United States: American Family Mutual Insurance Company v. Hansen

The Colorado Supreme Court recently decided American Family Mutual Insurance Company v. Hansen, 375 P.3d 115 (Colo. 2016). The case was widely followed by Colorado practitioners because the lower court's calculation of statutory damages for bad faith breach of insurance contract under C.R.S. §10-3-1115, 1116 was, to date, the most authoritative Colorado case precedent on that issue. The appellate court had held in Hansen that the award of statutory damages of "reasonable attorney fees and court costs and two times the covered benefit" should be interpreted as providing for two times the covered benefit plus attorney's fees and costs in addition to any damages award for a breach of contract claim. The effect of this was, in essence, treble damages for breach of insurance contract. Hansen was widely thought to be the case in which the Colorado Supreme Court would settle varied interpretations of the statutory damages provision under C.R.S. §10-3-1116(1). However, the Supreme Court decided Hansen on alternative grounds, holding that the insurance policy was unambiguous on its face, and altogether reversing the finding of liability on the statutory bad faith breach of insurance contract claim.

Hansen involved a claim for uninsured motorist (UIM) benefits by the daughter of the policyholders (her parents). American Family attempted to verify that the daughter resided with her parents at the time of the accident, and, through claimant's counsel, received a lienholder statement from American Family's local agent identifying Ms. Hansen as a named insured. American Family relied on the certified policy it obtained from its own underwriting department which did not list Ms. Hansen in the declaration pages, and denied the claim for insurance coverage. Ms. Hansen sued American Family for breach of contract, common law bad faith breach of insurance contract, and the statutory bad faith breach of insurance contract under C.R.S. §10-3-1115, 1116. At the trial court level, Ms. Hansen argued that the insurance policy was ambiguous as to the identity of the insured and provided the lienholder statement as evidence. American Family countered that the policy was unambiguous as to the identity of the named insureds (her parents), and therefore, no coverage could be afforded to Ms. Hansen under the policy. Shortly after cross-motions for summary judgment on the ambiguity issue, the insurance company became informed that claimant had owned the insured vehicle since inception of the policy and notified the claimant that the policy would be reformed to provide coverage for her injuries. The parties then settled the breach of contract claim at mediation and that claim was dismissed. However, both the statutory and bad faith breach of insurance contract claims remained.

The trial court held as a matter of law that the insurance policy was ambiguous and should be construed against American Family. Id. at *P14. Following the court's instruction, the jury found that the claimant was a named insured, found for American Family on the common law bad faith claim, and found against American Family on the statutory bad faith breach of insurance contract claim. However, because the breach of contract claim had previously been settled and paid, the jury found that the UIM benefit for which payment was delayed or denied without reason was $0 and did not award statutory damages. On motion to amend the judgment, the trial court ordered the award of reasonable attorney's fees and costs and $150,000 in statutory damages (two times $75,000 which was the amount determined to be the covered benefit at mediation).

On appeal, the Colorado Court of Appeals found no error by the trial court, agreeing that the policy was ambiguous. Hansen v. American Family Mutual Ins. Co., 2013 COA 173 (Colo. App. 2013). As to the statutory damages, the Court of Appeals affirmed, holding that the "covered benefit" for purposes of the statutory claim was $75,000 and the trial court had not erred in its calculation of statutory damages when it doubled that amount. The Colorado Supreme Court reversed. Am. Family Mut. Ins. Co., 375 P.3d 115 (Colo. 2016). The Court held that both the trial court and Court of Appeals erred in finding an ambiguity in the policy based on extrinsic evidence. Specifically, the Court held that "an ambiguity must appear in the four corners of the document before extrinsic evidence can be considered" and that American Family's denial of Ms. Hansen's claim in reliance on the unambiguous insurance policy was, therefore, reasonable. The Colorado Supreme Court reversed the finding that American Family was liable for statutory bad faith breach of insurance contract under C.R.S. §10-3-1115, 1116, obviating the need to address the calculation of damages issue.

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