Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-87-02788/USCOURTS-ca10-87-02788-0/pdf.json

Parties Involved:
State Farm Mutual Automobile Insurance Company
Appellee
Margaret S. Wilson
Appellant

Document Text:

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PUBLISH 

FILED 

United Scares Courc of Appeals 

Tenth Circuit 

UNITED STATES COURT OF APPEALS MAY 3 0 1991 

ROBERT L. HOECKER 

Clerk 

TENTH CIRCUIT 

MARGARET s. WILSON IPlaintiff-Appellee/ 

Cross-Appellant, 

v. 

STATE FARM MUTUAL AUTOMOBILE 

INSURANCE COMPANY, 

Defendant-Appellant/ 

Cross-Appellee. 

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Nos. 87-2717 

& 87-2788 

Appeal from the United States District Court 

for the District of Colorado 

(D.C. No. 86-M-583) 

Neil c. Bruce of Retherford, Mullen, Rector & Johnson, Colorado 

Springs, Colorado (Robert K. Jones with him on the brief), for 

Defendant-Appellant/Cross-Appellee. 

Patrie J. LeHouillier of LeHouillier, Erler and Nolan, Colorado 

Springs, Colorado, for Plaintiff-Appellee/Cross-Appellant. 

Before SEYMOUR and McWILLIAMS, Circuit Judges, and PHILLIPS,* 

District Judge. 

SEYMOUR, Circuit Judge. 

* The Honorable Layn R. Phillips, United States District Judge 

for the Western District of Oklahoma, sitting by designation. 

Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 1 
This case arises from State Farm Mutual Automobile Insurance 

Company's (State Farm) failure to pay benefits to Margaret S. 

Wilson under the Colorado Auto Accident Reparations Act (CAARA or 

Act), Colo. Rev. Stat. §§ 10-4-701 to -727 (1987 & Supp. 1990). 

State Farm appeals from the jury verdict in favor of Ms. Wilson, 

alleging numerous errors below. Ms. Wilson cross-appeals the 

district court's dismissal of her state law claim of bad faith 

breach of insurance contract and the court's grant of a directed 

verdict for State Farm with respect to her claim for intentional 

infliction of emotional distress due to outrageous conduct. Ms. 

Wilson also asks that we award her attorney's fees to cover the 

cost of this appea1. 1 We affirm in part and reverse in part. 

I. 

Ms. Wilson, the sole proprietor of a law firm and a resident 

of New Mexico, was injured in an automobile accident on December 

15, 1985, in Colorado while a passenger in an automobile driven by 

Ronald A. Peterson. Mr. Peterson was covered under an insurance 

policy issued by State Farm, which included no-fault personal 

1 Ms. Wilson also argues that she is entitled to post-judgment 

interest at a rate of 18% interest pursuant to § 10-4-708 of the 

Act, rather than at the statutory rate of 7.88% awarded by the 

district court. Because this argument was not presented to the 

district court we will not consider it on appeal. See Dille v. 

Council of Energy Resource Tribes, 801 F.2d 373, 376-77 (lOth Cir. 

1986); Channel v. Heckler, 747 F.2d 577, 579 n.2 (lOth Cir. 1984). 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 2 
injury protection (PIP) as required by the CAARA. Mr. Peterson's 

coverage extended to passengers in his automobile. 

Ms. Wilson submitted claims to State Farm for loss of income, 

medical and rehabilitative expenses, and essential services. 

Disagreements arose between Ms. Wilson and State Farm concerning 

the proper basis for calculation of lost income, as well as 

whether certain claims were compensable under the Act. Ms. Wilson 

subsequently filed suit against State Farm for its' failure to pay 

PIP benefits as required by the CAARA. Ms. Wilson also asserted 

claims for bad faith breach of insurance contract and intentional 

infliction of emotional distress caused by extreme and outrageous 

conduct. The district court dismissed the bad faith claim, 

holding that it was preempted by the CAARA, and directed a verdict 

for State Farm on the issue of intentional infliction of emotional 

distress. The jury found for Ms. Wilson on the claims based on 

the CAARA, awarding her $40,500 for medical and rehabilitation 

expenses, and $93,400 for lost income. It also found that State 

Farm's failure to pay was willful and wanton, which entitled her 

to treble damages under the Act. Pursuant to the Act, the court 

awarded prejudgment interest at a rate of 18% in the amount of 

$29,045, and attorney's fees totaling $26,200. The district court 

also ordered that interest run from the date of judgment at a rate 

of 7.88%. 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 3 
II. 

This case requires us to construe the Colorado Auto Accident 

2 Reparations Act, specifically §§ 10-4-706 and 10-4-708. 

"The [CAARA] mandates that every owner of a motor 

vehicle operated on Colorado's public highways obtain a 

complying automobile insurance policy ...• 

"The [CAARA] was enacted in part to avoid inadequate compensation to victims of automobile accidents. 

Consistent with this purpose, every owner of a motor 

vehicle operated on the public highways of Colorado must 

maintain an automobile insurance policy providing 

personal injury protection benefits 'without regard to 

fault' up to the statutory limits. . . . The CAARA is 

incorporated as part of every auto insurance policy, and 

governs in any conflict between the act and the insurance policy. " 

Allstate Ins. Co. v. Allen, 797 P.2d 46, 49 (Colo. 1990) (en bane) 

(citations omitted). PIP benefits compensate persons injured in 

automobile accidents for medical expenses incurred and gross 

income lost due to the accident. See Colo. Rev. Stat. § 10-4-706. 

2 Section 10-4-708 was amended in 1989 to provide for arbitration procedures to resolve disputes over PIP claims. See Colo. 

Rev. Stat. § 10-4-708 (1.5) (Supp. 1990). The amendment is 

applicable to claims arising after July 1, 1989. See 1989 Colo. 

Sess. Laws L. 89, p. 461, § 6. Because Ms. Wilson brought this 

action in 1986 her claim is governed by the unamended statute. 

Our holdings with respect to the issues disputed under the CAARA 

are only applicable to the statute as it was written prior to the 

amendment. 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 4 
State Farm first claims that the district court erred by 

instructing the jury that the formula for calculating Ms. Wilson's 

lost gross income was her hourly rate multiplied by the hours she 

would have worked but for her injuries. State Farm argues that 

while this calculation would properly measure the gross income of 

Ms. Wilson's sole proprietorship, i.e., her law firm, section 

10-4-706 provides compensation for lost personal gross income, not 

the gross income generated by the claimant's business. Thus, it 

contends, the appropriate measure of benefits is equal to Ms. 

Wilson's hourly rate multiplied by the hours she would have worked 

but for her injuries, minus the business expenses attendant to 

that work. While this issue has not been expressly addressed by 

the Colorado courts, State Farm argues that Ramirez v. Veeley, 757 

P.2d 160 (Colo. App. 1988), and a survey of other state cases 

construing similar no-fault PIP insurance statutes support this 

position. Ms. Wilson asserts that Ramirez is inapt, that the term 

"gross income" should be given its ordinary meaning, i.e., total 

income exclusive of deductions, and that none of the state cases 

cited by State Farm are relevant because the courts were not 

construing the term "gross income". 

Under Salve Regina College v. Russell, 111 S. Ct. 1217, 1221 

(1991), we review de novo a district court's interpretation of 

state law. Under Colorado law, "[o]ur primary task in construing 

[the CAARA] is to give effect to the intent of the [Colorado] 

General Assembly." Farmers Group, Inc. v. Williams, 805 P.2d 419, 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 5 
422 (Colo. 1991) (en bane). Colorado law also directs that we 

"construe the statute as a whole to give effect to all of its 

parts." Id. 

Section 10-4-706 provides in pertinent part: . 

"[T]he m~nl.IIlum coverages required for compliance with 

[the CAARA] are as follows: 

"Payment of benefits equivalent to one hundred 

percent of the first one hundred twenty-five dollars of 

loss of gross income per week, seventy percent of the 

next one hundred twenty-five dollars of loss of gross 

income per week, and sixty percent of any loss of gross 

income per week in excess thereof, with the total 

benefit under this subparagraph (1) not exceeding four 

hundred dollars per week, from work the injured person 

would have performed had he not been injured during a 

period commencing the day after the date of the 

accident, and not exceeding fifty-two additional weeks." 

(emphasis added). Although we agree that the ordinary meaning of 

gross income is total income exclusive of deductions, this is not 

dispositive of the issue. Rather, we must decide what kind of 

gross income it is that the CAARA compensates in order to arrive 

at the correct formulation. 

"The Act is designed to ensure that persons injured in 

automobile accidents are fully compensated for their injuries." 

Sulzer v. Mid-Century Ins. Co., 794 P.2d 1006, 1008 (Colo. 1990) 

(en bane) (emphasis added). When the claimant is an employee, the 

gross income lost is equivalent to the amount of salary the 

claimant would have received had she not been injured. See Bondi 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 6 
v. Liberty Mut. Ins. Co., 757 P.2d 1101, 1102 (Colo. App. 1988) 

(section 10-4-706 provides for lost wages). However, where, as 

here, the claimant is a sole proprietor, she wears two hats -- one 

as an employee and one as a business entity. Because the statute 

provides individual, not business coverage, it is necessary to 

calculate the sole proprietor's claim for lost income from her 

position as an employee. In such case, the proper amount of 

reimbursement equals that part of the gross income of the business 

that would have been earned by the claimant as individual wages. 

To compensate the sole proprietor based upon the gross income 

generated by the proprietorship would be to unfairly compensate 

her for business expenses, such as overhead or the salaries of her 

employees. We believe that a just and reasonable construction of 

section 10-4-706 mandates the deduction of business expenses from 

the calculation of lost gross income when the claimant is a sole 

proprietor. 

We agree with State Farm that Ramirez v. Veeley, 757 P.2d 160 

(Colo. App. 1988), provides strong support for this construction. 

In Ramirez, the Colorado Court of Appeals concluded, without 

expressly stating its rationale, that "loss of gross income per 

week pursuant to § 10-4-706 must be computed on an individual's 

gross income and not on the gross sales or income of the 

individual's business." Id. at 162. A review of other state 

court cases deciding this issue with respect to their own no-fault 

PIP auto insurance statutes supports our determination. See, 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 7 
~' Adams v. Auto Club Ins. Ass'n, 397 N.W.2d 262, 264 (Mich. 

App. 1986) (per curiam) (business expenses should be deducted from 

gross receipts in determining lost income of self-employed 

claimant under no-fault act); Bradley v. Aid Ins. Co., 629 P.2d 

720, 726 (Kan. App. 1981) (no-fault designed to protect claimant's 

out-of-pocket losses, rather than losses to her business); Zyck v. 

Hartford Ins. Group, 375 A.2d 1232, 1233 (N.J. Super. Ct. App. 

1977) (under no-fault statute partner in business owed only for 

loss of income, not damages measured by value of service to 

business), cert. denied, 384 A.2d 501 (N.J. 1977). Although it is 

true that the no-fault statutes construed in the foregoing cases 

do not modify the term "income" with "gross", our prior analysis 

makes clear why this distinction is, for the purposes of personal 

injury protection insurance, without a difference. We must 

therefore reverse and remand for a new trial on damages to 

determine the amount of income that should have been paid by State 

Farm based on Ms. Wilson's hourly rate multiplied by the hours she 

could not work due to her injuries, minus business expenses. 

State Farm next contends that the district court erred in 

denying its motion for a directed verdict on Ms. Wilson's claim 

that it acted willfully and wantonly under section 10-4-708 of the 

Act by refusing to pay her claims. A willful and wanton failure 

to pay PIP benefits results in an automatic statutory penalty of 

three times the amount of the award. See Farmers Group, Inc., 805 

P.2d at 421. 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 8 
"In a diversity case, this court applies the 

federal standard in determining whether the evidence is 

sufficient to go to the jury or, as a matter of law, the 

court should direct a verdict. Under the federal 

standard, the trial court must view the evidence and the 

inferences to be drawn therefrom in the light most 

favorable to the party against whom the motion is 

directed. When the evidence is so viewed, a directed 

verdict is proper only when the evidence is so patently 

in favor of the moving party that a jury verdict in 

favor of the opposing party would be improper and would 

have to be set aside by the trial judge. 

"While the sufficiency of the evidence is tested 

against the federal standard, the underlying cause of 

action in a diversity case is governed by state law." 

Peterson v. Hager, 724 F.2d 851, 853-54 (lOth Cir. 1984) (citation 

omitted). 

Although there has been no state judicial interpretation of 

"willful and wanton" conduct under section 10-4-708, the Colorado 

courts have defined such conduct in other contexts as that which 

is done purposefully, heedlessly, and recklessly, without regard 

to the consequences or the rights of others. See, ~' 

Pettingell v. Moede, 271 P.2d 1038, 1042 (Colo. 1954) (en bane) 

(automobile guest statute); see also Navratil v. Parker, 726 F. 

Supp. 800, 805 (D. Colo. 1989) (public employee immunity statute); 

cf. Colo. Rev. Stat. § 13-21-102-(l)(b) (1987) (exemplary damages 

statute). Under Colorado law, "'it is to be presumed that a 

legislature is cognizant of and adopts the construction which 

prior judicial decisions have placed on particular language when 

such language is employed in subsequent legislation.'" Allen, 797 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 9 
P.2d at 50 n.4 (quoting People v. Cooke, 150 Colo. 52, 62, 370 

P.2d 896, 901 (1962)). 

Colorado requires insurers to reimburse claimants for 

expenses incurred due to an auto accident within thirty days of 

receipt of reasonable proof that the expenses were in fact 

incurred. See Colo. Rev. Stat. § 10-4-708. Here, there was 

evidence produced that State Farm continued to receive, but not 

pay, bills incurred for treatment of Ms. Wilson's injuries without 

making any effort to ascertain the reasonableness of such bills. 

State Farm adjustors rejected Ms. Wilson's physicians' 

prescriptions and recommendations regarding her medical and 

rehabilitative treatment without consulting another doctor or 

expert in the field. There also was evidence that State Farm 

received from Ms. Wilson documentation of the income lost due to 

her injuries, both from her law firm and from other sources, but 

failed to reimburse her in accordance with the Act. Thus, State 

Farm acted purposefully and without regard to Ms. Wilson's right 

under the CAARA to have such bills paid within thirty days. State 

Farm argues that the correct standard of proof with respect to 

this issue is beyond a reasonable doubt. However, during the 

pendency of this appeal, the Colorado Supreme Court held that 

willful and wanton conduct under the CAARA need only be 

established by a preponderance of the evidence. Farmers Group, 

Inc., 805 P.2d at 427. We therefore conclude there was sufficient 

evidence of willful and wanton conduct on the part of State Farm 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 10 
in not paying Ms. Wilson's medical, rehabilitative and gross 

income claims to submit this issue to the jury under the 

preponderance standard. However, as discussed above, the district 

court's errant construction of the gross income formula requires 

reversal and remand with respect to the amount of damages to be 

awarded under this claim. 

III. 

We turn now to the issues raised in Ms. Wilson's 

cross-appeal. Ms. Wilson argues that the district court erred 

when it held that the CAARA preempted her common law claim for bad 

faith breach of insurance contract. Subsequent to the trial, the 

Supreme Court of Colorado held that the Act does not preempt this 

claim, see Farmers Group, Inc., 805 P.2d 426, and we therefore 

must reverse the district court's ruling and remand for a trial on 

this issue. 

Ms. Wilson next contends that the district court erred when 

it directed a verdict for State Farm on her claim for intentional 

infliction of emotional distress caused by extreme and outrageous 

conduct. Under Colorado law, such conduct must be: 

"so outrageous in character, and so extreme in degree, 

as to go beyond all possible bounds of decency, and to 

be regarded as atrocious, and utterly intolerable in a 

civilized community. Generally, the case is one in 

which the recitation of the facts to an average member 

of the community would arouse [her or] his resentment 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 11 
against the actor, and lead [her or] him to exclaim, 

'Outrageous!'" 

Churchey v. Adolph Coors Co., 759 P.2d 1336, 1350 (Colo. 1988) 

(quoting Rugg v. McCarty, 173 Colo. 170, 476 P.2d 753, 756 

(1970)). Ms. Wilson argues that State Farm's refusal to pay her 

claims within the statutorily required thirty days amounted to 

outrageous conduct because State Farm knew of the financial 

instability of her law practice. She also claims that the conduct 

of State Farm Agent, Richard Chilson, was outrageous when he 

slurred her American Indian heritage and made derogatory comments 

about her gender. Although these acts present a close case, we 

agree with the district court that they are insufficient to create 

liability under Colorado law. Cf. Churchey, 759 P.2d at 1351 

("not all 'acts that are definitely inconsiderate and unkind' 

create liability") (quoting Restatement (Second) of Torts, § 46 

comment d (1977)). 

Ms. Wilson asks that we award her attorneys fees under Colo. 

Rev. Stat. § 10-4-708(1) (1987) for the expenses incurred in this 

appeal. At the time the dispute arose, section 10-4-708(1) 

provided in pertinent part: 

"In the event that the insurer fails to pay [PIP] 

benefits when due, the person entitled to such benefits 

may bring an action in contract to recover the same. In 

the event the insurer is required by such action to pay 

any overdue benefits, the insurer shall, in addition to 

the benefits paid, be required to pay the reasonable 

attorney fees incurred by the other party." 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 12 
When the defendant appeals the jury's award of overdue benefits 

under the Act, a defense on appeal is necessary in order to 

recover that award. In effect, this defense is an extension of 

the original contract action that the claimant was forced to 

institute in order to receive what the statute requires. Thus, 

when the claimant is successful on appeal, the insurer must pay 

the claimant's attorney's fees for the defense of that appeal. In 

this case, however, State Farm was warranted in refusing to pay 

benefits based on the gross income of Ms. Wilson's business. 

Consequently, an award of attorney's fees for the appeal is 

inappropriate. 

The judgment of the district court is affirmed insofar as it 

awarded Ms. Wilson damages for medical and rehabilitative expenses 

and directed a verdict for State Farm on the claim for intentional 

infliction of emotional distress due to outrageous conduct. The 

judgment is reversed and remanded for a new trial on Ms. Wilson's 

bad faith breach of insurance contract, and for a damage 

determination only on Ms. Wilson's claim for lost gross income. 

The district court is further instructed to treble the damages, if 

any, determined under the gross income claim. 

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Appellate Case: 87-2788 Document: 01019292876 Date Filed: 05/30/1991 Page: 13