Colorado Supreme Court narrows consumer protection law for insurance claims

The Colorado Supreme Court ruled on Monday that the legislature's consumer protections requiring insurance companies to take certain steps before they allege a policyholder failed to cooperate do not apply to any obligation specifically laid out in the policy.

In 2020, the legislature changed state law to limit insurance companies' ability to assert a failure-to-cooperate defense when they are sued for withholding benefits. Among other things, an insurer must give a policyholder time to address any specifically identified failures to cooperate in the claim investigation.

Plaintiff Anthony Wenzell and the groups supporting him argued the law captures an insurer's allegation of noncooperation across the board, including obligations laid out in the insurance policy. The defendants — insurers State Farm and USAA — and their allies countered that extending the law's protections to cover things the policyholder is already aware of would spawn unnecessary legal disputes.

By 6-1, the Supreme Court sided with the insurance companies.

"Policyholders are on notice of the enumerated conditions precedent in their policies requiring them to engage in specific conduct — like the duty to provide a comprehensive medical release — without additional notice from the insurer," wrote Justice William W. Hood III in the April 27 opinion.

Justice Maria E. Berkenkotter dissented, arguing the majority's interpretation ran contrary to the legislature's goal in preventing insurance companies from using technical noncompliance to void entire claims.

"The statute means what it says: If an insurer claims that the insured has failed to provide information that a reasonable person would conclude was necessary to adjust the insured's claim, the insurer must provide the insured notice and an opportunity (to) cure," she wrote. "It is undisputed that did not happen here."

Colorado Supreme Court Justice Maria E. Berkenkotter asks a question during oral arguments at Courts in the Community on Oct. 26, 2023, at Gateway High School in Aurora. Timothy Hurst, Denver Gazette.Colorado Supreme Court Justice Maria E. Berkenkotter asks a question during oral arguments at Courts in the Community on Oct. 26, 2023, at Gateway High School in Aurora. Timothy Hurst, Denver Gazette.

In the underlying case, Wenzell was seriously injured in a 2014 car accident. He underwent surgery nearly 2.5 years later and in April 2017, Wenzell's doctor determined he was healing well. But the following day, a driver rear-ended Wenzell again, causing a new round of injuries.

Wenzell's estimated damages from the second collision exceeded $2.7 million. Consequently, he sought benefits from his primary insurance company, State Farm, which had a limit of $1 million. Wenzell also pursued benefits from USAA, which provided secondary coverage up to $300,000.

State Farm sought various documents, including medical records, that Wenzell's policy obligated him to share. While Wenzell provided some information, he contended other requests were inappropriate or unnecessary to investigate the claim. He filed suit for breach of contract and delay of benefits.

Consequently, State Farm moved to end Wenzell's lawsuit in its favor, contending he had not satisfied the contractual provision. USAA, meanwhile, also moved to end the case, as Wenzell could not recover money from his secondary insurer if he had not gone through the process with his primary insurer first.

An El Paso County judge agreed with the insurance companies, but a three-judge Court of Appeals panel reinstated the lawsuit. It relied on the 2020 law requiring insurers to notify Wenzell of information a "reasonable person would determine the insurer needs," and to give him time to fulfill the request.

"Neither insurer did so here," wrote Judge Terry Fox. "The insurer must clearly identify perceived deficiencies, so the insured is given notice — and a deadline — to provide what is needed to evaluate a claim or risk its denial."

She added that USAA had its own duty to investigate Wenzell's claim because, even if State Farm had granted him full benefits under its policy, Wenzell's injuries were costly enough to trigger his secondary USAA coverage.

The insurance companies appealed, contending lawmakers only sought to address situations where an insurer alleged a policyholder failed to cooperate generally, without an opportunity to fix the problem.

"When the policy specifically requires the insured to release medical records, however, there is no possible ambiguity about whether the insured must do so," wrote attorney Katherine C. Yarger for State Farm.

The majority agreed with her.

"Our holding today should not be understood as an invitation to insurers to try to circumvent (the law) by establishing novel or unduly onerous conditions," wrote Hood, adding that insurance companies could still be liable if they craft contractual provisions in bad faith.

Berkenkotter argued that lawmakers intended to protect policyholders across the board from allegations of noncooperation.

"Alleged gamesmanship by insurers concerning requests for blanket medical release authorizations — the type of noncooperation at issue here — was specifically mentioned by proponents of (the law) no fewer than ten times during the hearing in the House," she wrote. "The majority's analysis turns the legislature's intent on its head."

In addition, all justices agreed that USAA, as the secondary insurer, had the obligation to evaluate Wenzell's claim if his "undisputed damages" exceeded the limits in the State Farm policy.

The case is United Services Automobile Association et al. v. Wenzell.