Hallmark Specialty Ins. Co. v. Phx. C & D Recycling, Inc.

• Decision Date: 01 June 2021
• Docket Number: No. 20-1339,20-1339
• Citation: 999 F.3d 563
• Parties: HALLMARK SPECIALTY INSURANCE COMPANY, Plaintiff - Appellee v. PHOENIX C & D RECYCLING, INC., Defendant - Appellant R & A Properties, Inc., Defendant
• Court: U.S. Court of Appeals — Eighth Circuit

999 F.3d 563

HALLMARK SPECIALTY INSURANCE COMPANY, Plaintiff - Appellee

v. PHOENIX C & D RECYCLING, INC., Defendant - AppellantR & A Properties, Inc., Defendant

No. 20-1339

United States Court of Appeals, Eighth Circuit.

Submitted: January 14, 2021

Filed: June 1, 2021

Stephen V. Kovarik, Rebecca R. Weinreich, Angela Aggie Zanin, Lewis & Brisbois, Los Angeles, CA, Matthew A. McGuire, Michael William Thrall, Nyemaster & Goode, Des Moines, IA, Seth Ian Weinstein, Lewis & Brisbois, New York, NY, for Plaintiff-Appellee.

Jordan Ryan Hutchinson, Michael Shelby Jones, Patterson Law Firm, Des Moines, IA, for Defendant-Appellant Phoenix C & D Recycling, Inc.

Before COLLOTON, WOLLMAN, and SHEPHERD, Circuit Judges.

SHEPHERD, Circuit Judge.

Phoenix C & D Recycling, Inc. and its property owner, R & A Properties, Inc., (collectively, Phoenix) operate a trash recycling plant in Des Moines, Iowa. In July 2017, a fire began from a pile of biofuel material located on Phoenix's property. Hallmark Specialty Insurance Co. (Hallmark), Phoenix's insurer, made several payments to Phoenix for Phoenix's losses, but after disagreements as to those payments arose, Hallmark filed an action with the district court¹ seeking declaratory judgment that it did not breach the insurance policy or act in bad faith when adjusting Phoenix's claims. Phoenix asserted three counterclaims, and after the parties filed cross-motions for summary judgment, the district court granted Hallmark's motion in its entirety and granted Phoenix's motion in part. Phoenix now appeals the district court's grant of summary judgment in favor of Hallmark.² Having jurisdiction pursuant to 28 U.S.C. § 1291, we affirm.³

I.

Phoenix operated a recycling plant in Des Moines, Iowa, recycling construction debris and producing biofuel from wood materials. On July 6, 2017, a fire began at Phoenix's plant. At the time of the fire, Phoenix had nearly 18,000 tons of biofuel on its property, and the fire originated from a pile of this biofuel located at the southeast corner of the plant. Pursuant to a policy effective April 16, 2017, Hallmark insured Phoenix with coverage for property damage and business interruption of up to approximately $6.5 million. Phoenix provided Hallmark with notice of its fire loss on or about July 10, 2017. This loss included damage to buildings, wiring, equipment, and other materials located on Phoenix's property.

Hallmark assigned Bryan Jones, a "Property Claims Supervisor," to Phoenix's claimed loss and subsequently hired 11 different experts and consultants to also evaluate the loss. There are two experts and consultants pertinent to this appeal: Larry Baxter and HSNO. Hallmark hired Baxter, a mechanical engineer, to assess Phoenix's wiring and equipment damage. Baxter created a report, dated July 31, 2017, that included three different estimates for equipment loss: (1) actual cash value of $368,520; (2) replacement cost value of $1,226,400; and (3) repair cost of $93,600. R. Doc. 38-9, at 59. Within Baxter's report was an estimate of $124,800 for removal and replacement of wiring and equipment, including equipment removal and installation labor cost; replacement of electrical wiring cost; and a contingency fee. R. Doc. 38-9, at 59. In a separate report, R. Doc. 38-12, at 20, Jones characterized the electrical wiring replacement cost as being included in the replacement cost value category. Jones later confirmed this classification in a supplemental declaration, stating, "Based on [Baxter's] report, my understanding at the time was that the electrical equipment should be depreciated and allocated as [r]eplacement [c]ost [v]alue." R. Doc. 47-4, at 8. On October 18, 2017,⁴ Hallmark paid Phoenix $200,720 under its equipment loss coverage. This amount did not include compensation for removal and installation of wiring and equipment because, Hallmark contended, the policy did not require such payment until damaged property had been repaired or replaced. Hallmark did eventually compensate Phoenix for its damaged wiring and equipment (as well as the associated labor costs and contingency fee): Hallmark included the $124,800 in its July 6, 2018 "compromise" payment, which exceeded $1 million. However, Phoenix contends that Hallmark should have paid the $124,800 for removal and replacement of wiring and equipment on October 18, 2017.

Hallmark also hired HSNO, an accounting firm, in anticipation of Phoenix's business income interruption claim. HSNO began requesting information regarding any such claim in November 2017. In response, on December 1, 2017, Phoenix provided financial information for 2015, 2016, and through October 2017. At this time, Phoenix stated that "[t]he business income/extra expense loss exceeds $530,000," R. Doc. 59, at 21 (alteration in original), and demanded a $200,000 advance. However, at the time of its demand, Phoenix had not provided complete financial information to HSNO or to Hallmark—namely, financial information covering the time period beyond October 2017. HSNO then provided Hallmark with a preliminary calculation of business income loss totaling $28,774.34. HSNO characterized 94.16% of the expenses included in its calculation as "noncontinuing," meaning that no continuing payroll expenses were incorporated into the estimate. HSNO expressly told Jones that this calculation was preliminary, as it was subject to "additional discussions, and new information, including continuing payroll." R. Doc. 59, at 22. Jones then relayed this calculation to Phoenix, alerting Phoenix of the calculation's preliminary status. In response, Phoenix submitted to Hallmark a proof of loss for $28,774.34 coupled with a letter disputing HSNO's calculation. Phoenix did not provide a proposed alternative calculation or the missing financial information. Instead, it simply alleged that it had provided sufficient financial information and that, based on that information, it was entitled to a larger payment. On January 9, 2018, Hallmark advanced Phoenix $28,774.34 under the policy's business interruption coverage.

Hallmark brought an action in district court for declaratory judgment that it did not breach the insurance policy or act in bad faith when adjusting Phoenix's claims, and Phoenix brought three counterclaims, seeking punitive damages and contending that although Hallmark ultimately paid all sums owed under the policy, it breached the terms of the policy, acted in bad faith, and breached its fiduciary duty to Phoenix by delaying the payment of policy benefits. The parties filed cross-motions for summary judgment, and ultimately, the district court granted Hallmark's motion for summary judgment in its entirety and granted Phoenix's motion in part.⁵ We find that the district court did not err, and we affirm in full.⁶

II.

"We review de novo the district court's grant of summary judgment." Van Dorn v. Hunter, 919 F.3d 541, 544 (8th Cir. 2019) (citation omitted). "Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Kempf v. Hennepin Cnty., 987 F.3d 1192, 1195 (8th Cir. 2021).

On appeal, Phoenix abandons many of the claims that it raised before the district court and challenges only the district court's grant of summary judgment in favor of Hallmark on Phoenix's bad faith claim and Hallmark's claim for declaratory judgment, and on Phoenix's request for punitive damages. We agree with the district court's thoughtful analysis of these claims and affirm.⁷

"To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim." Dolan v. Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988) (citation omitted); see also Rodda v. Vermeer Mfg., 734 N.W.2d 480, 483 (Iowa 2007) (explaining that a plaintiff must prove that the insurer "had no reasonable basis for denying benefits under the policy" and that "the insurer knew, or had reason to know, that its denial was without basis" (citation omitted)). "The first element is an objective one; the second element is subjective." Rodda, 734 N.W.2d at 483 (citation omitted). As the district court correctly noted, we consider the second element only if we find that the insurer did not have a reasonable basis to deny the insured's claim. R. Doc. 59, at 15; see also Rodda, 734 N.W.2d at 483.

The first element is not satisfied if the "claim is ‘fairly debatable’ as to either a matter of fact or law." Rodda, 734 N.W.2d at 483 (citation omitted); see also Thornton v. Am. Interstate Ins. Co., 897 N.W.2d 445, 465 (Iowa 2017) (" ‘[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.’ ‘[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.’ " (second alteration in original) (emphasis omitted) (citation omitted)). Iowa courts find several principles important to the first element's analysis. First, "[t]he reasonable basis for denying the claim ... must exist at the time the claim is denied." Seastrom v. Farm Bureau Life Ins. Co., 601 N.W.2d 339, 346 (Iowa 1999). Second, although an insurer may conduct an investigation of an insured's claims, there is no duty of investigation on the insurer, Bellville v. Farm Bureau Mut. Ins. Co., 702 N.W.2d 468, 478 (Iowa 2005), and "an imperfect investigation, standing alone, ‘is not sufficient cause for recovery if the insurer in fact has an objectively reasonable basis for denying the claim,’ " Villarreal v. United Fire & Cas. Co., 873 N.W.2d 714, 728 (Iowa 2016) (citation omitted); see also Reuter v. State Farm Mut. Auto. Ins. Co., 469 N.W.2d 250, 254-55 (Iowa 1991). Third, "[t]here must be evidence that the basis for [the insurer's] valuation was unreasonable," and the insurer...