Dolan v. Aid Ins. Co., No. 87-1380

• Court: United States State Supreme Court of Iowa
• Writing for the Court: SNELL
• Citation: 431 N.W.2d 790
• Parties: Robert L. DOLAN Appellee, v. AID INSURANCE COMPANY, n/k/a Allied Insurance Group, Appellant.
• Docket Number: No. 87-1380
• Decision Date: 23 November 1988

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431 N.W.2d 790 Robert L. DOLAN Appellee,
v.
AID INSURANCE COMPANY, n/k/a Allied Insurance Group, Appellant. No. 87-1380. Supreme Court of Iowa. Nov. 23, 1988.
Rehearing Denied Dec. 16, 1988.

John J. Carlin of Carlin, Hellstrom & Bittner, Davenport, for appellant.

Alfred E. Hughes of Hughes & Trannel, Dubuque, for appellee.

William E. Timmons and Douglas A. Haag of Patterson, Lorentzen, Duffield, Timmons, Irish, Becker & Ordway, Des Moines, for amicus curiae Iowa Ins. Institute.

Considered en banc.

SNELL, Justice.

This appeal raises an issue which has recurrently been before this court: whether we will recognize a cause of action in tort against an insurance carrier for bad faith conduct relating to a claim made by its insured. Although we have recognized a cause of action against an insurer for bad faith in its representation of an insured against a third-party claim, Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 33-34 (Iowa 1982), we have consistently found it unnecessary to adopt or reject the tort of bad faith in the first-party situations. Hoekstra v. Farm Bureau Mut. Ins. Co., 382 N.W.2d 100, 112 (Iowa 1986); Pirkl v. Northwestern Mut. Ins. Ass'n, 348 N.W.2d 633, 636 (Iowa 1984); Higgins v. Blue Cross, 319 N.W.2d 232, 236 (Iowa 1982); M-Z Enterprises v. Hawkeye-Security Ins. Co., 318 N.W.2d 408, 415 (Iowa 1982). For the reasons discussed below, we now recognize first-party as well as third-party bad faith claims.

I

On September 24, 1984, the plaintiff, Robert Dolan, was involved in an automobile accident in Dubuque, Iowa with Bob

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Schroeder. On June 11, 1985, Dolan notified his insurer, Aid Insurance Company, n/k/a Allied Insurance Group (Allied), that Schroeder's liability policy limits would be insufficient to fully cover his damages. Dolan's policy with Allied provided underinsured motorist coverage, with a policy limit of $40,000. Dolan and Allied then corresponded concerning Dolan's medical bills and records, and his attempts to negotiate a settlement with Schroeder's insurer. On January 6, 1986, Allied waived its subrogation rights, and requested Dolan's therapy notes and information regarding whether Dolan had any preexisting injuries. Dolan later settled with Schroeder's insurer for Schroeder's policy limit of $25,000. On January 28, 1986, Dolan informed Allied that previous soft-tissue injuries he had incurred had healed by the time of his accident with Schroeder and that no residual disability existed when the accident occurred. Dolan also requested, for the second time, that Allied accept service of a petition against it for underinsured motorist coverage. Due to the previous soft-tissue injuries to Dolan's back, Allied sought to depose him and his attending physician, Dr. Cairns. Dolan's deposition was taken in June 1986; Dr. Cairns' was taken in July. On August 11, 1986, Allied received a copy of Dr. Cairns' deposition, and shortly thereafter received additional information concerning Dolan's lost wages. On August 21, less than a week before trial, Allied offered Dolan $20,000 in settlement of his underinsured motorist claim. Dolan did not respond and no further negotiations took place between the parties. At trial, the jury returned a verdict stating that the amount of Dolan's damages exceeded $25,000 by the amount of $79,361. Allied then paid Dolan the policy limit of $40,000.

On September 24, 1986, Dolan filed this action against Allied for bad faith failure to settle for the underinsured motorist policy limit. Dolan sought to recover compensatory and punitive damages. Allied moved for summary judgment, asserting (1) Dolan had failed to state a claim upon which relief could be granted since this court has not recognized the validity of a first-party bad faith claim, and (2) Dolan had failed to establish a sufficient factual basis to sustain his damage claims. The trial court denied Allied's motion. We then granted Allied's interlocutory appeal.

II

A majority of jurisdictions now recognize the first-party bad faith tort. ¹ The reasons frequently cited by these courts for the adoption of the first-party bad faith tort have been catalogued by one commentator as follows:

1. Without the tort, "an insurance company can arbitrarily deny coverage and delay payment of a claim" to its insured "with no more penalty than interest on the amount owed;"

2. Due to the "uneven bargaining power between an insured and its insurer, the insured needs the extra leverage the tort of bad faith would provide to even the positions;"

3. "Insurance contracts are contracts of adhesion;"

4. The bad faith tort "is justified because of the nature of the insurance industry, which is imbued with the public interest;"

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5. An insured is often "suffering from physical injury or economic loss when bargaining with the insurance company" and hence "the vulnerable position justifies the additional remedy of a bad faith cause of action;"

6. "The recognition of the bad faith tort in third-party situations justifies its recognition in first-party situations;" and

7. "When an insured purchases insurance, she is purchasing more than financial security; she is purchasing peace of mind," and "therefore, the extra remedy of bad faith is needed to insure she receives the benefit of her bargain."

Phelan, The First Party Dilemma: Bad Faith or Bad Business?, 34 Drake L.Rev. 1031, 1035-36 (1985-86) (citing Spencer v. Aetna Life & Casualty Ins. Co., 227 Kan. 914, 917-19, 611 P.2d 149, 152-53 (1980)) [hereinafter Phelan]. A large minority of jurisdictions, however, have expressly declined to recognize the first-party bad faith tort ², citing the following reasons to rebut those relied upon by the jurisdictions in the majority:

1. "The rationale behind a bad faith claim in a third-party situation is not applicable to first-party situations;"

2. "The 'peace of mind' argument does not justify the application of tort principles in insurance cases because every contract is entered into for peace of mind;"

3. The insurance industry is like any other commercial enterprise and is not "imbued with a public interest to justify the recognition of the bad faith tort;"

4. Insurance contracts are not contracts of adhesion because they have the approval of both parties;

5. Many states have statutory penalties against "companies which fail without good cause to settle claims with their insureds" and "these legislative remedies are exclusive, thus eliminating the need for other remedies;"

6. "Traditional compensatory damages for breach of contract are adequate and the additional remedy of" the "bad faith tort is unnecessary;" and

7. The torts of outrage, intentional infliction of emotional distress, fraud and the tort of bad faith provide "remedies for the same wrongs and they are in fact mixed concepts used somewhat interchangeably."

Phelan, 34 Drake L.Rev. at 1037.

Distillation of the arguments for and against adoption of the first-party bad faith tort reveals that generally the issue has been resolved by determining whether the contractual relationship between the insurer and insured is sufficiently special to warrant providing the insured with additional protection and, relatedly, by determining whether the insured's remedies for the insurer's wrongful conduct are adequate without resort to the tort of bad faith.

We have...