Supreme Court of Colorado Rules That Extrinsic Evidence Could Not Create Ambiguity in Policy

July 19, 2016 | Insurance Coverage

The Supreme Court of Colorado has ruled that extrinsic evidence could not create an ambiguity in an insurance policy but only could be used as an aid to ascertaining the intent of the parties once an ambiguity was found.

The Case

After Jennifer Hansen was injured in a motor vehicle accident, she presented an underinsured motorist (“UIM”) claim to American Family Mutual Insurance Company. As proof of insurance, Hansen offered lienholder statements issued to her by American Family’s local agent that identified her as the named insured at the time of the accident.

American Family’s own records, however, including a declaration page, indicated that the named insureds on the policy at the time of the accident were Hansen’s stepfather and mother, William and Joyce Davis. In reliance on the policy as reflected in its own records, American Family determined that Hansen was not insured under the policy and denied coverage.

Hansen filed an action against American Family asserting claims for breach of contract, common law bad faith, and statutory bad faith for unreasonable delay or denial of benefits under Colorado law. 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 deviation in the records issued by American Family’s agent and those produced by its own underwriting department created an ambiguity in the insurance policy as to the identity of the named insured, and instructed the jury that an ambiguous contract had to 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 on a special verdict form that American Family had delayed or denied payment without a reasonable basis for its action. The trial court awarded Hansen attorneys’ fees, court costs, and a statutory penalty.

American Family appealed, arguing, among other things, that the trial court had erred in finding that the lienholder statements created an ambiguity in the insurance contract as to the identity of the insured. The court of appeals affirmed, finding that the lienholder statements created an ambiguity.

The case reached the Colorado Supreme Court.

The Colorado Supreme Court’s Decision

The court reversed.

In its decision, the court reasoned that because the insurance contract “unambiguously named William and Joyce Davis as the insureds” at the time of the accident, the trial court and court of appeals had erred in relying on extrinsic evidence to find an ambiguity in the insurance contract.

The court said that an ambiguity must appear in the “four corners” of the policy before extrinsic evidence could be considered. Put differently, the court said, extrinsic evidence could not create ambiguity but was “an aid to ascertaining the intent of the parties” once an ambiguity was found.

Accordingly, it concluded, American Family’s denial of Hansen’s claim in reliance on the unambiguous insurance contract was reasonable, and American Family could not be held liable for statutory bad faith.

The case is American Family Mutual Ins. Co. v. Hansen, No. 14SC99 (Colo. June 20, 2016).

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  • Robert Tugander

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