Central Nat. Ins. Co. of Omaha v. Insurance Co. of North America

• Decision Date: 23 March 1994
• Docket Number: No. 92-1764,92-1764
• Citation: 513 N.W.2d 750
• Parties: CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, A Nebraska Corporation, Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, A Pennsylvania Corporation, and Employers Reinsurance Corporation, A Missouri Corporation, Appellees.
• Court: Iowa Supreme Court

Page 750

513 N.W.2d 750

CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, A Nebraska Corporation, Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, A Pennsylvania Corporation, and Employers Reinsurance Corporation, A Missouri Corporation, Appellees.

No. 92-1764.

Supreme Court of Iowa.

March 23, 1994.

Jeffrey A. Boehlert and Ronald M. Rankin of Patterson, Lorentzen, Duffield, Timmons, Irish, Becker & Ordway, Des Moines, for appellant.

Richard G. Santi, Randall H. Stefani and Michael J. Eason of Ahlers, Cooney, Dorweiller, Haynie, Smith & Allbee, P.C., Des Moines, for appellee Ins. Co. of North America.

John M. Wharton and Joseph M. Barron of Peddicord, Wharton, Thune & Spencer, P.C., Des Moines, for appellee Employers Reinsurance Corp.

Considered by LARSON, P.J., and CARTER, LAVORATO, NEUMAN, and TERNUS, JJ.

LAVORATO, Justice.

Central National Insurance Company of Omaha (CNI) obtained a default judgment against parties insured by Insurance Company of North America (INA) and Employers Reinsurance Corporation (Employers). When the judgment was not satisfied, CNI sued INA and Employers to recover on their policies under Iowa Code chapter 516. Employers answered within the time allowed by the rules; INA did not. In due time, CNI obtained a default judgment against INA. Shortly thereafter, INA moved to set aside the default. The district court granted INA's motion, finding that CNI had obtained the default in violation of local custom and practice.

Ultimately, the district court granted INA's motion for summary judgment. The court concluded there was no coverage for the acts that led to the judgment against INA's insureds.

The claim against Employers was tried to the court which found against CNI. The court determined there was no coverage because no notice of the claims against Employers' insureds was given to Employers during the policy period as allegedly required by Employers' claims made policy.

CNI appealed from the default and summary judgment rulings in favor of INA. CNI also appealed from the judgment in favor of Employers.

At oral arguments, CNI's counsel conceded that our recent decision in Hasbrouck v. St. Paul Fire & Marine Ins. Co., 511 N.W.2d 364, 367 (Iowa 1993), disposes of CNI's appeal from the judgment in favor of Employers. According to Hasbrouck, a prerequisite to coverage under a claims made policy is that the insured report a claim to the insurer while the policy is in effect. Hasbrouck, 511 N.W.2d at 367. So we give no further consideration to the appeal involving Employers and affirm the judgment in its favor.

Because we conclude the district court abused its discretion in setting aside the default against INA, we reverse the ruling on the default. For reasons stated later in this opinion, we remand for further proceedings on the default issue.

Frank E. Duncan and Gary Bailey were the sole shareholders, directors, and owners of four different corporations: (1) Church Insurance Consultants, Inc. (Church), (2) Action Insurance Agency (Action), (3) Insurance Marketing Service, Inc. (Insurance Marketing), and (4) Iowa Underwriters, Inc. In early 1984 Church entered into an agreement with CNI. Under the agreement, Church agreed to (1) sell and write insurance for CNI to religious institutions and organizations, (2) collect premiums, and (3) provide certain services to policyholders.

On February 1, 1984, INA issued a "Comprehensive Crime Policy" to Church. The policy period was from February 1, 1984, to February 1, 1985. Among the riders attached to the policy was one adding Action, Insurance Marketing, and Iowa Underwriters, Inc. as insureds.

Church and the other three corporations--Action, Insurance Marketing, and Iowa Underwriters, Inc.--went out of business before June of 1985. In June 1985 CNI filed a petition against Duncan and Bailey individually, and the four corporations just mentioned. The petition alleged claims for, among other things, (1) negligence, (2) breach of contract, and (3) fraud. The petition sought compensatory damages for (1) premiums allegedly not remitted by Church, and (2) losses allegedly paid on risks underwritten in violation of underwriting guidelines established by an underwriter who was the administrator for CNI of the agreement with Church. The petition also sought punitive damages. Because Church and the other three corporations were by now defunct, only Duncan and Bailey defended.

CNI ultimately obtained a default judgment against Church, Action, Insurance Marketing, and Iowa Underwriters, Inc. The judgment included $384,651.63 in compensatory damages and $100,000 in punitive damages. This judgment was not satisfied. The case against Duncan and Bailey individually is still pending.

CNI presented its claims against the four judgment debtor corporations under the INA policy. INA believed there was no coverage for the acts complained of under its liability policy and, through its local counsel, refused to defend.

When CNI's demands for satisfaction went unsatisfied, CNI filed the present action for damages against INA. INA was served with the original notice and petition when its agent--the Iowa insurance commissioner--accepted service on July 17, 1986. The commissioner then sent the papers by certified mail to INA's home office in Philadelphia. The home office received the papers and had ample time under the rules to answer. But apparently the individual who received them erroneously believed these papers pertained to CNI's action against the four judgment debtor corporations. As a result he took no further action.

CNI moved for default because of INA's failure to move or answer. The district court granted the motion on August 18 and set a hearing on damages for September 19.

Meanwhile, INA's Des Moines claims manager learned on August 29 that INA's home office had received a certified copy of the August 18 order for default. He immediately investigated and discovered that CNI had indeed filed suit against INA. He promptly contacted INA's local counsel.

On September 3 INA filed a motion to set aside the default, which CNI resisted. The district court set aside the default following a hearing.

INA then answered and moved for summary judgment on the grounds there was no coverage. The district court agreed and sustained the motion.

CNI appealed from the district court's order setting aside the default and the order granting INA's motion for summary judgment. Because we reverse and remand on the default issue, we limit our discussion to it.

I. Iowa Rule of Civil Procedure 236 provides that

[o]n motion and for good cause shown, and upon such terms as the court prescribes, but not ex parte, the court may set aside a default or the judgment thereon, for mistake, inadvertence, surprise, excusable neglect or unavoidable casualty. Such motion must be filed promptly after the discovery of the grounds thereof, but not more than sixty days after entry of the judgment. Its filing shall not affect the finality of the judgment or impair its operation.

A proceeding under this rule is at law. Williamson v. Casey, 220 N.W.2d 638, 639 (Iowa 1974).

We vest district courts with broad discretion in ruling on a motion to set aside a default. We reverse such a ruling only if this discretion is abused. Generally, we find such an abuse only when there is a lack of substantial evidence to support the district court's ruling. Paige v. City of Chariton, 252 N.W.2d 433, 437 (Iowa 1977). We are bound by the district court's findings of fact if supported by substantial evidence, and we view the evidence in the light most favorable to the district court's ruling. Flexsteel Indus., Inc. v. Morbern Indus. Ltd., 239 N.W.2d 593, 596 (Iowa 1976). We will uphold the district court's ruling even when the court has made no findings of fact or based its ruling entirely on a different ground. Paige, 252 N.W.2d at 437. We are more reluctant to interfere with the grant of a motion to set aside a default than with its denial. Insurance Co. of N. Amer. v. Sperry & Hutchison Co., 168 N.W.2d 753, 756 (Iowa 1969).

If there is no factual issue, the question is one of law. In these circumstances, we are not bound by the determination of the district court. Whitehorn v. Lovik, 398 N.W.2d 851, 853 (Iowa 1987).

The burden is on the movant to plead and prove good cause under the rule. The movant establishes good cause only if one of the grounds in the rule is proved. Flexsteel, 239 N.W.2d at 596.

Good cause is a sound, effective, and truthful reason. It is something more than an excuse, a plea, apology, extenuation, or some justification, for the resulting effect. Good cause also requires at least a claimed defense asserted in good faith. Id. (citations omitted).

II. With these principles in mind we turn to the record in this case. In its motion to set aside the default INA alleged, among other things, that CNI's "[counsel] failed to notify counsel for [INA] of his belief that [INA] was in default and provide [INA] an opportunity to appear in accord with the custom and practice generally followed by attorneys practicing in Polk County, Iowa." In support of this allegation, INA attached an affidavit of Kent Forney, a trial attorney in Polk County for the past twenty-eight years. The affidavit pertinently stated:

I am acquainted with the generally recognized local custom and practices observed by the members of the bar in Des Moines, Polk County, Iowa.

It is one of the local customs and practices that if a plaintiff's attorney knows a certain defendant is regularly represented by a specific lawyer or law firm who has been previously involved in the matter, no default judgment will be taken against the defendant without prior notification by the plaintiff's attorney to the lawyer or law firm who regularly represents that defendant.

As to this allegation, the district court made several findings of fact summarized as follows. On August 2, 1985, Jeffrey A. Boehlert, counsel for CNI,...