Colorado Supreme Court clarifies path for proving insurers' unreasonable delay of benefits

The Colorado Supreme Court delivered a decision with mixed benefits to insurance companies and policyholders on Monday, ruling that insurers' internal evaluations of claims cannot be used to prove how much they owe a plaintiff, but companies also cannot hide behind ambiguity to delay paying certain types of damages.

Under state law, insurers cannot unreasonably delay or deny payment on a claim. The Supreme Court, in a 2018 decision, previously clarified that auto insurers have an obligation to expeditiously pay the "undisputed portions" of an injured party's claim even if there are other parts in dispute.

In the case of Marcus A. Fear, who was rear-ended by a driver, a trial judge concluded GEICO had no reason to withhold money for Fear's noneconomic damages — like pain and suffering — when its own analysis showed a minimum and maximum amount the claim was worth. GEICO had used the minimum figure when attempting to negotiate a settlement with Fear.

However, in a Dec. 23 opinion, the Supreme Court concluded GEICO's internal figures could not be used to prove the undisputed amount Fear was owed. Simultaneously, wrote Justice Richard L. Gabriel, an insurance company cannot refuse to pay noneconomic damages to injured policyholders if at least some of the amount is undisputed.

"Although, as GEICO argues, non-economic damages tend to involve greater subjectivity than other types of damages like medical expenses," Gabriel elaborated, "we decline to conclude, as a matter of law, that such damages (or a portion thereof) can never be undisputed."

Lawyers for Fear and GEICO did not immediately respond to a request for comment.

The case attracted the attention of outside groups who weighed in to the Supreme Court and took away differing impressions of the opinion.

On the one hand, an attorney for the insurance industry called the decision a rejection of "a cynical attempt" from plaintiffs' lawyers to etch insurers' internal estimates in stone.

"In today's common-sense decision, the Colorado Supreme Court confirmed the overwhelming consensus of prior law that insurers are not required to advance noneconomic damages amounts that are reasonably disputed. And an insurer's own internal evaluation of such damages is not an 'undisputed' amount that must be paid immediately," said attorney Evan Stephenson, who represented multiple insurance trade associations but spoke on his own behalf.

However, Nelson Waneka, who submitted a brief on behalf of a bar association for plaintiffs' attorneys, characterized the outcome as "a victory for Colorado insureds."

"Among other things, the Court recognized that an auto insurer's evaluation of its insured's noneconomic damages can be relevant in an insurance bad faith case," he said.

In Fear's case, he received neck, back and head injuries from his accident. The responsible driver's insurance company paid Fear $25,000, pursuant to the policy limits.

Fear then sought additional benefits from his own insurer, GEICO, arguing his injuries exceeded $25,000. Fear did not accept GEICO's settlement offers or negotiate. Instead, he sued GEICO for unreasonably delaying or denying the payment of benefits.

In 2021, Denver District Court Judge Marie Avery Moses penalized GEICO for failing to pay Fear $3,961 on his claim, which the company's own evaluation found to represent the minimum amount Fear was owed. She relied on the Supreme Court's 2018 decision distinguishing between disputed and undisputed portions of claims. Moses also awarded Fear the penalty state law provides for unreasonable delay.

A three-judge panel of the Court of Appeals reversed the penalty, concluding Moses could not rely on the $3,961 figure that was generated internally during GEICO's efforts to settle Fear's claim. First, the analysis was "inextricably intertwined" with GEICO's settlement offer, and such offers are not to be used as evidence. Second, noneconomic damages are "inherently subjective."

"Internal evaluations like the one that GEICO completed in this case are not intended to confine the fact finder to a particular range of damages, or even to inform its decision-making process," wrote Judge Matthew D. Grove.

During oral arguments in November, the Supreme Court heard about the dynamics of insurance settlements and how a ruling could upend that process. If insurance companies did not immediately pay policyholders the minimum amount shown by their calculations, for example, they could risk a lawsuit for unreasonably delaying "undisputed" damages.

If that were the case, observed Gabriel, "every insurance company would run their number as 'zero to X.' And then you're stuck with, 'I guess the undisputed number is zero.' That makes no sense."

Ultimately, the Supreme Court decided GEICO's internal estimate of Fear's damages could not be used in court to show how much he was owed — a win for the insurance industry. But, in a benefit for policyholders and contrary to the Court of Appeals' belief, the court clarified that undisputed pain-and-suffering portions of a claim must be promptly paid out.

"Accordingly, insurers may not shield themselves from liability simply by disputing the value of a particular benefit; the dispute must have a reasonable basis," Gabriel added.

The Supreme Court concluded Fear had not proven GEICO unreasonably delayed payment of the undisputed portions of his claim.

The case is Fear v. GEICO Casualty Company.