Chapter 7 - § 7.9 • CONCLUSION — THE MEANING OF THE "FAIRLY DEBATABLE" STANDARD

• Jurisdiction: Colorado

§ 7.9 • CONCLUSION — THE MEANING OF THE "FAIRLY DEBATABLE" STANDARD

In many cases, Colorado courts have discussed "fair debatability" as a way to measure the reasonableness of an insurer's conduct. Courts have made broad pronouncements, ruling that (1) an insurer may challenge claims that are "fairly debatable," (2) resort to a judicial forum does not necessarily demonstrate bad faith, and (3) even if an insurer maintains a mistaken belief that a claim is not compensable, it may still be acting within the scope of permissible challenge. These rulings suggest that if reasonable minds could differ about the merits of a claim, an insurer's denial of the claim is reasonable and does not constitute bad faith. Such a standard of liability would make sense. If an insurer has a legitimate reason for taking a certain position, then it is acting with a "reasonable basis" for its conduct. For example, in the context of a UIM claim, if an insurer questions the causal relationship between a motor vehicle accident and the insured's injuries, and the insurer's position is supported by the opinions of an independent medical examiner, the insurer's challenge of causation would be founded upon a "reasonable basis," even in the face of conflicting expert medical testimony. This is the approach taken in other jurisdictions, including Utah. If the "fairly debatable" standard were applied in this manner, then it would indeed be a meaningful way to evaluate the reasonableness element of an insured's common law or statutory bad faith claim.

However, Colorado courts have backed away from such a definitive approach. Instead, as in Sanderson, the courts have ruled that, while fair debatability is part of the analysis of a bad faith claim, it is not necessarily sufficient, standing alone, to defeat such a claim, or, the fact that reasonable minds could differ about the...