Recently, in Schuessler v. Wolter, 2012 COA 86 (May 24, 2012), the Colorado Court of Appeals rejected an effort by the insurer to hide behind the fair debatability doctrine.
The insurer asserted that the trial court erroneously denied its motion for directed verdict or judgment notwithstanding the verdict (JNOV) as a matter of law. The argument was that in a first-party bad faith claim, an insurer is entitled to JNOV when the insurer shows it "acted reasonably in denying a claim based on a defense that was fairly debatable." In effect, the insurer took the extreme position that "fair debatability is a complete defense to a bad faith claim, as a matter of law, so long as there is any evidence to support its denial" of the claim.
The appellate court rightly rejected the argument. The issue arose by way of a common law bad faith tort in the workers’ compensation context. To prove the tort, a covered claimant has to show that the insurer "acted unreasonably" and "did so with knowledge of or reckless disregard for the fact that no reasonable basis existed for its action." See e.g., Bankruptcy Estate of Morris v. COPIC Ins. Co., 192 P.3d 519, 524 (Colo. App. 2008).
The so-called fair dabatability doctrine comes into play because in Colorado it is reasonable for an insurer to consider and thus to contest a claim for insurance benefits as “fairly debatable.” The court explained the important point that "the defense of fair debatability is not a threshold inquiry that is outcome determinative as a matter of law; it is not necessarily sufficient, standing alone, to defeat a bad faith claim." In other words, some evidence that a claim for benefits is fairly debatability will not automatically defeat a bad faith tort brought subsequent to the denial of the original claim for benefits.
If the evidence of the insurer's reasonableness in denying the claim for benefits is disputed, the insurer's evidence of fair debatability will not, per se, defeat a bad faith tort. The appellate court found that reasonableness was in fact disputed, which made the matter one for the jury.