The Colorado Supreme Court has ruled that car rental companies offering supplemental insurance through a third-party insurer are not themselves insurers subject to bad-faith claims.
The 4-3 decision, handed down on April 27, 2026, reversed the Colorado Court of Appeals and could reshape how the insurance industry thinks about fronting arrangements, de facto insurer liability, and the limits of bad-faith exposure for non-insurer entities that touch the insurance transaction.
The case traces back to a February 2020 car rental in Colorado. Roman Rakhimov rented a vehicle from Hertz and, for an additional $18.85 per day, opted into supplemental insurance that included uninsured/underinsured motorist coverage up to $1,000,000 per accident. The next day, another vehicle collided with the rental car and fled the scene, injuring two passengers – Stanislav Babayev and Oleg Chikov.
The insurance arrangement behind the supplemental coverage is where things get interesting for the industry. The actual policy was issued by ACE American Insurance Company, referred to in the case as Chubb. Under that policy, Chubb was the insurer, Hertz was the named insured, and Rakhimov and the passengers were additional insureds. Claims handling was delegated to ESIS, Inc., a wholly owned subsidiary of Chubb designated as the third-party claims administrator. ESIS was responsible for opening claim files, establishing reserves, investigating claims, retaining defense counsel, and settling claims within discretionary limits of $25,000 per person and $50,000 per accident.
But Hertz and Chubb also had a fronting agreement in place. Chubb would initially pay UM/UIM claims up to the $1,000,000 policy limit, and Hertz would then reimburse Chubb the full amount through a deductible. In practical terms, Hertz bore the entire financial burden for every UM/UIM claim.
After ESIS investigated the passengers' claims for over a year and issued payments that fell short of their medical expenses, Babayev and Chikov sued Hertz – not Chubb, not ESIS – for breach of contract, common-law bad faith, and unreasonable delay or denial of insurance benefits under Colorado statute. Their theory was straightforward: by selling supplemental insurance, Hertz was effectively acting as their insurer and owed them the duty of good faith and fair dealing that comes with that status.
The district court dismissed the case, finding Hertz was neither a statutory insurer under Title 10 of the Colorado Revised Statutes nor a de facto insurer under the common law. The Court of Appeals reversed, concluding Hertz was a statutory insurer and that factual disputes remained on the de facto insurer question. Hertz petitioned the Supreme Court, which took the case.
Justice Samour, writing for the majority, started with the statutory landscape. Colorado law defines an insurer as every person engaged as principal, indemnitor, surety, or contractor in the business of making contracts of insurance. A motor vehicle rental company, by contrast, is defined as an entity in the business of renting motor vehicles. The majority walked through a series of legislative amendments enacted in the mid-to-late 1990s, all prompted by the court's earlier decision in Passamano v. Travelers Indemnity Co. (1994), which had treated car rental companies offering insurance as insurers required to provide UM/UIM coverage.
The legislature, the court noted, moved quickly to undo that result. It exempted motor vehicle rental agreements and rental companies from the UM/UIM coverage mandate. It declared that car rental agreements offering insurance are not automobile insurance policies. It specified that the sale of insurance by car rental company agents does not constitute transacting insurance business. And it carved out car rental company employees from the definition of insurance producer. Taken together, the majority found, the legislature drew a clear line between car rental companies and insurers – and Hertz fell on the rental side.
That resolved the statutory question. The common-law question proved more contentious.
The plaintiffs argued that even if Hertz was not a statutory insurer, it should be treated as a de facto insurer under the framework from Cary v. United of Omaha Life Insurance Co. (2003). In that case, the court had extended the duty of good faith and fair dealing to a third-party administrator that performed virtually all claims-handling functions for a self-funded health plan and carried significant financial risk through a reinsurance agreement. The court found that administrator effectively stood in the shoes of an insurer.
The majority, however, read Cary narrowly. It held that the de facto insurer doctrine applies only to third-party administrators whose primary business is claims handling and who carry a significant financial stake in claims outcomes. That is a refinement of how some lower courts had been reading the precedent – and it matters. The majority found that Hertz is not a third-party administrator, does not have primary responsibility for claims handling, and does not operate in the claims-management business. ESIS, not Hertz, investigated claims, collected records, coordinated examinations, communicated with counsel, and paid benefits. Hertz rents cars. It does not insure them.
The court acknowledged that Hertz did participate in the early stages of the claims investigation and offered input on potential settlement, and that the fronting arrangement gave Hertz a significant financial incentive in the outcome of claims. But those factors, the majority concluded, were not enough. Treating Hertz as a de facto insurer, the court warned, would collapse the distinction between insurer and named insured, and could extend far beyond the car rental industry to any Colorado business that offers access to third-party insurance as an add-on to its core products or services.
The court also observed that Colorado already occupies unusual ground among the states by allowing bad-faith claims against third-party administrators at all. Stretching that liability further, the majority said, would push the state into territory that few if any other jurisdictions have chosen to enter.
Three justices disagreed – at least on the common-law question. Justice Hood, joined by Justice Gabriel and Justice Blanco, agreed that Hertz is not a statutory insurer but argued the de facto insurer question should have gone back to trial for further factual development. The dissent pointed to deposition testimony from an ESIS employee who acknowledged that Hertz maintained high involvement throughout the claims-adjustment process and held ultimate authority in determining claim values because it was Hertz's money on the line. The Risk Management Services Agreement also gave Hertz final settlement authority for larger claims.
The dissent warned that the majority's approach – requiring the defendant to be a third-party claims administrator by title – creates a formalistic limit that sophisticated industry actors could exploit. An entity could exercise real control over claims outcomes while avoiding the administrator label, and then cite the absence of that label to sidestep liability. The dissent would have applied Cary more broadly, looking at the actual control and financial incentives at play rather than the formal designation of each party's role.
The Supreme Court reversed the Court of Appeals and ordered reinstatement of the district court's dismissal. The plaintiffs still have options: they are pursuing claims against Chubb and ESIS in federal court, and they have brought a separate claim against Hertz under the Colorado Consumer Protection Act for allegedly deceptive practices in the marketing and sale of supplemental insurance. That federal case remains pending.
For the insurance industry, the decision offers some comfort to carriers and corporate policyholders using fronting arrangements – at least in Colorado. The court has drawn a line: offering incidental access to insurance and carrying financial risk through a fronting structure does not, by itself, make a non-insurer entity subject to bad-faith liability. But the 4-3 split and the dissent's pointed criticism suggest the question is far from fully settled, and the industry would be wise to pay close attention to how similar challenges develop in other jurisdictions.
