Lead Opinion
delivered the Opinion of the Court.
We granted certiorari in this case
We disagree with the court of appeals' strict application of a privity of contract analysis to this case. Here, the insurance administrators had primary control over benefit determinations, assumed some of the insurance risk of loss, undertook many of the obligations and risks of an insurer, and had the power, motive, and opportunity to act unserupulously in the investigation and servicing of the insurance claims. Under such cireumstances, we hold that a special relationship existed between the administrators and the insured sufficient to establish in the administrator a duty to act in good faith. In order for Cary to recover for a breach of that
Accordingly, we reverse the judgment of the court of appeals and reinstate claimant's tort cause of action against the administrators for breach of their duty to act in good faith when investigating and servicing the insurance claims.
We turn first to the evidence the parties put forth, as of the time the trial court entered summary judgment against Cary. For the purpose of reviewing the propriety of the court's summary judgment order, we must resolve all doubts in favor of Cary, the non-moving party. See Smith v. Boyett,
I.
The City of Arvada offered its employees, like Thomas Cary, access to its self-funded health insurance program overseen by the Arvada Medical and Disability Program Trust Fund (Trust), but аdministered by United of Omaha and Mutual of Omaha of Colorado
Due to its limited resources, the Trust did not administer the Plan itself. A five-member volunteer board of trustees staffed the trust. It had no support staff, and none of its members had any experience or expertise in handling insurance claims or making coverage decisions. The board therefore did not investigate claims or involve itself in claims handling or processing (other than hearing final appeals). It met only quarterly to consider claims appeals, review contracts with third-party administrators such as United and Omaha, approve contracts for the provision of certain mental health services, and consider funding issues.
By contrast, United, whom the Trust hired to administer the Plan, exercised near-complete control over the administration of the Plan. United's contract with the Trust obligated it to: provide claim handling facilities; furnish claim handling personnel; establish claim handling procedures, including claim files and systems; verify claimant eligibility for the Plan; receive all claim forms and related materials from Plan members; process submitted claims; send "explanation of benefits" letters to claimants when it acts on a claim; prepare claim payments; provide actuarial services to the Trust to project estimated Plan benefit costs; provide underwriting services whereby it analyzes Plan benefits and makes recommendations to the Trust about modifying the benefits; print and pay the cost of all Plan claim forms and benefit checks; develop and print Plan benefit booklets and identification cards; evaluate the health histories of "late" applicants and determine whether they should have Plan coverage; provide a toll-free number for Plan claimants; and periodically audit the claims processing system to determine the quality of claim administration. United even established an appellate procedure for denials of coverage (though the Trust was the entity of last resort for appeals).
At the same time United agreed to administer the Plan, it entered into a reinsurance agreement with the Trust. Pursuant to this agreement, United agreed to reimburse the Trust for payments in excess of $75,000, but less than $1 million, for any one Arvada employee. It also agreed to reimburse the Trust for aggregate claims in excess of a certain dollar amount.
The claims dispute in this case began when Thomas Cary and Beth Hanna's (Cary's) fifteen-year-old daughter, a beneficiary of the Plan, shot herself in an unsuccessful suicide attempt. Her injuries required extensive treatment, hospitalization, and multiple surgeries. Cary applied for benefits from the Plan but the Administrators denied his claim, citing the Plan's exclusion of self-inflicted injuries as justification.
Cary responded to the denial by suing the City, the Trust, and the Administrators, seeking a declaration that the Plan covered his daughter's injuries, as well as damages
Following the trial court's rulings, Cary settled with the City and the Trust for $800,000, and neither of those entities is involved with this appeal. Cary appealed the dismissal of his bad faith claim. The court of appeals affirmed the district court's judgment, holding that City's independent claims administrators owe no duty of good faith and fair dealing to parties, like Cary, who are not in contractual privity with the claims administrators.
IL.
We disagree with the court of appeals' strict application of a privity of contract analysis to this case. Here, the insurance administrators had primary control over benefit determinations, assumed some of the insurance risk of loss, undertook many of the obligations and risks of an insurer, and had the power, motive, and opportunity to act unserupulously in the investigation and servicing of the insurance claims. Under such cireumstances, we hold that a special relationship existed between the Administrators and the insured sufficient to establish in the Administrators a duty to act in good faith. In order for Cary to recover for а breach of that duty in tort on remand of this case, he must establish the facts and prove that the Administrators' conduct was unreasonable and the Administrators either knew their conduct was unreasonable or acted in reckless disregard of whether their conduct was unreasonable.
A.
Standard of Review
The trial court and court of appeals held that a third-party insurance claims administrator does not have a duty of good faith and fair dealing in the investigation and processing of the insured's claim, unless there is a contractual relationship between the insured and the administrator.
The existence and seope of a tort duty is a matter of law. E.g. HealthONE wv. Rodriguez,
The trial court granted summary judgment against Cary. But, summary judgment is appropriate only if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. HealthONE,
Summary judgment is a drastic remedy, to be granted only when there is a clear showing that the applicable standards have been met. Id. at 887-88. We review a grant of summary judgment de novo. Id. at 888. Here, Cary was entitled to proсeed on his bad faith tort claim.
We turn our discussion first to the court of appeals' strict application of a privity of contract analysis to this case. We then proceed to the special relationship that existed between the third-party Administrators and Cary.
B.
Exceptions to Privity Requirement
Every contract in Colorado contains an implied duty of good faith and fair dealing. Transamerica Premier Ins. Co. v. Brighton School Dist. 27J,
But, insurance contracts are not ordinary commercial contracts. Every insurer owes its insured a non-delegable duty of good faith and fair dealing. Bеcause of the "special nature of the insurance contract and the relationship which exists between the insurer and the insured," an insurer's breach of this duty gives rise to a separate cause of action sounding in tort. Farmers Group, Inc. v. Trimble,
In the typical insurance case, only the insurer owes the duty of good faith to its insured; agents of the insurance company-even agents involved in claims processing-do not owe a duty, since they do not have the requisite special relationship with the insured. See, e.g., Martinez v. Lewis,
In the typical case, the insured is adequately protected by the non-delegable duty the law imposes on the insurer. However, the existence of this non-delegable duty does not mean that a third-party claims administrator never has an independent duty to investigate and process the insured's claim in good faith. When the actions of a defendant are similar enough to those typically performed by an insurance company in claim administration and disposition, we have found the existence of a special relationship sufficient for imposition of a duty of good faith and tort liability for its breach-even when there is no contractual privity between the defendant and the plaintiff.
We first recognized an exception to the privity requirement in Travelers Ins. Co. v.
First, we relied on the "special nature" of the relationship that exists between an insured and his insurer, holding that this relationship also exists between the insurer and a beneficiary of quasi-insurance benefits:
The basis for liability in tort for the breach of an insurer's implied duty of good faith and fair dealing 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 intо 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 1272. Since this statement is true of workers' compensation insurance, we held that the provider of workers' compensation insurance has a duty to deal fairly and in good faith with an injured employee. Id. at 12783.
Second, we relied on the fact that a workers' compensation provider, like an insurer in contractual privity with an insured, has a financial incentive to use its leverage to limit claims:
[OJnee a calamity has befallen an employee covered by workers compensation or an insured covered under a private insurance contract, the injured party is particularly vulnerable because of the injury or loss.... Insurers, backed by sufficient financial resources, are encouraged to delay payment of claims to their insureds with an eye toward settling for a lesser amount than due under the policy. The inequity of this situation becomes particularly apparent in the area of disability insurance in which the insured, often pursued by creditors and devoid of bargaining power, may easily be persuaded to settle for an amount substantially lower than that provided for in the insurance contract.
Id. at 1278 (internal quotations and citations omitted).
We extended Savio in Scott Wetzel Servs. Inc. v. Johnson,
It is the statutory and regulatory structure and the adjuster's participation in the investigation and processing of claims that give rise to the duty and not the contract between the employer and claims adjusting sеrvice, or the law of principal and agent.
Id. at 812 n. 10 (emphasis added).
We also held that the privity requirement was inapplicable in the domain of surety contracts in Transamerica,
Second, we noted that when the time comes to enforce a suretyship agreement, there is a disparity in bargaining power between the surety and the beneficiary. Absent the prospect of damages for bad faith breach, the surety has no incentive to pay in good faith:
Contract damages "offer no motivation whatsoever for the insurer not to breach. If the only damages an insurer will have to pay upon a judgment of breach are the amounts that it would have owed under the policy plus interest, it has every interest in retaining the money, earning the higher rates of interest on the outside market, and hoping eventually to force the insured into a settlement for less than the policy amount."
Id. (quoting Dodge v. Fidelity & Deposit Co., 161 Ariz, 344,
C.
Special Relationship in This Case
A sufficient special relationship existed between the Administrators and Cary to impose a duty of good faith and fair dealing on the Administrators, in light of their central role in claims administration and their financial liability for claims.
Confronted with a situation that is nearly identical to that before us, the Tenth Cireuit imposed a duty of good faith and fair dealing on a third-party insurance administrator. Wolf v. Prudential Ins. Co.,
Given these facts, the Tenth Circuit declined to apply the privity requirement. Rather, it focused "on the factual question of whether the administrator acts like an insurer such that there is a 'special relationship' between the administrator and the insured that could give rise to a duty of good faith." Id. at 797. In light of the facts that the defendant administrator performed nearly all of the functions of an insurance company and bore the risk of losses by the insureds, the court held that the administrator had a duty of good faith and fair dealing: "[OIn the facts presented by plaintiffs, Prudential had the power, motive, and opportunity to act unscrupulously. We believe thаt the Oklahoma Supreme Court would impose & duty on an entity in Prudential's position for the same reasons it imposed the duty on 'true' insurers." Id. at 798.
The Tenth Circuit's Wolf holding accords with our precedent. In the case before us, the Administrators fulfilled virtually all of the functions normally performed by an insurance company in processing claims and determining whether to deliver insurance benefits. The Trust's only involvement in the operation of the Plan was funding the claims account and hearing final appeals when the Administrators denied benefits. As in other cases where we found an exception to the privity requirement, the Administrators had a significant financial incentive to delay payment of benefits or coerce Cary into a diminished settlement. Cary settlеd his insurance claim with the City and the Trust for $800,000 after the trial court determined that Cary's medical expenses are covered by the policy. United's reinsurance contract with the City obligates it to reimburse the City for payments in excess of $75,000, but less than $1 million, for any one Arvada employee. In such cireumstances, United had a powerful financial incentive to deny or limit claims.
Colorado's statutory policy, stated in seetion 10-1-101, 8 C.R.S. (2002), is that all persons providing insurance services to the
When a third-party administrator performs many of the tasks of an insurance company and bears some of the financial risk of loss for the claim, the administrator has a duty of good faith and fair dealing to the insured in the investigation and servicing of the insurance claim.
D.
Standard for Assessing Bad Faith Tort Claim
In "first party" bad faith insurance cases-cases in which an insured sues his insurance company directly-the plaintiff must prove that the conduct of the insurer was unreasonable, and that the insurer either knew that its conduct was unreasonable or acted in reckless disregard of whether it was unreasоnable. E.g. Transamerica,
IIL
Accordingly, we reverse the judgment of the court of appeals and reinstate Cary's tort cause of action against the Administrators for breach of their duty to act in good faith when investigating and servicing the insurance claims. We. remand this -case to the court of appeals for consideration of any other issues remaining on appeal, and further proceedings consistent with this opinion.
Notes
. We granted certiorari on the following issues:
1) Whether third-party administrators of health insurance plans owe the insureds any duty to process claims and determine coverage in a reasonable or good faith manner, and hence, whether they can be liable for either bad faith or negligence in the handling of those claims.
2) Whether the court of appeals' decision to affirm the district court's award of costs must be reversed because the respondents are not the prevailing parties in this case.
In light of our holding, we vacate the award of costs to the Administrators.
. We consolidated this case with an appeal from an unpublished court of appeals opinion in case number 00CA2127. The two appeals involve the same parties and the same underlying case.
. Mutual of Omaha of Colorado does business as Antero Health Plans. It is a wholly owned subsidiary of respondent United of Omaha Life Insurance Company.
. Apparently United assigned some of these functions, including the appellate function, to its wholly owned subsidiary, respondent Mutual of Omaha of Colorado.
. Although the Plan expressly excluded coverage for self-inflicted injuries, the district court found the scope of coverage under the Plan to be ambiguous, largely because the Plan defined the term "injury" in terms of accidental injuries, independent of illness and because the 1994 summary of the Plan sent to policyholders did not include self-inflicted injuries among the enumerated exclusions. The district сourt's order granting Cary's motion for summary judgment with regard to coverage of his daughter's medical treatment is not before us in this appeal.
. For instance, courts consider (1) the risk involved, (2) the foreseeability and likelihood of injury as weighed against the social utility of the actor's conduct, (3) the magnitude of the burden of guarding against injury or harm, and (4) the consequences of placing the burden on the actor. E.g. HealthONE,
. We have applied a similar approach outside the domain of insurance contracts. For example, in Greenberg,
. This case stands in contrast to cases like Martinez,
Dissenting Opinion
dissenting.
Today the majority announces a new civil duty (giving rise to a tort claim for damages) that is neither implied in contract, mandated by statute, nor recognized at common law. In what I consider to be a misconstruction of our prior holdings, the majority finds that certain claims adjusters owe a duty directly to insured parties, despite the absence of any existing contractual or other legal relationship between them, based solely on the amount of influence the adjusters actually exercise over the ultimate decision to allow or not allow coverage. It does so to protect the insured party by providing а disincentive for wrongful behavior by agents of the insurer, but also by providing an alternate source of recovery. |
'While its goal may be laudable, I do not believe the majority's conclusion arises out of a legal theory. Social policy is clearly an important consideration in the interpretation and development of the law, but it cannot be the primary basis for judicial resolution of individual cases and controversies. Because I believe that such policy-driven holdings create unworkable rules of law and generally undermine confidence in the judicial process, I would leave public policy initiatives of this kind to the General Assembly. I therefore respectfully dissent.
Initially, it must be understood that the liability creatеd by the majority today is separate and distinct from liability for insurance coverage under the terms of a contract. It is of course the insurer who is contractually liable to provide coverage under the terms of an insurance contract. Along with about half the other jurisdictions in this country, Colorado has also allowed that an insurer may be separately liable in tort for damages it causes by wrongfully denying insurance coverage.
The majority suggests that it does no more than apply existing "exceptions to the privity requirement" of a claim for bad faith breach of contract, and it likens its approach to other instances in which we have found a duty of care in the absence of a contractual relationship. See maj. op. at 466-467 & n. 7. In my view, this characterization not only misconstrues our prior holdings but highlights a fundamental difference in our understanding of the theoretical underpinnings of the tort of bad faith breach. While a tort by its very nature is an injury or wrong that is independent of contract, the tort of bad faith breach is unusual in that it recognizes liability for the wrongful breach of a duty to comply with the terms of an insurance contract. Unlike other duties of care that are independent of contractual relationships, the duty created by the majority in this case subjects non-contracting parties to liability for the denial of insurance coverage under the terms of a contract.
We have held that all contracts contain an implied duty of good faith and fair dealing, see Transamerica Premier Ins. Co. v. Brighton School Dist. 27J,
tract, similarly giving rise to an action in tort for wrongful breach of those duties. Whether the special duty is implied by a contractual relationship or imposed by statute, however, a breaching party can be liable only for damages suffered by someone to whom it owes a duty.
Our holdings that are characterized by the majority as "exceptions" to the privity requirement of a bad faith breаch of contract claim are, to my mind, not exceptions at all. Some of the examples cited by the majority do not alter the privity requirement in any way, while the others do not even involve a bad faith breach of contract. In Trans-america, for instance, the contractual relationship of the parties was never in doubt. The issue before the court concerned only the question whether the duty owed by a surety to its beneficiary is sufficiently like that of an insurer to its insured to implicate similar consequences for a breach. Trans-america,
By contrast, neither Travelers Ins. Co. v. Savio,
By deriving a duty to an insured person from the adjuster's separate relationship with the insurer and actual participation in the claims process, the majority, in my opinion, confounds the existence of a legal duty with the questions of causation and culpability; contravenes well-accepted ageney principles; and imposes liability without advance notice or consistent application of the law.
First, despite acknowledging that a "special relationship" is essential, the majority actually eliminates the need for any legal relationship between the claims adjuster and insured, premising its new duty instead on "the power, motive, and opportunity to act unserupulously in the investigation and servicing of the insurance claims." Maj. op. at 463-464. Motive and opportunity to see that coverage is denied may be relevant to the question whether United acted in good faith, but they clearly do not imply a duty to deal in any particular way with someone whom it does not insure. The significant question is not whether United owes a duty of good faith and fair dealing to someone, but to whom it owes such a duty. Similarly, the significance of United's involvement in processing claims for the City is not that it is acting like an insurer but rather that it is acting for an insurer. To the extent that it insures the City with a stop-loss or reinsurance policy, it has a "semi-fiduciary" relationship with the City, its insured, and owes the City a special duty that potentially conflicts with a similar duty to the City's insured.
Second, by creating a legal relationship that is neither implied by the agreement of the parties nor mandated by statute, the majority resolves this pending controversy by creating duties and liabilities that never before existed, in this jurisdiction or virtually anywhere else, and that were not reasonably foreseeable. Although a significant number of jurisdictions recognize a separate recovery in tort for bad faith breach of contract, far fewer join our readiness to extend a similar cause of action to the denial of statutory workers' compensation claims.
In Wolf v. Prudential Ins. Co.,
Finally, because I cannot find any theoretical basis for this duty, its seope is also unclear to me. Despite its reference to the broad legislative declaration in § 10-1-101, 8 C.R.S. (2002), the majority appears to reject the petitioners' argument that an action in tort should be permitted against all persons involved in the provision of insurance services, limiting the sweep of its holding instead to insurance claims adjusters having a reinsurance relationship with the actual insurer. It is unclear to me, however, the
I would be considerably more reticent than the majority about judicially creating duties and liabilities, not heretofore recognized at law, especially when they conflict with other policy choices of the legislature and seem to rest so heavily on the equities of individual cases. Because I disagree with both the majority's rationale and its judgment, I respectfully dissent.
I am authorized to state that Justice KOURLIS jоins in this dissent.
. See Douglas R. Richmond, The Two-Way Street of Insurance Good Faith: Under Construction, But Not Yet Open, 28 Loy. U. Chi. L.J. 95, 107 n. 74 (1996)(citing twenty-nine states that have recognized a common law tort for bad faith breach of a first-party insurance contract); see also Dominick C. Capozzola, First-Party Bad Faith: The Search for a Uniform Standard of Culpability, 52 Hastings LJ. 181, 182 n. 5 (2000)(finding twenty-five states that explicitly allow common law tort recovery, but citing five others that have allowed for "similar damages on expanded no
. See, e.g., Natividad v. Alexsis, Inc.,