Chadima v. National Fidelity Life Ins. Co.

• Decision Date: 14 June 1995
• Docket Number: Nos. 94-2056,94-2156 and 94-2157,s. 94-2056
• Citation: 55 F.3d 345
• Parties: George W. CHADIMA, Trustee of the George Milton Chadima and Lillian Esther Chadima Trust; Swisher Trust & Savings Bank, as Trustee of the George Milton Chadima and Lillian Esther Chadima Trust; George W. Chadima, Executor of Estate of George Milton Chadima; Lillian Esther Chadima, Executor of Estate of George Milton Chadima, Appellants/Cross-Appellees, v. NATIONAL FIDELITY LIFE INSURANCE COMPANY, Appellee/Cross-Appellant, State of Iowa, Civil Reparations Trust Fund, Intervenor-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 345

55 F.3d 345

George W. CHADIMA, Trustee of the George Milton Chadima and

Lillian Esther Chadima Trust; Swisher Trust & Savings Bank,

as Trustee of the George Milton Chadima and Lillian Esther

Chadima Trust; George W. Chadima, Executor of Estate of George Milton Chadima; Lillian Esther Chadima, Executor of Estate of George Milton Chadima, Appellants/Cross-Appellees, v. NATIONAL FIDELITY LIFE INSURANCE COMPANY, Appellee/Cross-Appellant,

State of Iowa, Civil Reparations Trust Fund,

Intervenor-Appellee/Cross-Appellant.

Nos. 94-2056, 94-2156 and 94-2157.

United States Court of Appeals,

Eighth Circuit.

Submitted Dec. 14, 1994.

Decided April 26, 1995.

Rehearing and Suggestion for Rehearing En Banc Denied June 14, 1995.

Kevin H. Collins, Cedar Rapids, IA, argued for appellant (James D. Hodges, on brief).

Richard E. Mull, Ames, IA, argued for appellee the State of Iowa. John DeDoncker, Davenport, IA, argued for appellee Nat. Fidelity. (Bonnie Campbell, Craig Kelinson and Thomas J. Shields, on brief).

Before McMILLIAN, Circuit Judge, JOHN R. GIBSON, Senior Circuit Judge, and SHAW, ^* District Judge.

JOHN R. GIBSON, Senior Circuit Judge.

This diversity case presents the question of whether a judge or jury should decide whether an insurer had a reasonable basis for denying a claim in a first-party bad faith action. Cases from the Iowa Supreme Court go both directions. The magistrate judge granted the insurer's post-trial motion for judgment notwithstanding the verdict, concluding that under Iowa law, whether the insurer's position is fairly debatable is a question of law. Because there was substantial evidence that the insurer, National Fidelity Life Insurance Company, had a reasonable basis for denying the claim of the insured, the estate of George M. Chadima, the judge determined that the insurer's position was fairly debatable, and that the insurer was entitled to judgment notwithstanding the verdict. The estate of George M. Chadima appeals, and we reverse.

National Fidelity Life Insurance Company issued a life insurance policy to George M. Chadima on January 21, 1986. The policy was a declining death benefit policy. In April of 1989, Chadima contacted National Fidelity complaining that he thought he had purchased a $100,000 fixed death benefit policy, rather than a declining death benefit policy. He asked to convert his policy to a $100,000 fixed death benefit policy. National Fidelity refused, but offered to issue a new policy with a $90,000 fixed death benefit. National Fidelity instructed Chadima to return the original policy with an executed change of policy form. On July 11, 1989, Chadima forwarded the policy and a change of policy form to National Fidelity. The request form provided that "the requested change(s) shall not take effect until approved in writing by the Company."

Chadima died October 26, 1989, before National Fidelity had changed or reissued the policy. At that time, the declining-benefit policy had a value of $134,973.20.

Chadima's estate filed a claim for benefits. Evidence at trial showed that a claims manager reviewed the policy file and determined that National Fidelity owed $136,692.72 because the original policy was still in effect. Nevertheless, National Fidelity tendered a check in the amount of $91,423.97, representing the $90,000 fixed death benefit requested by Chadima with interest.

Chadima's estate demanded payment under the original policy. After correspondence between the estate's attorney and National Fidelity, and pursuant to directions from its associate general counsel, National Fidelity acknowledged the original policy was still in effect and sent the estate an additional check for $46,072.89. Both checks included language releasing all claims against National Fidelity. The Chadima estate insisted on a written agreement allowing them to negotiate the checks without waiving any claims. Unable to reach a written agreement, National Fidelity orally instructed the estate to cross out the release language and cash the checks. The estate refused, afraid that National Fidelity was trying to mislead them.

Chadima's estate filed this action, asserting claims of first-party bad faith, breach of contract, and fraud. ¹ The parties tried the case before a magistrate judge. The magistrate judge initially concluded that under the most recent Iowa Supreme Court authority, Wetherbee v. Economy Fire & Casualty Company, 508 N.W.2d 657, 661 (1993), the court should decide as a matter of law whether National Fidelity had a reasonable basis for denying Chadima's claim. Chadima v. National Fidelity Life Ins. Co., 848 F.Supp. 1418, 1431 (S.D.Iowa 1994). The court proposed an instruction informing the jury that National Fidelity lacked a reasonable basis for denying the claim. Both sides objected to the instruction. Chadima's counsel argued that the jury, as the trier of fact, should decide whether National Fidelity had a reasonable basis for denying the claim. National Fidelity argued that the court should rule that National Fidelity had a reasonable basis for denying the claim, and thus, there was no first-party bad faith as a matter of law. National Fidelity agreed that if the court declined to find that National Fidelity reasonably denied the claim, then the jury should decide the question.

Reserving final judgment until post-trial motions, the magistrate judge submitted to the jury the question of whether National Fidelity had a reasonable basis for denying the claim. The jury found in Chadima's favor, awarding $34,029 in compensatory damages on the breach of contract and first-party bad faith claims, and $100,000 in punitive damages on the first-party bad faith claim. ²

On post-trial motions, the magistrate judge determined that the Iowa Supreme Court decision in Wetherbee required him to determine as a matter of law whether the insurer's position was fairly debatable. Chadima, 848 F.Supp. at 1433. In Wetherbee, the Iowa Supreme Court stated unequivocally: "[w]hether a claim is fairly debatable in any given situation is appropriately decided by the court as a matter of law." 508 N.W.2d at 662. ³ The magistrate judge granted judgment notwithstanding the verdict to National Fidelity on Chadima's bad-faith claim, concluding that substantial evidence existed on both sides of the question of whether National Fidelity had a reasonable basis for denying the claim, and, therefore, National Fidelity's position was fairly debatable as a matter of law. Chadima, 848 F.Supp. at 1431-32 & n. 14. Chadima's estate appeals, and the question before us is whether the court or jury should decide whether a claim is fairly debatable. ⁴

Chadima argues that the district court correctly recognized a factual dispute as to whether National Fidelity had a reasonable basis for denying Chadima's claim. Because of the factual dispute, Chadima contends the court correctly submitted the issue to the jury, but erred when it later entered judgment as a matter of law for National Fidelity. Chadima argues that Wetherbee does not control because, in that case, the insurer declined coverage based on a legal issue. Chadima then argues that when, as here, the insurer denies coverage based on a factual dispute, the issue must go to the jury.

We review the magistrate judge's determination of Iowa law de novo, giving it no deference. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220-21, 113 L.Ed.2d 190 (1991). The district court's decision to enter judgment notwithstanding the verdict is a ruling of law that we also review de novo. ⁵ Nelson v. Production Credit Ass'n of the Midlands, 930 F.2d 599, 603 (8th Cir.), cert. denied, 502 U.S. 957, 112 S.Ct. 417, 116 L.Ed.2d 438 (1991).

The Iowa Supreme Court first recognized the intentional tort of first-party bad faith in Dolan v. Aid Insurance Co., 431 N.W.2d 790 (Iowa 1988). To establish first-party bad faith, an insured must show that: (1) the insurer had no reasonable basis for denying benefits under the policy; and (2) the insurer knew or recklessly disregarded the lack of a reasonable basis for denying the claim. ⁶ Id. at 794. The court explained that when "a claim is 'fairly debatable,' the insurer is entitled to debate it, whether the debate concerns a matter of fact or law." Id. (citing M- Z Enterprises v. Hawkeye-Security Ins. Co., 318 N.W.2d 408, 415 (Iowa 1982)).

Chadima contends that Wetherbee did not change existing law, but merely stated the obvious proposition that when only the legal construction of a policy is at issue, the question of the insurer's reasonableness should be decided as a matter of law. Chadima contends that under Iowa law, a factual dispute as to the reasonableness of the insurer's denial is an issue for the jury, as shown by Kiner v. Reliance Insurance Co., 463 N.W.2d 9 (Iowa 1990), and Nassen v. National States Insurance Co., 494 N.W.2d 231 (Iowa 1992), cert. denied, --- U.S. ----, 113 S.Ct. 1846, 123 L.Ed.2d 470 (1993).

In Kiner, the Iowa Supreme Court considered the insurer's argument that the trial court erred by submitting the bad faith claim to the jury because the claim was fairly debatable as a matter of law. 463 N.W.2d at 12. The insurer had reimbursed its insured for pain medication for eight years, but then refused reimbursement, contending that the insured had a drug dependency problem. Id. at 11. The court determined that a reasonable fact finder could conclude that the insurer failed to exercise an honest and informed judgment in denying the claim, and thus, could conclude that the insurer's denial was not fairly debatable. Id. at 12. The court concluded the issue was "one for the jury, not for the court as a matter of law." Id. at 12.

Likewise, in Nassen, the insurer argued the trial court erred by failing to direct a verdict on the bad faith claim. 494 N.W.2d at 236. The insurer pointed to the insured's failure to disclose two allegedly preexisting health conditions as proof that the...