Late last year, Colorado’s appeals court determined that insurers have a good faith duty to communicate– not only with the insured, but also with anyone it was reasonably aware legitimately needed information pertaining to the handling of an insured’s claim.

In Dunn v. Am. Family Ins., 251 P.3d 1232, 1238 (Colo. App. 2010), the insureds’ home flooded with sewage and water, and mold resulted. After having to vacate the home, the insureds’ pipes froze and additional damages occurred. The insureds alleged that their contractor repeatedly attempted to communicate with American Family Insurance regarding potential coverage for remediation of water and mold damage. The insureds also claimed that despite repeated efforts, neither they nor their contractor were able to obtain American Family’s confirmation that certain repairs the contractor considered necessary were covered under their homeowners policy.

During the contractor’s deposition, he explained that, “without an assurance from either defendant or plaintiffs that one would pay if the other did not, he was hesitant to go forward with the work and made little progress in cleaning up the mold.” Eventually, due to this lack of progress, the insureds retained another contractor, causing further delays in the mold remediation. The insureds claimed that “this delay permitted the mold contamination to worsen and spread, causing more extensive damage to their home and adverse consequences for their health.”

The lower district court improperly granted summary judgment in favor of American Family, finding that the insureds’ claims related to communication did not state a claim for violation of any good faith duty.

On appeal, the Court considered this issue of first impression. The Colorado Court of Appeal noted that bad faith breach of an insurance contract encompasses the insurer’s entire course of conduct, and that Colorado’s Fair Claims Practices Act (C.R.S. § 10–3–1104(1)(h)(II), (V)) declares that failure to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies is an unfair or deceptive trade practice.

The Court then clarified the scope of people and entities with whom an insurer has a good faith duty to communicate. The Court stated:

The need for prompt communication and investigation is obvious: besides the absence of peace of mind, the untimely adjustment of a claim exposes a claimant to additional loss of property. Thus, we conclude that defendant had a duty to promptly and effectively communicate with anyone it was reasonably aware had or legitimately needed information pertaining to the handling of plaintiffs’ claim.

This opinion is particularly helpful to policyholders who select their own contractor, rather than a contractor on the insurer’s Preferred Service Provider (“PSP”) list. Often when a policyholder selects a contractor not on the insurer’s PSP list, the insured or the insured’s public adjuster is responsible for coordinating timing of work and payment issues. For larger commercial projects, contractors usually won’t begin work unless coverage is confirmed or partial payment is received upfront. This opinion provides policyholders additional leverage when the insurer fails to communicate with the insured, the contractor, and all other entities that legitimately need information pertaining to the handling of an insured’s claim.