In 2008, Colorado enacted C.R.S. §§10-3-1115 and 1116, establishing penalties for the unreasonable delay or denial of a claim for benefits submitted by any first-party claimant. A first-party claimant is defined as “an individual, corporation, association, partnership, or other legal entity asserting an entitlement to benefits owed directly to or on behalf of an insured under an insurance policy,” and includes “a public entity that has paid a claim for benefits due to an insurer’s unreasonable delay or denial of the claim.” The statutory claim does not apply to workers compensation insurance, title insurance, or life insurance.
A claimant who successfully establishes an unreasonable delay or denial of a claim for benefits under this statute can recover two times the covered benefit plus reasonable attorneys’ fees and costs. By contrast, an insurer that prevails in an action under the statute can recover attorneys’ fees and costs only if the court finds the action was frivolous. The statute disclaims any intent to bar a common law bad faith claim, but does preclude duplicative damages by stating that damages awarded under the statute are not recoverable in any other action.
Recently, Magistrate Judge Michael E. Hegarty of the United States District Court for the District of Colorado issued a ruling addressing the scope of Colorado’s unreasonable delay / denial statute. The case was originally filed in the El Paso County District Court, but was removed by the defendant insurer, to federal court where the parties consented to the jurisdiction of the Magistrate Judge for all purposes including ruling on dispositive motions.
The underlying claim arose under an insurance policy issued to a television production company providing benefits of $1 million to any eligible cast or crew member accidentally killed during the production of a reality television show being produced by the company. In June of 2012, plaintiff Melvin Bernstein’s wife, Terry Flanell-Bernstein, was killed during the production of the pilot for the television show. In May of 2013, the insurer sent a letter to Mr. Bernstein’s attorney informing him of the existence of the accidental death policy, and a claim was then submitted where the full benefits of $1 million were paid to Mr. Bernstein.
In the lawsuit, Mr. Bernstein argued that the insurer had unreasonably delayed the payment of the accidental death benefits because it failed to notify him prior to May of 2013 of the existence of the policy. The defendant insurer moved to dismiss the claim, arguing that the plain language of the statute applies only after a claim has been submitted, and noted that Mr. Bernstein did not allege any delay after his claim was submitted. The insurer further argued that the statute does not impose any obligation to notify potential claimants of the existence of insurance policies which may provide them benefits and does not create any right of action for failing to notify potential claimants of the existence of such policies.
Judge Hegarty issued his Order on the Motion to Dismiss on October 22, 2014, finding that the language of the statute was unambiguous and did not apply to the facts alleged in the complaint. Judge Hegarty noted that Mr. Bernstein alleged an unreasonable delay in payment of benefits only during the period he was unaware of the policy, and he was therefore not asserting an entitlement to benefits during that time period. Judge Hegarty further noted that the statute prohibited the unreasonable delay or denial of a claim for benefits, while undisputed, it was not submitted during the time in question.
Judge Hegarty rejected Mr. Bernstein’s effort to invoke Colorado’s common law bad faith tort in an effort to expand the scope of the statute to cover pre-claim conduct. Judge Hegarty instead agreed with the insurer that the bad faith tort was distinguishable from the bad faith statute, and declined to construe the statute as encompassing a broader scope of conduct than specifically articulated in its express language. Judge Hegarty further rejected Mr. Bernstein’s argument that the case law he cited relating to Colorado’s bad faith tort, which referred to the entire course of conduct and all dealings between the insurer and the insured, included conduct which took place before the submission of a claim for benefits.
Judge Hegarty therefore granted the motion to dismiss and ordered the clerk to direct judgment in favor of the defendant insurer. Mr. Bernstein did not appeal the ruling.