The Colorado Supreme Court has provided some much-needed certainty as to the statute of limitations period for statutory bad faith claims. Chief Justice Nancy Rice, the author of the court’s May 29, 2018, opinion in Rooftop Restoration, Inc. v. American Family Mutual Insurance Company, determined the one-year statute of limitations reserved for penalty-type statutes to be inapplicable to statutory bad faith claims made against insurance carriers.
A homeowner experienced hail damage to the roof of her house, which was insured by American Family. The insurance carrier and insured disagreed about the cost to repair the hail damage, leading the insured to assign any potential claims against the carrier to the insured’s roofing contractor, Rooftop Restoration. A lawsuit against American Family for breach of contract and unreasonable delay or denial of insurance benefits pursuant to section 10-3-1116(1) C.R.S. followed. American Family moved to dismiss the statutory bad faith claim as barred by a one-year statute of limitations. Recognizing that the limitations period was an open question of law, the court certified it for consideration to the Supreme Court.
As an initial matter, the Colorado Legislature regulates the claims-handling practices of insurance carriers by providing insureds with a private right of action against their insurer. Insurance carriers may not unreasonably delay or deny payment of a claim for benefits owed to or on behalf of any first-party claimant. Should a claimant be aggrieved pursuant to section 10-3-1115, then she is entitled to bring a claim and recover reasonable attorneys’ fees and court costs and two times the covered benefit. C.R.S. § 10-3-1116(1).
The bad faith statute previously lacked any explicit direction from the Legislature as to which limitations period should apply. Cf. Gargano v. Owners Ins. Co., No. 12-cv-01109-CMA—BNB, 2014 WL 1032303, at 3 (D. Colo. Mar. 18, 2014), aff'd 623 F. App’x 921 (10th Cir. 2015) (holding that the two-year limitation applied to both bad faith breach of an insurance contract claims and statutory bad faith claims); Mascarenas v. Am. Family Mut. Ins. Co., No. 14-cv-02799-KLM, 2015 WL 8303604, at 8 (D. Colo. Dec. 8, 2015) (explaining that statutory bad faith claims are subject to a one-year statute of limitations because such claims are penal in nature, and do not contemplate an award of actual damages).
Insurance carriers championed a one-year limitations period, which in Colorado applies to "all actions for any penalty or forfeiture of any penal statutes." C.R.S. § 13-80-103(1)(d). Thus, the query before the Supreme Court turned on its determination as to whether section 10-3-1116 amounted to a penalty.
American Family urged the Colorado Supreme Court to apply the judicially created Kruse test in making its inquiry. Pursuant to Kruse, a statute is penal if (1) the statute asserted a new and distinct cause of action, (2) the claim would allow recovery without proof of actual damages and (3) the claim would allow an award in excess of actual damages. Kruse v. McKenna, 178 P.3d 1198, 1201 (Colo. 2008). The court declined to follow Kruse in this instance, abrogating the test when the legislative intent is “clear” that a particular cause of action is or is not governed by a certain limitations period.
Quickly disposing of Kruse, the court turned to a purely textual analysis of the statutes. First, the court observed that the term “penalty” is defined as punishment imposed on a wrongdoer − a quality the bad faith statute lacks because Colorado does not directly impose a fine on the insurer acting in contravention of the law. Justice Rice then expanded her search into the broader statutory landscape by examining the interplay between the statute of limitations for penalties, the bad faith statute and the accrual statute for penalties. The accrual statute provides that a claim for penalties accrues for limitations purposes when the determination of overpayment or delinquency, for which a penalty may be assessed, is no longer subject to appeal. C.R.S. § 13-80-108(9).
The court observed that in accordance with section 10-3-1116(1), a statutory bad faith action can never result in a determination of overpayment or delinquency. Thus, the court found that if the bad faith statute is a penalty, the cause would never accrue under the statute, which the court deemed an impossible result because it would render the statute of limitations meaningless. Thus, the court held that the bad faith statute is not a penalty, and therefore not subject to the one-year statute of limitations.
This decision by the Colorado Supreme Court and another decision issued the same day in American Family Mutual Insurance Co. v. Barriga, continue the Colorado line of decisions interpreting the language of C.R.S. §§ 10-3-1115 and 10-3-1116 in favor of insureds.