Chapter 7 - § 7.1 • RECOGNITION OF THE "FAIRLY DEBATABLE" STANDARD IN COLORADO

• Jurisdiction: Colorado

§ 7.1 • RECOGNITION OF THE "FAIRLY DEBATABLE" STANDARD IN COLORADO

In Colorado, the "fairly debatable" standard can be traced back to Travelers Insurance Co. v. Savio, 706 P.2d 1258, 1275 (Colo. 1985), where the Colorado Supreme Court cited the test for first-party insurance bad faith applied by the Wisconsin Supreme Court in Anderson v. Continental Insurance Co, 271 N.W.2d 368, 377 (Wis. 1978). The court quoted with approval the following language from Anderson: "'Under these tests of the tort of bad faith, an insurance company . . . may 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.'" Savio, 706 P.2d at 1275. Colorado courts have applied the "fairly debatable" standard in several later cases involving disputes over workers' compensation benefits, PIP benefits, and underinsured motorist (UIM) coverage.

In Brandon v. Sterling Colorado Beef Co., 827 P.2d 559 (Colo. App. 1991), the court applied the "fairly debatable" standard in examining the issue of whether an insurer was liable for bad faith by appealing a decision that an injured employee was entitled to workers' compensation benefits. Brandon was injured while working for Sterling Colorado Beef Company, a self-insured employer, and began receiving workers' compensation benefits. After a hearing was held before the Department of Labor, the parties entered a settlement agreement under which Brandon was paid additional benefits and reserved the right to reopen his claim. Brandon then stopped working for Sterling and got another job. He later reopened his original claim and sought authorization for surgery. After Brandon received this treatment, a second hearing was held before the Department of Labor. The hearing officer awarded Brandon disability benefits and ordered Sterling to provide a vocational rehabilitation evaluation. Sterling appealed this decision to the Industrial Commission.

The basis of the appeal was Sterling's contention that Brandon had further injured himself performing strenuous work at his new job. Brandon, on the other hand, maintained that his condition was the result of progressive deterioration stemming from the original injury. The Industrial Commission rejected the appeal, and Sterling sought judicial review of the Industrial Commission's ruling by the court of appeals, which also affirmed. After losing the appeal, Sterling paid Brandon all back benefits, including interest. Moreover, a settlement of all claims was reached, in which Sterling agreed to pay vocational rehabilitation benefits and future disability benefits. Brandon then sued Sterling in district court, alleging that Sterling had frivolously appealed the decisions of the hearing officer and the Industrial Commission and that this conduct constituted bad faith. A jury trial was held, and the jury awarded Brandon compensatory and punitive damages. Sterling then appealed again.

Sterling's argument on appeal was that its pursuit of an appeal and judicial review did not, as a matter of law, constitute bad faith. The court of appeals agreed and set aside the judgment in favor of Brandon. The...