American Family Mutual Insurance Co. v. Hansen, 2016 CO 46

Background

On Dec. 30, 2007 Jennifer Hansen was injured as a passenger and later sought underinsured motorist (UIM) benefits from American Family for her 1998 Ford Escort.
Hansen produced lienholder statements from the local American Family agent (Burchill) showing her as the named insured; American Family’s underwriting records (November 2007 declaration page) unambiguously listed "DAVIS, WILLIAM & JOYCE" (her stepfather and mother) as the named insureds.
American Family denied coverage based on its declaration page; Hansen later provided proof of ownership and the insurer reformed the policy and paid the contract claim (settling for the policy limits).
Hansen sued for breach, common-law bad faith, and statutory bad faith under Colo. Rev. Stat. §§ 10-3-1115 and -1116; the breach claim was resolved by reformation and settlement, leaving bad-faith claims.
Trial court (and the court of appeals) held the discrepancy between agent lienholder statements and company declaration pages created an ambiguity; jury found statutory bad faith and awarded statutory penalties and fees.
Colorado Supreme Court granted certiorari and reversed: the declaration page unambiguously named the Davises, extrinsic evidence could not create ambiguity, and American Family’s denial was reasonable so statutory bad-faith liability fails.

Issues

Issue	Hansen's Argument	American Family's Argument	Held
Whether extrinsic lienholder statements created an ambiguity in the insurance contract as to the named insured	The agent‑issued lienholder statements naming Hansen created an ambiguity about who was the insured	The November 2007 declaration page unambiguously named the Davises; extrinsic evidence cannot create ambiguity	Court: No ambiguity; court cannot rely on extrinsic lienholder statements to create ambiguity — look only to four corners first
Whether insurer’s denial was unreasonable under §§ 10-3-1115–1116 when the coverage question was disputed	Discrepancy and agency documents meant insurer failed to reasonably investigate and thus denial was unreasonable	Denial was reasonable because it relied on an unambiguous declaration page naming the Davises	Court: Denial was reasonable; statutory bad‑faith claim fails
Applicability of the reasonable expectations doctrine to alter coverage despite unambiguous declarations	The lienholder statement created a reasonable expectation of coverage because it looked like a declarations page	Reasonable expectations doctrine applies only to insureds — after it is determined the claimant is an insured; cannot be used to establish insured status when declaration is unambiguous	Court: Doctrine inapplicable to create insured status here
Whether extrinsic remedy (reformation) or damages available despite no contract ambiguity	Hansen could rely on extrinsic evidence to establish coverage or recover statutory penalties	Reformation was available but does not retroactively make insurer’s original denial unreasonable when based on unambiguous contract; statutory penalties require unreasonable denial	Court: Reformation is an appropriate remedy to correct the contract, but does not make insurer liable for statutory bad faith where denial reasonably relied on unambiguous terms

Key Cases Cited

Ad Two, Inc. v. City & Cty. of Denver, 9 P.3d 373 (Colo. 2000) (extrinsic evidence not considered unless contract is ambiguous)
USI Props. E., Inc. v. Simpson, 938 P.2d 168 (Colo. 1997) (do not use extraneous evidence to prove intent where no ambiguity exists)
USAA Cas. Ins. Co. v. Anglum, 119 P.3d 1058 (Colo. 2005) (contract terms ambiguous if susceptible to more than one reasonable interpretation)
Bailey v. Lincoln Gen. Ins. Co., 255 P.3d 1039 (Colo. 2011) (reasonable expectations doctrine may override exclusionary language where insured would reasonably be deceived)
D.C. Concrete Mgmt., Inc. v. Mid‑Century Ins. Co., 39 P.3d 1205 (Colo. App. 2001) (ambiguity can exist where named‑insured designation is unclear)
Travelers Ins. Co. v. Savio, 706 P.2d 1258 (Colo. 1985) (insurer may challenge claims that are "fairly debatable")
Fed. Deposit Ins. Corp. v. Fisher, 292 P.3d 934 (Colo. 2013) (question of contract ambiguity reviewed de novo)
Cheyenne Mountain Sch. Dist. No. 12 v. Thompson, 861 P.2d 711 (Colo. 1993) (principle that unambiguous contract enforced as written)
Md. Cas. Co. v. Buckeye Gas Prods. Co., Inc., 797 P.2d 11 (Colo. 1990) (reformation proper where mutual mistake in insurance contract exists)