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(Article from Insurance Law Alert, July/August 2016)

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Reversing an appellate court decision, the Colorado Supreme Court ruled that a policyholder may not rely on extrinsic evidence to establish a policy ambiguity.  Rather extrinsic evidence may only be used to determine the parties’ intent if an ambiguity appears in the four corners of the document.  American Family Mutual Ins. Co. v. Hansen, 2016 WL 3398507 (Colo. June 20, 2016).

The coverage dispute arose out of a motor vehicle accident, in which Jennifer Hansen was injured.  She filed a claim with American Family under a policy that insured the car.  American Family denied the claim on the basis that Hansen was not insured under a policy that listed Hansen’s mother and stepfather as named insureds.  Hansen sued, alleging breach of contract and statutory and common law bad faith.  In support of her claims, she submitted lienholder statements issued to her by American Family’s local agent that identified her as a named insured under the policy.  A trial court ruled that the discrepancy between the declaration page and lienholder statement created an ambiguity which must be construed in Hansen’s favor.  A jury ruled in Hansen’s favor on the statutory bad faith claim, finding that American Family had denied payment without a reasonable basis.  An appellate court affirmed. 

The Colorado Supreme Court reversed, holding that because the policy listed only two other individuals as named insureds at the time of the accident, the trial court and appellate court erred in relying on extrinsic evidence to find an ambiguity.  The court stated that “[a]n ambiguity must appear in the four corners of the document before an extrinsic evidence can be considered.”  Therefore, the court held that American Family’s denial of Hansen’s claim in reliance on the unambiguous policy was reasonable and it could not be found liable for statutory bad faith.  The court also rejected Hansen’s reasonable expectations argument.  Although Colorado law has allowed the reasonable expectations of an insured to “succeed[ ] over exclusionary policy language,” the court deemed the doctrine inapplicable because Hansen was not an insured under the policy.