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What is insurance bad faith?

Insurance bad faith refers to damages claims that can be brought against insurance companies that fail to live up to their coverage obligations under Colorado law. Various claims can be brought under the common law as well as Colorado statutory law.

Insurance bad faith can occur when the at-fault driver's insurance company is presented with a demand for policy limits by the injured motorist. If the insurance company refuses to pay its policy limits when the injured person's losses are well above the policy limits, the insurance company may have exposed its insured, the at-fault driver, to additional liability.

The injured party may be inclined to sue the at-fault driver individually. If the plaintiff succeeds at trial and wins an excess judgment that is higher than the policy limits, the at-fault driver becomes personally liable for the portion of judgment that is higher than the policy limits. In such cases, the insurance company may have chosen to protect its own interests at the expense of its insured customer.  Faced with personal liability for an excess judgment, the at-fault driver may have a bad faith claim against his own insurance company because the insurance company could have settled the claim for policy limits and failed to do so. The at-fault driver might be willing to assign his bad faith claim to the plaintiff in exchange for a release of liability. The plaintiff can then sue the insurer for bad faith to collect on the full value of the judgment.

Example: Brett's careless driving causes a car crash that injures John. Brett has liability insurance coverage of $25,000 and no other substantial assets.  John's medical bills are $50,000. John makes a policy limits demand to Brett's insurance company for $25,000. Brett's insurer refuses to tender the $25,000 and instead offers only $15,000 to settle the claim. John withdraws his demand and sues Brett for the full value of his claim. After a trial, the jury returns a verdict in John's favor for total damages of $90,000 which includes John's medical bills, lost wages, and pain and suffering.  Brett's insurance company is now liable for the first $25,000 and Brett is personally liable for the remaining $65,000.  Brett now has a potential bad faith claim against his own insurance company for exposing him to liability when the insurer could have settled the claim for $25,000 before litigation started. Brett assigns his bad faith claim to John in exchange for an agreement in which John promises not to pursue Brett for the $65,000. John sues Brett's insurance company for bad faith and wins a judgment for the remaining $65,000 after a separate trial.

Another way insurance bad faith can occur is when an injured person's own insurance company fails to live up to its insurance coverage obligations. In such cases, the injured party may assert statutory insurance bad faith claims under Colorado law which could lead to double damages plus attorney fees.

Example: Ben's careless driving causes a car crash that injures Jenny. Ben has liability insurance coverage of $50,000 and no other substantial assets. Jenny's medical bills are $150,000.  Jenny makes a policy limits demand against Ben's insurance. Ben's insurance agrees to tender the entire policy limits of $50,000. This settlement releases Ben from further liability.  Because Jenny has not been fully compensated for her injuries, she now turns to her own insurance carrier to seek compensation under her UIM or underinsured motorist coverage. She has UIM coverage of $250,000.  Her Colorado injury attorney believes her medical bills, lost wages and pain and suffering make her total loss worth $300,000. Jenny requests that her insurance company fully compensate her loss up to the policy limits.  Her insurance company offers only an additional $50,000 to settle the claim.  Jenny sues her insurance carrier for statutory bad faith for unreasonably delaying or denying her request for benefits. After trial, a jury finds that her insurer has unreasonably denied payment of $200,000 in benefits under the policy. The statutory damages multiplier provides Jenny two times the covered amount in damages ($400,000) plus attorney fees of $75,000. A judge order Jenny's insurance company to pay $475,000 plus Jenny's costs of getting the case ready for trial, plus interest. The total award is $550,000.

Bad faith insurance is a complex area of the law. Success in these cases requires a skilled Colorado injury attorney with up to date knowledge of the constantly evolving case law in this practice area. The Max Law Firm, LLC has the trial experience and knowledge to aggressively pursue your bad faith insurance claim. For a free consultation call 720-699-8268.