FACTS:
The Guilliams had an insurance policy with Farm Bureau on a mobile home. They owned the home, but had moved and had been trying to sell it for quite some time. Rodney Guilliams had been unemployed for a year prior to the fire and was experiencing financial difficulties. The Guilliams had removed the mobile home from the market after the death of Rodney’s brother, as they were planning on moving to Missouri, to be near Rodney’s mother. The policy, which provided coverage on the Guilliams’ mobile home for property losses caused by fire, contained an exclusion for intentional acts. On May 17, 2001, the Guilliams’ mobile home and its contents were destroyed by an arson fire. The Guilliams filed a claim with Farm Bureau for the loss.
Farm Bureau found out that the Guilliams had kept two five-gallon cans of gas at the empty trailer, ostensibly for his lawn mower. One of the people arrested for the arson was Ron Flowers, a family friend that Rodney had met when both were incarcerated in the Pottawattamie County Jail. Despite Rodney’s significant financial difficulties, he took out an advance of $2,500 on his credit card to assist Flowers in paying his bail after Flowers was arrested on the arson charge. At about this time, Farm Bureau made a written settlement proposal to the Guilliams. According to a claims adjuster, while Farm Bureau was suspicious, it did not feel it had enough information to deny the claim.
Fortunately for Farm Bureau, Flowers, who had a criminal record, entered into a plea agreement with the State. In exchange for Flowers’ cooperation with the arson investigation, Flowers was permitted to plead guilty to arson in the third degree with the understanding that the State would recommend probation with placement in a community corrections facility. Flowers then made an unsworn statement to an assistant county attorney alleging that Rodney Guilliams had solicited Flowers to commit the arson. On April 24 a trial information was filed charging Rodney Guilliams with solicitation of a felony. Based on the detailed statement and the indictment, Farm Bureau sent a denial letter for the claim.
The Guilliams, through their attorney Joseph Hrvol, filed a complaint against Farm Bureau, alleging breaches of the insurance contract and the settlement agreement, as well as a first-party bad faith claim. The lawsuit proceeded to trial, and the jury returned verdicts in favor of Farm Bureau on all of the Guilliams’ claims.
ISSUE:
Farm Bureau then moved for sanctions against the Guilliams and their counsel under Iowa Rule of Civil Procedure 1.413(1), which requires the signatory of a petition to have read the petition, be acting without improper motive, and
certify that to the best of his knowledge, information, and belief, formed after a reasonable inquiry, the pleading . . . is (1) well grounded on the facts and (2) warranted either by existing law or by a good faith argument for the extension, modification, or reversal of existing law.
On a first-party bad faith claim, the issue was whether the insurance claim was fairly debatable:
[T]o establish a claim for first-party bad faith, the insured must prove two facts: (1) that the insurer had no reasonable basis for denying benefits under the policy and, (2) the insurer knew, or had reason to know, that its denial was without basis. The first element is objective, the second subjective. If a claim is " 'fairly debatable,' the insurer is entitled to debate it, whether the debate concerns a matter of fact or law." "Whether a claim is fairly debatable is appropriately decided by the court as a matter of law."
According to the Court of Appeals, the Court's question therefore boiled down to "whether the information, as viewed by a reasonably competent attorney, revealed an objectively reasonable basis for the insurance company’s denial." If the claim was fairly debatable as a matter of law, then a reasonably competent counsel could not make a plausible argument in support of a first-party bad faith claim, and filing such a claim would violate rule 1.413(1).
ANALYSIS:
The Guilliams and attorney Hrvol argued that a jury could have found Farm Bureau acted unreasonably in denying their claim, because the only new information Farm Bureau received after agreeing to settle the claim was Flowers’ statement. They assert this unsworn statement was an insufficient basis on which to deny the Guilliams’ claim, because it was made by an individual with a criminal record, and was given in consideration of reduced charges and after an opportunity to review both police investigative reports and Rodney’s statements to Farm Bureau investigators.
The Court disagreed:
However, a reasonable person could also find, in light of previously known and undisputed facts, that the statement was sufficiently reliable and credible to raise a fair debate about the validity of the Guilliams’ claim.
The court must look to all the information Farm Bureau had received up to the time it denied the claim, and which was within attorney Hrvol’s knowledge at the time the petition was filed. . . . Under the circumstances presented here, reasonable individuals could differ as to the credibility and weight to be afforded Flowers’ statement. It therefore logically follows that Farm Bureau’s reliance on the statement in denying the Guilliams’ claim was objectively reasonable. Thus, the first-party bad faith claim was unsupported as a matter of law.
The Court therefore remanded the case back to the District Court for a new ruling on the motion for sanctions.
OBLIGATORY BLOG COMMENTARY:
Absent the possibility of sanctions, a bad-faith claim would have no downside for the plaintiff and only court costs as a downside for claimant counsel. It's used simply as the next logical step whenever a company denies a claim: roll the dice and either get lucky or end up the same denial you had before. This case clarifies that you could actually get dinged for sanctions, making it a tad riskier to bring the bad-faith claim without solid evidence that no reasonable grounds for the denial existed.
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