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Injured Cyclist Denied Insurance Benefits, Carrier Did Not Act In 'Bad Faith'

August 19, 2005

An insurance carrier did not act in bad faith when it denied coverage to its insured based on the policy's owned-but-not-insured exclusion because it relied on the case law applicable at the time of its decision, the 10th Circuit U.S. Court of Appeals affirmed in James Anderson v. State Farm Mutual Automobile Insurance Co. (No. 04-1291, 10th Cir.).

James Anderson was involved in an accident while driving his motorcycle and, as a result, sustained severe injuries. At the time of the accident, both Anderson's motorcycle and his automobiles were insured by State Farm. The motorcycle policy provided uninsured motorist (UM) and underinsured motorist (UIM) coverage but did not provide personal injury protection (PIP). The automobile policies provided PIP coverage and UM/UIM coverage.

After the accident, State Farm determined that the other driver, Mark Presley, also insured by State Farm, was at fault and paid Anderson $100,000 under Presley's policy. Anderson sought to obtain PIP benefits under his automobile policies, but State Farm rejected his request relying on the "owned but not insured" exclusion, which states that benefits are not available "whenever an insured is occupying a vehicle which is owned by the named insured but which is not insured under the policy in question."

Anderson filed this class action in state court, alleging common-law bad faith and violations of the Colorado Consumer Protection Act (CCPA), Colorado Revised Statutes Section 6-1-105(1)(e), (g), (u). Anderson claimed that State Farm's failed to disclose and misrepresented the nature of UM/UIM coverage. State Farm subsequently removed the suit to the U.S. District Court for the District of Colorado.

State Farm moved to dismiss Anderson's amended complaint. The District Court dismissed Anderson's complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The court rejected Anderson's common-law bad faith claim, finding no support for Anderson's assertions that State Farm failed to effectively explain the effects of purchasing UM/UIM coverage after DeHerrera and that a mass mailer distributed by State Farm post-DeHerrera was vague. The court also concluded that Anderson did not adequately state a claim for an unfair or deceptive trade practice under the CCPA.

Anderson filed a motion for reconsideration, which was denied. Anderson appealed. On appeal, Anderson argued that the District Court erred in dismissing his claims for common-law bad faith and violations of the CCPA. The appeals panel rejected Anderson's arguments and determined that State Farm did not act unreasonably because at the time of Anderson's alleged injury, State Farm was relying on clear case law upholding owned-but-not-insured exclusions in insurance contracts providing UM/UIM coverage.

"A decision to award coverage benefits pursuant to retroactive application of a judicial decision does not mean that the prior disclosures and representations of the insurer based on the previously-understood state of the law constitute bad faith," the panel explained. Furthermore, the panel said that State Farm's explanation of UM/UIM coverage was based upon a reasonable, though mistaken, belief that under Colorado law, owned-but-not-insured exclusions in insurance policies providing UM/UIM coverage were valid. The panel also upheld dismissal of the CCPA claim, explaining that the insurer did not make any representations that it knew or should have known to be false or act with reckless disregard.