North Iowa State Bank v. Allied Mut. Ins. Co.

• Decision Date: 19 June 1991
• Docket Number: No. 90-268,90-268
• Parties: NORTH IOWA STATE BANK, Appellant, v. ALLIED MUTUAL INSURANCE COMPANY, Formerly Aid Insurance Company, Appellee.
• Court: Iowa Supreme Court

Page 824

471 N.W.2d 824

NORTH IOWA STATE BANK, Appellant, v. ALLIED MUTUAL INSURANCE COMPANY, Formerly Aid Insurance Company, Appellee.

No. 90-268.

Supreme Court of Iowa.

June 19, 1991.

As Corrected June 26, 1991.

H.P. Folkers, Mason City, and Robert M. Austin and Jerome B. Abrams, Minneapolis, Minn., for appellant.

Marsha Ternus of Bradshaw, Fowler, Proctor & Fairgrave, Des Moines, for appellee.

Considered by HARRIS, P.J., and LARSON, SCHULTZ, NEUMAN and ANDREASEN, JJ.

SCHULTZ, Justice.

Plaintiff, North Iowa State Bank (bank), incurred liability when borrowers, the Kloosters, recovered a judgment against the bank. See Klooster v. North Iowa State Bank, 404 N.W.2d 564 (Iowa 1987). The bank commenced the present action against its liability insurance carrier, defendant Allied Mutual Insurance Company (Allied), seeking reimbursement of the amount of settlement it paid to discharge the judgment, attorney fees incurred in a prior declaratory judgment action, and punitive damages. Following trial to the court, plaintiff's petition was dismissed and judgment entered for defendant. We affirm.

The genesis of this action is previous litigation between the bank and members of the Klooster family. See id. The Kloosters sued the bank for actual and punitive damages resulting from the attachment and sale of their swine herd. Following a trial, the jury returned findings in favor of the Kloosters and awarded actual and punitive damages on the following theories of recovery: (1) wrongful attachment; (2) conversion; (3) disposition of collateral in other than a reasonably commercial manner; (4) abuse of process; (5) tortious interference with a business relationship; and (6) violation of civil rights under 42 U.S.C. section 1983. The trial court believed that the verdicts were duplicative of each other and reduced the judgment to the amount of: (1) actual damages recovered for wrongful attachment; (2) emotional distress damages recovered under the civil rights violation; and (3) the highest of the several punitive damages awards.

On appeal, we held that the bank was entitled to a directed verdict on the wrongful attachment, tortious interference, and section 1983 theories of recovery. Klooster, 404 N.W.2d at 568-70. We affirmed the jury's verdict allowing plaintiff to recover $145,000 in actual damages and $100,000 in punitive damages on its claim of disposition of collateral in other than a reasonably commercial manner. Id. at 572. Although we did not hold that the bank was entitled to a directed verdict on the conversion and abuse of process theories of recovery, we did not order retrial on these two theories. Id.

When the Kloosters commenced litigation, the bank sought protection for its liability exposure by making a demand that Allied defend the bank and assume any loss resulting from the litigation. Allied's position was that the insurance policy covered only the tortious interference with a business relationship theory of recovery. Consequently, Allied provided an attorney to assist in only defending this claim. On all other theories advanced by the Kloosters, Allied denied the bank coverage and refused to provide a defense.

Prior to our ruling in Klooster, the bank commenced a declaratory judgment action seeking a determination of the extent of coverage afforded by the liability policy it held with Allied. That action was tried to the court shortly after we issued our decision in Klooster. The trial court ruled that Allied had a duty to defend the bank and that the policy provided coverage for all theories of liability advanced by the Kloosters with the exception of disposition of collateral in other than a reasonably commercial manner. Both parties dismissed their respective appeals from that ruling. Allied then reimbursed the bank for costs the bank incurred in defending and appealing the Klooster case.

The issue of Allied's responsibility for payment of the judgment awarded the Kloosters was not resolved and became the issue in this action which was tried to the court at law. The trial judge, different from the judge sitting on the declaratory judgment action, dismissed the bank's claim against Allied for the sum it was forced to pay the Kloosters. The court ruled that the judgment was rendered on a theory that was not covered under the policy, disposition of collateral in other than a reasonably commercial manner. The court found that the bank had not met its burden of proving its claim for attorney fees and punitive damages arising out of its allegation that Allied acted in bad faith and was stubbornly litigious.

On appeal, the bank challenges the trial court's ruling denying recovery of: (1) the sum of money paid to discharge the Klooster judgment; (2) attorney fees incurred in prosecuting the declaratory judgment action; and (3) punitive damages based on Allied's alleged bad faith. We address the bank's contentions in turn.

I. Liability under the insurance policy. The bank maintains that Allied's policy covers the bank's loss arising from the Klooster judgment. Resolution of this issue requires an examination of the terms of the policy and the character of the judgment. To resolve this issue, we must examine the policy to determine the extent of coverage and whether the bank's payment of the judgment fell within that coverage.

The relevant language from the comprehensive general liability policy provides that Allied "will pay on the behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of [bodily injury or property damage] to which this insurance applies...." Thus, the insured must establish that Allied has a legal obligation to pay the judgment by showing that the insurance policy applies or covers this obligation.

The term "legally obligated" is explained by a condition which provides that "[n]o action shall lie against the Company ... until the amount of the insured's obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the Company." In the absence of an agreement to the contrary, such a condition in a liability policy requires that no action may accrue against an insurer on a covered claim until the amount of the loss has been determined by a judgment against the insured. See Clark v. Bellefonte Ins. Co., 113 Cal.App.3d 326, 336-37, 169 Cal.Rptr. 832, 838 (1980); Coil Anodizers, Inc. v. Wolverine Ins. Co., 120 Mich.App. 118, 122, 327 N.W.2d 416, 418 (1982); Bacon v. American Ins. Co., 131 N.J.Super. 450, 459, 330 A.2d 389, 394-95 (Law Div.1974), aff'd 138 N.J.Super. 550, 351 A.2d 771 (App.Div.1976); J. Appleman & J. Appleman Insurance Law & Practice § 4851, at 479 (1981); 11 Couch on Insurance 2d § 44:319, at 494 (1982); 43 Am.Jur.2d Insurance § 713, at 772-73 (1982); see also Kester v. Travelers Indem. Co., 257 Iowa 1146, 1150, 136 N.W.2d 261, 264 (1965).

Allied has not agreed that a covered liability exists; therefore, the first question is whether the judgment rendered against the bank is for the covered acts of conversion or abuse of process. In determining the ground for the judgment rendered in this case, we review the action of the trial court on remand and our ruling in Klooster. On remand, the trial court entered a judgment for damages against the bank on Kloosters' theory of sale in other than a reasonably commercial manner and directed verdicts against the Kloosters on all remaining theories.

The bank contends that the trial court did not have authority to direct verdicts on the conversion and abuse of process theories because our decision in Klooster affirmed the award on these theories. Since the parties disagree on the meaning of our decision in Klooster, we interpret its meaning. In interpreting the meaning of one of our prior decisions, we have broad latitude and are guided only by our view of its underlying intent. Thomas v. Minner, 340 N.W.2d 285, 286 (Iowa 1983).

In Klooster, the determination of damages created problems. At trial, the court allowed the jury to determine the damages on each theory of recovery. As a result, the jury returned special verdicts in various amounts on each theory for which the Kloosters sought recovery. In Klooster, we neither approved nor disapproved of the jury's separate determination of damages. Also, we did not speculate about why the amount of the jury's award varied with each count. Rather, we determined that the only special verdict that could stand without retrial was the award on the theory of sale in other than a reasonably commercial manner. Klooster, 404 N.W.2d at 572. We held that the Kloosters were entitled to a judgment on this verdict. Id.

In Klooster, we also held that the jury's award on the conversion and abuse of process theories could not stand because of erroneous instructions. Id. However, we directed no retrial on these two theories because any damages that might be awarded on retrial were already included in the verdict for sale in other than a reasonably commercial manner. Id. Even though we did not hold that the bank was entitled to a directed verdict on conversion or abuse of process, we determined that the trial court should not enter judgment on the jury's verdicts on these two counts or retry the case. Id. Thus, we do not agree with the bank's contention that our Klooster decision affirmed the jury's award of damages on the conversion and abuse of process theories of recovery. As a result, the bank has never had a judgment entered against it for conversion or abuse of process.

The bank's contention that the trial court erred by directing verdicts on the conversion and abuse of process counts on remand provides the bank with no additional support for its claim that the policy covered the loss arising from the Klooster judgment. Perhaps in its remand order, the trial court should have dismissed, rather than directed verdicts on these two...