Kooyman v. Farm Bureau Mut. Ins. Co.

• Decision Date: 20 January 1982
• Docket Number: No. 65420,65420
• Citation: 315 N.W.2d 30
• Parties: Kathryn Lynn KOOYMAN, A Minor; by D. Frank Kooyman, Her Conservator and Father and Next Friend; D. Frank Kooyman, Individually; and Jane Kooyman, Appellants, v. FARM BUREAU MUTUAL INSURANCE COMPANY, Appellee.
• Court: Iowa Supreme Court

Page 30

315 N.W.2d 30

Kathryn Lynn KOOYMAN, A Minor; by D. Frank Kooyman, Her Conservator and Father and Next Friend; D. Frank Kooyman, Individually; and Jane Kooyman, Appellants, v. FARM BUREAU MUTUAL INSURANCE COMPANY, Appellee.

No. 65420.

Supreme Court of Iowa.

Jan. 20, 1982.

Paul E. Huscher & Paul R. Huscher, Des Moines, for appellants.

Thomas D. Hanson and Richard Pundt of Blanchard, Cless & Hanson, Des Moines, for appellee.

Considered by LeGRAND, P. J., and HARRIS, McCORMICK, McGIVERIN and LARSON, JJ.

LARSON, Justice.

The plaintiff Kathryn Kooyman was severely injured by a car while crossing a Des Moines street to board a school bus. Suit was filed on her behalf by her father, and by her parents individually, naming as defendants Wilmer J. Van Wyk, driver of the car, the Des Moines Independent School District, owner of the bus, and John Brown, its driver. Early in the trial the school district and its bus driver settled with the Kooymans and the case proceeded against Van Wyk alone. Van Wyk's defense was provided by the defendant here, Farm Bureau Mutual Insurance Company. A verdict was rendered for $1,100,000 and, after the settlement with the school and bus driver was deducted, a balance of $600,000 was entered as a judgment against Van Wyk. Execution on the judgment was returned unsatisfied. Van Wyk and the Kooymans then entered into a settlement agreement under which Van Wyk assigned to the Kooymans his potential claim against Farm Bureau for its allegedly improper handling of his defense. Thereafter, the Kooymans filed the present "excess judgment" action against Farm Bureau, alleging bad faith and negligence in its representation of Van Wyk. The district court dismissed the case on Farm Bureau's motion that the Kooymans' had failed to state a cause of action. See Iowa R.Civ.P. 104(b). On appeal to this court, we reversed the dismissal of the claim of bad faith but affirmed the dismissal of the claim of negligence. Kooyman v. Farm Bureau Mutual Insurance Company, 267 N.W.2d 403 (Iowa 1978). Following remand, the case was tried on the issue of bad faith, and after presentation of the Kooymans' evidence, the district court sustained a motion for directed verdict. On appeal the Kooymans contend the trial court erred in granting the motion for directed verdict, and in sustaining the objections to their expert testimony. We affirm one of the evidentiary rulings, reverse the other, and reverse the granting of the directed verdict.

Van Wyk's Farm Bureau policy included this provision:

The Company will defend any lawsuit, even if groundless, false or fraudulent, seeking damages which are payable under the terms of this policy, but the Company may make such investigation and settlement of any claims or lawsuit as it deems expedient.

The provision, which is standard in such policies, gives the insurer control over the settlement and trial, at least to the extent of its policy coverage. It also requires the insurer to pay for the defense of any suit, regardless of the size of the claim or of the expected recovery. See 7C J. Appleman, Insurance Law & Practice § 4712, at 476 (1979); 45 C.J.S. Insurance § 933, at 1060 (1966) ("It is (the) insurer's duty to conduct the whole defense, regardless of the amount involved, whether it exceeds or does not exceed insurer's liability, and to protect insured as well as itself against liability at all stages of the litigation ...."). The power to control the defense has a concomitant duty to give proper consideration to the interests of the insured, and failure to do so may be an element of bad faith in a suit against the insurer. Henke v. Iowa Home Mutual Casualty Co., 250 Iowa 1123, 1130, 97 N.W.2d 168, 173 (1959). A covenant is implied in an insurance contract that neither party will do anything to injure the rights of the other in receiving the benefits of the agreement. This covenant includes a duty to settle claims without litigation in appropriate cases. 7C Appleman, supra § 4712, at 446; see Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136, 1137-38 (1954) (responsibility of insurer for exercise of power to control defense implicit in policy); see also Neal v. Farmers Insurance Exchange, 21 Cal.3d 910, 920-21, 582 P.2d 980, 985, 148 Cal.Rptr. 389, 395 (1978) (implied covenant discussed).

The general rule is that an insurer will be liable for its acts in representing an insured only if "bad faith" is established, although some cases have adopted a negligence standard. Most seem to combine the concepts:

Some courts, in weighing the responsibilities of the liability insurer, speak of bad faith; some speak of negligence; others use the two terms interchangeably. And, in truth, they are to some extent interchangeable. The insurer, as a professional defender of lawsuits, is held to a standard higher than that of an unskilled practitioner. What might be ignorance in one instance may be unforgivable oversight of the insurer; what might be neglect in one instance could well constitute bad faith on the part of the insurer. The question is always: "Did the insurer exercise that degree of skill, judgment, and consideration for the welfare of the insured which it, as a skilled professional defender of lawsuits having sole charge of the investigation, settlement, and trial of the suit may have been expected to utilize?" If it did, there is no problem; it is not liable. If it did not, then a court could easily describe its conduct as being negligent, or as not in accordance with the high duty of good faith which it owed to its insured. And the insured, having surrendered to the insurer the exclusive control over these matters which impinge so closely upon his future welfare and financial well-being, is entitled to expect that skill, that judgment, and that consideration to which reference has been made.

7C Appleman, supra § 4712, at 425-26. Other authorities agree that any distinction between the negligence and bad-faith concepts is virtually obliterated by admitting evidence of negligence on the issue of bad faith. Keeton, supra at 1140; Annot., Duty of Liability Insurer to Settle or Compromise, 40 A.L.R.2d 168, 171 (1955); see Brown v. United States Fidelity & Guaranty Co., 314 F.2d 675, 677 (2d Cir. 1963).

The general rule that evidence of negligence is admissible on the issue of bad faith has been modified in Iowa so that only evidence of negligence which shows an indifference to or disregard of the interests of the insured may be considered. Kohlstedt v. Farm Bureau Mutual Insurance Co., 258 Iowa 337, 339, 139 N.W.2d 184, 185 (1965); Ferris v. Employers Mutual Casualty Co., 255 Iowa 511, 516, 122 N.W.2d 263, 266 (1963). See generally 7C Appleman, supra § 4712, at 432-447 (factors involved in bad faith); Annot., 40 A.L.R.2d supra at 171.

The Kooymans contend there was sufficient proof of Farm Bureau's negligence to submit the issue of bad faith to the jury. Evidence was presented from which the jury could conclude it was obvious to all of the attorneys involved that a verdict would be rendered far in excess of Van Wyk's policy limits of $25,000. The Kooymans claim that despite the probability of a large excess verdict, the preparation for the trial by Farm Bureau's attorneys was minimal and that they did not pursue settlement negotiations with the insured's interests in mind, indicating its lack of good faith.

Farm Bureau contends that bad faith is a "species of fraud," and that the evidence here was insufficient as a matter of law. However, good faith or bad faith in this context does not connote the absence or presence of positive misconduct of a malicious, illegal, or immoral nature such as would be required for punitive damages; rather, it refers to a breach of the implied covenant of good faith. See Neal v. Farmers Insurance Exchange, 21 Cal.3d at 921-22 n.5, 582 P.2d at 986 n.5, 148 Cal.Rptr. at 395 n.5.

The phrase 'good faith' is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized (in other contexts) as involving 'bad faith' because they violate community standards of decency, fairness or reasonableness.

Restatement (Second) of Contracts § 205, comment a (1981). "Bad faith" under the circumstances of this case refers simply to the absence of good faith required by the implied contract. See 7C Appleman, supra § 4712, at 439.

I. The Directed Verdict Ruling.

In ruling on a motion for directed verdict, the evidence must be viewed in the light most favorable to the party against whom the motion was made, regardless of whether it was contradicted; moreover, a court must draw every legitimate inference in aid of the evidence. If reasonable minds could differ on the issue, it should be submitted to the jury. See Iowa R.App.P. 14(f)(2), (17); Larsen v. United Federal Savings & Loan Association, 300 N.W.2d 281, 283 (Iowa 1981); Beitz v. Horak, 271 N.W.2d 755, 757 (Iowa 1978); Curran Hydraulic Corporation v. National-Ben Franklin Insurance Company, 261 N.W.2d 822, 823 (Iowa 1978).

We set out the evidence of bad faith in the light most favorable to the Kooymans. This evidence showed that the verdict was expected to be very high: one of Farm Bureau's attorneys expected it would be around $800,000 and his co-counsel expected it to be $1,000,000 to $1,200,000. One of the attorneys representing the school district valued it at $500,000 to $1,000,000; another of its attorneys valued it at over $1,000,000 and testified that upon his investigation he "could see no way (the insured) would not be held liable." Farm Bureau's own claims manager testified he felt it would be "very unlikely that (its) insured would be exonerated." And its assistant general counsel testified, "(w)e...