Chapter 7 - § 7.5 • WHETHER A CLAIM IS "FAIRLY DEBATABLE" IS NOT DISPOSITIVE OF THE ISSUE OF COMMON LAW OR STATUTORY BAD FAITH, BUT FAIR DEBATABILITY IS EVIDENCE OF THE REASONABLENESS OF AN INSURER'S CONDUCT

• Jurisdiction: Colorado

§ 7.5 • WHETHER A CLAIM IS "FAIRLY DEBATABLE" IS NOT DISPOSITIVE OF THE ISSUE OF COMMON LAW OR STATUTORY BAD FAITH, BUT FAIR DEBATABILITY IS EVIDENCE OF THE REASONABLENESS OF AN INSURER'S CONDUCT

While several of the early cases discussing the "fairly debatable" standard suggested that it may be a threshold inquiry to determine whether an insurer acted unreasonably or in bad faith in handling a claim, more recent cases have dispelled that notion, although the question has yet to have been ultimately determined by a decision of the Colorado Supreme Court.

Sanderson v. American Family Mutual Insurance Co., 251 P.3d 1213 (Colo. App. 2010), was a common law bad faith case arising out of an underinsured motorist claim. The trial court entered summary judgment in favor of the insurer and the court of appeals affirmed.

The plaintiff, Leonard Sanderson, was injured in an auto accident on October 15, 2003. The at-fault driver, Kelly Pierce, had auto liability coverage of $25,000. Sanderson had UM/UIM coverage with American Family with limits of $100,000. After a year of litigation against Pierce, Sanderson settled for her $25,000 policy limit, reducing his UIM coverage limit to $75,000. Immediately after the settlement, Sanderson demanded arbitration of his UIM claim, asserting that his case was worth more than the policy limit. He also requested American Family to provide its evaluation of his UIM claim and threatened to sue for bad faith if he prevailed in the arbitration. The record showed that within days of the arbitration demand American Family had received Sanderson's medical records as well as information gathered during discovery in his lawsuit against Kelly. Through discovery in the arbitration proceeding, Sanderson provided more information to American Family to substantiate his UIM claim. Eventually, Sanderson made a final demand for payment of the $75,000 policy limit based upon his contention that his future medical expenses alone would exceed $250,000. American Family made a counteroffer of $30,000, asserting that Sanderson had no past or future income losses and had preexisting degenerative conditions. In addition, American Family argued that it had paid all of Sanderson's medical expenses through his PIP coverage, which had not yet been exhausted. The issue of whether Sanderson was at fault for causing the accident was not raised either in Sanderson's demand for payment or in American Family's response.

Since the case could not be resolved through settlement, it proceeded to arbitration, in which the panel awarded $357,387.80 in damages, which was calculated after offsetting the $25,000 settlement with Pierce and reducing the damages by the 15 percent of fault for the accident charged to Sanderson. The arbitration panel rejected American Family's contention that there should also be an offset for PIP benefits. American Family immediately paid the policy limits of $75,000, plus arbitration costs and interest.

Sanderson then brought a bad faith action against American Family, alleging it had improperly handled his claim, resulting in a delay in payment of insurance benefits. The trial court rejected Sanderson's motion to amend his complaint to add a claim for exemplary damages, finding he had not made a prima facie showing of entitlement to such damages. American Family moved for summary judgment, seeking dismissal of Sanderson's case. The trial court granted American Family's motion, finding that an insurer may challenge claims that are "fairly debatable"; Sanderson's claims were fairly debatable because there was a genuine issue of fact about liability and about the amount owed under the policy, including the PIP offset; and these factual and legal issues gave American Family a reasonable basis to delay payment of Sanderson's claim. Sanderson, 251 P.3d at 1216. Although the court of appeals disagreed with the trial court's application of the "fairly debatable" defense, it affirmed the court's entry of summary judgment in favor of American Family.

The court of appeals held that "although fair debatability is part of the analysis of a bad faith claim, it is not necessarily sufficient, standing alone, to defeat such a claim." Id. at 1217. The court recognized that one element of a common law bad faith claim is the reasonableness of the insurer's conduct, which "must be determined objectively." The court noted that "if a reasonable person would find that the insurer's justification for denying or delaying payment of a claim was 'fairly debatable' (i.e., if reasonable minds could disagree as to the coverage-determining facts or law), then this weighs against a finding that the insurer acted unreasonably." The court also pointed out that this analysis applies "even if the insurer's defense ultimately proves to be unsuccessful, because resort to a judicial forum does not necessarily evince bad faith or unfair dealing, regardless of the outcome of the proceeding." Though "an insurer maintains a mistaken belief that a claim is not compensable, it may still be within the scope of permissible challenge, even if the insurer's belief turns out to be incorrect." Id.

Despite recognizing these principles, the court of appeals rejected American Family's contention that "'fair debatability,' without more, is necessarily sufficient to defeat a bad faith claim as a matter of law." Id. Rather, quoting Zilisch v. State Farm Mutual Auto. Insurance Co., 995 P.2d 276, 279 (Ariz. 2000), the court concluded that "'[w]hile it is clear that an insurer may defend a fairly debatable claim, all that means is that it may not defend one that is not fairly debatable [and] in defending a fairly debatable claim, an insurer must exercise reasonable care and good faith.'" Id. at 1218. Thus, "fair debatability is not a threshold inquiry that is outcome determinative as a matter of law, nor is it both the beginning and the end of the analysis in a bad faith case." Id.

Nevertheless, even after applying the appropriate legal standard, the court of appeals concluded "that no reasonable jury could have found, on the evidence presented, that AFI acted in bad faith." Id. at 1217. The court of appeals found that "Sanderson presented no evidence to suggest that AFI had contested liability in bad faith or without a reasonable basis for doing so." Id. at 1218. With regard to the PIP offset, the court pointed out that Sanderson did not contend that American Family lacked a reasonable basis in law to assert this defense, but only asserted that the offset would be limited to $100,000.

The court of appeals agreed "with Sanderson that the district court erred in holding that because the liability and PIP offset issues were fairly debatable, AFI's conduct in processing his claim was irrelevant as a matter of law." Id. at 1219. Sanderson asserted that American Family's claim handling fell below industry standards because its investigation was inadequate; it substituted the nonmedical opinions of its claims adjuster for those of Sanderson's physicians; it failed to explain why Sanderson's claim was being delayed and denied; it made a low-ball settlement offer of $30,000; and it never explained the basis of that offer. However, in the circumstances of this case, the court of appeals was "not persuaded that this evidence was sufficient to establish a genuine issue of material fact." Id.

Zolman v. Pinnacol Assurance, 261 P.3d 490 (Colo. App. 2011), was an insurance bad faith case arising out of a workers' compensation claim. The court of appeals affirmed the summary judgment in favor of the defendant, Pinnacol Assurance.

The plaintiff, Charlotte Zolman, injured her back on December 3, 2004, while she was lifting a wheelchair in the course of her employment as a personal companion for Horizon Home Care, LLC. After the accident, Zolman was...