Lira v. Shelter Ins. Co., 95SC153

• Decision Date: 25 March 1996
• Docket Number: No. 95SC153,95SC153
• Citation: 913 P.2d 514
• Parties: Joel LIRA, Petitioner, v. SHELTER INSURANCE COMPANY, a/k/a Shelter Mutual Insurance Company, a/k/a Shelter General Insurance Company, a/k/a Shelter Life Insurance Company, Respondent.
• Court: Colorado Supreme Court

Page 514

913 P.2d 514

Joel LIRA, Petitioner, v. SHELTER INSURANCE COMPANY, a/k/a Shelter Mutual Insurance

Company, a/k/a Shelter General Insurance Company,

a/k/a Shelter Life Insurance Company, Respondent.

No. 95SC153.

Supreme Court of Colorado,

En Banc.

March 25, 1996.

Rehearing Denied April 15, 1996.

Law Office of Neil D. O'Toole, P.C., Neil D. O'Toole, Denver, for Petitioner.

Levy & Lambdin, Professional Corporation, Suzanne Lambdin, Scott P. Landry, Englewood, for Respondent.

Colorado Trial Lawyers Association, Susanna Meissner-Cutler, Denver, McDermott and Hansen, William J. Hansen, Denver, Breit, Bosch, Levin & Coppola, Bradley A. Levin, Denver, Thomas L. Roberts, Denver, for Amicus Curiae Colorado Trial Lawyers Association.

Berryhill, Cage & North, P.C., Mark W. Williams, Denver, for Amicus Curiae National Association of Independent Insurers.

Chief Justice VOLLACK delivered the Opinion of the Court.

We granted certiorari to review the decision of the court of appeals in Lira v. Shelter Insurance Co., 903 P.2d 1147 (Colo.App.1994), which held that when an insured's only claimed damages are the outstanding punitive damages awarded against him in the underlying suit, the insured may not recover against the insurer for acting in bad faith in failing to settle. We affirm the decision of the court of appeals.

I.

Early in the morning on January 3, 1988, Joel Lira (Lira) became involved in an altercation with another driver, Edgar Gunn (Gunn), while traveling northbound on Interstate 25. Lira had spent much of the prior evening consuming beer at various locations. According to Lira's testimony, Gunn pulled in front of him and stopped suddenly, causing Lira's vehicle to collide with Gunn's vehicle and lock bumpers with it. The two drivers then exited their vehicles, leaving the vehicles in a traffic lane on Interstate 25, and began fighting on the highway. After the two finished fighting, Gunn left the scene in his vehicle. Lira departed on foot, abandoning his vehicle in the traffic lane on Interstate 25. Lira neglected to report to any authorities that he had left his vehicle in the path of oncoming traffic.

Soon thereafter, Lira's vehicle was struck by Jeffrey Davis (Davis), who was traveling north in his vehicle on Interstate 25. Subsequently, Davis brought an action against Lira, seeking compensatory and punitive damages. Shelter Insurance Company ("Shelter"), as Lira's insurance company at the time of the accident, hired a law firm to defend Lira. Shelter also notified Lira by correspondence that

the plaintiff is seeking punitive damages. Exclusion 11 on Page 5 of your policy exclude (sic) punitive damages from coverage under your policy. Should there be a judgment rendered against you for punitive damages, you would be responsible for same. Again, you have a right to hire an attorney at your expense to defend you as to the punitive damages.

During the pretrial proceedings, Davis offered to settle his claims against Lira for the policy limit of $50,000. Shelter, on behalf of Lira, refused this offer, and made a counteroffer of $10,000. Shelter based this counteroffer on its assessment that Davis had incurred $30,000 in losses relating to the accident and that Lira should be liable for one-third of those losses. ¹ Davis refused Shelter's counteroffer, and the case proceeded to trial. ² After trial, the jury returned a verdict against Lira in the amount of $87,300 in compensatory damages and $87,300 in punitive damages. The trial court reduced the compensatory damages award to $43,650, pursuant to the comparative negligence statute, section 13-21-111, 6A C.R.S. (1987), and the pro rata liability statute, section 13-21-111.5, 6A C.R.S. (1987). Additionally, the trial court reduced the punitive damages award to $43,650, pursuant to the punitive damages statute, section 13-21-102(1)(a), 6A C.R.S. (1987). The damages awards were upheld by this court. Lira v. Davis, 832 P.2d 240, 246 (Colo.1992).

Shelter satisfied the compensatory damage award, plus interest and costs, the total of which was within the $50,000 limit of Lira's policy with Shelter. Shelter declined to pay the punitive damages awarded against Lira, as Lira's insurance policy exempted punitive damages from coverage.

Lira then brought the instant action against Shelter for bad faith breach of Lira's insurance policy, alleging that Shelter acted in bad faith by failing to settle Davis's action against Lira. The damages alleged by Lira were the $43,650 in punitive damages, plus interest, awarded against Lira in the underlying suit. ³ After trial, the jury in the instant case returned a verdict against Shelter in the amount of $58,000.

Shelter appealed, and the court of appeals reversed the jury's verdict, holding that an insured may not recover against his insurer for a bad faith failure to settle when the insured's only claimed damages are the punitive damages awarded against him in the underlying suit. ⁴

II.

Lira contends that the court of appeals erred by reversing the jury verdict in his favor on the basis that an insured may not recover against his insurer for bad faith in failing to settle when the insured's only claimed damages are the punitive damages awarded against him in the underlying suit. Shelter contends that the court of appeals' ruling is correct, because it prevents responsibility for punitive damage awards from being shifted to the insurer in contravention of Colorado policy underlying imposition of punitive damages. This question is an issue of first impression in Colorado. We hold that in an action by an insured against his insurer for bad faith failure to settle, the insured may not collect as compensatory damages the punitive damages awarded against him in the underlying lawsuit.

An insurer's tort liability for breach of its implied duty of good faith and fair dealing derives from the nature of the insurance contract and the relationship between the insured and insurer. Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo.1984). This tort liability is based on the quasi-fiduciary nature of the insurance relationship and is predicated on the parties' contractual responsibilities. Trimble, 691 P.2d at 1142; Bailey v. Allstate Ins. Co., 844 P.2d 1336, 1339-40 (Colo.App.1992). The tort duty imposed upon the insurer, therefore, must be within the scope of the obligations imposed by the contract. An insurer who has not contracted to insure against its insured's liability for punitive damages has no duty to settle the compensatory part of an action in order to minimize the insured's exposure to punitive damages. Magnum Foods, Inc. v. Continental Casualty Co., 36 F.3d 1491, 1506 (10th Cir.1994); Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co. 724 F.2d 1343, 1346 (9th Cir.1983). ⁵ Thus, if the insurer has no contractual duty to indemnify the insured for punitive damages, the insurer has no tort duty to settle in good faith with regard to punitive damages.

Bad faith breach of an insurance contract may subject the insurer to traditional tort damages. Ballow v. PHICO Ins. Co., 878 P.2d 672, 677 (Colo.1994). The insurer may become liable to the insured in tort for compensatory damages, such as for an award of damages in excess of the policy limits or for emotional distress. Id. If the breach is found to be accompanied by circumstances of fraud, malice, or willful and wanton conduct, the insurer may also be liable to the insured for punitive damages arising from the insurer's conduct. Id. at 682. This court has never decided whether an insured may recover compensatory damages consisting solely of the punitive damages from the underlying third-party action from an insurer who commits a bad faith breach of the insurance contract.

In the instant case, the Shelter Automobile Insurance Policy provided that Shelter would not be liable for punitive damages incurred by the insured. Shelter's duty to settle, therefore, did not encompass a duty to protect the petitioner from exposure to punitive damages. Shelter cannot be held liable for damages for breach of a duty which it did not have in the first place. The damages which are claimed to be "compensatory" in the instant case are none other than the punitive damages from the underlying case. The contract between the parties expressly precluded recovery for punitive damages incurred by the insured. The insured may not later utilize the tort of bad faith to effectively shift the cost of punitive damages to his insurer when such damages are expressly precluded by the underlying insurance contract.

This reasoning is in accord with Colorado case law and policy regarding punitive damages. The public policy of Colorado prohibits an insurance carrier from providing insurance coverage for punitive damages. See Universal Indemnity Ins. Co. v. Tenery, 96 Colo. 10, 17, 39 P.2d 776, 779 (1934); Gleason v. Fryer, 30 Colo.App. 106, 109, 491 P.2d 85, 86 (1971). Punitive damages are not meant to reimburse an injured plaintiff for harm suffered by that individual, but rather are intended to punish the defendant for his wrongful acts and to deter similar conduct in the future. Seaward Constr. Co. v. Bradley, 817 P.2d 971, 974 (Colo.1991). To allow the petitioner in this case to recover compensatory damages which derive from his own wrongful conduct undercuts the public policy of this state against the insurability of punitive damages.

The Court of Appeals of New York reached the same conclusion under similar factual circumstances in Soto v. State Farm Insurance Co., 83 N.Y.2d 718, 613 N.Y.S.2d 352, 635 N.E.2d 1222 (1994). That case involved an auto accident in which the insured's car, driven by another individual, struck and killed two victims. The victims' administrators then brought actions against the insured and the driver. Despite the administrators' willingness to settle the action for the policy limits, the insurer, defending the case on behalf of the insured, declined to offer...