In Dunn v. American Family Insurance, 09CA2173, 2010 WL 4791948 (Colo. App. Nov. 24, 2010), the Dunns reported a claim to American Family on their homeowners insurance policy after sewer and water backup caused sewage to flood their basement. American Family gave the Dunns contact information for a contractor (ICA) to remediate the flooding. However, ICA was unsuccessful and sewage began to infiltrate the Dunns’ HVAC system. Subsequently, black mold was detected in the HVAC system, the Dunns suffered health and respiratory problems, and they soon after vacated the home. The Dunns hired and fired two more contractors for unsatisfactory work throughout the winter before hiring a fourth to finish the job. Because the home remained vacant and unheated throughout the winter, the water pipes ruptured. The mold spread throughout the entire home and all of the contents needed to be replaced, which amounted to a claim of $340,000 on the policy.
Colorado Court of Appeals holds that insurance companies owe duty of prompt and effective communication to claimants and repair subcontractors.
American Family agreed to pay the full $340,000. However, the Dunns brought suit claiming that American Family breached the implied duty of good faith and fair dealing by: 1) failing to screen ICA for expertise; 2) failing to screen ICA for liability insurance coverage; 3) failing to monitor ICA’s work; 4) failing to advise them that flooding can cause further damage, including freezing pipes and mold; and, 5) failing to adequately and promptly communicate with them and remediation subcontractors in the course of investigating and handling their claim.
The trial court found no duty owed by American Family beyond adjustment and timely payment of claims. Because American Family paid timely and in full, they dismissed all of the Dunns’ claims. However, the Court of Appeals reversed in part.
In doing so, the Court expressly held that an insurance company has no duty to screen subcontractors it suggests for quality or insurance, monitor the work performed by subcontractors, or advise an insured of the possibility of likely further damage after an initial claim. Id. at *3. However, as a matter of first impression, the court held that American Family “had a duty to promptly and effectively communicate with anyone it was reasonably aware had or legitimately needed information pertaining to the handling of plaintiffs’ claim” (e.g., subcontractors performing the work). Id. at *5-6. The court then remanded the case to the trial court with instructions to prove that American Family breached the duty to communicate; and, that the breach of that duty caused further damages to the Dunns. Id. at *6.
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