August 24, 2019

Tenth Circuit: Fair Debatability Does Not Preclude Claim for Insurance Bad Faith

The Tenth Circuit Court of Appeals issued its opinion in Home Loan Investment Co. v. St. Paul Mercury Insurance Co. on Tuesday, July 5, 2016.

Ms. Rosemarie Glas owned a property in Grand Junction called White Hall with a mortgage through Home Loan Investment Co. When she stopped making payments on the loan, Home Loan accepted a deed in lieu of foreclosure from Ms. Glas in order to allow her to sell White Hall. Ms. Glas also informed Home Loan that she was unable to pay certain utilities and the insurance on the property. Home Loan contacted St. Paul to obtain insurance for the property, and completed a form from St. Paul by checking the option that it was the mortgagee in possession of the property. Later, there was a fire, and White Hall was almost completely destroyed. Home Loan submitted a claim to St. Paul for the value of the property, but St. Paul denied the claim, determining that Home Loan did not qualify as a mortgagee in possession and there was no foreclosure proceeding underway so there was no coverage.

Home Loan filed suit in Colorado state court, alleging claims for common law breach of contract and statutory bad faith pursuant to C.R.S. §§ 10-3-1115 and -1116. St. Paul removed the action to federal court, citing diversity jurisdiction. Prior to trial, St. Paul moved for summary judgment, but the district court denied the motion. At trial, St. Paul argued that Home Loan had never had “possession” or “care, custody, or control” sufficient to trigger coverage under the policy. St. Paul also argued that because its position was “fairly debatable,” it could not have acted unreasonably for purposes of the bad faith statutes. St. Paul renewed its motion for summary judgment and moved for judgment as a matter of law (JMOL) after Home Loan rested. The district court denied the motions. The jury returned a verdict for Home Loan on the common law breach of contract and statutory bad faith claims. St. Paul again moved for JMOL under F.R.C.P. 50(b), or, alternatively, a new trial under F.R.C.P. 59(a). The district court denied both motions, and St. Paul appealed to the Tenth Circuit on the statutory bad faith claim.

St. Paul raised three issues on appeal: (1) the district court erred in denying its motion for JMOL because its denial was reasonable as a matter of law, and the district court erroneously instructed the jury on assessing the standard for reasonableness; (2) C.R.S. §§ 10-3-1115 and -1116 only provide remedies for unreasonable claims handling activities, not underwriting practices; and (3) the district court erred in calculating the amount of damages under C.R.S. § 10-3-1116 because it awarded the covered benefit plus twice that amount as damages, for a total of three times the covered benefit. The Tenth Circuit examined and rejected each contention in turn.

The Tenth Circuit first addressed St. Paul’s argument that because its denial was “fairly debatable,” it was not unreasonable as a matter of law. Home Loan responded that fair debatability is only one factor in the overall reasonableness analysis. The Tenth Circuit noted that the question had not been addressed by the Colorado Supreme Court, but different panels of the Colorado Court of Appeals had answered the question differently. The Tenth Circuit remarked, though, that the Colorado Court of Appeals had expressly rejected the position advanced by St. Paul. The Tenth Circuit held that the district court did not err in denying St. Paul’s motion for JMOL on those grounds.

St. Paul next argued that C.R.S. §§ 10-3-1115 and -1116 only provide a remedy for claims-handling activities, not underwriting activities. The Tenth Circuit evaluated the statutes and found nothing to support St. Paul’s position. The Tenth Circuit instead held that the Colorado legislature intended to capture all aspects of the insurance relationship and provide a remedy for bad faith, regardless of whether the bad faith arose out of claims handling or underwriting.

Finally, St. Paul argue the district court erred in awarding three times the covered benefit. The Tenth Circuit again disagreed, reading the statute to provide for an award of the covered benefit plus two times that amount as a penalty.

The Tenth Circuit next addressed the argument raised by the dissent. The dissent would have granted JMOL because the evidence at trial did not support a finding that St. Paul acted unreasonably in denying Home Loan’s claim. The majority panel concluded that St. Paul neither forwarded a sufficiency of the evidence challenge before the district court nor argued sufficiency before the Tenth Circuit on appeal, and therefore the argument was waived. Although St. Paul advanced a Rule 50(a) argument at the close of Home Loan’s evidence, it argued a different issue on the hearing for its motion. Following the trial, St. Paul moved for JMOL under Rule 50(b), but the Tenth Circuit majority panel again found that the focus of St. Paul’s motion was not sufficiency of the evidence but rather the scope of the bad faith claim. Therefore, St. Paul’s sufficiency of the evidence challenge was not properly preserved.

The Tenth Circuit affirmed the district court. Judge Bacharach dissented.

Print Friendly, PDF & Email

Speak Your Mind

*