In my experience, those who handle general and professional liability claims don’t get jonesed for decisions involving automobile coverage. And there’s good reason for that. Many automobile coverage cases do not involve issues that are relevant to general and professional liability claims. Sure there are exceptions – most notably, the lessons from bad faith failure to settle cases are transferrable to general and professional liability claims.

The Colorado Supreme Court recently issued a decision in an automobile coverage case involving an issue with the potential for much wider applicability. The fact that there were ten amici curiae involved – including three representing the interests of builders (yes, builders, in an auto coverage case) -- is strong evidence of this.

At issue in American Family Mutual Insurance Co. v. Hansen, No. 14SC99 (June 20, 2016) is whether extrinsic evidence can alter the terms of an insurance policy. That the case arises in the auto policy context is of no consequence. The decision is applicable to every type of policy.

The facts are simple and so is the analysis.

Jennifer Hansen was injured in a motor vehicle accident. She presented a UIM claim to American Family Mutual Insurance Company, asserting coverage under her policy on her 1998 Ford Escort. “As proof of insurance, Hansen offered lienholder statements issued to her by American Family’s local agent that identified her as the named insured at the time of the accident. American Family’s own records, however, including a November 2007 declaration page, indicated that the named insureds on the policy at the time of the accident were Hansen’s stepfather and mother, William and Joyce Davis.”

Continuing on with the facts as set out by the court: “In reliance upon the policy as reflected in its own records, American Family determined that Hansen was not insured under the policy and denied coverage. Hansen filed an action against American Family asserting claims for breach of contract, common law bad faith, and statutory bad faith for unreasonable delay or denial of benefits under sections 10–3–1115 and –1116, C.R.S. (2015). Prior to trial, American Family reformed the contract to name Hansen as the insured, and the parties settled the breach of contract claim, leaving only the common law and statutory bad faith claims for trial.”

The dispute is easy to see. American Family looks at its policy and sees that it’s issued to Jennifer Hansen’s parents. Since Jennifer doesn’t live at home, coverage is denied. Hansen sees it much differently, and not surprisingly. She points to the lienholder statements issued to her by American Family’s local agent. The document looks just like a policy declarations page and it identifies her as the named insured at the time of the accident.

American Family reformed the policy and settled the UIM claim. So Jennifer had something to her argument. However, the case still went to trial on Jennifer’s bad faith claims. The trial court determined that the discrepancy between the lienholder statement and the records in American Family’s underwriting department created an ambiguity as to the identity of the named insured. The court instructed the jury that an ambiguous contract must be construed against the insurer. The jury found in American Family’s favor on the common law bad faith claim but in Hansen’s favor on the statutory bad faith claim. [The fact that these are bad faith claims is not relevant to the core issue – can the lienholder statement alter the policy?] The court of appeals affirmed, finding that the lienholder statements created an ambiguity.

The Colorado Supreme Court reversed: “Because the insurance contract unambiguously named William and Joyce Davis as the insureds at the time of the accident, the trial court and court of appeals erred in using the extrinsic evidence of the lienholder statements to find an ambiguity in the contract. Accordingly, American Family’s denial of Hansen’s claim in reliance on the unambiguous insurance contract was reasonable, and the company cannot be held liable under sections 10–3–1115 and –1116 for statutory bad faith.”

The Supreme Court’s reasoning was simple. The insurance policy itself was not ambiguous. The declarations page unambiguously named William and Joyce Davis as the insureds. It was only the existence of the lienholder statement that created the ambiguity. However, “an ambiguity must appear in the four corners of the document before extrinsic evidence can be considered.” (emphasis in original). As the Supreme Court succinctly put it: “[E]xtrinsic evidence cannot create ambiguity; it is an aid to ascertaining the intent of the parties once an ambiguity is found.”

This is no insignificant decision. It is easy to see Jennifer Hansen waving that lienholder statement up and down saying – “Look. Look at this. It says I’m an insured. So either I am -- or its ambiguous (and so I am).” As attractive of an argument as that seems for an insured – Jennifer or others in a variety of scenarios -- it was rejected. Extrinsic evidence can only be a solution to a problem. It cannot create a problem.