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Ballow v. PHICO Ins. Co.

Supreme Court of Colorado

November 15, 1993

Edward BALLOW, D.P.M.; Foot Associates, P.C.; Mark P. Berland, D.O.; Richard N. Bernhardt, M.D., Richard N. Bernhardt, M.D., P.C.; Leonard D. Bernstein, M.D., the OB/GYN Associates, P.C.; J. Tashof Bernton, M.D.; J. Tashof Bernton, M.D., P.C.; Roland J. Brandt, D.O.; High Country Orthopedic Associates of Colorado Springs, P.C.; Robert A. Brumfield, M.D.; Rustic Hills Orthopaedic Association, P.C.; W.M. Campbell, M.D.; Southern Colorado OB/GYN, P.C.; Joseph Carpenter, M.D.; Joseph Carpenter, M.D., P.C.; John Chisholm, M.D.; Denver Obstetrical and Gynecological Associates, P.C.; Harvey M. Cohen, M.D.; Cohen and Conner Professional Corporation; Wayne Conner, M.D.; Gayle P. Crawford, M.D.; Drs. Ross and Crawford, P.C.; David L. Crosson, M.D.; Pueblo Orthopedic Professional Corporation; Jacqueline M. Demolin, M.D.; Goodman OB/GYN Associates, P.C.; Larry M. Dewell, M.D.; Beverly E. (Jessup) Donnelly, M.D.; Fort Collins Women's Clinic, P.C.; Terry A. Downing, M.D.; Terry A. Downing, M.D., P.C.; John H. Drabing, D.O.; Thomas F. Driver, M.D.; Paul S. Drohan, M.D.; Paul S. Drohan, M.D., P.C.; Edward Duerksen, M.D.; Edward Duerksen, M.D., P.C.; Samuel C. Duhon, Jr., M.D.; Samuel C. Duhon, Jr., M.D., P.C.; Edward L. Ehrichs, M.D.; Reich & Ehrichs, P.C.; Frederick C. Feiler, M.D.; Glen C. Ferguson, D.O.; Glen C. Ferguson, D.O., P.C.; Glenn T. Foust, III, M.D.; Denver-Evergreen OB/GYN Group, P.C.; Donald P. Gazibara, M.D.; W.B. Goddard, M.D.; Woodridge Women's Clinic, P.C.; Reid A. Goodman, M.D.; Stanley N. Goodman, M.D.; Ronald A. Green, D.P.M.; Michael L. Hall, M.D.; Linder and Hall OB/GYN Associates, P.C.; Gordon C. Ham, M.D.; Gordon C. Ham, M.D., P.C.; Richard G. Hamill, M.D.; David Harris, M.D.; David Harris, M.D., P.C.; Lowell N. Harris, M.D.; James F. Hartman, M.D.; James F. Hartman, M.D., P.C.; Duval E. Harvey, M.D.; Robert W. Hendee, Jr., M.D.; Pediatric Neurosurgery, P.C.; Raymond W. Henry, M.D.; David F. Holz, D.P.M.; Allied Foot and Ankle Clinics of Colorado, P.C.; Brett S. Hulet, M.D.; Herbert L. Jacobs, M.D.; Valerie A. Jacobs, M.D.; David Kessel, M.D., P.C.; Arvada Pediatric Associates, P.C.; Ransy L. Jeffrey, M.D.; Johnny E. Johnson, Jr., M.D.; Johnny E. Johnson, Jr., M.D., P.C.; Elisabeth Kandel, M.D.; Family Medicine Associates; Ralph L. Kelley, M.D.; Corwin Orthopedic Group, P.C.; Kelvin F. Kesler, M.D.; David Kessel, M.D.; Thomas E. Kilfoyle, M.D.; Edward Kirschman, M.D.; Michelson, Losasso, Kirschman, M.D., P.C.; Joshua J. Kopelman, M.D.; Eugene E. Lalli, D.O.; Eugene E. Lalli, D.O. & Associates, P.C.; David Leistikow, M.D.; Edward Lord, M.D.; Leonard J. Losasso, M.D.; Stephen L. Ludwig, M.D.; Gary A. Ludwin, M.D.; Eva Martin, M.D.; Thomas Tuttle McCarthy, D.O.; Edward Larry McCleary, M.D.; James W. Meeuwsen, M.D.; M.H. Melmed, M.D.; M.H. Melmed, M.D., P.C.; T. Robert Mestas, M.D.; Gary A. Meyer, D.O.; Abraham K. Michelson, M.D.; David J. Muller, M.D.; Martin E. Nowick, M.D.; Martin E. Nowick, M.D., P.C.; E.P. O'Loughlin, M.D.; Robert P. Paunovich, D.O.; Mark W. Pfenninger, M.D.; Mark W. Pfenninger, M.D., P.C.; Peter Press, M.D.; Anesthesia Associates, P.C.; Alan M. Rapaport, M.D.; Marshall P. Reich, M.D.; Bruce C. Richards, M.D.; Ira Rifkin, M.D.; Ira Rifkin, M.D., P.C.; Michael H. Ross, M.D.; Nancy A. Rudd-McCoy, M.D.; Keith Sadler, M.D.; Keith Sadler, M.D., P.C.; Ron Schneebaum, M.D.; Joseph M. Sherman, M.D.; Lloyd V. Shields, M.D.; Joseph Shroyer, M.D.; Murray M. Snyder, D.O.; Contemporary OB/GYN, P.C.; Stanley H. Solomon, D.P.M.; Lawrence Spivack, M.D.; Colorado Eye Specialists, P.C.; Stephen L. Stoll, M.D.; Phillip Tannenbaum, M.D.; Phillip Tannenbaum, M.D., P.C.; Richard C. Taylor, M.D.; Arapahoe Bone and Joint Surgeons, P.C.; Dwayne Thomason, D.O.; Yona Victor, M.D.; Joan Weiss, M.D.; Robert Weiss, D.O.; Robert Weiss, D.O., P.C.; Max L. Weissman, M.D.; Russell J. Weister, M.D.; Harry Wherry, M.D.; Patrick Wherry, M.D.; Kevin Whitaker, M.D.; Derek Williams, M.D.; Murray S. Willis, M.D.; Murray S. Willis, M.D., P.C.; Mark R. Wolf, M.D.; S. Steve Yasazawa, M.D.; S. Steve Yasuzawa, M.D., P.C.; and John R. Young, M.D., Petitioners,
PHICO INSURANCE COMPANY, a Pennsylvania corporation, Respondent.

Rehearing Denied Dec. 6, 1993.

Page 1356

McDermott, Hansen & Reilly, Gerald P. McDermott, William J. Hansen, Denver, for petitioners.

Wood, Ris & Hames, P.C., F. Michael Ludwig, Mary E. Kanan, Mary E. Gibbons, Denver, for respondent.

Hall & Evans, Alan Epstein, Denver, for amicus curiae the American Ins. Ass'n.

Catherine Sparkman, Denver, Richard E. Barnsback, Phillip E. Stano, David M. Leifer, Washington, DC, for amicus curiae Blue Cross and Blue Shield of Colorado and American Council Life Ins.

Gale A. Norton, Atty. Gen., Raymond T. Slaughter, Chief Deputy Atty. Gen., Timothy M. Tymkovich, Sol. Gen., Merrill Shields, Deputy Atty. Gen., Richard Djokic, First Asst. Atty. Gen., Robert M. Howard, Senior Asst. Atty. Gen., Regulatory Law Section, Denver, for amicus curiae Colorado Com'r of Ins.

Page 1357


Justice MULLARKEY Justice.

We granted certiorari in this case to address several issues arising out of a medical malpractice insurance carrier's withdrawal from the Colorado market. The trial court, in a 294-page order, ruled in favor of the petitioners who are the doctors formerly insured by the medical malpractice insurance carrier. It held that the insurance carrier breached its contract with the doctors, engaged in fraud and negligent misrepresentation, and acted in bad faith. The court of appeals, in Ballow v. PHICO Insurance Co.,841 P.2d 344 (Colo.App.1992), reversed, holding that the trial court erred in finding that the insurer breached its contract with the doctors, and that it engaged in fraud, negligent misrepresentation, and bad faith conduct. We granted certiorari and, for the reasons set forth below, we reverse.


The petitioners are 105 medical doctors, doctors of osteopathy, and doctors of podiatric medicine practicing in the State of Colorado (collectively referred to in this opinion as doctors). The respondent, PHICO Insurance Co. (PHICO), is a medical malpractice insurance carrier owned by the Hospital Association of Pennsylvania (HAP).

PHICO was created in 1976 as a Pennsylvania malpractice insurer specializing in hospital coverage. In 1978, HAP decided to expand its programs and operations into states other than Pennsylvania, and to broaden its customer base to independent physicians. [1] PHICO began marketing a claims-made policy in Colorado in the spring of 1981 and sold its first independent physician policy here on February 1, 1982.

To properly approach this case, a basic understanding of the concepts relevant to claims-made insurance coverage is required. There are presently two basic types of professional liability insurance policies: claims-made and occurrence. See Regulation 5-1-8, 3 C.C.R. 702-5 (1992). A pure claims-made policy provides coverage for claims made during the policy period, regardless of when the events out of which the claim arose occurred. [2] 7A J. Appleman, Insurance Law and Practice § 4503, at 96 (Supp.1992). In contrast, an occurrence policy provides coverage for all "occurrences" which take place during a policy period, regardless of when the claim is made. Id.

Insureds who purchase claims-made policies can protect themselves against claims made after the policy terminates in one of two ways. One option is to obtain "prior acts" coverage. Under this option, the new insurer charges an additional premium to cover the insured for acts occurring before the inception date of the new policy. Insurers need not offer this coverage. Another option is to purchase extended reporting period, or "tail," coverage. See Regulation 5-1-8, 3 C.C.R. 702-5 (1992). This coverage, which is usually available, [3] is purchased from the first insurer and covers future claims made for incidents occurring during the time of the claims-made coverage. In effect, such coverage turns claims-made coverage into occurrence coverage. [4]

Page 1358

When PHICO entered the Colorado market, most physicians were insured under occurrence policies and were reluctant to switch to claims-made policies. This reluctance stemmed, in part, from uncertainty concerning the cost of tail coverage. Many doctors testified that they feared the cost of tail coverage would be "unpredictably expensive," and that "the insurance company would be able to create any number out of the air and say this is [what it's] going to cost you to get out of the company." To allay the doctors' fears concerning the unpredictable cost of tail coverage, PHICO made numerous guarantees in its marketing. For example, Mr. Rodger Hasty, PHICO's Regional Manager in Denver, wrote to a prospective insured on October 12, 1982, repeatedly emphasizing that PHICO offered a percentage "cap" on both claims-made policy and tail policy premiums. PHICO sent prospective insureds a letter dated April 25, 1983, containing similar assurances:

We have eliminated all of the "unknowns" in the purchase of a "tail" policy. Its cost is now as predictable as the occurrence rate. Each policy will contain an endorsement which guarantees the cost of the basic claims-made coverage, as a percentage of our occurrence rate, and the cost of a tail policy, as a percentage of our mature (4th year) claims-made rate in effect at the commencement of your current claims-made policy.

A further example can be found in a letter dated June 8, 1983, from a PHICO agent to a physicians' group. This letter promised that "[t]he tail charges are guaranteed in the policy and are in no way subject to underwriting whims."

An endorsement to PHICO's early policies provided that tail coverage would be available for 79 percent of the mature rate premium after one year of coverage with PHICO, 112 percent of the mature rate premium after two years of coverage, and 118 percent after the third and every subsequent year of coverage. Despite previous assurances that the percentage rates on tail policy premiums were "capped," PHICO raised these rates on October 1, 1984. The new percentages, listed as an endorsement to the policy, were 89 percent of the mature premium rate after one year, 134 percent after the second year, and 140 percent after the third and every subsequent year.

This new endorsement also provided that "[t]ail policy premiums are percentages of the fourth-year premium in effect at the inception of the last policy period under the claims-made policy." As part of its April 1, 1986 premium increase, however, PHICO changed the date from which the tail premium was determined from the premium in effect at the beginning of the last policy year, to the premium in effect at the inception of the tail policy.

Changes in the terms of PHICO's tail policy coincided with changes occurring in PHICO's business philosophy. PHICO experienced its first net loss in 1984, amounting to $20 million before discounting. As of November 1, 1984, PHICO ceased accepting new individual physician business altogether. In correspondence sent to policyholders in 1985, PHICO claimed that it took this action to ensure that PHICO would remain strong for its present insureds. In fact, PHICO had altered its business plan, and had shifted its emphasis from individual doctors to institutional insureds, i.e., hospitals, and had as one of its 1985 business plan goals the reduction of its individual physician policy count. This goal included a timetable: 190 fewer individual physician policies by March 31, 1985; 310 by June 30; 810 by September 30; and 1,069 by the end of the year. The next year's business plan also included a timetable for reducing the individual physician policy count: 50 fewer individual physician policies by January 31, 1986; 100 by the end of February; 175 through March; 250 through April; 325 through May; 400 through June; 575 through July; 650 through August; 725 through September; 800 through October; 875 through November; and 1000 by year's end.

As the trial court noted, while PHICO's financial position allegedly worsened, its representations of longevity and stability became "almost strident" in their frequency and intensity. The court of appeals likewise found that PHICO kept its aggressive campaign for new business intact, despite radical

Page 1359

changes in PHICO's business philosophy and indications that PHICO's continued presence in Colorado was questionable. Ballow, 841 P.2d at 349.

The actual decision to nonrenew independent physicians was made tentatively in a President's Committee meeting on June 12, 1986. The minutes of that meeting state that no announcement of the decision, even to staff, would be made until an official statement had been drafted and approved by the President's Committee. The decision was finalized in a follow-up President's Committee meeting on June 18, and presented to and approved by the Board of Directors on June 27 as part of the business plan.

PHICO sent a letter dated July 21, 1986 to the Colorado doctors, informing them about its decision to withdraw from the Colorado market. However, most of the doctors had renewal dates in July or earlier. Therefore, when they were informed about the withdrawal, the majority of the doctors had already renewed their policies requiring new, higher tail premium rates. If the doctors wanted to purchase tail coverage, they had no choice but to purchase a PHICO policy at these higher rates. COPIC, the only viable malpractice carrier in the market, did not offer "prior acts" coverage, and the Hartford Insurance Company had announced its decision to withdraw from the Colorado market on June 3, 1986.

In 1987, the doctors filed suit against PHICO, alleging breach of contract, fraud and negligent misrepresentation, bad faith, and interference with contract and prospective business opportunity. After a lengthy bench trial, the trial court entered judgment in favor of the doctors on the breach of contract, fraud and negligent misrepresentation, and bad faith claims. It also awarded punitive damages to 29 of the 105 doctors. PHICO appealed, and the court of appeals reversed, holding that PHICO did not breach its insurance contracts with the doctors when it changed the terms of its tail policy, and that the doctors' other claims failed mainly for that reason. We granted certiorari to review the court of appeals' decision, and we now reverse.


The doctors initially contend that the court of appeals erred in its construction of the insurance contracts they had with PHICO. According to the doctors, the tail endorsement to the claims-made policy could not be modified unilaterally by PHICO since the policy was continuous in nature. PHICO, on the other hand, argues that the policy was a one-year term policy, freely modifiable on renewal. Finding the policy to be ambiguous with regard to duration, the trial court construed the policy in favor of the doctors. On appeal, the court of appeals held that the policy was unambiguous as a matter of law and covered only a one-year period. We disagree.

Unless there is an ambiguity in the terms of a policy, a court will enforce the insurance contract as written. Republic Ins. Co. v. Jernigan,753 P.2d 229, 232 (Colo.1988). However, if a contractual provision is ambiguous, it is construed against the insurer who drafted the policy and in favor of the insured. Chacon v. American Family Mut. Ins. Co.,788 P.2d 748, 750 (Colo.1990). In order to determine whether an ambiguity exists, a court must begin with the language of the policy, construed in light of the generally accepted meaning of the words employed and with reference to all provisions of the document. Wota v. Blue Cross & Blue Shield,831 P.2d 1307, 1309 (Colo.1992). We treat a policy provision as ambiguous when it is reasonably susceptible to more than one meaning. Northern Ins. Co. v. Ekstrom,784 P.2d 320, 323 (Colo.1989).

The key to determining the intended duration of this contract lies in construing the term "policy period," as used in the PHICO policy. The policy itself defines the term to mean "the policy period shown on the Declarations," and the declarations page contains the phrase "policy period," followed by a one-year time period. PHICO argues that this reference to a one-year period is dispositive and conclusively proves that each policy has a term of one year.

PHICO's argument ignores the fact that a single provision of an insurance contract cannot be read in isolation, but all of the provisions

Page 1360

must be considered as a whole. Simon v. Shelter Gen. Ins. Co.,842 P.2d 236, 239 (Colo.1992). Contrary to PHICO's assertions, an examination of the entire contract reveals that the term "policy period" is ambiguous because it is reasonably susceptible to more than one meaning. See Ekstrom, 784 P.2d at 323. While "policy period" may refer to a one-year period on the declarations sheet of the policy, PHICO also uses the term to refer to multiple-year periods in other parts of the policy.

Significantly, PHICO uses the term "policy period" to refer to multiple years of coverage in its tail policy endorsement, the terms of which are at issue in this case. For example, contrary to the declarations sheet, the endorsement which PHICO issued in 1982 does not limit the term "policy period" to a single policy year. Rather, the endorsement states that "extended reporting period" or tail coverage "extends indefinitely the period for reporting claims arising from medical incidents during the policy period." (Emphasis added). It then goes on to explain that tail premiums are "percentages of mature claims-made [4th year] premiums and increase each policy year for 3 years and then remain constant." (Emphasis added). If the term "policy period" were synonymous with "one year," then there would have been no need for the endorsement to distinguish between "policy period" and "policy year." This distinction only makes sense if PHICO intended for the phrase "policy period" in this context to refer to multiple policy years. [5]

The language PHICO uses throughout its tail policy endorsement further supports the view that the method of pricing tail coverage contained therein would continue beyond a single policy year. The endorsement issued by PHICO in 1982 is illustrative. In this endorsement, PHICO states:

Extended reporting form ("tail") premiums are percentages of MATURE CLAIMS-MADE [4th year] premiums and increase each policy year for 3 years and then remain constant. These percentages follow:

      Policy year      Tail Premium
   First Year               79%
   Second Year             112%
   Third Year              118%
   Fourth Year (etc.)      118%

If PHICO had intended to limit the terms of the tail endorsement to the policy year shown on the declarations page, it could have done so. [6] However, by using the word "constant," and addressing the cost of tail coverage more than one year into the future, PHICO implied that the terms of the tail coverage offered would extend beyond a single policy year.

This conflict in the contract language is not confined to the tail policy endorsement, but can be found throughout the PHICO policy. For example, Form # M4-CO (rev. 10/83) issued by PHICO refers to calculation of the tail premium "based on the number of years a policy is in force." Here, "policy" is used in the singular, but refers to a period of "years." As the trial court noted in its order, this phrase belies PHICO's assertion that the policy was a one-year term policy.

Under the principles of contract interpretation outlined above, we believe that the duration of the PHICO policy is ambiguous. [7]

Page 1361

PHICO used the term "policy period" in its policy to refer to two different time periods. The declarations page of the contract defines "policy period" as a one-year period, but the language used by PHICO in other portions of the policy and in the tail policy endorsement contemplates contractual obligations extending beyond a one-year period. Given this conflict, the trial court did not err in construing the policy against PHICO and in favor of the insured doctors. [8] See Simon, 842 P.2d at 242. When the policy is interpreted in this light, the trial court correctly determined that PHICO was bound by its promise to provide tail coverage at the rate initially contracted for, and breached this contract by later unilaterally changing the percentage and method by which the cost of tail coverage was calculated.


The next question before this court is whether the trial court erred in finding that PHICO engaged in fraud, negligent misrepresentation, and bad faith conduct with regard to its nonrenewal of its independent physician insureds in Colorado. PHICO contends that the fraud and negligent misrepresentation claims were legally insufficient, and that bad faith is limited to the context of insurance claims. We disagree with both of these contentions.

In order to prove fraud, a plaintiff must establish: (1) a false representation of a material existing fact; (2) knowledge on the part of the one making the representation that it is false; (3) ignorance on the part of the one to whom the representation is made of the falsity; (4) that the representation was made with the intention that it be acted upon; and (5) damage caused by the representation. Kinsey v. Preeson,746 P.2d 542, 550 (Colo.1987). Similarly, the elements of fraudulent concealment are: (1) the concealment of a material existing fact that in equity and good conscience should be disclosed; (2) knowledge on the part of the party against whom the claim is asserted that such a fact is being concealed; (3) ignorance of that fact on the part of the one from whom the fact is concealed; (4) the intention that the concealment be acted upon; and (5) action on the concealment resulting in damages. Ackmann v. Merchants Mortgage & Trust Corp.,645 P.2d 7, 13 (Colo.1982).

The trial court found that PHICO made misrepresentations and failed to disclose information falling into four categories: (1) misrepresentations about the longevity and stability of the company; (2) misrepresentations about the tail premium charges; (3) misrepresentations about the mature premium rate; and (4) misrepresentations about the rates being charged by PHICO. [9]

Page 1362

Relying on its conclusions regarding the insurance contract, the court of appeals held that the doctors' claims based on misrepresentations of the tail premium charges, the mature premium rate, and the rates being charged by PHICO failed as a matter of law. The court of appeals stated that these misrepresentations were not actionable because a new contract was entered into each time a doctor renewed a policy, and that each doctor agreed to these changed terms upon renewal. Ballow, 841 P.2d at 351. As we held above, the court of appeals erred in its interpretation of the contract. Therefore, the insurance contract does not preclude these claims as a matter of law.

With regard to PHICO's representations about its stability and longevity, the court of appeals held that these were statements of opinion relating to future events, and as such, were not actionable. [10]Id. This conclusion, however, overlooks the history of the misstatements made by PHICO.

By October 1984, PHICO had established a policy of, and a timetable for, eliminating its independent physician book of business nationwide. At this same time, however, PHICO continually reassured the doctors of its commitment to Colorado. In an advertisement published in the Colorado Insurance News in October 1984, for example, PHICO described itself as a company "that will stand by you in the long run," and which was "in the market to stay." PHICO also specifically and individually reassured twenty-nine of the doctors that it intended to remain in Colorado even as the decision to nonrenew independent physicians was being finalized. One physician in particular renewed his policy on July 1, 1986, after receiving "very emphatic" assurance in early June that PHICO had no intention of leaving the state. Had he not renewed his policy, the cost of tail coverage would have been $26,484. However, after renewing in 1986, his tail premium increased to $71,585.

Merely expressing an opinion in the nature of a prophecy as to the happening of a future event is not actionable. Leece v. Griffin,150 Colo. 132, 135, 371 P.2d 264, 265 (1962). However, "[a] promise concerning a future act, when coupled with a present intention not to fulfill the promise, can be a misrepresentation which is actionable as fraud." Kinsey, 746 P.2d at 551 (quoting Stalos v. Booras,34 Colo.App. 252, 256, 528 P.2d 254, 256 (1974)).

In this case, PHICO was not simply prophesying that it would be in Colorado, come what may. Instead, PHICO marketed itself saying that it intended to stay in Colorado for the long haul. While such statements may have reflected PHICO's true intent when it began doing business in Colorado, PHICO changed that intent over time due to perceived problems with the independent physician program. Thus, by October 1984, PHICO's commitment to Colorado may have existed with respect to certain sectors of the medical malpractice market (such as the hospital market), but it did not exist with regard to the independent physician sector. The trial court's findings and conclusions in this regard are not contrary to the evidence.


The third issue before the court is whether PHICO engaged in bad faith insurance practices leading up to and culminating in the nonrenewal of all of the independent physicians insured by PHICO. PHICO argues that it does not have a duty of good faith toward its insureds in the nonrenewal or negotiation context. We disagree.

In Farmers Group, Inc. v. Trimble,691 P.2d 1138 (Colo.1984), we recognized a claim for relief based on insurance bad faith in the context of a third-party insurance claim. Tort liability in that context

Page 1363

is grounded upon the special nature of the insurance contract and the relationship which exists between the insurer and the insured. The motivation of the insured when entering into an insurance contract differs from that of parties entering into an ordinary commercial contract. By obtaining insurance, an insured seeks to obtain some measure of financial security and protection against calamity, rather than to secure commercial advantage.

Id. at 1141. We held there that the applicable legal standard was whether the conduct of the insurer was reasonable.

In Travelers Insurance Co. v. Savio,706 P.2d 1258 (Colo.1985), we extended this claim for relief to a first-party insurance claim. In that context, we stated that the plaintiff must also establish either knowledge on the part of the insurer that the conduct is unreasonable, or a reckless disregard for the fact that the conduct is unreasonable. Id. at 1276.

This case raises the question of whether there is a place for an insurance bad faith claim outside the scope of the insurance claims setting. PHICO argues that insurance bad faith does not apply outside the claims context. We disagree.

It is the nature of the relationship created by the insurance contract, rather than the activity involved, which determines if the duty of good faith and fair dealing exists. And, as we stated in Savio, this relationship "permeates all of the dealings of the parties." Id. at 1268 (emphasis added). Moreover, it is the policy of this state, announced in section 10-1-101, 4A C.R.S. (1987), that all persons providing insurance services to the public must "be at all times actuated by good faith in everything pertaining thereto." This duty is not limited, as PHICO argues, merely to the claims or cancellation contexts. Instead, the duty, as formulated by the General Assembly, is a broad and wide-ranging one, extending to "everything pertaining" to the provision of insurance services to the public.

As a general principle, we agree that an insurer may choose to nonrenew an insured for any reason. [11]Buell v. Security Gen. Life Ins. Co.,779 F.Supp. 1579, 1581 (D.Colo.1991), aff'd, 987 F.2d 1467 (10th Cir.), cert. denied, 510 U.S. 916, 114 S.Ct. 308, 126 L.Ed.2d 255 (1993). However, an insurer is required to act in good faith when carrying out its decision not to renew either a single insured or entire blocks of business. In this setting, we believe that good faith should be measured according to the legal standard used in the first-party claims context: unreasonable conduct and either knowledge or reckless disregard of the unreasonableness of the conduct. See Savio, 706 P.2d at 1276; Hartford Fire Ins. v. Colorado Div. of Ins.,824 P.2d 76, 80-81 (Colo.App.1991), cert. denied (Feb. 18, 1992).

It is clear that the trial court did not err in holding that PHICO breached its duty of good faith by knowingly engaging in an unreasonable pattern of conduct. [12] As in the Hartford case, PHICO enticed the doctors to purchase claims-made coverage through promises of longevity and assurances that the terms and method of calculating the premium for a tail policy would be fixed. It then undermined these promises by unilaterally changing the terms of the tail policy to discourage renewal by the doctors, and without disclosing its plan to nonrenew them. Instead, PHICO continued to reassure doctors that it had no intention of leaving the state in the several months prior to its withdrawal from the Colorado market. Rather than dealing with the doctors in good faith once it decided not to renew them, PHICO concealed its intention and actively misled the doctors to their detriment.

Page 1364


Finally, we granted certiorari to determine whether this court should address certain damages issues raised by the physicians on cross-appeal, or whether these issues should be remanded to the court of appeals. At the present time, we decline to address the damages issues raised by the physicians for several reasons. First, we lack the proper legal and factual foundation to do so. The parties were unable to fully explore these issues before this court due to briefing limitations. Moreover, we cannot fully resolve this case without also considering the numerous damages issues raised by PHICO on appeal. Since the court of appeals reversed the trial court and found in favor of PHICO, it was not necessary for the court of appeals to consider PHICO's appeal on damages. However, since our decision today upholds the trial court's judgment in favor of the physicians, PHICO's damages issues, as well as the doctors' damages issues, must be addressed.

In the interests of judicial economy, we also decline to remand this case to the court of appeals for determination of the damages issues raised by the parties. Therefore, we will decide all damages issues in a separate opinion and, prior to our decision, the parties will be directed to fully brief these issues by further order of the court.


In summary, we conclude that the court of appeals erred in holding that the duration of the PHICO policy was unambiguous. The term "policy period" is ambiguously defined and used in the policy, and should have been construed in favor of the doctors. We also conclude that PHICO fraudulently misrepresented its intentions with regard to its commitment to serving the independent physician market in Colorado, and that PHICO engaged in bad faith insurance practices under the circumstances in which it nonrenewed the independent physicians. Accordingly, we reverse the court of appeals. We retain jurisdiction over this matter, and the parties will be directed to fully brief all damages issues by subsequent order of this court.

ERICKSON, J., specially concurs in the result, and SCOTTS, J., joins in the special concurrence in the result.

Justice ERICKSON specially concurring in the result:

I specially concur in the reversal of the court of appeals, but for reasons that differ in some respects from those set forth in the majority opinion. I agree with the majority that the court of appeals erred in deciding the insurance contract was unambiguous. I would hold the insurance contracts between the physicians and PHICO Insurance Company (PHICO) were continuous contracts breached by PHICO.


A civil action was commenced by 105 "independent physicians" against PHICO for damages based on fraud, breach of contract, negligent misrepresentation, bad faith, and interference with contract and prospective business opportunities. [1]

The controversy centers on PHICO's sale and subsequent termination of a "Physicians Professional Liability Policy" that provided "claims-made" coverage to the plaintiff-physicians. [2] Upon termination of the liability policy, a doctor would have coverage for incidents occurring during the policy period but not reported as claims until after the date of termination only if he or she purchased reporting period (tail) coverage. PHICO offered

Page 1365

tail coverage based upon a percentage of the fourth-year "mature rate." [3]

The parties tried this case to the court. Following a six week trial, the trial judge entered a 294 page order on September 5, 1989, containing findings of fact, conclusions of law, and a judgment for the plaintiff-physicians. The court of appeals reversed the trial court and found for the defendant, PHICO.

We granted certiorari to review the decision of the court of appeals in Ballow v. PHICO Insurance Co.,841 P.2d 344 (Colo.App.1992).


PHICO is owned by the Hospital Association of Pennsylvania and was established in Pennsylvania in 1976 to insure Pennsylvania hospitals and physicians employed by local hospitals. Although PHICO primarily insured hospitals, in 1978 it decided to expand its business to include insuring independent physicians. In 1979, PHICO wrote its first independent physician policy in Pennsylvania. PHICO was licensed to do business in Colorado on March 25, 1980, and began marketing a policy in Colorado in the spring of 1981.

The first PHICO independent physician policy was sold in Colorado on February 1, 1982. By November 1, 1984, PHICO had ceased accepting new independent physician business but continued to write new policies for hospitals. In 1985, PHICO established a plan to reduce the number of independent physicians insured but maintained its stance that it would continue to insure the doctors already receiving coverage. Also in 1985, PHICO increased the percentage of the fourth-year mature rate required to buy a tail policy. On June 18, 1986, PHICO decided not to renew any of the independent physician business. On July 12, 1986, PHICO sent a letter to its insured independent physicians providing notice of its decision to withdraw from the Colorado market. Most of the doctors had a renewal date of July or earlier so they had already renewed when they were informed of the withdrawal and the increased cost to purchase a tail policy.


In order to determine if the insurance policy provided by PHICO to the independent physicians was breached by PHICO, it is first necessary to analyze the type of policy written by PHICO and the purpose behind this type of liability policy. I would not interpret the contract in favor of the insureds and then find a breach, as the majority does, but would address the nature of the policy and conclude that there was a purpose and intent shared by both parties and that a breach occurred. The examination of the type of policy written by PHICO yields essential insight into why this type of policy must be treated as a continuous policy.

A. Types of Medical Malpractice Coverage

As the majority points out, there are two general types of medical malpractice insurance available to individual doctors--"occurrence" and "claims-made." Generally, "[a]n 'occurrence' policy protects the policyholder from liability for any act done while the policy is in effect, whereas a 'claims-made' policy protects the holder only against claims made during the life of the policy." St. Paul Fire & Marine Ins. Co. v. Barry,438 U.S. 531, 535 n. 3, 98 S.Ct. 2923, 2926 n. 3, 57 L.Ed.2d 932 (1978). The act which triggers coverage under an occurrence policy is the act or omission itself--if the liability inducing event occurs during the policy period, the insured is indemnified regardless of when the claim is brought. Conversely, the act which determines coverage under a claims-made insurance policy is the assertion of the claim during the policy period. One type of claims-

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made policy provides coverage for claims made during the policy period no matter when the alleged act or omission occurred. [4] See Mutual Fire, Marine & Inland Ins. Co. v. Vollmer,306 Md. 243, 508 A.2d 130, 134-35 (1986) (stating that claims-made policies provide indemnity during the policy term no matter when the alleged error or omission or act of negligence occurred); Stine v. Continental Cas. Co.,419 Mich. 89, 349 N.W.2d 127, 130 (1984) (same). See also Gereboff v. Home Indem. Co.,119 R.I. 814, 383 A.2d 1024 (R.I.1978) (involving a policy written to cover all claims made during the policy period regardless of when the event giving rise to the liability claim occurred). An insurer may modify a claims-made policy and limit coverage only to a certain range of occurrences by creating a "retroactive date." All events that occur prior to the retroactive date are outside the scope of coverage even if the claim is made while the policy is in force. [5]

Some insurers offer policies that have a retroactive date identical to the beginning of the coverage with the insurer. This type of policy is a combination of claims-made and occurrence policies. This type of claims-made coverage (hybrid claims-made policy) covers negligent acts or omissions which occur and are the subject of a claim during the policy period. [6] See Stine, 349 N.W.2d at 134 (involving a policy written to cover only claims which are made and occur within the policy period).

From the standpoint of the insured, hybrid claims-made policies contain the worst characteristics of both claims-made and occurrence policies, and the best of neither. Hybrid claims-made policies provide neither the prospective protection of an occurrence policy nor the retroactive coverage of a claims-made policy with no retroactive limit. Prospective or retroactive coverage must be purchased to supplement the hybrid claims-made coverage in this case. [7] The distinction

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is critical to the analysis inasmuch as the type of coverage in this case is both occurrence and claims-made and emphasizes the essential purpose behind the coverage offered by PHICO. The insurance policies purchased by the physicians in this case were hybrid claims-made policies. [8]

B. The Rationale of Claims-Made Policies

Claims-made policies are a fairly recent development and were created primarily in response to situations in which the event or occurrence giving rise to liability is difficult to pinpoint. Vollmer, 508 A.2d at 135. Occurrence policies were inadequate instruments with which to deal with the long and open "tail" exposure presented by an extended or undefined liability-inducing event. Donald S. Malecki & Arthur L. Flitner, Commercial General Liability: Claims-made and Occurrence Forms 12 (3d ed. 1990). Claims-made policies allow underwriters to define their exposure and accurately set premiums and reserves. The accuracy is the result of the insurer's ability to limit liability to claims actually made during the term of the policy for which the premium is computed. Vollmer, 508 A.2d at 135. "As a result, the insurer is better able to predict the limits of its exposure and more accurately estimate the premium rate schedule necessary to accommodate the risk undertaken." Stine, 349 N.W.2d at 131. Hybrid claims-made policies further restrict the exposure of insurance carriers by limiting the coverage to occurrences and claims made during the policy period.

When an insured's coverage under a claims-made policy is terminated, or not renewed, the insured may purchase coverage for claims that arose during the policy period but were subsequently asserted. The subsequent coverage is called a "tail policy" or "retroactive reporting coverage" and in effect converts a claims-made policy into an occurrence policy. The tail policy provides coverage for all acts and omissions during the period of continuous coverage with the claims-made carrier, regardless of when the claim is reported in the future. [9] An alternative to tail coverage, where available, is "prior acts" coverage. A prior acts policy is essentially tail coverage offered by the subsequent carrier. [10]

C. The Rationale of Hybrid Claims-Made Policies

Hybrid claims-made policies are marketable despite their shortcomings because they reduce the insured's premiums in the first several years. Statistics show that only a small percentage of claims that arise within the policy period are reported in the first year of coverage. Therefore, the insurance companies charge lower premiums for the first year. In the second year of coverage, a hybrid claims-made policy covers all claims reported during the second year that occurred either in the first or second year. Therefore, the second-year premium is higher than the first-year premium. The third year of coverage encompasses all claims reported in the third year that occurred during the first, second, and third years. The fourth-year rate, also known as the "mature

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rate," levels out because statistics show most claims arising out of the prior years will be reported within the first four years. Such policies are attractive because the insureds realize significant premium savings in the early years. [11]

The physicians in this case purchased hybrid claims-made policies and tail options with the belief they would realize savings over several years and would be covered when they terminated their policies. The underwriters sold the hybrid claims-made and tail policies to enable them to limit their exposure and to accurately set reserves and compute premiums. The character of the policies at issue in this case shows the shared intent of both parties to enter a long-term hybrid claims-made insurance contract.

D. The Hybrid Claims-Made Policy Is Ambiguous

An insurance policy is a contract and the standard rules of contract construction apply. Republic Ins. Co. v. Jernigan,753 P.2d 229, 232 (Colo.1988). Insurance contracts are to be interpreted and read according to the terms of the policy. A contract is ambiguous only if it is reasonably and fairly susceptible of more than one meaning. Terranova v. State Farm Mut. Auto. Ins. Co.,800 P.2d 58, 60 (Colo.1990). A mere disagreement between the parties does not create ambiguity. Id. When a contract is ambiguous, extrinsic evidence may be admitted to clarify the meaning of the terms and to ascertain the parties intentions. Kuta v. Joint Dist. No. 50(J), 799 P.2d 379, 382 (Colo.1990); Pepcol Mfg. Co. v. Denver Union Corp.,687 P.2d 1310, 1314 (Colo.1984).

As the majority points out, the terms in the declaration and endorsements create a conflict and make the contract ambiguous. The declaration indicated that each year was a separate and distinct policy year, while the endorsements suggest a continuous policy. The trial court found the contract to be ambiguous:

The obvious conflict here is between the declarations of the policy, which clearly establish a one-year period of the policy, and the endorsements, which equally clearly establish a percentage rate and a method of calculation which extends into the future.

Because an insurance policy and an endorsement are considered a single instrument, Martinez v. Hawkeye-Security Insurance Co.,195 Colo. 184, 576 P.2d 1017 (1978), the policy is ambiguous as to whether the insured has one continuous policy or several year-long policies. [12]

Ambiguity in a contract should first be resolved by attempting to give effect to the intent of the parties. [13] See Martinez v. Continental Enterprises,730 P.2d 308 (Colo.1986); Pepcol Mfg. Co., 687 P.2d at 1313; Spillane v. U.S. Fidelity & Guaranty Co.,137 Colo. 385, 325 P.2d 700, 704 (1958) (stating in seeking to determine the legal effect of a policy, the court should endeavor to determine what the parties had in mind at the time of procuring the insurance policy); see also Massachusetts Bonding & Ins. Co. v. Board of County Comm'rs,100 Colo. 398, 68 P.2d 555 (1937) (holding whether a renewal of an insurance contract creates a new and independent contract or a continuation of the original contract depends on the intent of the parties). In my view, it is not necessary to reach the conclusion that an ambiguous contract is construed against the drafting insurer. While it is true that ambiguous contract terms must be read in favor of the insured, Republic Insurance Co., 753 P.2d at 232, whether the renewal of an insurance contract creates a new and independent contract or a continuation of the original contract depends upon the intent of the parties. Massachusetts

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Bonding & Ins. Co., 100 Colo. at 399, 68 P.2d at 556; see also 18 George J. Couch, Cyclopedia of Insurance Law § 68.40 (2d rev. ed. 1983) (footnotes omitted) ("Whether the renewal of a policy constitutes a new and independent contract or continuation of the original contract primarily depends upon the intention of the parties as ascertained from the instrument itself.").

In this case, the evidence supports the trial court's finding that the parties intended the hybrid claims-made policy to be a continuous policy. [14] The trial court stated:

Thus, the Court must determine whether the intention of the parties was that the successive renewals of the PHICO policy were a continuation of a single contract such that PHICO was bound by the express terms of the original policy, or whether these were separate and distinct contracts of insurance subject to unilateral modification at the time of renewal with notice to the insured.... Accordingly, the Court has considered the marketing literature and oral and written representations made by PHICO and its agents, and relied upon by physicians, in construing the intent of the parties.


... [T]he Court finds the intent of the parties was to create a contract which would bind the parties to the tail percentages denoted in the original endorsement. This result is amply buttressed by a review of the evidence adduced from the advertising literature and the testimony of the parties themselves.

The purpose and the language of the policy, as well as the tail policy provisions, indicate that the intent of the parties was to create a continuous policy.

In addition, the purpose behind buying and selling the liability insurance reflects that the parties intended the hybrid claims-made policy to be continuous. The hybrid claims-made policies provide coverage over a number of years at a rate substantially discounted over the first several years. The policies provide a savings to the insured and limit and define exposure of the insurer. If the policies are not continuous and do not reach maturation, they do not serve their purpose to the insured. While the hybrid claims-made policy is sold on an annual basis, there is a sequential or cumulative effect from year to year in terms of risk assumed, the cost of that risk, and the cost of a tail policy for the extension of coverage. The underwriters compute the exposure over the years to maturation and establish the premiums and tail rates accordingly. The trial court found:

[A] review of the testimony of the 105 plaintiffs reveals tellingly that each doctor was under the impression, in fact had been led to believe, that the tail percentage was "fixed," "poured in concrete," etc. The evidence is clear that the endorsement was propounded by the defendant to calm fears and allow the insureds to avoid the many pitfalls of a new and relatively unusual type of insurance coverage.

The insurers then market the hybrid claims-made policies as a substantial savings over time. The physicians intended the contract to protect them over a period of years, and PHICO offered long-term coverage so that it could assume a calculated risk over the same period.

The language of the policy also suggests a continuing contract. The policy itself encompasses all prior years and covers a "medical incident occurring during the policy period" for the purposes of defining when an occurrence is covered under the policy. [15] The retroactive date is set from the first day of the insurance coverage with PHICO, not at

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the beginning of each year, thereby providing coverage for occurrences and claims made during coverage by PHICO. If the "policy period" is only one-year, then the hybrid claims-made coverage under the policy does not extend to prior years of claims-made coverage. Under a single-year construction, a "medical incident" occurring in year two of the claims-made policy coverage would not be covered if reported during year three of claims-made coverage. This construction would defeat the entire purpose of obtaining claims-made malpractice insurance.

Finally, the tail policy provisions indicate the intent of the parties to create a continuous policy. The tail policy rate was a one time charge contingent on the year in which the policy was terminated, or not renewed, and measured against the fourth-year mature rate. The rate was specified with respect to which year the insured left and not stated merely as a percentage if the tail policy was purchased at the end of a specific ...

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