Insurance Companies Risk Bad Faith Based on Failure to Investigate Even Where Full Amount of Claim is Paid

Insurance Companies Risk Bad Faith Based on Failure to Investigate Even Where Full Amount of Claim is Paid

A recent decision of the Tenth Circuit has important ramifications for Colorado policyholders, insurance companies, and insurance counsel. In Paden v. State Farm, the court held that even where an insurance company had paid a claimant the most she could recoup under applicable insurance policies, the district court erred in granting summary judgment to the insurer on a claim for bad faith breach of insurance contract where a reasonable fact-finder could have concluded the insurer had breached its duty of good faith by failing to perform a reasonable investigation into the insured’s claims.

The case arose out of a car accident. Plaintiff Wendy Peden and others gathered in a van that one of their friends had recently purchased. Ms. Peden said that she had expected her friend only to show off the van and photograph the group, but he drove off and crashed, causing serious injuries to Ms. Peden. State Farm, coincidentally, insured both the driver for his liability and Ms. Peden for underinsured-motorist coverage. After an investigation, Ms. Peden received a total of $240,000 under the driver’s liability policy, which together with payments to the other injured parties totaled the extent of the liability policy. 

Ms. Peden claimed that she was also entitled to the maximum amount she could receive under her underinsured-motorist coverage--$350,000. State Farm initially denied the claim. Ms. Peden sued, alleging State Farm breached both Colorado statutory and common law due to its unreasonable denial and delay in paying the claim. During the litigation, State Farm obtained additional information and ultimately paid Ms. Peden the full $350,000. State Farm then moved for summary judgment, arguing that its handling of the claim was reasonable as a matter of law, and Ms. Peden moved for partial summary judgment on her statutory bad faith breach of insurance contract claim. The district court granted State Farm’s motion and denied Ms. Peden’s motion as moot.

Employing the standards of good faith in the insurance industry, the Tenth Circuit determined that a reasonable fact-finder could infer that State Farm breached its duty of good faith by failing to reasonably investigate Ms. Peden’s underinsured-motorist claim for two reasons: (i) further investigation was needed to determine whether Ms. Peden assumed the risk for the accident; and (ii) further investigation was needed to determine whether Ms. Peden was entitled to greater damages from the driver.

As to the “assumption of risk” issue, State Farm discounted the claim by 15%, reasoning that Ms. Peden had assumed the risk of injury by going for a ride with the driver, who was intoxicated. However, Ms. Peden disputed that she had known that the driver was going to drive the van at all. State Farm likewise assumed, against Ms. Peden’s testimony, that Ms. Peden had known that the driver was intoxicated. Ms. Peden argued that because these important facts were in dispute, State Farm should have spoken with the other passengers in the van. The court held that a rational trier of fact could find that State Farm acted unreasonably by reaching its conclusions without at least trying to speak with the other passengers. 

As to the damages that Ms. Peden could have obtained from the driver, State Farm valued Ms. Peden’s claim at less than 43% of the damages itemized in Ms. Peden’s demand letter, assigning without explanation zero value for future noneconomic damages, prejudgment interest, or future wage loss. Ms. Peden had provided significant documentation and testimony supporting such amounts. The court noted that State Farm had not consulted with a physician, asked Ms. Peden to submit to a physical examination, or interviewed her. The court thus held that a fact-finder could justifiably question the reasonableness of State Farm’s investigation. The court additionally held that even if State Farm had adequately investigated the driver’s liability to Ms. Peden, a genuine issue of material fact would exist on the reasonableness of State Farm’s initial refusal to pay anything for future noneconomic damages or future wage loss, in light of the information it possessed on those topics.

State Farm also argued that it had demonstrated the reasonableness of its investigation by complying with a Colorado regulation that generally requires that claims decisions be made within 60 days. The court cited a recent Tenth Circuit precedent, however, stating that compliance with this regulation does not preclude a finding that an insurer acted unreasonably, and dismissed this argument as well.   

Accordingly, the appellate court reversed the award of summary judgment to State Farm and vacated the denial of Ms. Peden’s motion for partial summary judgment, remanding the case to the district court for further proceedings.

While not binding on Colorado state courts, the practical import of this decision is that a policy holder may now have more leverage to demand coverage for claims or, at least, further investigation by an insurance company prior to a coverage determination.


This article is intended to provide general information and, therefore, should not be treated as legal advice. If you have questions about a specific legal issue, you should seek the advice of a qualified attorney.

Authors: Rudy Verner and Benjamin Wilson