American Family Mutual Insurance Co. v. Hansen
2016 CO 46, 2016 WL 3398507, 375 P.3d 115 (2016)
Rule of Law:
The interpretation of an unambiguous insurance contract must be confined to its "four corners," and extrinsic evidence may not be considered to create an ambiguity, nor can the doctrine of reasonable expectations establish who is an insured where the policy is unambiguous.
Facts:
- Jennifer Hansen purchased a 1998 Ford Escort on May 18, 2002, and bought an American Family auto insurance policy for it from the Heath Burchill American Family Insurance Agency.
- On April 9, 2007, Hansen obtained a lienholder statement from Burchill that identified "DAVIS, JENNY" as the named insured, despite Hansen's last name not being Davis.
- On December 30, 2007, Jennifer Hansen was injured in a motor vehicle accident while a passenger in her boyfriend's vehicle.
- American Family's underwriting department records, including a November 2007 declaration page, consistently listed "DAVIS, WILLIAM & JOYCE" (Hansen's mother and stepfather) as the named insureds on the policy for Hansen's 1998 Ford Escort at the time of the accident.
- On April 24, 2008, Hansen filed an underinsured motorist (UIM) claim with American Family for benefits under the policy.
- An American Family claims adjuster made repeated unsuccessful attempts to contact Hansen in April and May of 2008 to determine her residence and eligibility for UIM coverage under her parents' policy.
- In the fall of 2009, Hansen received an offer from her boyfriend's insurer to settle her claim for $25,000, prompting her to contact Burchill and receive a January 13, 2010, lienholder statement identifying "HANSEN, JENNIFER" as the named insured at the time of the accident.
- Relying on the certified policy from its underwriting department, American Family denied Hansen's UIM claim on April 27, 2010.
Procedural Posture:
- Jennifer Hansen filed an action against American Family Mutual Insurance Company in a trial court (court of first instance), asserting claims for breach of contract, common law bad faith, and statutory bad faith for unreasonable delay or denial of benefits.
- Prior to trial, American Family reformed the contract to name Hansen as the insured, and the parties settled the breach of contract claim, leaving only the common law and statutory bad faith claims for trial.
- The trial court ruled that the conflicting records created an ambiguity in the insurance policy as to the identity of the named insured and instructed the jury that an ambiguous contract must be construed against the insurer.
- The jury found in American Family's favor on the common law bad faith claim but in Hansen's favor on the statutory bad faith claim, indicating American Family had delayed or denied payment without a reasonable basis for its action, but found the UIM benefit for which payment was delayed or denied was $0.
- The trial court awarded Hansen attorney fees, court costs, and a statutory penalty, granting Hansen's motion to amend the verdict to award $150,000 (two times the covered benefit) in addition to attorney fees and costs, for a total final judgment of $199,683.28.
- American Family (appellant) appealed the judgment and award of statutory damages to the Colorado Court of Appeals (intermediate appellate court), arguing the trial court erred in finding ambiguity and denying reconsideration of judgment.
- The Colorado Court of Appeals affirmed the trial court's decision, finding that the lienholder statements created an ambiguity and that American Family could be held liable for statutory bad faith even if its legal position was 'fairly debatable.'
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Issue:
May a court consider extrinsic evidence, such as lienholder statements, to create an ambiguity in an insurance contract regarding the identity of the named insured when the policy's declaration page is otherwise unambiguous?
Opinions:
Majority - Justice Eid
No, a court may not consider extrinsic evidence, such as lienholder statements, to create an ambiguity in an insurance contract regarding the identity of the named insured when the policy's declaration page is otherwise unambiguous. The Colorado Supreme Court held that an insurance contract, like any other contract, is subject to general rules of interpretation, meaning a term is ambiguous only if it is "susceptible on its face to more than one reasonable interpretation." Absent such facial ambiguity, courts will not look beyond the "four corners of the agreement" to determine the parties' intent (citing Ad Two, Inc. v. City & Cty. of Denver, 9 P.3d 373, 376–77 (Colo. 2000)). The Court clarified that extrinsic evidence cannot create an ambiguity; it merely serves as an aid to ascertain intent once an ambiguity is found within the document itself. In this case, the November 2007 declaration page unambiguously named "DAVIS, WILLIAM & JOYCE" as the insureds, and Hansen was not included in that designation. The Court distinguished D.C. Concrete Management, Inc. v. Mid-Century Insurance Co. (39 P.3d 1205 (Colo. App. 2001)), noting that in D.C. Concrete, the designation of the insured was inherently unclear, whereas here, the names on the declaration page were clear. The Court rejected Hansen's argument that lienholder statements from an agent could create ambiguity or modify the policy, reiterating that extrinsic evidence is inadmissible when the contract is unambiguous. Furthermore, the doctrine of reasonable expectations applies only after a claimant's status as an "insured" has been established; it cannot be used to determine or establish who the named insured is when the policy is unambiguous. Since the insurance contract unambiguously identified the Davises as the insureds, American Family's denial of Hansen's claim was based on a reasonable interpretation of the policy and therefore constituted a "reasonable basis" under section 10-3-1115(2), precluding a finding of statutory bad faith and the associated recovery of attorney fees, costs, or statutory penalties.
Analysis:
This case significantly reinforces Colorado's "four corners" doctrine for contract interpretation, particularly within the context of insurance law. It establishes a high bar for proving ambiguity in insurance contracts, requiring the ambiguity to arise from the explicit language within the policy document itself, not from external evidence or documents. This strengthens insurers' ability to rely on the clear terms of their policies, potentially reducing liability for bad faith claims based on perceived inconsistencies from external sources. The ruling also clarifies that the doctrine of reasonable expectations cannot be used to establish who is an insured when the policy's designation of named insureds is unambiguous, but rather addresses coverage for already established insureds. Future litigants challenging clear policy language will find it more difficult to introduce extrinsic evidence to create ambiguity.
