(1)(d). Thus, the query before the Supreme Court turned on its determination as to whether section 10-3-1116 amounted to a penalty.

American Family urged the Colorado Supreme Court to apply the judicially created Kruse test in making its inquiry. Pursuant to Kruse, a statute is penal if (1) the statute asserted a new and distinct cause of action, (2) the claim would allow recovery without proof of actual damages and (3) the claim would allow an award in excess of actual damages. Kruse v. McKenna, 178 P.3d 1198, 1201 (Colo. 2008). The court declined to follow Kruse in this instance, abrogating the test when the legislative intent is “clear” that a particular cause of action is or is not governed by a certain limitations period.

The Decision

Quickly disposing of Kruse, the court turned to a purely textual analysis of the statutes. First, the court observed that the term “penalty” is defined as punishment imposed on a wrongdoer − a quality the bad faith statute lacks because Colorado does not directly impose a fine on the insurer acting in contravention of the law. Justice Rice then expanded her search into the broader statutory landscape by examining the interplay between the statute of limitations for penalties, the bad faith statute and the accrual statute for penalties. The accrual statute provides that a claim for penalties accrues for limitations purposes when the determination of overpayment or delinquency, for which a penalty may be assessed, is no longer subject to appeal. C.R.S. § 13-80-108(9).

The court observed that in accordance with section 10-3-1116(1), a statutory bad faith action can never result in a determination of overpayment or delinquency. Thus, the court found that if the bad faith statute is a penalty, the cause would never accrue under the statute, which the court deemed an impossible result because it would render the statute of limitations meaningless. Thus, the court held that the bad faith statute is not a penalty, and therefore not subject to the one-year statute of limitations.

This decision by the Colorado Supreme Court and another decision issued the same day in American Family Mutual Insurance Co. v. Barriga, continue the Colorado line of decisions interpreting the language of C.R.S. §§ 10-3-1115 and 10-3-1116 in favor of insureds.

Court Says Claims for Unreasonable Delay or Denial of Insurance Benefits Can Be Filed Beyond One Year

Jonathan Bukowski | Property Insurance Coverage Law Blog | June 12, 2018

As discussed in a previous post, Colorado allows policyholders—even repair vendors such as contractors or roofers where there has been an assignment of insurance benefits—to bring a cause of action for bad faith where an insurance company unreasonably delays or denies the payment of covered insurance benefits.1

This law allows the potential recovery of two times the covered insurance benefits that have not been paid, or that were paid after an unreasonable delay. The statute provides a powerful deterrent against the wrongful delay or denial of insurance benefits to policyholders. While the statute provides strong protection for policyholders, the legislature did not assign a timeframe for which a policyholder or repair vendor must bring a claim for the unreasonable delay or denial of insurance benefits leading to much uncertainty.

The Colorado Supreme Court issued two important decisions this week surrounding Colorado’s statutory bad faith law. My colleague, Ashley Harris, previously wrote about the Colorado Supreme Court’s decision in American Family Mutual Insurance Company v. Barriga, holding that an award for unreasonable delay or denial of insurance benefits cannot be reduced by payments delayed, but later paid by an insurance carrier. This post will discuss Rooftop Restoration, Inc. v. American Family Mutual Insurance Company, and the Colorado Supreme Court’s decision to strike down arguments made by insurance carriers that any claim for unreasonable denial or delay of payment of benefits must be brought within one year.

In late August 2013, the insureds timely filed a claim for hail damages to their property with American Family. American Family inspected the property several days later, determining that the damage to the insureds property did not exceed the $1000.00 deductible of their policy. The insureds assigned their insurance claim to Rooftop Restoration, who provided American Family an estimate for damages of approximately $70,000.00 in May 2014. Following a reinspection, American Family increased its estimate to $4,000.00 and issued payment less the policy’s deductible on May 28, 2014. Rooftop Restoration subsequently sued for breach of contract and unreasonable delay and denial of insurance benefits in September 2015. American Family moved to dismiss Rooftop Restoration’s bad faith claim for unreasonable delay and denial of benefits as untimely, arguing that a claim for the unreasonable delay or denial of insurance benefits is penal in nature and therefore must be brought within one year. Due to the lack of a controlling decision on the issue, the lower court requested that the Colorado Supreme Court provide direction.

After considering the legislative intent in creating the statute, the Colorado Supreme Court ultimately ruled that the one-year statute of limitations applicable to penal actions did not apply to Colorado’s unreasonable delay and denial statute because the legislature did not intend the statute to operate as a penalty. The Colorado Supreme Court decision is helpful to policyholders where even the property adjustment of an insurance claim can take well over one year to complete.

While the Court’s decision brings some clarity to the time requirements for filing a claim for the unreasonable delay or denial of insurance benefits, the Colorado Supreme Court did not specifically identify the limitation period applicable to a cause of action under for the unreasonable delay or denial of insurance benefits. Therefore, it remains important to pay attention to the claims process and identify unreasonable conduct by the insurance carrier. If you have been affected by one of the many recent Colorado hailstorms and feel that your insurance company has unreasonably delayed or denied the payment insurance benefits, consider contacting a Colorado licensed attorney experienced in protecting first-party policyholder claims.
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1 Colorado Revised Statute § 10-3-1115 and § 10-3-1116.

New Jersey Senate Passes Bad Faith Bill

Jason Cleri | Property Insurance Coverage Law Blog | June 10, 2018

Recently, the New Jersey Senate passed S-2144, entitled the New Jersey Insurance Fair Conduct Act. While the bill still must go through the Assembly and be signed by the Governor, this is much welcomed news by insureds and their representatives. Since 1993, insureds have had basically no right to bad faith claims against their insurers under the blanket of the Picket v. Lloyd “fairly debatable” standard.1

That standard set the bar so low for the insurance carrier to overcome that most cases could only proceed under the breach of contract claim. The new bill states:

a. In addition to the enforcement authority provided to the Commissioner of Banking and Insurance pursuant to the provisions of P.L. 1947, c.379 (C.17:29B-1 et seq.) or any other law, a claimant may, regardless of any action by the commissioner, file a civil action in a court of competent jurisdiction against its insurer for:

(1) an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy; or

(2) any violation of the provisions of section 4 of P.L. 1947, c.379 (C.17:29B-4).

b. In any action filed pursuant to this act, the claimant shall not be required to prove that the insurer’s actions were of such a frequency as to indicate a general business practice.

c. Upon establishing that a violation of the provisions of this act has occurred, the plaintiff shall be entitled to:

(1) actual damages caused by the violation of this act;

(2) prejudgment interest, reasonable attorney’s fees, and all reasonable litigation expenses; and

(3) treble damages

This could be a huge win for insureds in New Jersey if it passes as-is. Not only could a Plaintiff recover extra-contractual damages but those damages can also be tripled (treble damages).

In addition, removing the requirement to show a pattern or practice by the insurance company allows a single litigant the ability to collect under this act. Stay tuned for more developments as this bill makes its way through the New Jersey legislature.

I leave you with a quote from Matt Mead, Governor of Wyoming who stated: Connectivity is important to our state, including the opportunity for our citizens to see our legislative process at work. Let’s hope the New Jersey legislature does the right thing here and passes this bill.
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1 Picket v. Lloyd, 131 N.J. 457 (1993).

Colorado Supreme Court Finds One-Year Statute of Limitations Inapplicable to Statutory Bad Faith Claims

Jessica C. Collier and Kayla D. Dreyer | Wilson Elser | June 7, 2018

The Colorado Supreme Court has provided some much-needed certainty as to the statute of limitations period for statutory bad faith claims. Chief Justice Nancy Rice, the author of the court’s May 29, 2018, opinion in Rooftop Restoration, Inc. v. American Family Mutual Insurance Company, determined the one-year statute of limitations reserved for penalty-type statutes to be inapplicable to statutory bad faith claims made against insurance carriers.

Background

A homeowner experienced hail damage to the roof of her house, which was insured by American Family. The insurance carrier and insured disagreed about the cost to repair the hail damage, leading the insured to assign any potential claims against the carrier to the insured’s roofing contractor, Rooftop Restoration. A lawsuit against American Family for breach of contract and unreasonable delay or denial of insurance benefits pursuant to section 10-3-1116(1) C.R.S. followed. American Family moved to dismiss the statutory bad faith claim as barred by a one-year statute of limitations. Recognizing that the limitations period was an open question of law, the court certified it for consideration to the Supreme Court.

As an initial matter, the Colorado Legislature regulates the claims-handling practices of insurance carriers by providing insureds with a private right of action against their insurer. Insurance carriers may not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of any first-party claimant. Should a claimant be aggrieved pursuant to section 10-3-1115, then she is entitled to bring a claim and recover reasonable attorneys’ fees and court costs and two times the covered benefit. C.R.S. § 10-3-1116(1).

The bad faith statute previously lacked any explicit direction from the Legislature as to which limitations period should apply. Cf. Gargano v. Owners Ins. Co., No. 12-cv-01109-CMA—BNB, 2014 WL 1032303, at 3 (D. Colo. Mar. 18, 2014), aff’d 623 F. App’x 921 (10th Cir. 2015) (holding that the two-year limitation applied to both bad faith breach of an insurance contract claims and statutory bad faith claims); Mascarenas v. Am. Family Mut. Ins. Co., No. 14-cv-02799-KLM, 2015 WL 8303604, at 8 (D. Colo. Dec. 8, 2015) (explaining that statutory bad faith claims are subject to a one-year statute of limitations because such claims are penal in nature, and do not contemplate an award of actual damages).

Insurance carriers championed a one-year limitations period, which in Colorado applies to “all actions for any penalty or forfeiture of any penal statutes.” C.R.S. § 13-80-103(1)(d). Thus, the query before the Supreme Court turned on its determination as to whether section 10-3-1116 amounted to a penalty.

American Family urged the Colorado Supreme Court to apply the judicially created Kruse test in making its inquiry. Pursuant to Kruse, a statute is penal if (1) the statute asserted a new and distinct cause of action, (2) the claim would allow recovery without proof of actual damages and (3) the claim would allow an award in excess of actual damages. Kruse v. McKenna, 178 P.3d 1198, 1201 (Colo. 2008). The court declined to follow Kruse in this instance, abrogating the test when the legislative intent is “clear” that a particular cause of action is or is not governed by a certain limitations period.

The Decision

Quickly disposing of Kruse, the court turned to a purely textual analysis of the statutes. First, the court observed that the term “penalty” is defined as punishment imposed on a wrongdoer − a quality the bad faith statute lacks because Colorado does not directly impose a fine on the insurer acting in contravention of the law. Justice Rice then expanded her search into the broader statutory landscape by examining the interplay between the statute of limitations for penalties, the bad faith statute and the accrual statute for penalties. The accrual statute provides that a claim for penalties accrues for limitations purposes when the determination of overpayment or delinquency, for which a penalty may be assessed, is no longer subject to appeal. C.R.S. § 13-80-108(9).

The court observed that in accordance with section 10-3-1116(1), a statutory bad faith action can never result in a determination of overpayment or delinquency. Thus, the court found that if the bad faith statute is a penalty, the cause would never accrue under the statute, which the court deemed an impossible result because it would render the statute of limitations meaningless. Thus, the court held that the bad faith statute is not a penalty, and therefore not subject to the one-year statute of limitations.

This decision by the Colorado Supreme Court and another decision issued the same day in American Family Mutual Insurance Co. v. Barriga, continue the Colorado line of decisions interpreting the language of C.R.S. §§ 10-3-1115 and 10-3-1116 in favor of insureds.

Adjusters May Be Personally Liable Under Washington Law

Dwain Clifford | The Policyholder Report | April 11, 2018

The Washington Court of Appeals recently held that the obligation to act in “good faith” applies to the adjuster working for an insurer, not just the insurer that employed the adjuster. This rule not only permits insureds to go directly after the person at the insurance company responsible for denying a claim in bad faith, but it may also allow insureds to keep state-law claims filed in state court right where they were filed.

In Keodalah v. Allstate Ins. Co., Division 1 of the Washington Court of Appeals accepted the insured’s request for interlocutory review of a trial judge’s decision that shielded an adjuster making bad-faith decisions from personal liability (this procedure allows review of trial-court decisions before the case goes all the way to trial). The trial judge had ruled that bad-faith claims and claims under Washington’s Consumer Protection Act (CPA) could be brought only against the insurance company, Allstate, but not Allstate’s employee, Tracey Smith, who made the decisions about what Allstate would pay.

In this case, Moun Keodalah had stopped at a stop sign and then started to drive through an intersection when his truck was struck by a motorcycle, killing the motorcycle driver and injuring Keodalah. The police department determined that the motorcycle had been traveling between 70 and 74 mph (in a 30 mph zone!). And the insurer’s own investigator found that Keodalah had stopped, that the motorcycle had been going at least 60 mph, and that the motorcyclist’s “excessive speed” had caused the accident. Straightforward approval of the claim, right? Well, no.

Photo by Chris Yarzab

Despite all of this evidence pointing to the motorcyclist’s fault, Allstate responded to Keodalah’s claim under his underinsured-motorist coverage with its determination that Keodalah was somehow 70% at fault, offering only $1,600 to settle the claim (the jury in this first lawsuit later found nearly $109,000 in damages). Disregarding the police report and the conclusions of Allstate’s own investigators, Smith claimed that Keodalah had run the stop sign and been talking on his cell phone (the latter conclusion was contradicted by Keodalah’s phone records). Keodalah won his coverage lawsuit, including a jury determination that the motorcyclist was 100% at fault, and then filed a second lawsuit asserting bad-faith and CPA claims against both Allstate and Smith.

In this second lawsuit, the trial judge gave a quick victory to Smith in dismissing the bad-faith and CPA claims against her, but this was not to last. The Keodalah court held that Washington’s statute requiring “good faith” in the business of insurance applies to insurers and those acting on behalf of insurers: “Smith was engaged in the business of insurance and was acting as an Allstate representative. Thus, under the plain language of the statute, she had the duty to act in good faith. And she can be sued for breaching this duty.”

Similarly, the court followed a recent decision by the Washington Supreme Court to reverse an older case that had required a contractual relationship between the defendant and a plaintiff asserting claims under the CPA. Without this element, the Keodalah court held that CPA claims can be asserted against adjusters like Smith even though, of course, an insured and an adjuster do not have any contact with each other.

While this result will gratify insureds who often feel personally aggrieved by an adjuster’s bad faith and relish the thought of holding an adjuster personally responsible, Keodalah will doubtlessly play an important role in the familiar battleground between insurers and insureds about which court will hear a case.

Insurers often prefer federal court and remove coverage cases filed in state court to federal court based on what is known as “diversity jurisdiction,” which applies when the plaintiffs and defendants are all citizens of different states. Under Keodalah, insureds can sue individual adjusters, which may defeat diversity jurisdiction (if the insured and adjuster are citizens of the same state) or defeat removal (if the adjuster is a defendant of the state where the suit is brought).

Both because of the availability of bad-faith and CPA claims against another defendant, and because of the procedural advantages in suing an adjuster, Keodalah offers several tools for lawyers on the policyholders’ side of the bar.