Bellville v. Farm Bureau Mut. Ins. Co.

Citation702 N.W.2d 468
Decision Date29 July 2005
Docket NumberNo. 02-1343.,02-1343.
PartiesRoger BELLVILLE, Administrator of the Estate of Sue Ellen Bellville, Deceased, and the Estate of Sue Ellen Bellville, Appellees, and State of Iowa ex rel. Civil Reparations Trust Fund, Intervenor-Appellee, v. FARM BUREAU MUTUAL INSURANCE COMPANY, Appellant.
CourtUnited States State Supreme Court of Iowa

Thomas D. Hanson and Barry A. Russell of Hanson, Bjork & Russell, L.L.P., Des Moines, and Mark D. Sherinian, West Des Moines, for appellant.

John R. Hearn, Des Moines, and John R. Ward, Des Moines, for appellees.

Thomas J. Miller, Attorney General, Craig Kelinson, Special Assistant Attorney General, and Richard E. Mull, Assistant Attorney General, Ames, for intervenor-appellee.

Tom L. Drew of Drew Law Firm P.C., Des Moines, for amicus curiae Iowa Trial Lawyers Association.

TERNUS, Justice.

The plaintiffs, Roger Bellville and the Estate of Sue Ellen Bellville, obtained a judgment against the Bellvilles' underinsured motorist (UIM) carrier, defendant Farm Bureau Mutual Insurance Company, for extracontractual and punitive damages. The State of Iowa intervened on appeal to protect its interest in a statutory share of the punitive damage award. The Iowa Court of Appeals reversed the judgment, ruling the district court erred in failing to grant Farm Bureau's motion for directed verdict. This court granted further review. Upon our examination of the record and consideration of the arguments of the parties, we reach the same conclusion as the court of appeals, but for slightly different reasons. Therefore, we vacate the decision of the court of appeals, reverse the district court judgment, and remand for entry of judgment in favor of Farm Bureau.

I. Background Facts and Proceedings.

On October 9, 1999, Roger Bellville (Bellville) and his wife, Sue Ellen, were involved in a motor vehicle accident with Guy Schueler. Sue Ellen died at the scene; Bellville was unharmed.

At the time of the accident, Schueler had an automobile insurance policy with a liability limit of $50,000. Although this policy provided coverage for his liability arising out of the accident, Schueler owned few other assets. Bellville carried underinsured motorist coverage with Farm Bureau with limits of $300,000.

Early in 2000 Bellville's attorney demanded the limits of the Farm Bureau policy and also requested that Farm Bureau consent to Bellville's settlement with Schueler for the limits of Schueler's liability insurance coverage. Negotiations ensued, but Farm Bureau refused to pay Bellville's reduced demand for a $270,000 payment under the UIM coverage. In addition, Farm Bureau refused to consent to Bellville's settlement with Schueler, asserting it had no duty to do so.

On April 13, 2000, Bellville sued Farm Bureau to recover under the UIM coverage; he also alleged a tort claim for bad faith. (Although Bellville and the estate are named plaintiffs, we will refer to them jointly as Bellville or the plaintiff in the remainder of this opinion.) Bellville's contractual claim was tried first, resulting in an award of the full $300,000 in UIM coverage. The bad faith action was then tried to a jury based on two grounds: (1) Farm Bureau's undervaluation of Bellville's UIM claim; and (2) Farm Bureau's refusal to consent to Bellville's settlement with the underinsured motorist. Farm Bureau's motion for directed verdict was denied, and the jury returned a verdict in favor of the plaintiff, finding bad faith on both grounds. The jury awarded compensatory and punitive damages. The State then intervened on behalf of the Civil Reparations Trust Fund to claim its share of the punitive damages award pursuant to Iowa Code section 668A.1(2)(b) (2001).

Farm Bureau appealed and the case was transferred to the court of appeals. The court of appeals reversed and remanded, finding the evidence was insufficient to prove Farm Bureau lacked a reasonable basis for its valuation of Bellville's claim or for refusing to consent to settlement. The court concluded, therefore, that the district court erred in failing to direct a verdict in favor of Farm Bureau.

This court granted Bellville's application for further review, as well as the Iowa Trial Lawyers Association's request to file a brief in support of the application. Although multiple issues are raised in the parties' briefs, we find it necessary to address only one: the sufficiency of the evidence to support a finding of bad faith.

II. Governing Principles of Law.

A. Standard of review. Farm Bureau contends the district court erred in failing to grant its motion for directed verdict. A directed verdict for the defendant was required only if there was no substantial evidence to support the elements of the plaintiff's claim. Thompson v. U.S. Fid. & Guar. Co., 559 N.W.2d 288, 290-91 (Iowa 1997). Substantial evidence means evidence that a "`reasonable mind would accept as adequate to reach a conclusion.'" Id. (citation omitted). In determining whether substantial evidence was offered, the trial court was required to view the evidence in the light most favorable to the plaintiff, "regardless of whether it was contradicted." Reuter v. State Farm Mut. Auto. Ins. Co., 469 N.W.2d 250, 251 (Iowa 1991). The court was also obligated to draw every legitimate inference from this evidence in support of the plaintiff. Id. We review the trial court's ruling on a motion for directed verdict for the correction of errors of law. See Wolbers v. Finley Hosp., 673 N.W.2d 728, 734 (Iowa 2003)

.

B. Elements of bad faith claim. To establish Farm Bureau's bad faith, the plaintiff was required to prove (1) Farm Bureau had no reasonable basis for denying the plaintiff's claim or for refusing to consent to settlement, and (2) the defendant knew or had reason to know that its denial or refusal was without reasonable basis. Sampson v. Am. Standard Ins. Co., 582 N.W.2d 146, 149 (Iowa 1998). The first element is an objective one; the second element is subjective. Reuter, 469 N.W.2d at 253.

1. Objective element: lack of reasonable basis. A reasonable basis exists for denial of policy benefits if the insured's claim is fairly debatable either on a matter of fact or law. Sampson, 582 N.W.2d at 150; Morgan v. Am. Family Mut. Ins. Co., 534 N.W.2d 92, 96 (Iowa 1995), overruled on other grounds by Hamm v. Allied Mut. Ins. Co., 612 N.W.2d 775, 784 (Iowa 2000)

. A claim is "fairly debatable" when it is open to dispute on any logical basis. See Morgan, 534 N.W.2d at 96; 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 204:28, at 204-43 (1999) (defining "debatable reason" as "an arguable reason, a reason that is open to dispute or question") [hereinafter "Couch on Insurance 3d"]. Stated another way, if reasonable minds can differ on the coverage-determining facts or law, then the claim is fairly debatable. See William T. Barker & Paul E.B. Glad, Use of Summary Judgment in Defense of Bad Faith Actions Involving First-Party Insurance, 30 Tort & Ins. L.J. 49, 56 (1994) [hereinafter "Barker & Glad Article"].

The fact that the insurer's position is ultimately found to lack merit is not sufficient by itself to establish the first element of a bad faith claim. Cent. Life Ins. Co. v. Aetna Cas. & Sur. Co., 466 N.W.2d 257, 263 (Iowa 1991); see Thompson, 559 N.W.2d at 292

. The focus is on the existence of a debatable issue, not on which party was correct. See Thompson, 559 N.W.2d at 292; see also Myers v. Broussard, 696 So.2d 88, 104 (La.Ct.App. 1997) (stating fact that insurer erroneously evaluated claim does not equate to arbitrary and capricious conduct); State Farm Lloyds, Inc. v. Polasek, 847 S.W.2d 279, 286-87 (Tex.App.1992) ("The issue in the bad faith case is not whether the factfinder believes the evidence that State Farm believed when it denied the claim; the issue is whether such evidence existed.").

Whether a claim is fairly debatable can generally be decided as a matter of law by the court. See Thompson, 559 N.W.2d at 290

; Clark-Peterson Co. v. Indep. Ins. Assocs., Ltd., 514 N.W.2d 912, 914 (Iowa 1994); Wetherbee v. Econ. Fire & Cas. Co., 508 N.W.2d 657, 662 (Iowa 1993). That is because "`[w]here an objectively reasonable basis for denial of a claim actually exists, the insurer cannot be held liable for bad faith as a matter of law.'" Gardner v. Hartford Ins. Accident & Indem. Co., 659 N.W.2d 198, 206 (Iowa 2003) (quoting Morgan, 534 N.W.2d at 97) (emphasis added). As one court has explained, "[c]ourts and juries do not weigh the conflicting evidence that was before the insurer; they decide whether evidence existed to justify denial of the claim." Polasek, 847 S.W.2d at 285. Thus, if it is undisputed that evidence existed creating a genuine dispute as to the negligence of an uninsured or underinsured motorist, the comparative fault of the insured, the nature and extent of the insured's injuries, or the value of the insured's damages, a court can almost always decide that the claim was fairly debatable as a matter of law. See, e.g., Sampson, 582 N.W.2d at 152 (holding district court properly decided bad faith claim as a matter of law where nature and extent of insured's injuries were debatable); Cent. Life Ins. Co.,

466 N.W.2d at 263 (holding insurer entitled to judgment as a matter of law where there was a good faith dispute on the amount of the insured's damages); Dirks v. Farm Bureau Mut. Ins. Co., 465 N.W.2d 857, 862 (Iowa 1991) (holding insurer entitled to directed verdict on bad faith claim where there was conflicting information as to who was at fault in underlying automobile accident); Barker & Glad Article, 30 Tort & Ins. L.J. at 57 (same). One treatise has explained the standard this way:

[A]n insurer is innocent of bad faith as a matter of law ... if the insurer took a position in regard to the claim that reasonable minds could hold. Unless the trial court is prepared to grant a directed verdict to the insured on his claim under the policy and to hold that reasonable
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