Norman v. State Farm Fire & Cas. Co., No. 13-CV-01643-PAB-CBS, 2014 WL 6478046 (D. Colo. Nov. 19, 2014).
District of Colorado holds that insured has no duty to hire own adjuster in order to receive payment, and denies insurer’s motion for summary judgment on bad faith claims even where coverage claim was arguably “debatable” and insureds may have caused delay.
In June and July of 2012, the Waldo Canyon Fire caused extensive property damage in Colorado. On June 23, 2012, Plaintiffs J. Bruce and Diane Norman were directed to evacuate their Colorado Springs home. The Normans returned on July 5, 2012 and reported heavy smoke damage and some melting to their insurer, State Farm. Five days later, State Farm inspected the Norman’s home, finding light smoke damage and a smoke smell in the house, along with limited fire damage. State Farm issued the Normans an advance of approximately $87,000 for cleaning costs.
After various additional fire-related issues with the home came to light, the Normans retained public adjuster Troy Payne of Loss Analytics (the “public adjuster”), who in turn retained industrial hygienist SJR Environmental Consulting (“SJR”). SJR inspected and tested the Normans’ home, issued a report that found ash and char present throughout the house and soot residue present inside the furnace and air ducts, and recommended cleaning throughout the home. Upon receipt of SJR’s invoice, State Farm contacted Mrs. Norman, who said that she would be meeting with the public adjuster in the near future to review the scope of repairs the Normans wished to pursue. State Farm left the Normans’ claim open and asked Mrs. Norman to “submit any pending concerns for review.”
On February 20, 2013, Loss Analytics provided State Farm with a proof of loss estimate of $809,949.23. After repeated requests from State Farm regarding information on the scope of repairs, on March 22, 2013, State Farm received from Loss Analytics a disc that included the complete itemized estimate of damages. On March 27, 2013, State Farm informed Mr. Payne that State Farm was retaining its own engineer and industrial hygienist to inspect the Normans’ home. The next month, Engineering Systems Inc. (“ESI”), an engineering firm hired by State Farm, and Forensic Analytical Consulting Services (“FACS”), an industrial hygienist firm hired by State Farm, conducted an inspection of the Normans’ home. On April 26, 2013, ESI issued its report. Noting some damage, FACS’ report recommended cleaning/restoration of areas with visible smoke impact and cleaning of surfaces with “ ‘uncommon’ prevalence of combustion products,” which included furnishings/contents/fixtures, flooring/baseboards/door thresholds, windows, the attic, and the exterior.
On May 9, 2013, State Farm reviewed the ESI and FACS reports. On May 16, 2013, State Farm contacted Mr. Payne requesting information regarding completed repairs at the Normans’ home, and in turn met with the Normans and Mr. Payne to discuss the Normans’ claim. On May 29, 2013, State Farm contacted Mrs. Norman and confirmed that it was completing its estimate of repairs for known items, but would keep the claim open for any unknown items. State Farm also requested copies of receipts referred to in the proof of loss. On May 31, 2013, State Farm informed the Normans that it declined to accept the entire proof of loss, but sent the Normans $85,574.43 (the “May 2013 payment”) as compensation for “covered damages as outlined in the enclosed building estimate and contents inventory.”
The Normans filed a claim alleging, among other counts, breach of the implied covenant of good faith and fair dealing and violation of Colo. Rev. Stat. § 10–3–1115 and § 10–3–1116. State Farm moved for summary judgment with respect to the both Normans’ common law bad faith claim and their statutory claim.
Under Colorado common law, a “special duty is imposed upon an insurer to deal in good faith with an insured.” To show bad faith in a first-party claim, like this one, the insured must prove (1) that the insurer acted “unreasonably under the circumstances” and (2) that “the insurer either knowingly or recklessly disregarded the validity of the insured’s claim.” Under common law bad faith principles, Colorado courts traditionally find that it is reasonable for an insurer to challenge claims that are “fairly debatable.” However, “fair debatability is not a threshold inquiry that is outcome determinative as a matter of law, nor is it both the beginning and the end of the analysis in a bad faith case.”
An insurer’s claims handling decisions “must be evaluated based on the information before the insurer at the time of that decision,” and is ordinarily a question of fact for the jury. In Colorado, the Unfair Claims Settlement Practices Act (“UCSPA”), Colo. Rev. Stat. § 10–3–1104(1)(h) is designed to regulate the conduct of the insurance industry and, while it does not establish a standard of care or actionable tort, it may be used as valid, but not conclusive, evidence of industry standards.
The Normans claimed that State Farm’s conduct was unreasonable in two relevant respects. First, the Normans claim that State Farm “denied and/or delayed investigating and paying the full damages that were present at the inception of the claim in July 2012. The second aspect of the Normans’ common law bad faith claim was State Farm’s refusal to pay SJR’s invoice for its inspection and testing of the Normans’ home.
State Farm argued that it reasonably evaluated the Normans’ claim, timely making the first payment and, upon receipt of further information from the Normans, timely made additional inspections and payments. The insurer argued that any delay in making the May 2013 payment was attributable to the actions of the Normans and their public adjuster. The Normans responded that, regardless of whether a public adjuster intervened, State Farm was obligated to conduct a reasonable inspection and prepare a fair and accurate estimate, but failed to do so.
The court rejected any argument that an insured must retain its own adjuster in order to secure the complete payment of a claim. Because an insured is not required to retain its own adjuster, a reasonable juror could also conclude that it is unreasonable for an insurer to compel an insured to hire an adjuster to recover amounts due under a policy by offering less than what is ultimately recovered. Further, the court found that there was evidence that State Farm’s additional inspections should not or could not have been conducted earlier in the claims handling process. Because the Normans’ home was in substantially the same condition in July 2012 as it was in April 2013, engineering and industrial hygienist inspections conducted earlier in the claims handling process would have revealed the same information upon which State Farm based its May 2013 payment, which in turn could have led to an earlier payment of the additional $85,574.43. Moreover, the court found that there was an issue of material fact vis-à-vis State Farm’s argument that the Normans failed to timely provide to State Farm documents it requested or a scope of repairs. Further, the court found that a reasonable juror could find that State Farm’s failure to conduct a reasonable investigation caused the Normans to incur the expense of retaining SJR and, as a result, that State Farm's decision not to pay the SJR invoice was made in bad faith.
With respect to whether State Farm knowingly or recklessly disregarded the validity of the Normans’ claim, the court found that, among other evidence, as early as December 17, 2012, State Farm knew that SJR also recommended extensive rehabilitation and cleaning of the home. As such, the court found that there was sufficient evidence for a reasonable juror to find that State Farm was aware of or recklessly disregarded the possibility that the Normans’ claim was not entirely satisfied by the July/August 2012 payment.
Moving to the Normans’ statutory claim, the court noted that the burden of proof is “less onerous” on plaintiffs compared to the common law claim. Because the statutory claim appeared to be based on the same aspects of State Farm’s conduct that were held to constitute a plausible claim for common law bad faith, the court rejected State Farm’s motion as to the statutory claim as well.
Finally, the court rejected State Farm’s argument that an expert would be required to determine the reasonableness of an insurer’s conduct. The failure to reasonably investigate the full extent of the damage to the Normans’ home was held to be within the common understanding of an ordinary juror. Further, the Colorado UCSPA would serve to provide relevant guidance concerning the industry standards applicable to the dispute.
