Economic loss not necessary to prove emotional distress.

A plaintiff in a bad-faith case can recover emotional distress damages from an insurer without showing substantial economic loss, the Colorado Supreme Court has ruled in a case of first impression. (Goodson v. Am. Standard Ins. Co. of Wis., 89 P.3d 409 (Colo. 2004).)

The defendant, American Standard Insurance Co. of Wisconsin, repeatedly denied payment of plaintiff Dawn Goodson's medical bills arising from a car crash until a year and a half after she sought reimbursement. The car Goodson was driving was struck from behind by another vehicle while stopped at a traffic light. The owner of the car, who had authorized Goodson to drive it, was insured by the defendant.

American Standard argued that because it eventually reimbursed Goodson, she suffered no economic loss and therefore couldn't recover emotional distress damages. The appellate court agreed--in an unpublished opinion.

"It is pretty unusual in our state that the supreme court would [agree to review] an unpublished opinion, but they did in this case," said Bradley Levin, who filed an amicus brief for Goodson on behalf of the Colorado Trial Lawyers Association. "They ended up issuing an opinion saying that when you buy an insurance policy, what you are buying is security and peace of mind."

Goodson filed suit based on several claims, but the trial court submitted the case to the jury based solely on a claim of bad-faith breach of insurance contract. After the judge refused to issue the instruction sought by American Standard--that the jury could award damages for emotional distress only if it found that Goodson had suffered substantial property loss or economic damages--the jury awarded Goodson both actual and punitive damages. The appeals court threw out the verdict, finding that the trial court had erred in failing to give the jury the instruction.

The state high court disagreed.

"The trial court did not err in refusing to tender American Standard's requested instruction," Justice Gregory Hobbs wrote for the majority. "The basis for the trial court's refusal reflects the same concerns that underlie our current holding--that the essence of the tort of bad-faith breach of insurance contract is the insurer's conduct in unreasonably denying benefits."

The trial court did not deliver the jury instruction because "such a requirement would encourage insurance companies to delay payments owed," Hobbs wrote. "The fact that an insurer finally pays in full does not erase the distress caused by the bad-faith conduct. Damages for emotional distress the insured proves are therefore available in actions for bad-faith breach of insurance contract upon the showing of the insurer's liability."

In overturning the verdict, the court of appeals relied on Farmers v. Trimble III, the third in a series of decisions arising out of a single case. (768 P.2d 1243 (Colo. Ct. App. 1988).)

"Trimble v. Farmers is the leading case in Colorado that established bad faith in a third-party context," Levin said. In Trimble III, "the court of appeals had stated that in order to recover emotional distress damages you didn't need to reach the threshold of establishing that there was outrageous conduct or intent to inflict emotional distress. What they said in that opinion was that as long as you had substantial property loss or economic loss, that would be sufficient to sustain a claim."

The reason the appellate court in Trimble III included the substantial-property-loss requirement was to "reduce the threat of fictitious claims," Hobbs wrote. "However, the burden of proof the insured must carry on the issue of liability and damages is sufficient of itself to guard against frivolous claims. Here, American Standard's liability is not at issue, and the jury found that Goodson proved her economic distress damages."

The supreme court noted that to the extent that the two decisions conflicted, Goodson overruled Trimble III as well.

The court added that insurance contracts are unlike ordinary bilateral contracts because the motivation for entering into an insurance contract is different.

"Every contract in Colorado contains an implied duty of good faith and fair dealing," Hobbs wrote. "In most contractual relationships, a breach of this duty will only result in damages for breach of contract and will not give rise to tort liability.... Insureds enter into insurance contracts for the financial security obtained by protecting themselves from unforeseen calamities and for peace of mind, rather than to secure commercial advantage."

Levin said that the Goodson decision should not have come as a surprise to anyone. "Long ago, in the Trimble case, our supreme court said that a breach of the implied covenant of good faith and fair dealing is a tort," he said. "So you should be able to recover the kinds of damages that you typically recover for any type of tortious conduct, and that would include compensatory damages for emotional distress."

Still, the decision is significant: "It brought to the fore the whole notion of what insurance is all about," Levin said. "If the insurance company doesn't hold up its end of the bargain, it is going to have to pay the consequences."