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Hernandez v. American Standard Insurance Company of Wisconsin

United States District Court, Tenth Circuit

December 16, 2013

AMERICAN STANDARD INSURANCE COMPANY OF WISCONSIN, a member of the American Family Insurance Group, Defendant.


R. BROOKE JACKSON, District Judge.

Defendant asks the Court to enter partial summary judgment dismissing plaintiffs' insurance bad faith claims. For the reasons discussed herein, the motion is granted as to plaintiffs' claim for statutory penalties under C.R.S. §§ 10-3-1115 and -1116 but denied as to their claim for bad faith breach of insurance contract.


Pedro Hernandez was seriously injured on June 27, 2009 when a pickup truck negligently driven by Mead Travis Myers III struck him as he sat in a chair at his produce stand. He and his wife sued, and Myers, who was driving his girlfriend's truck, obtained a defense under the girlfriend's liability policy with Country Mutual Insurance Company. Myers' attorneys also tendered the defense to, and demanded indemnity from, the American Standard Insurance Company of Wisconsin which had sold a "Family Car Policy" to Myers' mother, Judith Myers. American Standard denied coverage. Thereafter, the plaintiffs settled with Mead Myers in exchange for a payment by Country Mutual of its policy limits of $100, 000 and an assignment of Myers' rights, if any, against American Standard.

The dispute arises from the fact that the American Standard policy covers Judith Myers and her relatives. Policy [docket entry #15-3] at ¶I.B.1(a) (CM/ECF page 6). "Relative" is defined to mean "a person who, at the time of the accident, is related by blood... to the named insured... and who resides in the insured's household, even if temporarily living elsewhere. " Id. at ¶I.A. of Colorado Changes/Changes Applying to the Family Car Policy and Miscellaneous Vehicle Policy (CM/ECF page 21) (emphasis added). The issue is whether Mead Myers resided in Judith Myers' household at the time of the accident.

The American Standard policy lists Judith Myers' address at 8171 W. Walker Drive, Littleton, CO XXXXX-XXXX. Id. at CM/ECF page 1. She listed that address for other purposes as well, such as her driver's license, bank accounts, tax returns, a bankruptcy filing, and other documents. Mead Myers also listed the Walker Drive address on his driver's license and as the address of his business. Insurance premium billings were sent to "Myers, Judy Mead" or "Judy Mead Myers" at that address.

However, an American Standard claims adjuster interviewed Judith Myers. According to the adjuster's affidavit [#29-2], Judith told her that although she owned the Walker Drive house and made its mortgage payments, she was actually living at 8399 Quay Court, Littleton, CO - a house owned by Mead Myers - at the time of the accident. Judith reportedly told the adjuster that she and Mead had changed houses about four years earlier, and that at the time of the accident Mead and his girlfriend were living at the Walker Drive address. Id. at ¶¶6-7.

Based upon that interview the adjuster concluded that Mead was not Judith's "relative, " as that term is defined in the policy, and American Standard denied coverage. Mead's attorney requested reconsideration, arguing that Judith's official residence was 8171 W. Walker Drive where American Standard admitted Mead was living. American Standard again denied coverage on the basis that mother and son were not residing in the same household.

Mr. Hernandez and his wife filed the present lawsuit against American Standard in state court as Mead Myers' assignee. American Standard removed the case to this Court based on diversity of citizenship. 28 U.S.C. § 1332. Plaintiffs assert claims for damages based upon (1) breach of contract; (2) bad faith breach of insurance contract; and (3) statutory "damages" under Colorado Revised Statutes §§ 10-3-1115 and 10-3-1116.

On March 30, 2012 American Standard moved for summary judgment, arguing that the Court should find that there was no genuine dispute of material fact as to whether Mead Myers was residing in Judith Myers' household at the time of the accident, and therefore, that the contract claim should be dismissed as a matter of law. [#15]. American Standard also argued that if there is no coverage under the insurance contract, there could be no liability for bad faith. After full briefing and oral argument, and in consideration of documents submitted with plaintiffs' response [##18-1 through 18-7] and concerns about Judith's credibility, the Court denied the motion in a bench ruling on March 20, 2013. See Minute Order. [#24].


Second Claim: Bad Faith Breach of Insurance Contract

Colorado has long recognized a tort claim arising from the covenant of good faith and fair dealing implied in all insurance contracts, commonly referred to as bad faith breach of insurance contract. See Goodson v. American Standard Ins. Co. of Wisconsin, 89 P.3d 409, 414-15 (Colo. 2004). Plaintiffs argue that the standard of care applicable to Mead Myers' bad faith claim against American Standard is simple negligence - did American Standard act as a reasonable insurer would have acted under the same or similar circumstances. I agree. Negligence is the applicable standard in judging the tort liability of an insurer in a third-party context, i.e., a claim by an insured for protection against a liability claim of a third party. Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1142 (Colo. 1984). See C.R.S. § 10-3-1113(2) (codifying this standard). Mead Myers' claim, which plaintiffs now assert as his assignee, is that American Standard acted unreasonably and therefore in bad faith in its investigation and ultimately its refusal to defend or indemnity him against the claim of the plaintiffs in the underlying suit.

I pause, however, to note that there is no small measure of irony in plaintiffs' position. In a direct or first-party context, where the insured sues his own insurer for bad faith breach of an insurance contract, the insured must establish not only that the insurer acted unreasonably but also that the insurer knew or recklessly disregarded the fact that its conduct was unreasonable. Travelers Ins. Co. v. Savio, 706 P.2d 1258, 1275-76 (Colo. 1985). See C.R.S. § 10-3-1113(3) (codifying this standard). Plaintiffs implicitly argue, consistent with Colorado law, that the higher standard of care applicable to a first-party claim does not apply, because they are asserting Mead Myers' third-party claim against American Standard. Yet, in plaintiffs' Third Claim, where they seek recovery under C.R.S. §§ 10-3-1115 and -1116, plaintiffs necessarily argue that Mead Myers was a "first-party claimant, " because the statute applies only to ...

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