It's one of the most frustrating situations that a policyholder can experience: their insurer has stepped forward to cover at least a part of a claim, but then communication breaks down. The insurer fails to respond promptly to inquiries from the policyholder and fails to coordinate with the necessary third parties who are attempting to resolve the claim. The policyholder is kept in a state of limbo, wondering whether, and to what extent, the insurer will cover the claim.
Fortunately for policyholders who find themselves in this situation, a recent Colorado Court of Appeals decision clarifies that insurance companies have a duty to communicate effectively and promptly in the course of investigating and handling a claim.
In Dunn v. American Family Insurance, Case No. 09CA2173 (Colo. Ct. App. Nov. 24, 2010), homeowners Michael and Alissa Dunn tendered a claim to their insurance company to remedy property damage caused by a sewer and water backup that flooded their basement. Although the insurer agreed to pay for certain repair costs, the flooding problem went from bad to worse for the homeowners.
The first contractor failed to remedy the problem, and black mold was subsequently discovered. After the insurer hired another contractor to address the mold, communication broke down. Despite the homeowners' repeated efforts to get an answer, the insurer failed to confirm whether certain recommended repairs would be covered under their policy. As a result, the contractor was hesitant to remedy the mold problem, and eventually the homeowners had to retain another contractor to finish the job. In total, the homeowners went through four contractors to remedy the problem, as mold spread throughout their home and caused extensive damage.
The homeowners eventually filed a lawsuit, alleging that the insurer breached its duty of good faith and fair dealing by, among other things, failing to communicate promptly and effectively with them and the contractors hired to remedy the damage.
The Colorado Court of Appeals confirmed that an insurer may be liable for bad faith by failing to communicate with its insured:
"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."
The lesson from Dunn v. American Family Insurance is clear: an insurer must always communicate effectively and promptly with its insured as well as other necessary parties playing a role in responding to the claim. The duty of prompt and effective communication does not stop when the insurer starts paying a claim. Rather, it is a duty imposed by law that permeates the policyholder-insurer relationship throughout the entire claims-handling process. Your insurer should be talking to you, and the Dunn decision makes this the law.