The State of Punitive Damages in Colorado

The State of Punitive Damages in Colorado

Many states provide limited to no checks on a plaintiff’s ability to plead and seek exemplary or punitive damages in the initial stage of litigation. For example, in California plaintiffs are met with no initial bar in pleading punitive damages. While there are effective tools to combat a frivolous prayer for punitive damages, its initial inclusion in a complaint can often provide unwarranted leverage to a plaintiff.

Like a majority of states, Colorado affords plaintiffs the opportunity to seek exemplary or punitive damages where an injury is attended by circumstances of fraud, malice, or willful and wanton conduct. (CO Rev Stat § 13-21-102.) The general purpose of punitive damages is punishment where the court seeks to deter against the commission of similar offenses by the defendant or others in the future.

Colorado Now Requires a Noticed Motion to Assert Punitive Damages

Like California, prior to 2003 Colorado provided no initial bar to a plaintiff’s request for punitive damages. In 2003, Colorado began prohibiting plaintiffs from pleading punitive damages at the outset of litigation. Instead, plaintiffs are now required to make an affirmative showing via noticed motion to amend the complaint to add a request for punitive damages. These pleading requirements act as a meaningful safeguard in affording defendants with ample protection from unwarranted claims.

Colorado Also Requires Proof Beyond a Reasonable Doubt to Award Punitive Damages

While most states require a “clear and convincing” standard of proof for an award of punitive damages, Colorado provides an extra layer of security to defendants by awarding punitive damages only when the requisite showing has been made “beyond a reasonable doubt.” Colorado also caps punitive damages at three times compensatory damages while requiring punitive damages bear a reasonable relationship to compensatory damages. (Mortgage Finance Inc. v. Podelski (Colo. 1979) 742 P.2d 900.)

Insurers are not Liable for Punitive Damages in Colorado

Colorado also provides an additional safeguard to insurers. Since 1934, Colorado has prevented insurers from being held responsible for punitive damages resulting from wrongful conduct generally covered by its policies. In Universal Indem. Inc. Co. v. Tenery, (1934) 96 Colo. 10, judgment was entered against Universal Indemnity Insurance Company and its insured after the insured carelessly and negligently operated an automobile causing a collision, while under the influence of “intoxicating liquor.” Judgment was subsequently entered in the amount of $2,575.44 (calculated as $1,575.44 in compensatory damages and $1,000.00 in punitive damages.)

On appeal after Universal Indemnity Insurance Company refused to pay plaintiff/judgment creditor pursuant to a garnishment order, the Colorado Supreme Court reversed holding Universal Indemnity Insurance Company had no obligation to pay the punitive damages ordered on the insured. The court reasoned an insurer, not participating in the wrong which resulted in damages, is under no obligation to indemnify for punitive damages awarded against an insured. (Id. at 17.)

While Colorado insurers can rest assured they will not be required to reimburse exorbitant punitive damages award, the pleading of punitive damages in no way alleviates an insurer from its contractual duty to defend. A defense obligation exists if a complaint alleges facts that are potentially or arguably covered. If any doubt exists, an insurer is required to defend. (Hecla Mining v. New Hampshire Ins. Co. (Colo. 1991) 811 P.2d 1083.)

The Takeaway

When and if a close call arises, an insurer would be wise to proceed with discharging its duty to defend and protect its right to contest coverage at a later time via a reservation of rights letter. While no Colorado-based authority has ruled on this course of action, the Tenth Circuit has indicated Colorado law explicitly allows an insurer to recover defense costs where a reservation of rights letter has been invoked and coverage is later denied.

While the threat of punitive damages can be worrisome, Colorado courts provide far greater protection to insurers and insureds from excessive runaway jury verdicts than most other states.

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