Colorado’s bad faith insurance statute, codified at C.R.S. 10-3-1115 and 10-3-1116, lets a policyholder whose insurer unreasonably delays or denies payment of a covered benefit sue for two times the benefit plus reasonable attorney fees and court costs. That statutory remedy sits on top of your ordinary contract claim for the money the policy owes you, and it can be paired with a separate common law bad faith claim for additional tort damages.
What the Statute Prohibits
C.R.S. 10-3-1115 is the rule: an insurer cannot unreasonably delay or deny payment of a claim for benefits owed to a first-party claimant.1Justia. Colorado Code 10-3-1115 – Improper Denial of Claims A delay or denial is unreasonable when the insurer lacks a reasonable basis for it. You don’t have to prove the insurer acted out of spite or knew its behavior was improper. Objective unreasonableness is enough.
C.R.S. 10-3-1116 supplies the remedy. A first-party claimant whose benefits were unreasonably delayed or denied can sue in district court for two times the covered benefit plus reasonable attorney fees and court costs.2Justia. Colorado Code 10-3-1116 – Remedies for Unreasonable Delay or Denial of Benefits The statute expressly preserves other claims, so this action can be combined with a breach-of-contract claim for the underlying benefit and with any common law claim.
The statute protects only first-party claimants, meaning people asserting benefits under their own insurance policy.1Justia. Colorado Code 10-3-1115 – Improper Denial of Claims If you’re a third party pursuing someone else’s liability carrier, 10-3-1115 is not your tool.
What Counts as Unreasonable
Courts ask whether the insurer’s handling of the claim was objectively unreasonable. In Sanderson v. American Family Mutual Insurance Co., the Colorado Court of Appeals framed the question as “whether there is sufficient evidence from which reasonable jurors could conclude that in the investigation, evaluation, and processing of the claim, the insurer acted unreasonably.”3FindLaw. Sanderson v American Family Mutual Insurance Where a claim is “fairly debatable” — meaning reasonable minds could disagree about coverage — that weighs against a finding of bad faith, though it doesn’t automatically defeat the claim.
C.R.S. 10-3-1104(1)(h) lists specific conduct that qualifies as an unfair claim settlement practice, and courts treat those behaviors as evidence of unreasonableness. They include:
- Misrepresenting policy terms or coverage to the insured.
- Failing to investigate a claim before denying it.
- Not affirming or denying coverage within a reasonable time after proof of loss.
- Offering unreasonably low settlements, or refusing to settle a clear-liability claim promptly.
- Forcing an insured to sue to recover amounts that should have been paid voluntarily.
Those practices, once documented, become the backbone of a bad faith case.4Justia. Colorado Code 10-3-1104 – Unfair Methods of Competition – Unfair or Deceptive Practices The insurer’s internal claim file, the sequence of decisions, and the communications between adjusters and management are typically where courts find the answer.
Damages You Can Recover
The Statutory Award
Win a claim under 10-3-1116 and the court awards two times the covered benefit, plus attorney fees and court costs.2Justia. Colorado Code 10-3-1116 – Remedies for Unreasonable Delay or Denial of Benefits Because that award is separate from a contract claim for the original benefit itself, a policyholder can collect the benefit and the statutory penalty in the same case.
The fee-shifting piece matters more than it might sound. Without it, litigation costs would swallow smaller claims. With it, cases involving modest denied benefits remain economically viable.
Common Law Bad Faith Damages
Colorado also recognizes a separate common law bad faith tort. It’s harder to prove: you must show both that the insurer acted unreasonably and that it knew or recklessly disregarded the unreasonableness of its conduct.5Colorado Judicial Branch. Chapter 25 Bad Faith Breach of Insurance Contract That mental-state element is the trade for a broader damages menu. Common law bad faith allows recovery of traditional tort damages, including compensation for emotional distress caused by the insurer’s conduct — categories the statute does not cover.
Because 10-3-1116 does not limit other actions, most policyholders pursue both claims together and let the evidence at trial determine which yields the better result.
Exemplary Damages
When the insurer’s conduct involves fraud, malice, or willful and wanton behavior, Colorado permits exemplary damages. The default cap equals the actual damages awarded. If the insurer continued the misconduct during the lawsuit or took actions that worsened the harm, the court can raise the cap to three times actual damages.6Justia. Colorado Code 13-21-102 – Exemplary Damages
Claims the Statute Does Not Cover
Workers’ Compensation
Workers’ compensation insurance is expressly carved out. C.R.S. 10-3-1115 excludes any insurance issued under the Workers’ Compensation Act of Colorado.1Justia. Colorado Code 10-3-1115 – Improper Denial of Claims Mishandling by a workers’ comp carrier has to be pursued through the workers’ compensation system, not through this statute.
ERISA-Governed Employer Plans
If your health or disability coverage comes through a private-sector employer’s benefit plan, federal law likely preempts the state bad faith statutes. The U.S. Supreme Court held in Pilot Life Insurance Co. v. Dedeaux (1987) that ERISA preempts state-law bad faith claims for group benefit plans. Under ERISA, recovery is limited to the denied benefit itself: no punitive damages, no emotional distress recovery, no statutory penalty. Self-funded employer plans are the most clearly preempted; fully insured employer plans require a more careful analysis. If your coverage came through your employer, resolving the ERISA question is the first step, because it dictates every other option.
The Filing Deadline
A bad faith claim is treated as a tort, so the two-year statute of limitations under C.R.S. 13-80-102 applies. The clock starts running when you know, or should know through reasonable diligence, both that you were harmed and what caused it.7Colorado Judicial Branch. Chapter 25 Bad Faith Breach of Insurance Contract Practically, that usually means two years from the date of the denial or from the point when a delay became clearly unreasonable.
Two years disappears quickly during months of back-and-forth with adjusters. If informal negotiations have crossed the one-year mark without resolution, filing suit before the deadline closes needs to be actively on the table.
Building the Case
Bad faith cases turn on evidence about what the insurer was doing and thinking while it handled your claim. Start preserving that evidence now.
Keep every letter, email, and denial notice. Log phone calls with dates and the names of the people you spoke to. Save every version of the policy you were given. Note requests for information that felt duplicative or designed to stall. Track deadlines the insurer set for itself and missed.
Request the insurer’s claim file. Colorado’s claims-handling rules require insurers to maintain detailed records of their investigation and decision-making, and that file is often where the case is won. Internal notes showing the insurer ignored favorable evidence, relied on a slanted investigation, or acknowledged coverage internally while denying externally are the strongest proof of unreasonableness.
One provision worth checking in your policy: Colorado voids any language in a health or disability policy that gives the insurer discretion to interpret the policy or decide eligibility.2Justia. Colorado Code 10-3-1116 – Remedies for Unreasonable Delay or Denial of Benefits A denial that leans on that kind of discretionary clause is on weaker legal ground before the case even begins.
Risks and Tax Consequences
Bad faith claims are not risk-free. If a court finds the lawsuit frivolous, the insurer’s attorney fees and costs shift to the plaintiff.2Justia. Colorado Code 10-3-1116 – Remedies for Unreasonable Delay or Denial of Benefits Frivolous doesn’t mean losing; it means the claim lacked any substantial basis from the outset. Disagreeing with a denial is not the same as having a bad faith case, and that distinction should be tested honestly before filing.
Taxes catch plaintiffs off guard too. Federal tax law excludes damages from gross income only when they were received “on account of personal physical injuries or physical sickness.”8Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Insurance bad faith recoveries almost never fit. The two-times statutory penalty is taxable. Exemplary damages are taxable. Attorney fees you recover can create tax liability even though the money passes through to counsel. Emotional distress damages are taxable unless they cover actual medical expenses for that distress. Talk to a tax professional before you settle.
Working With an Attorney
Building proof of bad faith requires subpoenaing internal records, deposing adjusters, and often retaining experts on claims-handling standards. That is not a project most people take on themselves.
Most insurance bad faith lawyers work on contingency, taking a percentage of the recovery, commonly one-third to 45 percent, rather than billing hourly. The fee-shifting provision in 10-3-1116 helps because court-awarded fees come on top of your damages rather than out of them. On a claim with real dollars behind it and a documentable pattern of insurer conduct, the economics generally favor bringing the case.