In Colorado, actions for common law bad faith require the insured to prove unreasonable denial or delay in payment of a claim and that the insurer knew or recklessly disregarded the unreasonableness of its actions. Colorado’s 2008 prompt payment statute, C.R.S. § 10-3-1115, carves out a standard different from common law bad faith, based only on reasonableness:

[A]n insurer’s delay or denial was unreasonable if the insurer delayed or denied authorizing payment of a covered benefit without a reasonable basis for that action.

Colorado’s prompt payment statute does not require the insured to prove the insurer knew or recklessly disregarded the unreasonableness of its actions, however, the insured’s burden arguably remains the same with regard to proving that the delay or denial was unreasonable. In State Farm Mut. Auto. Ins. Co. v. Fisher, 618 F.3d 1103, 1109 (10th Cir. 2010), an action pursuant to C.R.S. § 10-3-1115, the court applied the same reasonableness standard used in common law bad faith cases.

In the past, insurance companies have successfully argued that the denial of coverage is not unreasonable where coverage of the claim was “fairly debatable.” For example, in Brennan v. Farmers Alliance Mut. Ins. Co., 961 P.2d 550, 557 (Colo. App. 1998), the court granted summary judgment in favor of the insurer because the coverage decision was complex, fact-intensive, and “fairly debatable.” The court concluded the insurer was reasonable in seeking a judicial determination of coverage. However, Colorado courts’ analyses of “unreasonable” and “fairly debatable” continue to evolve.

In Sanderson v. Am. Family Mut. Ins. Co., 251 P.3d 1213, 1217-18 (Colo. App. 2010), the lower court granted summary judgment to the insurer after finding the policyholder’s claim was “fairly debatable,” so denial of coverage was not unreasonable. The lower court incorrectly determined that if an insurer proves coverage of a claim was “fairly debatable,” it was sufficient to defeat a claim for bad faith. The Colorado Court of Appeals disagreed, stating:

[W]e respectfully disagree with the district court’s apparent conclusion that “fair debatability,” without more, is necessarily sufficient to defeat a bad faith claim as a matter of law. In this regard, we agree with the Arizona Supreme Court’s statement 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. But in defending a fairly debatable claim, an insurer must exercise reasonable care and good faith.”
. . . .

Stated another way, 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.

The Sanderson opinion is certainly helpful to policyholders. Unfortunately, policyholders are still left to wonder what additional factors, in addition to fair debatability, may be analyzed when attempting to determine whether an insurer’s delay or denial is unreasonable. Claims under Colorado’s prompt payment statute now working through the courts will likely land at the Colorado Court of Appeals and help shed additional light on what it means for an insurer to be “unreasonable” in Colorado.

  • Chris Mosley

    Excellent analysis. Insurers are attempting to take the bad faith statute in many different manners. But the bad faith statute is designed to accomplish a simple, single goal – fair and promptly handling of claims for the protection of the policyholder and the policyholder’s peace of mind. That goal is not one which is “fairly debatable” – it is the essence of why individuals and business purchase insurance, and insurer’s failure to pursue that goal created the need for the bad faith statute. Well done.

  • Erin Kristofco

    Thanks for reading my post, Chris. Unfortunately, compared to most policyholders, insurers still have money, time and other resources on their side.