Morgan v. American Family Mut. Ins. Co.

• Decision Date: 21 June 1995
• Docket Number: No. 94-151,94-151
• Citation: 534 N.W.2d 92
• Parties: John Jay MORGAN, Kathleen Morgan and Penny Hill Kapinski, Appellees, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Appellant, State of Iowa ex rel. Civil Reparations Trust Fund, 99AG68645, Intervenor.
• Court: Iowa Supreme Court

Page 92

534 N.W.2d 92

John Jay MORGAN, Kathleen Morgan and Penny Hill Kapinski, Appellees, v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Appellant, State of Iowa ex rel. Civil Reparations Trust Fund, 99AG68645, Intervenor.

No. 94-151.

Supreme Court of Iowa.

June 21, 1995

Rehearing Denied July 13, 1995.

Douglas A. Haag of Patterson, Lorentzen, Duffield, Timmons, Irish, Becker & Ordway, Des Moines, for appellant.

James E. Shipman and Chad M. VonKampen of Simmons, Perrine, Albright & Ellwood, L.L.P., Cedar Rapids, and John H. Ehrhard, Cedar Rapids, for appellees.

Thomas J. Miller, Atty. Gen., Craig Kelinson, Sp. Asst. Atty. Gen., and Richard E. Mull, Asst. Atty. Gen., for intervenor State.

Randy V. Hefner of Van Werden, Hulse & Hefner, Adel, and William J. Bribriesco, Bettendorf, for amicus curiae Iowa Trial Lawyers Ass'n.

Considered by HARRIS, P.J., and CARTER, SNELL, ANDREASEN, and TERNUS, JJ.

ANDREASEN, Justice.

This case involves a dispute over an insurer's responsibility to pay uninsured motorist benefits. The insureds brought suit alleging breach of contract and bad faith denial of their claim. The jury found the insurer failed to pay the benefits in bad faith and determined the amount of compensatory and punitive damages. The trial court entered judgment on the jury's verdict. The insurer appeals and the insured cross-appeals. The State of Iowa, on behalf of the Civil Reparations Trust Fund, intervened regarding the award of punitive damages. We reverse and remand.

I. Background.

Plaintiffs John and Kathleen Morgan and Kathleen's daughter, Penny Hill Kapinski, (collectively "the Morgans") allege bad faith by American Family Mutual Insurance Company (American Family) for refusing to pay uninsured motorist benefits under a policy issued to John and Kathleen for injuries suffered by Penny. On August 19, 1985 Penny was driving her parents' car when another vehicle, driven by Walter Fisher (Fisher), ran a red light and broadsided her. It is undisputed that Fisher's negligence was the sole cause of the accident and that he was uninsured.

John was summoned to the scene of the accident. Although Penny bumped her head with sufficient force to dent and crack the dashboard in the collision, she told him she was all right, "just a little bit shook up and a little scared." She declined to see a doctor and was not treated or examined by a doctor until September 9, 1985, after she fainted at school. Dr. Rega, who examined Penny that day, hypothesized that the faint was possibly the result of hypoglycemia. Penny did not seek medical attention again until April 21, 1986 when she saw Dr. Ahn. Dr. Ahn's records indicated that Penny had experienced five fainting spells and noted a working diagnosis of hysteria or seizure disorder. He requested an EEG study which came back normal. The next time Penny sought medical examination was October 15, 1986. At that time she saw Drs. Uhl and Varney at the Veterans' Administration Hospital where she worked. They suspected she might be suffering partial complex seizure disorder and referred her to Dr. Hines, a neurologist. Dr. Hines diagnosed Penny as having partial complex seizure disorder, which he believed was a result of the 1985 accident.

Finally, in December 1986 the Morgans notified American Family of Penny's injuries and their intention to make a claim for her injuries under the uninsured motorist policy. American Family requested a written loss report from the Morgans, which it received in March 1987. In the loss report Penny described her injuries as "bump on head, bruises." Dr. Hines filled out a casualty medical report indicating Penny's problems "are secondary to an auto accident" in August 1985.

Because it questioned whether Penny's seizures were related to injuries she received in the accident, American Family sought the advice of an expert. Dr. Schutta, a professor and chairperson in the Department of Neurology at the University of Wisconsin Medical School, examined the medical records American Family had collected from Penny's doctors. Dr. Schutta's review did not include Dr. Varney's records because American Family had not yet received them when it sent him Penny's records. Dr. Varney's records indicated Penny had suffered temporary cortical blindness at the time of the accident. Penny never told any other doctor that she experienced blindness at the time of the accident and did not testify at trial that she experienced temporary blindness at that time. Dr. Schutta's report indicated that even if Penny was having partial complex seizures, he did not believe they were due to the accident because there was no evidence that she had sustained any significant concussion in the accident.

On July 8, 1987 a four-member claims committee denied the Morgans' claim for uninsured motorist benefits based primarily upon Dr. Schutta's opinion. On January 19, 1989 the Morgans filed a petition against American Family, seeking damages for breach of contract and bad-faith denial of insurance benefits. The trial court denied American Family's motions for separate trials on the breach of contract and bad faith claims. The issues were tried together in a jury trial.

Before the trial, American Family had Penny examined by Dr. Jones, a clinical neuropsychologist, and Dr. Rizzo, a neurologist. Dr. Jones' six-hour neuropsychological assessment of Penny produced no evidence that she had sustained a permanent brain injury. Dr. Rizzo also did not discover evidence of any brain injury during his neurological examination of Penny.

The jury found the Morgans had suffered total damages of $351,877.95 as a result of the accident. It also found American Family failed to pay the benefits in bad faith and awarded $1,000,000 in punitive damages. The State of Iowa intervened for a statutory portion of the punitive damages. See Iowa Code § 668A.1(2)(b) (1993). The trial court entered judgment for the uninsured motorist policy limits, $100,000, plus attorney fees, litigation expenses and prefiling interest from the date American Family denied the claim. Because the jury found that American Family's conduct was not directed specifically towards the plaintiffs, the court divided the punitive damages by awarding $250,000 to the plaintiff, $350,000 in plaintiffs' attorney fees pursuant to a contingency fee arrangement, and $400,000 to Iowa Civil Reparation Trust Fund. The court awarded interest on the punitive damages from the date of the verdict.

The parties raise several issues in this appeal. American Family argues the court erred in overruling its motions for directed verdict and judgment notwithstanding the verdict on the bad faith claim. It also challenges the court's failure to grant its motion for directed verdict on the breach of contract claim based on the limitations period set forth in the contract. Other issues raised by American Family relate to the court's instruction on what constitutes bad faith, the award of attorney fees and litigation expenses as compensatory damages on the bad faith claim, and the dates from which interest on the damages was awarded. The Morgans challenge the court's limitation of compensatory damages on the bad faith claim to the policy limits and the jury's determination that American Family's conduct was not directed specifically against them. The intervenor State disputes the method used to calculate the amount of attorney fees that are deducted from the punitive damage award. Amicus curiae, the Iowa Trial Lawyers Association, filed a brief on the issue of the method of calculating attorney fees. Our resolution of the bad faith and contractual limitations issues makes it unnecessary to address all of the issues raised.

II. Scope of Review.

Questions involving the sufficiency of evidence to generate a submissible jury issue in the face of a motion for directed verdict present issues of law. Wolfe v. Graether, 389 N.W.2d 643, 651 (Iowa 1986). When reviewing the denial of a motion for a directed verdict or judgment notwithstanding the verdict, we must view the evidence in the light most favorable to the resisting party. Konicek v. Loomis Bros., 457 N.W.2d 614, 617 (Iowa 1990). When the sufficiency of the evidence to support a jury finding is at issue, we look to whether there is substantial evidence to support the finding. See Iowa R.App.P. 14(f)(1).

III. Bad Faith.

American Family argues the court erred in denying its motions for directed verdict and judgment notwithstanding the verdict on the bad faith claim. To prove American Family acted in bad faith in denying their claim, the Morgans must show the absence of a reasonable basis for denying their claim under the policy. Dolan v. Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988). They must also show American Family denied the claim knowing or having reason to know that its denial was without a reasonable basis. Kiner v. Reliance Ins. Co., 463 N.W.2d 9, 13 (Iowa 1990). An insurance company, however, has the right to debate a claim that is "fairly debatable" without being subject to bad faith tort claims. Clark-Peterson v. Independent Ins. Assocs., 514 N.W.2d 912, 914 (Iowa 1994). A claim may be fairly debatable as to either a matter of fact or law. Dolan, 431 N.W.2d at 793. Whether a claim is fairly debatable is appropriately decided by the court as a matter of law. Wetherbee v. Economy Fire & Casualty Co., 508 N.W.2d 657, 662 (Iowa 1993).

The absence of a reasonable basis for denying the claim is an objective element. Reuter v. State Farm Mut. Auto. Ins. Co., 469 N.W.2d 250, 253 (Iowa 1991). Where 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. Id.

Both parties agree that the evaluations by Drs. Jones and Rizzo provided a reasonable basis to deny the claims by the time of the trial. However, the Morgans brought their bad faith claim based on American Family's denial of their coverage claim on July 8, 1987....