Chapter 7 - § 7.2 • APPLICATION OF THE "FAIRLY DEBATABLE" STANDARD IN OTHER JURISDICTIONS

• Jurisdiction: Colorado

§ 7.2 • APPLICATION OF THE "FAIRLY DEBATABLE" STANDARD IN OTHER JURISDICTIONS

The "fairly debatable" standard, in one form or another, has been applied in many jurisdictions, including Iowa, South Dakota, Nebraska, New Jersey, Utah, Wisconsin, Wyoming, Idaho, Arizona, North Dakota, Rhode Island, and Alabama. A number of courts have held that the question as to whether the insurer's conduct is "fairly debatable" is an issue that can be decided as a matter of law. This view appears to be the approach taken by the majority of jurisdictions.

§ 7.2.1—The "Fairly Debatable" Issue Can Be Decided as a Matter of Law

In several of the jurisdictions that have adopted a "fairly debatable" standard for determining whether an insurer has acted in bad faith, courts have found that the issue of whether the insurer's conduct is fairly debatable can be determined as a matter of law. Several illustrative cases are examined below.

Bellville v. Farm Bureau Mutual Insurance Co., 702 N.W.2d 468 (Iowa 2005), is illustrative of this line of cases. Bellville arose out of a fatal motor vehicle accident, in which the wife of the plaintiff, Roger Bellville, was killed by the at-fault motorist, Schueler. Schueler had liability coverage of $50,000 and owned some other assets. Bellville had a policy with Farm Bureau with UM/UIM limits of $300,000. After Farm Bureau refused to settle Bellville's UIM claim for the policy limits, and later refused to settle for a reduced demand of $270,000, Bellville brought an action to recover UIM benefits and a bad faith action against Farm Bureau. Bellville also asserted that the insurer acted in bad faith by refusing to consent to settle with Schueler. The claim for UIM benefits was tried to a jury, which awarded the full policy limits.

The bad faith action then proceeded to trial on two theories: Farm Bureau's undervaluation of the UIM claim and its refusal to consent to settlement. The jury awarded Bellville compensatory and punitive damages, and Farm Bureau appealed. Applying a "fairly debatable" test, the Iowa Supreme Court held that, as a matter of law, there was insufficient evidence to support Bellville's bad faith claim and reversed the judgment against Farm Bureau.

The standard for first-party bad faith in Iowa is a two-pronged test very similar to the standard in Colorado. The first part of the test, lack of reasonable basis for denial of a claim, is an objective standard. Under this test, "[a] reasonable basis exists for denial of policy benefits if the insured's claim is fairly debatable either on a matter of fact or law." Id. at 473. In other words, "if reasonable minds can differ on the coverage-determining facts or law, then the claim is fairly debatable." Id. Further, "[w]hether a claim is fairly debatable can generally be decided as a matter of law by the court." Id. The court found that there were fairly debatable issues both with regard to the comparative fault of Bellville and the amount of damages Bellville was likely to recover. Thus, the court held as a matter of law that Farm Bureau did not act in bad faith by undervaluing Bellville's claim. The court noted:

Certainly there may be cases in which the UIM limits are so low or the undisputed damage items so high that there would be no reasonable basis to refuse payment notwithstanding the impossibility of accurately predicting the value of the insured's damages. . . . But this case is not one of those.

Id. at 481-82.

Although the court agreed with Bellville that Farm Bureau did have a duty to consent to settle, the court also concluded that the legal issue as to whether such a duty existed was fairly debatable. As a matter of law, Farm Bureau did not act in bad faith, even though it had taken the wrong position on this issue. Therefore, the Iowa Supreme Court remanded the case for entry ofjudgment in favor of Farm Bureau on Bellville's bad faith action.

In Phen v. Progressive Northern Insurance Co., 672 N.W.2d 52 (S.D. 2003), a case arising out of a claim for uninsured motorist benefits, the court held that the trial court erroneously denied the insurer's motion for summary judgment seeking dismissal of the plaintiff's bad faith claim. Progressive denied the insured's claim for uninsured motorist benefits based on policy exclusions. The insured argued that the policy exclusions were void as contrary to public policy, and the trial court granted summary judgment in favor of the insured on this issue. The South Dakota Supreme Court affirmed the trial court's decision that the policy exclusions were void. However, in holding that the trial court erred by failing to dismiss the insured's bad faith claim, the court noted that "[a]n insurance company is entitled to 'challenge claims which are fairly debatable and will be found liable only where it has intentionally denied (or failed to process or pay) a claim without a reasonable basis.'" Id. at 59. The court found that Progressive's action in asserting "a policy defense is insufficient grounds upon which to find a genuine issue of material fact as to whether it acted in bad faith." Id. "Because the question whether the policy exclusion was void was fairly debatable," the court held that "the trial court improperly denied Progressive's summary judgment motion on Phen's claim of bad faith." Id.

Williams v. Allstate Indemnity Co., 669 N.W.2d 455 (Neb. 2003), was an action for breach of contract and bad faith against a homeowners' insurer arising out of its handling of a fire loss claim. The insured raised numerous complaints as to how the repairs to her home were handled by the insurer and a contractor it had recommended. The jury found for the insured on her breach of contract claim, but the trial court directed a verdict in favor of the insurer on the bad faith claim. The Nebraska Supreme Court affirmed the directed verdict in favor of the insurer, ruling as follows:

To establish a claim for bad faith, a plaintiff must show an absence of a reasonable basis for denying the benefits of the insurance policy and the insurer's knowledge or

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