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Ballow v. Phico Insurance Co.11/15/1993
JUSTICE MULLARKEY delivered the Opinion of the Court.
We granted certiorari in this case to address several issues arising out of a medical malpractice insurance carrier's withdrawal from the Colorado market. The trial court, in a 294-page order, ruled in favor of the petitioners who are the doctors formerly insured by the medical malpractice insurance carrier. It held that the insurance carrier breached its contract with the doctors, engaged in fraud and negligent misrepresentation, and acted in bad faith. The court of appeals, in Ballow v. PHICO Insurance Co., 841 P.2d 344 (Colo. App. 1992), reversed, holding that the trial court erred in finding that the insurer breached its contract with the doctors, and that it engaged in fraud, negligent misrepresentation, and bad faith conduct. We granted certiorari and, for the reasons set forth below, we reverse.
I.
The petitioners are 105 medical doctors, doctors of osteopathy, and doctors of podiatric medicine practicing in the State of Colorado (collectively referred to in this opinion as doctors). The respondent, PHICO Insurance Co. (PHICO), is a medical malpractice insurance carrier owned by the Hospital Association of Pennsylvania (HAP).
PHICO was created in 1976 as a Pennsylvania malpractice insurer specializing in hospital coverage. In 1978, HAP decided to expand its programs and operations into states other than Pennsylvania, and to broaden its customer base to independent physicians. PHICO began marketing a claims-made policy in Colorado in the spring of 1981 and sold its first independent physician policy here on February 1, 1982.
To properly approach this case, a basic understanding of the concepts relevant to claims-made insurance coverage is required. There are presently two basic types of professional liability insurance policies: claims-made and occurrence. See Regulation 5-1-8, 3 C.C.R. 702-5 (1992). A pure claims-made policy provides coverage for claims made during the policy period, regardless of when the events out of which the claim arose occurred. 7A J. Appleman, Insurance Law and Practice ยง 4503, at 96 (Supp. 1992). In contrast, an occurrence policy provides coverage for all "occurrences" which take place during a policy period, regardless of when the claim is made. Id.
Insureds who purchase claims-made policies can protect themselves against claims made after the policy terminates in one of two ways. One option is to obtain "prior acts" coverage. Under this option, the new insurer charges an additional premium to cover the insured for acts occurring before the inception date of the new policy. Insurers need not offer this coverage. Another option is to purchase extended reporting period, or "tall," coverage. See Regulation 5-1-8, 3 C.C.R. 702-5 (1992). This coverage, which is usually available, is purchased from the first insurer and covers future claims made for incidents occurring during the time of the claims-made coverage. In effect, such coverage turns claims-made coverage into occurrence coverage.
When PHICO entered the Colorado market, most physicians were insured under occurrence policies and were reluctant to switch to claims-made policies. This reluctance stemmed, in part, from uncertainty concerning the cost of tail coverage. Many doctors testified that they feared the cost of tail coverage would be "unpredictably expensive," and that "the insurance company would be able to create any number out of the air and say this is [what it's] going to cost you to get out of the company." To allay the doctors' fears concerning the unpredictable cost of tail coverage, PHICO made numerous guarantees in its marketing. For example, Mr. Rodg
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