Goodson v. American Standard Ins. Co.

• Decision Date: 03 May 2004
• Docket Number: No. 02SC388.,02SC388.
• Citation: 89 P.3d 409
• Parties: Dawn Michelle GOODSON, individually, and as parent and guardian and next friend of Brittany Weber and Austin Weber, minors, Petitioner, v. AMERICAN STANDARD INSURANCE COMPANY OF WISCONSIN, Respondent.
• Court: Colorado Supreme Court

89 P.3d 409

Dawn Michelle GOODSON, individually, and as parent and guardian and next friend of Brittany Weber and Austin Weber, minors, Petitioner, v. AMERICAN STANDARD INSURANCE COMPANY OF WISCONSIN, Respondent.

No. 02SC388.

Supreme Court of Colorado, En Banc.

May 3, 2004.

William Muhr, David A. Harper, Colorado Springs, Colorado, Attorneys for Petitioner.

A. Peter Gregory, Rebecca K. Wagner, Englewood, Colorado, Attorneys for Respondent.

Thomas L. Roberts, Bradley A. Levin, Denver, Colorado, Attorneys for Amicus Curiae, Colorado Trial Lawyers Association.

Justice HOBBS delivered the opinion of the court.

We granted certiorari in this case to review the court of appeals' decision in Goodson v. American Standard Insurance Co. of Wisconsin, No. 00CA1489, 2002 WL 1803756 (Colo.App. Mar.7, 2002).¹ The court of appeals reversed the trial court's judgment entered on the jury verdict in favor of the insured. It held that the insurer defending against a bad faith tort suit was entitled to an instruction that the insured must establish substantial property or economic loss as a prerequisite to recovering damages for emotional distress.

We disagree with the court of appeals and reverse. We hold that, in a tort claim against an insurer for breach of the duty of good faith and fair dealing, the plaintiff may recover damages for emotional distress without proving substantial property or economic loss. To the extent this holding conflicts with the court of appeals' decision in Farmers Group, Inc. v. Trimble, 768 P.2d 1243 (Colo.App.1988) ("Trimble III"), we overrule that decision.

I.

In May, 1995, Dawn Goodson and her two minor children were involved in an automobile accident. They were stopped at a red light when a vehicle struck them from behind. Chet Weber owned the vehicle that Goodson was driving at the time of the accident. Weber gave Goodson authorization to drive his vehicle. Weber was a named insured of American Standard Insurance Company of Wisconsin ("American Standard"). Goodson timely notified American Standard of the collision.

Goodson delayed seeking medical treatment for herself and her children for over a year because she was concerned about the cost of medical bills and was unaware of the personal injury protection ("PIP") benefits available under Weber's policy. In July, 1996, Goodson and her children began receiving chiropractic treatment for their injuries. Around that time, Goodson learned of the possibility of receiving PIP benefits and submitted to American Standard an application for PIP benefits. Around October, 1996, Goodson submitted her outstanding chiropractic bills to American Standard for payment.

American Standard disputed Goodson's claim from the outset. First, American Standard took the position that the PIP benefits under Weber's policy were subject to reduction because Goodson and her children received treatment from a provider that was not a member of American Standard's preferred provider organization ("PPO"). Second, around October 1996, American Standard claimed that Weber's policy was ineffective at the time of the accident because he failed to pay the premium. Third, in December, 1997, American Standard agreed that the policy was effective at the time of the collision, but asked Goodson and her children to undergo an independent medical evaluation ("IME") to determine whether their injuries were related to the accident and whether their medical treatment was reasonable and necessary. In April 1998, American Standard finally paid the full amount of the outstanding medical bills, which totaled slightly over $8,000.

In July, 1998, Goodson filed suit against American Standard, alleging the following claims: breach of contract; bad faith breach of insurance contract; outrageous conduct; and willful and wanton breach of insurance contract and exemplary damages.² During the trial, American Standard reasserted its position that the policy had been cancelled for non-payment of the premium and threatened to recover the benefits Goodson received.

The case was submitted to the jury solely on the tort claim of bad faith breach of insurance contract. American Standard requested an instruction requiring the jury to find substantial property or economic loss as a prerequisite to an award of emotional distress damages. The trial court refused to give the instruction, reasoning that if such an instruction were required,

[I]nsurance companies would understand that they can fiddle around and put the insured through all sorts of hoops and problems and difficulties ... and then at the last minute, the insurer can pay the bills ... and eliminate damages for emotional distress, and the whole idea of bad faith handling of insurance cases goes out the window.

The trial court instructed the jury to consider "any non-economic losses or injuries which Plaintiffs have had or will have in the future including: pain and suffering; inconvenience; emotional distress; and impairment of quality of life." The trial court also instructed the jury to award punitive damages if it found beyond a reasonable doubt that American Standard acted in a willful and wanton manner.

The jury returned a general verdict against American Standard, awarding Goodson and her children $75,000 in actual damages. Moreover, the jury found beyond a reasonable doubt that American Standard's breach was willful and wanton, and awarded $75,000 in punitive damages. The trial court entered judgment on the jury verdict.

American Standard appealed the judgment, claiming that: (1) the trial court erred in refusing to instruct the jury that it could award damages for emotional distress only if Goodson showed substantial property loss or economic damages caused by American Standard's breach; and (2) the trial court erred in denying its motions for directed verdict and judgment notwithstanding the verdict. Goodson filed a cross-appeal, claiming that: (1) the trial court erred in denying her motion to increase the exemplary damages awarded by the jury to three times the actual damages; and (2) the trial court erred in determining the date for accrual of prejudgment interest as part of Goodson's bill of costs.

The court of appeals reversed the trial court on the issue of the jury instruction, holding that the trial court erred in refusing to instruct the jury that it could only award damages for emotional distress if Goodson showed substantial property loss or economic damages caused by American Standard's breach.³ In reaching its decision, the court of appeals relied on Trimble III, 768 P.2d 1243 (Colo.App.1988), which held that in order to reduce the threat of fictitious claims, damages for emotional distress can only be recovered in an action for bad faith breach of insurance contract "when the emotional distress results from substantial property or economic loss proximately caused by the insurer's tortious conduct." The court of appeals remanded the case for a new trial solely on the issue of damages.

II.

We disagree with the court of appeals and reverse. We hold that, in a tort claim against an insurer for breach of the duty of good faith and fair dealing, the plaintiff may recover damages for emotional distress without proving substantial property or economic loss.

A. Bad Faith Breach of Insurance Contract

Whether emotional distress damages in bad faith cases can only be awarded upon a showing of substantial property or economic loss is a question of law; accordingly, we review this question de novo. Mortgage Invs. Corp. v. Battle Mountain Corp., 70 P.3d 1176, 1183 (Colo.2003).

Every contract in Colorado contains an implied duty of good faith and fair dealing. Cary v. United of Omaha Life Ins. Co., 68 P.3d 462, 466 (Colo.2003). In most contractual relationships, a breach of this duty will only result in damages for breach of contract and will not give rise to tort liability. Id. at 466.

But, insurance contracts are unlike ordinary bilateral contracts. Id.; Huizar v. Allstate Ins. Co., 952 P.2d 342, 344 (Colo. 1998). First, the motivation for entering into an insurance contract is different. Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo.1984) ("Trimble II"). Insureds enter into insurance contracts for the financial security obtained by protecting themselves from unforeseen calamities and for peace of mind, rather than to secure commercial advantage. Cary, 68 P.3d at 467; Trimble II, 691 P.2d at 1141. Second, there is a disparity of bargaining power between the insurer and the insured; because the insured cannot obtain materially different coverage elsewhere, insurance policies are generally not the result of bargaining. Huizar, 952 P.2d at 344.

Due to the "special nature of the insurance contract and the relationship which exists between the insurer and the insured," an insurer's breach of the duty of good faith and fair dealing gives rise to a separate cause of action arising in tort. Cary, 68 P.3d at 466 (citing Trimble II, 691 P.2d at 1141). The basis for tort liability is the insurer's conduct in unreasonably refusing to pay a claim and failing to act in good faith, not the insured's ultimate financial liability. Trimble II, 691 P.2d at 1142. Therefore, the fact that an insurer eventually pays an insured's claims will not prevent the insured from filing suit against the insurer based on its conduct prior to the time of payment.

Claims for bad faith breach of insurance contract arise in first-party and third-party contexts. First-party bad faith cases involve an insurance company refusing to make or delaying payments owed directly to its insured under a first-party policy such as life, health, disability, property, fire, or no-fault auto insurance. Farmers Group, Inc. v. Williams, 805 P.2d 419, 421 (Colo.1991); John H. Bauman, Emotional Distress Damages and the Tort of Insurance Bad Faith, 46 Drake L.Rev. 717, 739 (1998). The insurer's actions expose the insured to being personally liable for the...