Opinion ID: 2230281
Heading Depth: 1
Heading Rank: 2

Heading: Governing Principles of Law.

Text: A. Standard of review. Farm Bureau contends the district court erred in failing to grant its motion for directed verdict. A directed verdict for the defendant was required only if there was no substantial evidence to support the elements of the plaintiff's claim. Thompson v. U.S. Fid. & Guar. Co., 559 N.W.2d 288, 290-91 (Iowa 1997). Substantial evidence means evidence that a `reasonable mind would accept as adequate to reach a conclusion.' Id. (citation omitted). In determining whether substantial evidence was offered, the trial court was required to view the evidence in the light most favorable to the plaintiff, regardless of whether it was contradicted. Reuter v. State Farm Mut. Auto. Ins. Co., 469 N.W.2d 250, 251 (Iowa 1991). The court was also obligated to draw every legitimate inference from this evidence in support of the plaintiff. Id. We review the trial court's ruling on a motion for directed verdict for the correction of errors of law. See Wolbers v. Finley Hosp., 673 N.W.2d 728, 734 (Iowa 2003). B. Elements of bad faith claim. To establish Farm Bureau's bad faith, the plaintiff was required to prove (1) Farm Bureau had no reasonable basis for denying the plaintiff's claim or for refusing to consent to settlement, and (2) the defendant knew or had reason to know that its denial or refusal was without reasonable basis. Sampson v. Am. Standard Ins. Co., 582 N.W.2d 146, 149 (Iowa 1998). The first element is an objective one; the second element is subjective. Reuter, 469 N.W.2d at 253. 1. Objective element: lack of reasonable basis. A reasonable basis exists for denial of policy benefits if the insured's claim is fairly debatable either on a matter of fact or law. Sampson, 582 N.W.2d at 150; Morgan v. Am. Family Mut. Ins. Co., 534 N.W.2d 92, 96 (Iowa 1995), overruled on other grounds by Hamm v. Allied Mut. Ins. Co., 612 N.W.2d 775, 784 (Iowa 2000). A claim is fairly debatable when it is open to dispute on any logical basis. See Morgan, 534 N.W.2d at 96; 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 204:28, at 204-43 (1999) (defining debatable reason as an arguable reason, a reason that is open to dispute or question) [hereinafter Couch on Insurance 3d ]. Stated another way, if reasonable minds can differ on the coverage-determining facts or law, then the claim is fairly debatable. See William T. Barker & Paul E.B. Glad, Use of Summary Judgment in Defense of Bad Faith Actions Involving First-Party Insurance, 30 Tort & Ins. L.J. 49, 56 (1994) [hereinafter Barker & Glad Article]. The fact that the insurer's position is ultimately found to lack merit is not sufficient by itself to establish the first element of a bad faith claim. Cent. Life Ins. Co. v. Aetna Cas. & Sur. Co., 466 N.W.2d 257, 263 (Iowa 1991); see Thompson, 559 N.W.2d at 292. The focus is on the existence of a debatable issue, not on which party was correct. See Thompson, 559 N.W.2d at 292; see also Myers v. Broussard, 696 So.2d 88, 104 (La.Ct.App. 1997) (stating fact that insurer erroneously evaluated claim does not equate to arbitrary and capricious conduct); State Farm Lloyds, Inc. v. Polasek, 847 S.W.2d 279, 286-87 (Tex.App.1992) (The issue in the bad faith case is not whether the factfinder believes the evidence that State Farm believed when it denied the claim; the issue is whether such evidence existed.). Whether a claim is fairly debatable can generally be decided as a matter of law by the court. See Thompson, 559 N.W.2d at 290; Clark-Peterson Co. v. Indep. Ins. Assocs., Ltd., 514 N.W.2d 912, 914 (Iowa 1994); Wetherbee v. Econ. Fire & Cas. Co., 508 N.W.2d 657, 662 (Iowa 1993). That is because `[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.' Gardner v. Hartford Ins. Accident & Indem. Co., 659 N.W.2d 198, 206 (Iowa 2003) (quoting Morgan, 534 N.W.2d at 97) (emphasis added). As one court has explained, [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. Polasek, 847 S.W.2d at 285. Thus, if it is undisputed that evidence existed creating a genuine dispute as to the negligence of an uninsured or underinsured motorist, the comparative fault of the insured, the nature and extent of the insured's injuries, or the value of the insured's damages, a court can almost always decide that the claim was fairly debatable as a matter of law. See, e.g., Sampson, 582 N.W.2d at 152 (holding district court properly decided bad faith claim as a matter of law where nature and extent of insured's injuries were debatable); Cent. Life Ins. Co., 466 N.W.2d at 263 (holding insurer entitled to judgment as a matter of law where there was a good faith dispute on the amount of the insured's damages); Dirks v. Farm Bureau Mut. Ins. Co., 465 N.W.2d 857, 862 (Iowa 1991) (holding insurer entitled to directed verdict on bad faith claim where there was conflicting information as to who was at fault in underlying automobile accident); Barker & Glad Article, 30 Tort & Ins. L.J. at 57 (same). One treatise has explained the standard this way: [A]n insurer is innocent of bad faith as a matter of law ... if the insurer took a position in regard to the claim that reasonable minds could hold. Unless the trial court is prepared to grant a directed verdict to the insured on his claim under the policy and to hold that reasonable minds could not disagree as to the insured's entitlement to proceeds under the policy, it follows that reasonable minds could disagree about the insured's entitlement to policy proceeds. Therefore, the insurer should be entitled to a directed verdict in its favor on the insured's bad faith claim unless the insured is entitled to a directed verdict in his favor on the policy claim. Stephen S. Ashley, Bad Faith Actions Liability & Damages § 5:04, at 5-17 to 5-18 (2d ed.1997) (also discussing exceptions to this rule, none of which are implicated here) [hereinafter Bad Faith Actions ]; accord Reuter, 469 N.W.2d at 254 (noting that existence of submissible jury question on insured's entitlement to policy benefits will generally, though not automatically, establish that the issue is fairly debatable); see also Chateau Chamberay Homeowners Ass'n v. Associated Int'l Ins. Co., 90 Cal. App.4th 335, 108 Cal.Rptr.2d 776, 785, 787 (2001) (stating as long as there is no dispute as to the underlying facts, it is for the court, not a jury, to decide whether the insurer had `proper cause' [to deny the insured's claim]). 2. Subjective element: knowledge of lack of reasonable basis. Even when the insurer lacks a reasonable basis for its denial of a claim, liability for bad faith will not attach unless the insurer knew or should have known that the basis for denying its insured's claim was unreasonable. Sampson, 582 N.W.2d at 150; Kiner v. Reliance Ins. Co., 463 N.W.2d 9, 13 (Iowa 1990). An insurer's negligent or sub-par investigation or evaluation of a claim is relevant to the fact finder's determination of whether the insurer should have known its denial lacked a reasonable basis. Reuter, 469 N.W.2d at 254; Bad Faith Actions § 5:08, at 5-42 ([A] breach of the duty to investigate constitutes a substitute for knowledge.). But an improper investigation, standing alone, is not sufficient cause for recovery if the insurer in fact has an objectively reasonable basis for denying the claim. Reuter, 469 N.W.2d at 254-55; accord Seastrom v. Farm Bureau Life Ins. Co., 601 N.W.2d 339, 347 (Iowa 1999); Bad Faith Actions § 5:08, at 5-42 (stating a negligent investigation does not constitute bad faith by itself). With this background, we turn now to an analysis of the plaintiff's bad faith claim.