James B. Wilson, As Administrator Of The Estate Of Lily M. Wilson, Vs. Farm Bureau Mutual Insurance Company ( 2006 )

IN THE SUPREME COURT OF IOWA
No. 5 / 04-0864
Filed May 12, 2006
JAMES B. WILSON, as Administrator of the Estate of LILY M. WILSON,
Deceased,
Appellant,
vs.
FARM BUREAU MUTUAL INSURANCE COMPANY,
Appellee.
Appeal from the Iowa District Court for Muscatine County, David H.
Sivright, Jr., Judge.
Insured appeals from a district court ruling denying its motion for
summary judgment on its contract claim for underinsurance motorist
benefits and granting the insurer’s motion for summary judgment on the
insured’s bad faith claim. AFFIRMED IN PART, REVERSED IN PART,
AND CASE REMANDED.
Sara Riley of Tom Riley Law Firm, P.L.C., Cedar Rapids, for appellant.
Brian C. Ivers of McDonald, Woodward & Ivers, P.C., Davenport, for
appellee.
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LAVORATO, Chief Justice.
In an underlying tort suit, an insured obtained a jury verdict against
an underinsured motorist. Following the verdict, the district court reduced
it by the percentage of fault the jury attributed to the insured and entered
judgment for the reduced amount. Following entry of the judgment, the
insured filed a motion to correct the judgment by increasing it to reflect the
jury’s determination regarding loss of consortium claims. The court granted
the motion and entered an amended judgment.
The insured sued its insurer on a contract claim to recover
underinsured motorist benefits in the amount of the amended judgment
entry less the underinsured motorist’s liability limits pursuant to the
insured’s underinsured motorist (UIM) coverage. The insured also joined a
claim for bad faith against the insurer for its failure to pay the insured’s
demand for the underinsured benefits. The court granted the insured’s
motion for summary judgment on its contract claim in part and denied it in
part. In granting the motion, the court ruled that a consent-to-be-bound
provision under the insured’s UIM coverage was contrary to public policy
and therefore unenforceable. In denying the motion, the court allowed the
insurer to relitigate the issue of damages in the underlying tort suit. The
district court granted the insurer’s motion for summary judgment as to the
insured’s bad faith claim.
The insured filed an application for interlocutory appeal, which we
granted.
We conclude the insurer is bound by the original judgment entry but
not bound by the amended judgment entry. We also conclude that as a
matter of law the insurer was not in bad faith in denying the insured’s
demand. Finally, we conclude the consent-to-be-bound provision is valid
3
and enforceable. We therefore affirm in part, reverse in part, and remand
for further proceedings consistent with this opinion.
I. Background Facts and Proceedings.
On November 30, 1999, Lily M. Wilson walked across a road to
retrieve her mail from a mailbox that was located across the road from her
home. While walking back to her home, Wilson was struck by a vehicle
driven by Margie Carter. Later that day, Wilson died of her injuries suffered
in the incident.
Wilson had automobile insurance with Farm Bureau Mutual
Insurance Company, which included medical pay coverage of $5000 and
UIM coverage of $100,000. Carter had automobile insurance through
Hartford Insurance Company with liability limits of $100,000 (each person)
and $300,000 (each occurrence).
Wilson’s policy provided in part the following:
REPORTING A CLAIM—INSURED’S DUTIES
....
4. Other Duties Under . . . Under-Insured Motor
Vehicle . . . Coverage[]
The person making claim also shall:
....
d. under the . . . under-insured motor vehicle coverage[],
send us at once a copy of all suit papers when the
party liable for the accident is sued for these
damages.
....
Coverage I—Under-Insured Motor Vehicle
....
We will pay damages for bodily injury an insured is
legally entitled to recover from the owner or operator of an
under-insured motor vehicle. The bodily injury must be
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caused by an accident and arise out of the ownership,
maintenance or use of an under-insured motor vehicle.
....
THERE IS NO COVERAGE UNDER COVERAGES H OR I:
1. FOR ANY INSURED WHO, WITHOUT OUR WRITTEN
CONSENT, SETTLES WITH ANY PERSON OR ORGANIZATION
WHO MAY BE LIABLE FOR THE BODILY INJURY.
....
Written Consent Requirement—Coverage H and I
We are not bound by any judgment against any person
or organization obtained without our written consent.
[Hereinafter referred to as the consent-to-be-bound provision.]
A. Suit I. In February 2000 Wilson’s estate sued Carter for damages
to the estate and for loss of consortium suffered by the decedent’s surviving
children. On July 18 the estate’s attorney wrote Farm Bureau notifying it of
the estate’s intention to make a claim for UIM benefits for the estate under
Wilson’s policy. Enclosed with the letter was a copy of the amended and
substituted petition filed on behalf of the estate against Carter and Carter’s
answer to the petition. The letter further notified Farm Bureau that the
estate’s attorney had learned through discovery that Carter’s liability limits
were $100,000/$300,000, which the attorney believed were insufficient to
cover the estate’s damages.
On February 6, 2002, a jury returned a verdict in the estate’s favor
and against Carter as follows: $7906.81 for interest on reasonable burial
expenses, $6888.50 for the reasonable value of medical expenses, and
$145,000 for loss of consortium suffered by the decedent’s surviving
children for a total of $159,795.31.
During the trial, the district court submitted an instruction, which
neither party objected to, informing the jury that “[t]he fault of the person
whose injury or death provides the basis for the consortium claim of Lily
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Wilson’s children does not bar or reduce the consortium recovery.” The jury
verdict form relating to the consortium claims stated in part: “State the
amount of damages sustained by the children due to loss of parental
services or parental consortium proximately caused by defendant’s fault.
Do not take into consideration any reduction of damages due to Lily
Wilson’s fault.” Neither party objected to this verdict form.
The jury found Wilson twenty percent at fault and Carter eighty
percent at fault. After the jury returned its verdict, the district court
reduced the total jury award, including the loss of consortium award, by
twenty percent. The court reduced the loss of consortium award by twenty
percent because it believed that it had instructed the jury incorrectly that
the decedent’s fault does not reduce the consortium claims. See Iowa Code
§ 668.3(1)(b) (2005) (any damages for consortium will be reduced by the
percentage of fault attributed to the person who provides the basis for the
consortium damages); id. § 668.3(4) (the court shall determine the amount
of damages payable to each party in accordance with the findings of the
court or jury). This reduced the verdict from $159,795.31 to $127,836.25.
In response to the court’s action, the estate filed a motion on
February 20 to correct judgment entry. The estate alleged that the
instruction, even though an incorrect statement of the law, became the law
of the case. For that reason, the estate further alleged, the judgment entry
should be corrected to reflect that the consortium damages are not reduced
by the decedent’s fault. That same day, the district court entered an
amended judgment entry for the medical expenses and interest on burial
expenses reduced by the percentage of fault attributed to the decedent and
for the full loss of consortium damages as the jury had awarded. The total
amended judgment as entered was $156,836.25, together with interest as
provided by law.
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In the meantime, on February 11, Carter’s attorney offered the estate
Carter’s policy limits of $100,000, which the estate conditionally accepted
on February 13. The condition was that Carter was to provide proof of
inability to pay the excess judgment. Carter subsequently provided such
proof, and the estate entered a satisfaction of the judgment in return for
payment of $100,000 on March 14.
On March 8 the estate made a demand on Farm Bureau for
$56,836.25, which represented the balance of the amended judgment entry
minus Carter’s $100,000 policy limits. In the demand, the estate agreed to
waive pre- and postjudgment interest. Farm Bureau rejected the demand
and offered $22,000 in settlement, which the estate rejected.
B. Suit II. On May 9, 2002, the estate sued Farm Bureau for breach
of contract for the underinsured damages and for bad faith. The estate later
filed an amended and substituted petition. Farm Bureau’s amended answer
raised several affirmative defenses, the following of which are pertinent to
this appeal: (1) the judgment was not obtained with Farm Bureau’s written
consent, (2) the judgment has no res judicata effect because Farm Bureau
was not a party to the underlying tort suit, and (3) the judgment is not an
amount the insured was “legally entitled to recover,” making the amount
fairly debatable.
On January 23, 2004, the estate filed a motion for summary
judgment. The estate sought summary judgment on its breach of contract
claim but not on its bad faith claim. As to the latter, the estate maintained
genuine issues of material fact existed on that issue.
Farm Bureau filed a resistance to the estate’s summary judgment
motion and a counter motion for summary judgment. Farm Bureau
contended that there were genuine issues of material fact as to the estate’s
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breach of contract claim and no genuine issue of material fact as to the
estate’s bad faith claim.
The district court granted the estate’s motion for summary judgment
in part and denied it in part. In granting the motion, the court ruled that
the consent-to-be-bound provision was contrary to public policy and
therefore unenforceable. In denying the motion, the court concluded the
amended judgment entry was correct. However, the court also concluded
that “Farm Bureau would be unfairly prejudiced if bound by a judgment
resulting from erroneous jury instructions, given without objection by
Carter’s attorney, which became the law of the case.” Consequently, the
court allowed Farm Bureau to relitigate the issue of damages in the
underlying tort suit. Finally, the court sustained Farm Bureau’s motion for
summary judgment on the estate’s bad faith claim.
The estate filed an application for interlocutory appeal and an
application to stay district court proceedings. We granted both
applications.
II. Issues.
In this appeal, the estate’s challenge to the district court’s ruling on
its motion for summary judgment on its contract claim raises two issues.
First, is Farm Bureau bound by the amended judgment entry in suit I?
Second, if Farm Bureau is not bound by the amended judgment entry, is it
bound by the original judgment entry in suit I? The estate also challenges
the district court’s ruling granting Farm Bureau’s motion for summary
judgment on the estate’s bad faith claim.
III. Scope of Review.
We review a ruling on a motion for summary judgment for correction
of errors at law. Dickens v. Associated Anesthesiologists, P.C., 709 N.W.2d
122, 125 (Iowa 2006). Summary judgment must be granted
8
if the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law.
Iowa R. Civ. P. 1.981(3). “Summary judgment is appropriate if the only
conflict concerns the legal consequences of undisputed facts.” Farmers Nat’l
Bank of Winfield v. Winfield Implement Co., 702 N.W.2d 465, 466 (Iowa
2005). We therefore concern ourselves with two questions: whether there
is a genuine issue of material fact and whether the district court correctly
applied the law. Ratcliff v. Graether, 697 N.W.2d 119, 123 (Iowa 2005).
IV. Is Farm Bureau Bound By the Amended Judgment Entry in
Suit I?
In denying the estate’s motion for summary judgment, the district
court concluded that
Farm Bureau would be unfairly prejudiced if bound by a
judgment resulting from erroneous jury instructions, given
without objection by Carter’s attorney [in suit I], which became
the law of the case. Under the unusual facts in this record,
Farm Bureau should be afforded an opportunity to relitigate
the issue of underinsured damages due the plaintiff.
This ruling raises the question whether Farm Bureau is bound by the
amended judgment entry in suit I. On this issue, we must first look to the
language of the UIM provision in the decedent’s policy with Farm Bureau.
See Am. Family Mut. Ins. Co. v. Petersen, 679 N.W.2d 571, 584 (Iowa 2004).
In American Family Mutual Insurance Co. v. Petersen, we were
concerned with the binding effect of a default judgment in the context of an
uninsured motorist (UM) provision providing that the insurer would pay
damages for bodily injury that the insured is legally entitled to recover from
the uninsured motorist. Id. Although here we are dealing with a UIM
provision, the following language in Petersen applies with equal force to
such a provision:
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In considering the binding effect of the judgment, we are
mindful that the issue is presented only in the context of an
action to enforce the UM provisions of an insurance policy
requiring the insurer to pay the insured damages which the
insured “is legally entitled to recover” from the uninsured
motorist. Consequently, the binding effect of the tort judgment at
issue in this case is not necessarily governed by the doctrine of
res judicata and collateral estoppel; the language of the contract
between the parties is the primary source of the parties’
respective rights. If an insured establishes legal entitlement to
damages against an uninsured motorist, then the insurer is
contractually obligated to pay the insured the damages as
specified in the insurance policy. An insured generally satisfies
the “legally entitled to recover” condition of UM coverage when
a valid judgment has been entered against the uninsured
motorist.
Id. (emphasis added) (citations omitted). Thus, assuming the other terms
and conditions of the policy are satisfied, once the insured obtains a valid
judgment against the underinsured motorist, the insurer is obligated
pursuant to the terms of the policy to pay the amount of the judgment that
exceeds the liability coverage of the underinsured motorist up to the limit of
the UIM coverage.
An insured establishes the legally entitled to recover requirement by
proving the underinsured motorist was liable and the amount of damages.
Id. at 584 n.3. The insured is allowed to meet this burden either in an
action against the underinsured motorist or in an action against the
insurer. Id.; Handley v. Farm Bureau Mut. Ins. Co., 467 N.W.2d 247, 249
(Iowa 1991).
Although securing a valid judgment against an underinsured motorist
can establish the insured’s right to recover UIM benefits, the UIM coverage
provisions here impose other conditions that could require relitigation of the
liability and damages issues. See Petersen, 679 N.W.2d at 584-85. In
Petersen, we held the default judgment against the uninsured motorist was
not binding on the insurer because the insured had not given adequate
notice to the insurer of its suit against the uninsured motorist as required
10
by the policy. Id. at 585. Because the notice issue in Petersen was
dispositive, we did not consider the effect of a policy provision that provided
that the insurer was not bound by any judgment without its “ ‘consent’ to
the suit.” Id.
In its motion for summary judgment on the contract claim, the estate
contended in the district court as it does on appeal that (1) the amended
judgment entry in suit I conclusively established what the estate is legally
entitled to recover from Farm Bureau and (2) issue preclusion is not an
available defense to avoid the binding effect of the amended judgment entry.
In response, Farm Bureau contends, as it did in the district court, that (1)
the amended judgment entry in suit I did not conclusively establish what
the estate is legally entitled to recover under the policy and (2) Farm Bureau
could only be bound by the principles of issue preclusion.
As to the amended judgment entry, Farm Bureau raised a number of
defenses to the estate’s motion for summary judgment on its contract claim,
all of which Farm Bureau raises here. We address only one of those
defenses because we think it is dispositive of the issue. The defense is
based on the written consent-to-be-bound provision pertaining to UIM
coverage. As mentioned, this provision provides as follows: “We are not
bound by any judgment against any person or organization obtained
without our written consent.”
This requirement is commonly referred to as a “consent-to-sue”
provision, but it is more accurately described as a “consent-to-be-bound”
provision. Peterman v. State Farm Mut. Auto. Ins. Co., 961 P.2d 487, 491 n.3
(Colo. 1998). The consent-to-be-bound provision has been widely litigated.
Some courts have declared such provisions to be void or invalid and hold
that tort judgments against the underinsured motorists are generally
binding on the insurer. Reasons given by such courts for this holding
11
include the following: (1) “[I]t is generally against public policy for the
insurer to restrict the insured’s right to trial by jury of the action against a
negligent motorist,” Keel v. MFA Ins. Co., 553 P.2d 153, 157 (Okla. 1976); (2)
Such provisions “are contrary to public policy because they present
arbitrary barriers to the recovery of statutorily mandated benefits,” Kwong
v. Depositors Ins. Co., 627 N.W.2d 52, 56 (Minn. 2001); (3) An insurance
company could unreasonably and arbitrarily withhold consent, Kremer v.
Am. Family Mut. Ins. Co., 501 N.W.2d 765, 768-69 (S.D. 1993); and (4)
Declaring consent-to-be-bound provisions void or invalid promotes the
policy of avoiding a multiplicity of lawsuits, Nationwide Mut. Ins. Co. v.
Webb, 436 A.2d 465, 473 (Md. 1981). The district court, relying on Kwong,
found the consent-to-be-bound provision in the Farm Bureau policy
contrary to public policy and unenforceable.
Recognizing that the insurer has some legitimate concerns about
protecting its interests, the court in Kwong concluded that “[t]hose interests
can be adequately safeguarded by requiring that the insurer ‘receive notice
of, and an opportunity to [intervene and] participate in, the insured’s
personal injury claim.’ ” Kwong, 627 N.W.2d at 57 (citation omitted).
Several courts have followed the same approach. See, e.g., Webb, 436 A.2d
at 475-78; Heisner v. Protective Fire & Cas. Co., 169 N.W.2d 606, 611-12
(Neb. 1969); Keel, 553 P.2d at 157-58; Kremer, 501 N.W.2d at 769.
Following this approach here would be problematic because of our
decision in Handley v. Farm Bureau Mutual Insurance Co., 467 N.W.2d 247
(Iowa 1991). We held in that case that it was an abuse of discretion not to
sever the tort claim against the underinsured motorist from the contract
claim against the insurer for UIM benefits. Handley, 467 N.W.2d at 250.
We reasoned that evidence of insurance would cause the jury to return a
larger verdict against the underinsured motorist than it would have if it
12
were unaware that insurance existed. Id. We therefore concluded that
potential prejudice could be avoided by severing the claims against the
insurer from the claim against the underinsured motorist. Id. Facing a
similar problem, the court in Keel simply overruled its prior holding and
permitted the joinder of an insurer as a party defendant in an action against
an uninsured motorist. See Keel, 553 P.2d at 158.
Other courts have upheld the validity of consent-to-be-bound
provisions. See, e.g., Gulf Am. Fire & Cas. Co. v. Gowan, 218 So. 2d 688,
693-94 (Ala. 1969); MFA Mut. Ins. Co. v. Bradshaw, 431 S.W.2d 252, 256
(Ark. 1968); Moorcroft v. First Ins. Co. of Haw., 720 P.2d 178, 179-80 (Haw.
1986); Baron v. Coronet Ins. Co., 361 N.E.2d 799, 802 (Ill. App. Ct. 1977);
Allstate Ins. Co. v. Pietrosh, 454 P.2d 106, 110-11 (Nev. 1969); Poray v. Royal
Globe Ins. Co., 217 A.2d 916, 920-21 (N.J. Super. Ct. Law Div. 1966);
Criterion Ins. Co. v. Brown, 469 S.W.2d 484, 485 (Tex. Civ. App. 1971).
However, in upholding consent-to-be-bound provisions, courts have
recognized that such provisions have the potential to hinder an insured’s
ability to recover damages. 9 Steven Plitt, Daniel Maldonado & Joshua D.
Rogers, Couch on Insurance § 124:3, at 124-8 (3d ed. 2005). Therefore, the
validity of consent-to-be-bound provisions “is often contingent upon an
implied promise on the part of the insurer that it will not arbitrarily or
unreasonably withhold or refuse its consent.” Id.; see also Levy v. Am. Auto.
Ins. Co., 175 N.E.2d 607, 611 (Ill. App. Ct. 1961); Newark Ins. Co. v. Ezell,
520 S.W.2d 318, 321 (Ky. Ct. App. 1975).
As one court has recognized, one of the purposes of requiring the
insurance company’s written consent to be bound “is to allow the insurance
company to protect itself from a default judgment taken against the
uninsured/underinsured motorist or an insubstantial defense by the
uninsured/underinsured motorist.” In re Koehn, 86 S.W.3d 363, 368 (Tex.
13
Ohio App. 2002); see also Pietrosh, 454 P.2d at 111 (Enforcement of the consent-
to-bound provision “may be appropriate in a case where the insured secures
a default judgment against the uninsured motorist, since an adversary
determination of liability and damages is absent.”). Another reason
includes guarding against collusion between the insured and the
underinsured motorist. See Ezell, 520 S.W.2d at 321.
We hold that a consent-to-be-bound provision, like the one in this
case, is valid and enforceable provided the insurer does not withhold or
refuse its consent without a reasonable basis to do so. There are several
reasons for our holding. The provision does not require a forfeiture of
benefits if consent is not obtained, a reason some states have given for
holding such provisions valid. See, e.g., Moorcroft, 720 P.2d at 180.
Additionally, we see nothing in our statutory provisions regarding UIM
coverage that requires such coverage be unqualified. See generally Iowa
Code ch. 516A; see also Moorcroft, 720 P.2d at 180. Moreover, the approach
we take eliminates the previously discussed joinder problem that might
arise were we to declare the consent-to-be-bound provision void or invalid.
See, e.g., Handley, 467 N.W.2d at 250; Keel, 553 P.2d at 158. Finally, our
holding is consistent with how we have treated a similar provision—the
consent-to-settlement clause—in the context of a UIM case. See Bellville v.
Farm Bureau Mut. Ins. Co., 702 N.W.2d 468 (Iowa 2005). We held in Bellville
v. Farm Bureau Mutual Insurance Co. that “the consent-to-settlement clause
not only imposes an express duty on the insured to obtain the insurer’s
consent to settlement but also imposes an implied reciprocal duty on the
insurer to consent unless it has a reasonable basis for refusing to do so.”
Id. at 484.
Our holding that a consent-to-be-bound provision is valid and
enforceable imposes on the insured and the insurer certain duties. Before
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the insured can satisfy the legally entitled to recover condition under the
UIM coverage, the insured must comply with all of the other conditions of
such coverage. For example, here, the UIM policy provision requires the
insured to provide the insurer a copy of all suit papers when the insured
sues the underinsured motorist. In addition to complying with this
condition, the insured must obtain a valid judgment against the
underinsured motorist. Implicit in this last requirement is that the suit
must be defended. Default judgments, insubstantial defenses, and
collusion between the insured and the underinsured motorist will preclude
the insured from satisfying the legally entitled to recover condition. In
short, the insurer will not be bound by a judgment obtained through any of
these means. Once the insured satisfies the legally entitled to recover
condition of the UIM coverage, the insurer has an implied reciprocal duty to
refrain from withholding or refusing its consent to be bound by the
judgment without a reasonable basis to do so.
These express duties on the part of the insured protect the insurer
against default judgment, insubstantial defenses, and collusion between the
insured and the underinsured motorist. The insurer’s implied reciprocal
duty prevents arbitrary barriers to the recovery of statutorily mandated
benefits and promotes the avoidance of multiplicity of lawsuits.
With these principles in mind, we turn to the record in this case
regarding the amended judgment entry in suit I. Farm Bureau contended
in the district court, as it does here, that the amended judgment entry was
obtained without Farm Bureau’s written consent in violation of its consent-
to-be-bound provision. For that reason, Farm Bureau argues, it is not
bound by the amended judgment entry.
It is undisputed that the estate did not obtain Farm Bureau’s written
consent to the amended judgment entry in suit I. In addition, the record is
15
uncontroverted, as Farm Bureau argues, that at the time the estate filed its
motion to correct judgment entry, suit I was undefended, a fact unknown to
Farm Bureau at the time. Thus, there was an insubstantial defense to the
motion. See Koehn, 86 S.W.2d at 368. Carter’s attorney filed an
uncontroverted affidavit that confirms these facts. He stated:
1. I am an attorney licensed to practice law in the state of
Iowa.
2. I represented defendant Margie Carter in [suit I] that
went to trial in February 2002.
3. I recently learned that [the estate’s lawyer] made two
telephone calls to [the judge who tried suit I] following the trial
of [suit I]. I had no knowledge of these telephone calls [before
they were made].
4. Following the trial, [the estate’s lawyer] filed a motion to
correct judgment entry [in suit I]. I filed no resistance to that
motion because [the estate’s lawyer] already accepted my
client’s offer to settle the case.
5. I never made any analysis, one way or the other, of
whether the motion to correct judgment entry should be
granted.
The circumstances in which the amended judgment entry was
granted underscore the very reason for the consent-to-be-bound provision.
But our inquiry does not end here. With regard to consent-to-settlement
provisions, we said in Bellville:
Our court has held that [consent-to-settlement] clauses are
permissible under Iowa law as a means to protect the insurer’s
subrogation rights against the responsible party. In
recognition of this limited purpose, we have held that an
insured’s failure to obtain the insurer’s consent to settlement
will preclude payment of UIM benefits only if the insurer
“proves that, absent such a breach, it could have collected from
the tort-feasor.” Furthermore, the insured’s entitlement to UIM
benefits will be reduced only by the amount of the subrogation
recovery lost by the insurance company. We have placed the
burden of proving prejudice on the insurer: “The insurer must
establish not only that the claim has been released but also
that it was collectible and establish within a reasonable
approximation the dollar amount that might be collected.”
Bellville, 702 N.W.2d at 483 (citations omitted).
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Similarly here, as we now hold, consent-to-be-bound provisions are
permissible to protect the insurer’s interests, albeit those interests are
different from subrogation rights. We are convinced the insurer, as with
consent-to-settlement provisions, should bear the burden of proving
prejudice when an insured has not secured the insurer’s consent to be
bound. Farm Bureau has the burden to prove that the amended judgment
entry has prejudiced its rights; otherwise it is bound by it. For reasons that
follow, we think Farm Bureau has met its burden.
If the district court was correct in amending the judgment, Farm
Bureau has suffered no prejudice; otherwise it has. The estate relies heavily
on our decision in Sullivan v. Wickwire, 476 N.W.2d 69 (Iowa 1991) to
support the district court’s action in entering the amended judgment.
In Sullivan, all defendants except one settled before trial. Sullivan v.
Wickwire, 476 N.W.2d 69, 70 (Iowa 1991). During the trial, the district
court submitted a jury instruction without objection that failed to advise the
jury that if they assigned fault to a settling defendant, that fault would
reduce the damages awarded to the plaintiff. Id. at 72. The jury returned a
verdict assessing the plaintiff’s damages and assigned a percentage of fault
to the plaintiff and to all of the defendants except one. Id. Despite the
incorrect instruction, the district court reduced the verdict by the settling
defendant’s fault, thereby reducing the plaintiff’s recovery. Id. The non-
settling defendant argued on appeal that the district court was correct in
reducing the verdict while the plaintiff argued that the district court was
powerless to correct the judgment. Id. On this issue, we said:
There is considerable merit in plaintiff’s claim . . . . In
Iowa and elsewhere, an instruction submitted to the jury
without objection becomes the law of the case and will not be
disturbed on appeal. The [defendant] attempts to discredit the
rule in the present case by arguing the jurors’ sole task was to
find damages and allocate percentages of fault, leaving to the
17
court the job of applying mathematical formulas to achieve the
correct judgment. We do not believe, however, that the jury’s
understanding of the impact of its verdict is irrelevant to its
decision-making responsibilities. In keeping with Iowa Code
section 668.3(5), our prior decisions make clear that the court
must instruct the jury with respect to the effect of answers
given to special interrogatories, and the court’s failure to do so
may constitute reversible error.
Id. at 72-73 (citations omitted).
Although the facts in Sullivan are similar to the facts here we need not
follow the reasoning expressed in the foregoing discussion because it was
dicta. This was made apparent in the passage following that discussion:
“We need not decide in the present case whether the court’s error merits a
new trial or merely an amended judgment, because other errors committed
by the court demand a new trial.” Sullivan, 476 N.W.2d at 73. For reasons
that follow, we decide not to follow this dicta.
In Reese v. Werts Corp., this court recognized that section 668.3(5)
“requires the [district] court to instruct the jury not only on the effect of the
claimant’s contributory fault but also on the effect of the fault of other
parties.” 379 N.W.2d 1, 3 (Iowa 1985). In that case, the district court
instructed the jury that the percentage of negligence it attributed to the
plaintiff (the case was tried in part under comparative negligence) would be
used by the court to reduce the amount of damages the jury found the
plaintiff had sustained. Id. What the court did not tell the jury in that
instruction was that a defendant who bears less than fifty percent of the
total fault was not jointly and severally liable, as the court was required to
do under Iowa Code section 668.3(5). Id. at 3-4. The plaintiff objected to
the instruction because the instruction did not take into account the joint
and several liability rule. Id. at 3. The district court overruled the
objection. Id. The jury found that the plaintiff sustained $100,000 in
damages. Id. at 2. The jury attributed five percent of the negligence to the
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plaintiff, and attributed fifteen percent to the defendant. Id. Following the
verdict, the plaintiff moved for a judgment against the defendant in the
amount of $95,000. Id. Instead the court entered judgment in favor of the
plaintiff in the amount of $15,000. Id. Under the instruction, if it were
true, the plaintiff’s recovery would have been $95,000 instead of $15,000.
Id. at 3. This court held that because the district court undertook to
instruct the jury on the effect of its determinations it was required to
instruct accurately. Id. We reversed and remanded for a new trial,
concluding that the district court had given the jury misleading advice and
had failed to instruct the jury on the effect of its answers to the
interrogatories as required by section 668.3(5). Id. at 4. Obviously, this
court reversed because the verdict was tainted by that error resulting in
prejudice to the plaintiff.
In Schwennen v. Abell, we also noted that section 668.3(5) requires
that the jury be made aware of the effect of its fault apportionment on the
claimant’s right to recovery. 430 N.W.2d 98, 104 (Iowa 1988). In that case
we said: “In Reese, we found it to be reversible error for the court to fail to
instruct on this matter or to give misleading instructions with respect
thereto.” Id. (citation omitted). We then pointed out in Schwennen that the
instructions given in the case before it were based on the incorrect premise
that one of the defendants could be allocated some fault. Id. We rejected
the plaintiff’s suggestion that such fault should be disregarded and the
jury’s allocation of fault should be reassigned to the remaining defendants
by a process of interpolation. Id. We noted that the plaintiff’s suggestion
would “have a substantially different effect on the [remaining defendants]
than the jury would have perceived them to have under the trial court’s
instructions.” Id. Such a result, we held, required that the apportionment
of fault among the remaining defendants had to be tried anew. Id. Because
19
the verdict was tainted by the district court’s error resulting in prejudice to
the remaining defendants, we reversed. Id.
Implicit in both Reese and Schwennen was the fact that the erroneous
and misleading instructions tainted the jury verdicts resulting in prejudice
to the parties challenging the verdicts. See Grefe & Sidney v. Watters, 525
N.W.2d 821, 824 (Iowa 1994) (“If instructions are erroneous, they must be
prejudicial before we will order reversal.”). Here, the estate did not assail
the jury’s verdict on the grounds of an erroneous and misleading
instruction that prejudiced the consortium claimants. Rather, the estate
accepted the verdict as the correct measure of damages. Instead of
challenging the verdict, the estate is seeking to uphold it on the grounds
that the incorrect instruction became the law of the case. Because the
consortium claimants were not prejudiced by the instruction and resulting
verdict, the estate had no grounds to prevent the district court from
reducing the verdict as it did. By reducing the loss of consortium claim by
the percentage of fault which the jury attributed to the decedent, the district
court did exactly what it was required to do under the law. See Iowa Code §
668.3(1)(b) (any damages for consortium will be reduced by the percentage
of fault attributed to the person who provides the basis for the consortium
damages); id. § 668.3(4) (the court shall determine the amount of damages
payable to each party in accordance with the findings of the court or jury).
It follows therefore that Farm Bureau is prejudiced by the amended
judgment entry, which restored the jury’s verdict on the loss of consortium
claims. For that reason Farm Bureau is not bound by the amended
judgment entry. Cf. Carroll v. Martir, 610 N.W.2d 850, 857 (Iowa 2000)
(recognizing that district court has the power to correct its own perceived
errors); see also Iowa Code §§ 668.3(1)(b), 668.3(4).
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V. Is Farm Bureau Bound by the Original Judgment Entry in Suit
I?
In its resistance to the estate’s motion for summary judgment on the
contract claim, Farm Bureau did not raise any policy defenses (for example,
failure to provide suit papers or violation of the consent-to-be-bound
provision) to the original judgment entry in suit I. Nor does Farm Bureau
raise any such defenses here. That is not surprising for three reasons.
First, the estate notified Farm Bureau that it was making a UIM claim
under the decedent’s policy because in the estate’s lawsuit against Carter,
the estate learned that Carter had liability coverage of only $100,000, a sum
the estate believed was insufficient to cover its damages. Second, the
lawsuit against Carter was being defended. Last, the district court reduced
the verdict by reducing the consortium award by the percentage of fault
attributed to the decedent.
Moreover, the estate proved Carter’s negligence and its damages.
And, as mentioned, Carter was defended up to and including the entry of
the original judgment. Therefore at this point the estate had a valid
judgment, and Farm Bureau had no reasonable basis to withhold or refuse
its consent. The fact that Carter’s attorney did not object to the consortium
instruction did not render the defense insubstantial. In our view an
insubstantial defense equates with no defense at all or one that is imaginary
or illusory. That was far from true in this case. Were we to hold otherwise,
an insured would rarely be able to obtain a judgment meeting the legally
entitled to recover condition of UIM coverage. This is because, as a
practical matter, a lawsuit is hardly ever perfectly defended.
For all of these reasons, we conclude the estate satisfied the legally
entitled to recover condition of the UIM coverage provision of the decedent’s
21
policy. Contrary to the district court ruling, Farm Bureau was bound by
the original judgment entry in suit I.
VI. The Bad Faith Claim.
As mentioned, in suit II, the district court granted Farm Bureau’s
motion for summary judgment on the estate’s bad faith claim. On appeal,
the estate contends the court erred in dismissing the claim. The claim is
twofold. The estate contends Farm Bureau’s conduct in delaying payment
of the decedent’s medical expenses under the medical pay provision of her
policy constituted bad faith. Additionally, the estate contends Farm
Bureau’s conduct in denying the estate’s demand to pay the amount of the
amended judgment entry in excess of Carter’s policy limits constituted bad
faith.
Farm Bureau correctly points out that the bad faith issue regarding
the medical pay expense was not properly preserved for our review. The
estate concedes that the district court’s ruling granting Farm Bureau’s
motion for summary judgment on the bad faith claim was silent on this
issue. Because the estate failed to file a motion requesting a ruling on this
unresolved issue, the issue was not preserved for our review. See Meier v.
Senecaut, 641 N.W.2d 532, 537-39 (Iowa 2002).
That leaves for our review that portion of the district court summary
judgment ruling regarding Farm Bureau’s conduct in denying the estate’s
demand to pay the amount of the amended judgment entry in excess of
Carter’s policy limits. To establish Farm Bureau’s bad faith claim, the
estate was required to prove (1) Farm Bureau had no reasonable basis for
denying the estate’s demand to pay the amount of the amended judgment
entry in excess of Carter’s policy limits and (2) Farm Bureau knew or had
reason to know that its denial lacked a reasonable basis. See Bellville, 702
N.W.2d at 473.
22
In Bellville, we summarized the principles we apply in determining
whether there is a lack of a reasonable basis necessary for the first element
of a bad faith claim:
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. A claim is “fairly debatable” when it is open to dispute on
any logical basis. Stated another way, if reasonable minds can
differ on the coverage-determining facts or law, then the claim
is fairly debatable.
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. The focus is on the existence of a
debatable issue, not on which party was correct.
Whether a claim is fairly debatable can generally be
decided as a matter of law by the court. 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.’ ”
Id. at 473-74 (alteration in original) (citations omitted).
There are several reasons why Farm Bureau had a reasonable basis
to assert it had no duty to pay the estate’s demand. Whether Farm Bureau
had a good faith duty to consent to be bound by the amended judgment
entry had not been decided by an Iowa appellate court. We agree with Farm
Bureau that with no Iowa law on the issue, its duty to consent to be bound
by the amended judgment entry was fairly debatable. Cf. id. at 484-85
(holding similarly regarding consent-to-settlement clause). Moreover, as we
already concluded, Farm Bureau was not bound by the amended judgment
entry, a fact the estate concedes was necessary to establish the estate’s bad
faith claim. We therefore conclude as a matter of law that Farm Bureau
was not in bad faith for denying the estate’s demand to pay the amount of
the amended judgment entry in excess of Carter’s policy limits.
VII. Disposition.
In sum, we reach the following conclusions. Farm Bureau is not
bound by the amended judgment entry in suit I. We therefore affirm the
23
district court ruling denying the estate’s motion for summary judgment on
this issue but for reasons other than those cited by the district court. As a
matter of law, Farm Bureau had a reasonable basis to deny the estate’s
demand to pay the amended judgment entry in suit I in excess of Carter’s
policy limits. We therefore affirm the district court ruling granting Farm
Bureau’s motion for summary judgment on the estate’s bad faith claim.
Contrary to the district court ruling, the consent-to-be-bound
provision is valid and enforceable. We therefore reverse the district court’s
grant of the estate’s motion for summary judgment on this issue. However,
Farm Bureau is bound by the original judgment entry in suit I. We
therefore reverse that part of the district court ruling which allowed Farm
Bureau to relitigate damages in the underlying tort suit.
We remand for further proceedings consistent with this opinion. We
have carefully considered all of the issues raised by the parties. Those we
have not addressed we find lack merit or were not properly preserved.
AFFIRMED IN PART, REVERSED IN PART, AND CASE
REMANDED.
All justices concur except Wiggins, J., who concurs in result only.