Randy Barnhart

Oppressive, Intimidating Claim Practices? - Still Bad Faith Even if Claim Fairly Debatable

Our neighbor state to the north answered the insurance law question: "Even though the insurer here had a 'fairly debatable' reason for not paying the claim in the first place, i.e., its belief that the loss was the result of arson, it cannot properly go beyond a reasonable denial of the claim and engage in unreasonable or unfair behavior to gain an unfair advantage. A 'fairly debatable' reason to deny a claim is not a defense against torts that may flow from engaging in oppressive and intimidating claim practices." Hatch v. State Farm Fire & Cas. Co., 842 P.2d 1089, 1099 (Wyo. 1992).

Bad Faith Claims - a Trio of Important Cases - Part 2

My last post on a trio of important Colorado cases governing bad faith claims concluded with the abuse by insurers of the "fairly debatable" doctrine in motions for summary judgment on both the common law and statutory bad faith actions by honest policy-holders.

Insurers pin high hopes on Zolman v. Pinnacol Assur., 261 P.3d 490, 499-500 (Colo. App. 2011), but the court in Schuessler dashed those hopes:

Pinnacol’s reliance upon Zolman for a different result is misplaced. That case does not stand for the proposition that proof of fair debatability allows judgment for the insurer as a matter of law in a bad faith case. . . . To the extent that Pinnacol contends its evidence of fair debatability defeated [the policy-holder's] bad faith claim, we conclude that this proposition would be true only if the evidence of the reasonableness of its conduct were undisputed, and only if a reasonable person could not reach the same conclusion as the jury, when viewing the evidence in the light most favorable to Schuessler.

Schuessler, 2012 COA 86, ¶¶ 39-42.

Just because an insurer comes forward with some evidence that its conduct was reasonable does not mean that a policy-holder is precluded from coming forward with evidence that State Farm’s conduct was unreasonable, even recklessly so. See Zolman, 261 P.3d at 497 (“What constitutes reasonableness under the circumstances is ordinarily a question of fact for the jury.”).

The insurer's abuse of the “fair debatability” doctrine would also have absurd consequences. If an insurer could win summary judgment merely by adducing some evidence that its claim investigation and handling was at some point reasonable, then the jury instruction on the defense of fair debatability would be a nullity. The issue would never reach the jury because insurers would prevail as a matter of law at the summary judgment stage or at the latest be granted a directed verdict each and every time. The law does not allow such absurd results.

Stay tuned (and if you have any questions, please contact the firm).

Bad Faith Insurance - Not Fairly Debatable

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.

Download the Wolter opinion