In The Home Loan Investment Co. v. St. Paul Mercury Ins. Co., 827 F.3d 1256 (10th Cir. 2016), the Tenth Circuit Court of Appeals held that a property insurance company’s denial of a fairly debatable claim was not per se reasonable. The insurer, St. Paul Mercury Ins. Co., argued that because its coverage decision was “fairly debatable,” it was, as a matter of law, not unreasonable. St. Paul argued that a claim’s fair debatability was outcome determinative because, under Colorado law, an insurance company could not act unreasonably in denying a fairly debatable claim. In response, the insured argued that a claim’s “fair debatability” was merely one factor in the overall analysis of whether the insurer acted reasonably in delaying or denying coverage. The Tenth Circuit rejected St. Paul’s argument.
The Tenth Circuit began its analysis by recognizing that the Colorado Supreme Court had not weighed in on the issue of fair debatability. The Court then reviewed various Intermediate Colorado Appellate Court decisions. A review of the Colorado Intermediate Appellate Court decisions revealed that while the courts did permit a fairly debatable defense, the defense was not absolute and was not a threshold inquiry that was outcome determinative as a matter of law. Stated differently, fair debatability was not necessarily sufficient, standing alone, to defeat a bad faith claim.