A recent Tenth Circuit Court of Appeals decision, The Home Loan Investment Co. v. St. Paul Mercury Ins. Co., 827 F.3d 1256 (10th Cir. 2016), demonstrates that, although multiple jurisdictions may recognize similar defenses available to an insurer to defeat a policyholder’s bad faith claim, the application and extent to which the defense may be available to protect an insurer from bad faith exposure can vary significantly. In Home Loan Investment, the Tenth Circuit rejected an insurer’s “fairly debatable” defense as a threshold inquiry to determine the reasonableness of a claim denial; and it further found that Colorado statutory bad faith law provides a first-party remedy for unreasonable conduct in both claims-handling activities and underwriting practices.

The Bank That Never Foreclosed

The Home Loan Investment case arises from a coverage dispute between Home Loan, the bank that held a deed of trust on a property known as White Hall, and St. Paul Mercury Insurance Company, doing business as or also known as Travelers (Travelers), the insurer for the bank’s foreclosed properties. When the original White Hall owner stopped making the property’s mortgage payments, Home Loan opted to work with the owner to sell the property rather than foreclosing on the property, with the intention of receiving payment from the proceeds of the sale. Home Loan obtained coverage for the value of its loan from Travelers, as “mortgagee in possession” of White Hall.

After White Hall was nearly destroyed by fire, Travelers determined that Home Loan had not initiated foreclosure proceedings on White Hall. Travelers, therefore, determined that White Hall did not meet the definition of a “foreclosed property”; and, therefore, Home Loan was not a mortgagee in possession, because it did not have possession of the property at the time of loss and as required for Home Loan to have coverage under its Travelers’ policy. Travelers denied Home Loan’s fire loss claim, as a result.

Home Loan filed suit in Colorado state court and alleged various claims against Travelers, including those for common law breach of contract, common law bad faith, and violations of Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116, which provide Colorado’s statutory bad faith remedies to a first-party claimant for unreasonable delay or denial of insurance benefits.1 Travelers removed the action to federal court. As the basis for removal was diversity jurisdiction, the substantive law of the forum state of Colorado still governed the analysis of the underlying claims.

Home Loan’s common law bad faith claim, among other claims, was dismissed; and, at trial, a jury returned a verdict in favor of Home Loan on both the common law breach of contract claim and its statutory bad faith claim. Travelers appealed to the Tenth Circuit Court of Appeals, but only with respect to the statutory bad faith claim under Colorado law — namely, the standard for reasonable conduct by insurers; and the damages award available under Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116. On appeal, Travelers argued that:

  1. The claim denial was reasonable, and, therefore, it was not liable under Colorado’s bad faith statutes;
  2. Colorado statutory bad faith only provides a remedy for unreasonable claims-handling activity, and, therefore, inapplicable here where Home Loan’s bad faith claim only implicated St. Paul’s underwriting practices; and
  3. Damages under Colorado’s bad faith statute were miscalculated, as the district court erroneously awarded Home Loan a total of three times the covered benefit, when Home Loan was only entitled to a recovery of two times the covered benefit, per the bad faith statute.

The “Fairly Debatable” Defense

Many U.S. jurisdictions have adopted the “fairly debatable” defense such that an insurer may defeat a first-party bad faith claim as a matter of law where the insurer’s coverage determination was fairly debatable, or reasonable, or where the coverage issue presented a “genuine dispute.” While the nomenclature of the defense may vary from jurisdiction to jurisdiction, the defense, itself, operates primarily the same — namely, it is derived from an insurer’s right to challenge and deny claims where the insurer shows the existence of a valid, reasonable, or legitimate coverage question. In jurisdictions that recognize the “fair debatability” or a similar genuine dispute defense, the insurer has no liability for bad faith in instances where the coverage for the claim is fairly debatable, or the coverage questions are reasonable.2 This defense is also upheld in the Tenth Circuit, as, for example, Wyoming’s longstanding focus remains on “whether or not the validity of the denied claim was fairly debatable.” 3

Colorado’s Great Debate on the Fairly Debatable Defense

In its appellate briefing, Travelers first relied on a 1985 Colorado Supreme Court case, Travelers Ins. Co. v. Savio, 706 P.2d 1258 (Colo. 1985), to submit that the Colorado Supreme Court addressed the standard for an insurer’s reasonable conduct in the first-party context and recognized that the appropriate standard involved two factors: (1) the absence of a reasonable basis for the denial of policy benefits; and (2) the insurer’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. The Savio court held “that an insurer may challenge claims that are fairly debatable and will be found liable only where the insurer has intentionally denied a claim without a reasonable basis.4 Travelers cited additional Colorado Court of Appeals decisions in which it contends that the Colorado Court of Appeals, too, followed the position that, where a claim was fairly debatable, the denial of coverage was reasonable as a matter of law.5 As explained more fully below, however, this reasonableness standard originated from the tort of bad faith, as recognized by Colorado’s common law, and not in the context of statutory bad faith as alleged by Home Loan under Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116.

Travelers’ appellate briefing further recognized that, in other decisions by the Colorado Court of Appeals — like in the 2010 appellate decision, Sanderson v. Amer. Family Mut. Ins. Co. case — the appeals court held that “‘fair debatability’ is not outcome-determinative,” but it is merely a factor for consideration in determining the reasonableness of an insurer’s conduct.6

Travelers submitted on appeal that, due to the split of authority, none of the decisions controlled. As a result, Travelers requested that the Tenth Circuit follow the Zolman, Pham, and Fisher line of cases to hold, in Travelers’ words on appeal, “that whether an insurer acted reasonably in denying a claim that was ‘fairly debatable’ may be decided as a matter of law.” In further support of its appeal, Travelers argued that, since whether Home Loan was a mortgagee in possession based on the information disclosed to Travelers was fairly debatable, Travelers did not act unreasonably as a matter of law, precluding it from liability to Home Loan under Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116.

The Denial of a Fairly Debatable Claim Is Not Per Se Reasonable, Under Colorado Law

In addressing Travelers’ appeal, the Tenth Circuit explained that the center of the parties’ dispute was on whether the denial of a fairly debatable claim is per se reasonable under Colorado law, an issue upon which the Colorado Supreme Court has yet to rule. The Tenth Circuit acknowledged that the Colorado Court of Appeals has addressed the issue, but has done so inconsistently in light of the two lines of cases, as cited in the appellate briefing. Ultimately, and in a move to reconcile Colorado’s appellate decisions, the Tenth Circuit explained that the earlier Zolman, Pham, Brennan, and Brandon Colorado Court of Appeals decisions (relied upon by Travelers for its argument that the fair debatability defense meant that the denial was reasonable per se), were ultimately limited by those subsequent and more recent Colorado Court of Appeals decisions since 2012 — i.e., Vaccero, Fisher, Hansen, and Schuessler — effectively relegating the fairly debatable defense to now serving as but one factor to consider in the overall reasonableness analysis.

The Tenth Circuit, thus, held that the recent Colorado Court of Appeals decisions expressly reject the argument that the fairly debatable defense is outcome determinative to establish reasonableness per se, affirming the lower court’s denial of Traveler’s Motion for Judgment as a Matter of Law (JMOL) filed by Travelers on the issue, following the jury’s verdict.

Colorado Common Law Versus Colorado Statutory Bad Faith

Though unmentioned by the Tenth Circuit’s majority opinion and only raised in a footnote by the dissent,7 there are additional distinctions between these two lines of appellate decisions that have developed in Colorado, which, if not fully relevant to the legal analysis here, remain instrumental in understanding the framework of Colorado first-party bad faith, its evolving burden of proof, and the resulting effects on an insurer’s available defenses to a bad faith claim. For instance, it is noteworthy that the 2011 Zolman appellate decision and its progeny of case law (on which Travelers relies for the proposition that the fairly debatable defense is outcome determinative on the reasonableness determination) does not address the Colorado statutory bad faith regime of Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116 at issue before the Tenth Circuit in the Home Loan case. Instead, the Zolman line of cases only address the tort of bad faith as recognized under Colorado common law.

This point is relevant because, pursuant to the Colorado common law bad faith principles underlying the tort of bad faith of an insurance contract, the policyholder, in a first-party context, must prove that: the insurer’s conduct was unreasonable; and that the insurer knowingly or recklessly disregarded the validity of the claim. Under Sections 10-3-1115 and 10-3-1115, however, a policyholder does not have to prove knowledge or reckless disregard on behalf of the insurer for recovery, as the statutes prohibit an unreasonable delay or denial of payment, irrespective of an insurer’s intent, knowledge or reckless disregard. Since the fairly debatable defense goes to both prongs of the common law tort of bad faith (i.e., reasonableness and knowledge/intent), there are decisions such as Zolman lending support to the traditional application of the fairly debatable defense in the common law bad faith context — namely, the finding that the insurer’s justification for denying a claim is fairly debatable can be determinative that the insurer acted reasonably and insulated from common law bad faith exposure as a matter of law.8

In contrast, and as explained by the Colorado Court of Appeals in its 2012 Vaccaro decision, this fairly debatable legal standard derived from Colorado common law bad faith cases does not necessarily govern a policyholder’s claim under Colorado’s bad faith statutes, which expressly provide a private right of action for bad faith to a first-party claimant due to an unreasonable delay or denial of payment.9 In a decision not cited by the Tenth Circuit in its recent analysis in the Home Loan case, the U.S. District Court for the District of Colorado further highlighted the distinctions between Colorado’s common law tort of bad faith and its statutory bad faith law in the first-party context, comparing the focus of the Zolman line of cases with the contrasting Vaccaro line of cases, as follows:

Under common law bad faith principles, Colorado courts traditionally find that it is reasonable for an insurer to challenge claims that are “fairly debatable.” Zolman, 261 P.3d at 296. Thus, under common law, finding that an insurer’s justification for denying or delaying payment of a claim is “fairly debatable” typically weighs against finding that an insurer acted unreasonably. Sanderson v. Am. Fam. Ins. Co., 251 P.3d 1213, 1218 (Colo. App. 2010) (citation omitted). Because the statutes at issue here [Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116], however, create a right of action that is different from the common law tort of bad faith breach of an insurance contract, the “burden of proving th[e] statutory claim is less onerous than that required to prove a claim under the common law for breach of the duty of good faith and fair dealing.” Kisselman v. Am. Fam. Mut. Ins. Co., 292 P.3d 964, 975 (Colo. App. 2011). Even if [an insurer’s] denial was “fairly reasonable” in the common law context, that would not alone establish that the defendant’s actions were reasonable as a matter of law under the statutes. Vaccaro v. Am. Fam. Ins. Grp., 275 P.3d 750, 760 (Colo. App. 2012); see also Sanderson, 251 P.3d at 1218 (noting that, even under common law, finding that a claim was fairly debatable “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”).10

Since Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116 create a private right of action that is different from the common law tort of bad faith breach of insurance contract — removing the burden to show that the insurer had knowledge of the unreasonableness or was reckless — the policyholder’s burden of proof for the statutory claim of bad faith is “less onerous,” than that to prove a common law bad faith claim. It is, thus, axiomatic that the insurer’s burden of proof for its defenses would be more onerous when faced with the statutory bad faith claim, as demonstrated in the Home Loan case where the insurer could not escape statutory liability solely on a fairly debatable defense.

As a result, even if there were not an overall trend in Colorado moving away from the dispositive nature of the fairly debatable defense as exemplified in the 2010 Colorado Court of Appeals case, Sanderson v. Amer. Family Mut. Ins. Co.,11 it stands to reason that an insurer’s fairly debatable defense would still not be sufficient, in and of itself, to serve as outcome determinative and capable of establishing reasonableness per se in the face of a policyholder’s statutory claim under Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116. Stated another way, even if the effect of the fairly debatable defense were not eroding in the context of a Colorado common law bad faith claim, it still remains unlikely that it would serve as a threshold inquiry and outcome determinative defense in the context of the first-party statutory claims against an insurer under Sections 10-3-1115 and 10-3-1116.

Colorado Bad Faith Statutes Are Not Limited to Claims Handling

Travelers also argued that it could not be liable under Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116, as those statutes only provide a remedy for unreasonable conduct with respect to claims-handling activities. Since Travelers’ underwriting practices were at issue in this case (and not its claims-handling practices), Travelers, again, argued that it could not be liable under the statutes.

The Tenth Circuit rejected this argument, citing the broad and sweeping language of the statutory language, including the fact that Section 10-3-1115 applies to a person “engaged in the business of insurance.” Additionally, Colorado law broadly defines an “insurer” as “every person engaged as a principal, indemnitor, surety, or contractor in the business of making contracts of insurance.”12 The Tenth Circuit concluded that Colorado’s intent is to capture all aspects of the insurance relationship and to impose liability for both the bad faith breach of the obligation to indemnify (i.e., underwriting) and the bad faith breach of the obligation to pay a specified amount (i.e., claims handling). Thus, the Tenth Circuit held that a first-party claimant may recover under Colo. Rev. Stat. Ann. §§ 10-3-1115 and 10-3-1116, regardless of whether a claim is unreasonably delayed or denied due to the insurer’s determination that the policy should have never been issued; or due to the insurer’s determination of a particular issue with the claim, itself.

Colorado Bad Faith Statutory Damages Are in Addition to Breach of Contract Damages

The lower district court awarded Home Loan damages against Travelers, totaling three times the benefit amount denied by Travelers, comprising: the covered benefit to which Home Loan was entitled for breach of contract; in addition to a statutory bad faith penalty pursuant to Section 10-3-1116 equaling two times the covered benefit. Travelers interpreted these damages as in excess of the recovery allowed by Section 10-3-1116, which was limited to attorney’s fees, court costs, and two times the covered benefit, according to the statutory language.

Again, the Tenth Circuit rejected Travelers’ claim. Though the Colorado Supreme Court has not yet ruled on the proper interpretation and damages calculation set forth in Section 10-3-1116, the Colorado Court of Appeals has explained that the penalty awarded under Section 10-3-1116 arises from a claim separate from the policyholder’s common law breach of contract claim.13 As a result, a first-party claimant stands to recover: (1) a damages award for the breach of contract claim; a bad faith penalty award equaling two times the covered benefit denied; and attorneys’ fees and costs. The net effect is that, with the breach of contract damages combined with the bad faith penalty award, the damages total three times the benefit denied.


The Tenth Circuit’s Home Loan analysis demonstrates that bad faith defenses — even those as common to bad faith litigation and universally known as the fairly debatable defense — are not and should not be considered one-size-fits-all. Pending bad faith claims and the determination of available defenses require jurisdictional-specific analysis based on the particular facts at issue in the case and in light of the detailed complexities of competing case law and evolving trends in the relevant jurisdiction. When faced with a bad faith claim in a particular jurisdiction, it is important to evaluate fully a series of factors, including: whether the claim is derived from the jurisdiction’s common law or a relevant bad faith or extracontractual statute; the policyholder’s burden of proof; the bad faith defenses potentially available to an insurer in the particular jurisdiction and the associated burden(s) of proof; and the common law and statutory, if any, bad faith or other related extracontractual framework for the particular jurisdiction sufficient to support a realistic potential total exposure analysis.