Amended August 22, 2017 Toby Thornton v. American Interstate Insurance Company ( 2017 )

IN THE SUPREME COURT OF IOWA
No. 15–1032
Filed May 19, 2017
Amended August 22, 2017
TOBY THORNTON,
Appellee,
vs.
AMERICAN INTERSTATE INSURANCE COMPANY,
Appellant.
Appeal from the Iowa District Court for Pottawattamie County,
Jeffrey L. Larson, Judge.
Workers’ compensation insurer appeals judgment on jury verdict
awarding actual and punitive damages after district court on summary
judgment found insurer in bad faith as a matter of law. DISTRICT
COURT JUDGMENTS AFFIRMED IN PART AND REVERSED IN PART;
CASE REMANDED FOR NEW TRIAL.
Mark McCormick and Stephen H. Locher of Belin McCormick, P.C.,
Des Moines, for appellant.
Tiernan T. Siems, Karen M. Keeler, and MaKenna J. Dopheide of
Erickson & Sederstrom, P.C., Omaha, Nebraska, for appellee.
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Deborah M. Tharnish and Sarah E. Crane of Davis Brown Law
Firm, Des Moines, for amicus curiae Property Casualty Insurers
Association of America.
Richard J. Sapp and Ryan G. Koopmans, until withdrawal, of
Nyemaster Goode, P.C., Des Moines, for amici curiae Chamber of
Commerce of the United States and Iowa Association of Business and
Industry.
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WATERMAN, Justice.
In this appeal, we must resolve a workers’ compensation insurer’s
multipronged challenge to a judgment on a jury verdict awarding
$25 million in punitive damages and $284,000 in compensatory
damages. The plaintiff was paralyzed below his chest in an on-the-job
accident. The insurer disputed whether the employee was permanently
and totally disabled (PTD) and contested his petition for a partial
commutation (lump-sum) award while it continued to pay full weekly
PTD benefits and explore settlement. The Iowa Workers’ Compensation
Commissioner determined the employee was PTD and granted his
petition for partial commutation. The employee sued the insurer for
common law first-party bad faith.
On cross-motions for summary judgment, the district court
determined the insurer, by contesting PTD and commutation, acted in
bad faith as a matter of law by March 11, 2013 (nearly four years after
the accident). The court instructed the jury the insurer had acted in bad
faith for those actions and instructed the jury to decide whether other
actions by the insurer were in bad faith and determine damages. The
jury found the insurer’s bad-faith conduct began several months after
the accident and awarded punitive and compensatory damages at a ratio
of 88:1. The insurer appealed after its posttrial motions were denied.
The plaintiff cross-appealed the denial of attorney fees incurred
prosecuting the bad-faith action. We retained the case.
The insurer argues that (1) it cannot be found in bad faith when it
voluntarily and continuously paid stipulated weekly PTD benefits due
under its policy, (2) the district court erred by deciding the insurer acted
in bad faith as a matter of law, (3) insufficient evidence supports the
compensatory damage awards, and (4) the punitive damage award is
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unconstitutionally excessive under the Federal Due Process Clause. For
the reasons explained below, we conclude the insurer knew or should
have known it lacked any reasonable basis to dispute this quadriplegic’s
PTD status and affirm summary judgment for the plaintiff on that issue.
But the district court erred by ruling the insurer was in bad faith as a
matter of law for resisting the commutation. It should have granted
summary judgment for the insurer on that issue. We reverse the
judgments for compensatory and punitive damages without reaching the
constitutional challenge and remand the case for a new trial on the
remaining bad-faith claims. Applying the American rule, we affirm the
district court’s ruling denying plaintiff an award of attorney fees incurred
prosecuting the bad-faith action.
I. Background Facts and Proceedings.
A. Initial Care. Thirty-one-year-old Toby Thornton worked as an
over-the-road truck driver for Clayton County Recycling (CCR). His job
duties included picking up scrap metal in Iowa and Wisconsin and
delivering it to CCR’s salvage yard. On June 25, 2009, Thornton lost
control of his semitruck when the load shifted. The truck rolled over,
crushing the cab with Thornton inside. Thornton injured his spinal cord,
face, left leg, and ribs. First responders extracted Thornton using the
Jaws of Life™. He was rushed by ambulance to Mercy Hospital in
Dubuque and airlifted to the University of Iowa Hospitals in Iowa City,
where he underwent multiple surgeries. The accident left Thornton
permanently paralyzed from the chest down with no use of his left hand
and limited use of his right hand.
American Interstate Insurance Company (American Interstate) was
the workers’ compensation insurer for CCR and specialized in insuring
high-risk employers. It learned of Thornton’s accident the next day, and
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its claims adjuster, Luann Baum, contacted Thornton’s wife, Tara, by
telephone. On June 27, Baum traveled to the University of Iowa
Hospitals and assured Thornton’s family that workers’ compensation
benefits would begin immediately.
Baum gathered wage information and calculated Thornton’s weekly
benefits, assuming PTD. American Interstate issued the first benefit
check to Thornton on July 2 and weekly thereafter. Two weeks after the
accident, American Interstate received a medical opinion from Thornton’s
examining physician that Thornton was PTD. It set reserves for
Thornton’s care at $762,644, an amount based on PTD. Baum later
testified she did so because she “believed that the injury was severe
enough . . . to easily classify as a perm total.”
Thornton retained counsel for his workers’ compensation claim.
On July 8, his attorney wrote Baum requesting the “calculations used to
arrive at Toby’s weekly compensation rate” and a “wage statement for
Toby’s earnings for the year prior to the injury in accordance with Iowa
Code Section 85.40.” On August 7, counsel again wrote to Baum, noting
Baum had not responded to the prior request. The second letter referred
the insurer to Iowa Code section 85.41, which states the failure to
furnish wage information upon request within thirty days is a simple
misdemeanor. On August 25, counsel sent a third letter to Baum,
stating Baum had supplied wage information but had missed the last full
week Thornton worked before the accident. On September 1, counsel
mailed another letter, again inquiring about weekly wages and requesting
medical records. On September 24, counsel for American Interstate
responded by letter, stating,
After we talked on the phone, I obtained the additional
wage information from the employer. I recalculated the wage
information and changed the rate based on the updated
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information. The new rate will be $513.18 per week. This
resulted in a $7.44 per week increase and we had issued 15
weeks so far, so I also issued a check today for an additional
$111.60 to bring current.
Here are the weeks and the hours I used for the
calculations.
The letter then listed thirteen weeks of wage information, including
June 15 to 21, the week missed in the earlier statement. Thornton later
stipulated that $513.18 was the correct weekly benefit.
After multiple surgeries and aggressive physical, occupational, and
respiratory rehabilitation, Thornton was released from the hospital in
October. Thornton moved into his in-laws’ home. At Thornton’s request,
Baum arranged for modifications to make the house handicap-
accessible. American Interstate paid to install a shower and hospital bed
and specially ordered a wheelchair and van matched to Thornton’s height
and weight. Thornton told Baum he was pleased, stating, “[V]an was
great, equipment is good, bed is a little small for turning, but . . . [the
new mattress] should be in by next week.”
Initially, Tara provided in-home care to Thornton. In June 2010,
Baum arranged for a home healthcare nurse so Tara could return to
work. That month, Thornton indicated an interest in purchasing a
home, and Baum met with him to discuss housing options. In July,
Baum received an email from Thornton that he needed to move out of his
in-laws’ home “immediately” because he and Tara were separating.
Baum arranged for home-aide care, modifications to a new apartment,
and for Thornton to take a disabled driver’s license test. By November,
Thornton had received his driver’s license and a van outfitted so he could
drive. He reported to Baum he was doing “great” and “ha[d] no
complaints at this time.” Throughout this period, American Interstate
continued to pay Thornton weekly benefits at the PTD rate.
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Meanwhile, Thornton’s mother passed away. She left him a small
inheritance, about $3000, which Thornton used to purchase a headstone
for her grave and a TV for his home for his children to watch after school.
Thornton complained to his physician that he was depressed. In
February 2011, Thornton attempted suicide by overdosing on pain
medication. He was admitted to St. Mary’s Hospital for inpatient mental
health treatment. After his discharge, Thornton received outpatient
counseling to cope with his depression. Thornton’s treatment records
show he attributed his mental problems to his mother’s death and his
separation from his wife, without mentioning American Interstate.
Thornton did not tell Baum about his overdose or mental health
treatment. Baum and American Interstate were unaware of Thornton’s
treatment for depression until months later when bills for payment were
submitted.
In March, Dr. Michael Rogge, Thornton’s treating physician,
concluded Thornton had reached maximum medical improvement (MMI).
Thornton told Baum he did not want to discuss settlement options with
American Interstate until his divorce was finalized. American Interstate
honored his request, continuing to pay him weekly benefits at the PTD
rate. In July, when internally discussing Thornton’s file, Baum noted
she had not assigned a permanent partial disability percentage to
Thornton because “[t]his [claimant] is now a quadriplegic. . . . [H]e will
be a perm[anent] total case.” In January 2012, Thornton contacted
Baum and told her his divorce was finalized and he was ready to discuss
settlement.
The next month, Baum and John Cantwell, who handles annuities,
met with Thornton to discuss settlement. In preparation for this
meeting, Baum noted a lump-sum payment would be important to
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Thornton because he had been trying to purchase a home. At the
meeting, Baum and Cantwell presented Thornton with two alternative
proposals for settlement. Each proposal included payment of weekly
indemnity benefits (an upfront payment and annuity) and the creation of
a Medicare Set Aside (MSA) and Custodial Medical Account (CMA) for
future medical expenses. The MSA covered Medicare expenses; if the
account was exhausted, the expenses would be picked up by Medicare.
The CMA account covered other expenses. If the CMA was exhausted,
Thornton would become personally liable for ongoing expenses. Both
proposals also included a “Miscellaneous Medical” section, entitling
Thornton to an immediate cash payment, a smaller annuity to offset
Medicare deductibles, and a series of lump sums for future van
purchases.
In both proposals, American Interstate sought a “closed file”
settlement to end its liability for future weekly benefits or medical
expenses. Upon Thornton’s death, any remaining indemnity, MSA, or
CMA funds reverted to American Interstate. This structured settlement
proposed by American Interstate substantially reduced its own cost of
settlement. Thornton understood that “[i]t was just [the] first offer on the
table, and [he] wanted to show it to [his] lawyer and get some legal
representatives on it.”
B. PTD Claim. In May, Thornton, through counsel, filed a
petition before the Iowa Workers’ Compensation Commissioner seeking a
determination of permanent total disability. Baum retained counsel for
American Interstate, Cory Abbas. Baum disclosed to Abbas that
“[American Interstate] ha[d] voluntarily accepted this claim as PTD
exposure.” In June, Abbas emailed Baum his initial evaluation of the
claim, acknowledging that “there is not a strong argument that Claimant
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is not a permanent total disability.” American Interstate nevertheless
denied PTD in its answer to the petition.
Counsel engaged in settlement discussions for several months.
Thornton did not want to pursue a closed-file settlement, fearing that the
medical funds may run out and he would become personally liable for his
healthcare needs. In September, Abbas emailed Tiernan Siems, counsel
for Thornton, urging a closed-file settlement for a quicker resolution
because, as it could be “2–3 years before a final award is entered
(considering potential appeals to the Commissioner, and potentially
much longer with appeals to the Courts).” The parties proceeded to
mediation in October, where Siems claimed Abbas said American
Interstate would “deny, delay, appeal, and drive-up the costs” of litigation
if Thornton refused to settle. Abbas denied making such a statement.
The mediation was unsuccessful.
American Interstate deposed Thornton in February 2013.
Thornton testified that “[s]ome day [he’d] like to get a job” if someone
could be found who would employ him “in the condition that [he was] in.”
On March 4, Abbas contacted Siems and informed him that Phil Davis, a
vocational counselor, had been authorized by American Interstate to
provide vocational rehabilitative services “if Mr. Thornton ha[d] any
interest in such.” 1 Siems responded by questioning the motives of Abbas
for offering vocational training so close to the hearing on Thornton’s PTD
1This later turned out to be incorrect. Davis actually had been hired by
American Interstate to opine whether Thornton could return to some sort of work, not
to provide rehabilitative services. Davis submitted a report at the arbitration hearing
opining that Thornton could return to work if he so desired. However, Davis later
testified that his opinion in no way should have been used to undercut that Thornton
was PTD.
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claim. Meanwhile, Dr. Rogge informed Abbas that he would not release
Thornton to participate in vocational rehabilitation because he was PTD.
On March 11, after conferencing with Dr. Rogge, Abbas emailed
Jami Rodgers, who had succeeded Baum at American Interstate. Abbas
stated, “Due to Dr. Rogge’s opinions not being favorable to our defense, a
follow-up written report will not be requested.” He added, “As originally
evaluated, there really is no possible situation where Claimant is not
going to be found to be permanently and totally disabled in this matter.”
Abbas recommended American Interstate agree to a settlement for PTD
and warned that the deputy commissioner may find “the defense
unreasonable, issuing sanctions for the costs of the litigation.” American
Interstate nevertheless elected to proceed with the hearing contesting
PTD. Rodgers explained, “[W]e may not have had a reasonable defense,
but I still felt we had the right to go to hearing.” On May 23, the deputy
found Thornton PTD and ordered American Interstate to continue paying
Thornton the weekly benefits.
C. Partial Commutation Claim. Eleven days later, Thornton
petitioned for a partial commutation of benefits. See Iowa Code § 85.48
(2013) (allowing partial payment of lump-sum benefits with reduced
weekly benefits continuing). He sought commuted benefits in a lump
sum of $761,957 to purchase a home, pay attorney fees, and invest with
the assistance of a money manager. Siems had emailed Abbas over a
week earlier, asking if American Interstate would agree to the partial
commutation. Siems accused American Interstate of raising “frivolous
defenses suggesting [Thornton] was not [PTD],” despite agreeing that he
was likely entitled to a commutation. Abbas responded the next day,
stating,
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While I may have agreed/stated that Mr. Thornton has a
significant chance of being awarded a partial commutation
by a Deputy and the Commissioner (based upon the results
of many current partial and full commutation decisions), I
never have stated that anyone is “entitled” to a partial
commutation.
American Interstate resisted the petition for partial commutation.
In July, Thornton received a letter from a financial advisor,
explaining how a lump-sum commutation would be invested to generate
a regular monthly income. The plan included a 1.8% annual fee. It also
assumed no change in tax treatment, although the investment income
would be taxable, unlike weekly workers’ compensation payments. In
November, Thornton testified at his deposition that he had not previously
owned any investments, he and his wife had incurred overdraft charges
before the accident, he was only “so-so” with finances, his “[c]redit cards
don’t get taken care of as good as they should,” he connected with this
financial advisor through his brother, he had never met with any other
financial advisor, he had spent a $3000 inheritance from his mother on
bills and “a couple of things,” and he had never put together or operated
under a monthly budget. 2
American Interstate retained an expert, Michael Alexander, to
address whether the commutation would be in Thornton’s best interest.
Alexander’s report noted Thornton’s proposed monthly budget used a
2Prior to the commutation hearing, American Interstate filed three discovery-
related motions against Thornton—all of which were granted by the deputy
commissioner. In a September 2013 order granting American Interstate’s motion to
compel, the deputy characterized Thornton’s resistance as resting on “wholly frivolous
grounds” that “do little to foster timely and economic resolution of contested case
litigation.” The deputy granted the insurer’s motion to quash a discovery deposition in
November, reasoning that Thornton “appears, as defendants contend, to ‘fish’ for
information potentially useful in other litigation.” Finally, in March 2014, the deputy
granted American Interstate’s motion to quash on the basis that “the information
sought by [Thornton] is unnecessary to get to the truth and provide the parties rough,
speedy justice.”
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significantly lower housing cost than the anticipated cost of Thornton’s
home. Even without considering the taxability of investment returns,
Alexander noted the lump-sum payment would have to generate a 4.44%
annual return to match current weekly payments. Alexander expressed
concern about Thornton’s ability to avoid tapping into the principal.
Alexander concluded, “A sound game plan hasn’t been completed to
protect or justify this lump sum commutation.”
Thornton’s counsel asked to depose Alexander. Abbas emailed
Rodgers, warning that Alexander’s testimony may not help the insurer’s
resistance:
Claimant’s counsel has requested a deposition of our
financial expert, Michael Alexander. He is likely to tear up
Mr. Alexander pretty good, as Toby’s case presented a
difficult position for Mr. Alexander to argue that it was not in
his best interests to receive a lump sum versus weekly
payments. I will keep you informed as to when the
deposition is scheduled, as well as the outcome.
. . . Unfortunately, as we have previously discussed, no
matter how well I am able to depose [Thornton’s] experts, it
will be unlikely to bring forth significant evidence that will
sway a Deputy and/or the Commissioner from awarding a
commutation.
Alexander testified at his deposition “the crux” of his opinion was that a
commutation would not be in Thornton’s best interest because he could
“take withdrawals whenever he wanted to.” But Alexander acknowledged
that if Thornton avoided invading the principal, commutation would be
in his best interest. He noted without the partial commutation, Thornton
could be unable to keep up with his expenses:
Q. There’s risk that Mr. Thornton’s rent and cost of
food will outpace his budget unless he gets a partial
commutation. A. Yes. There’s also interest rate risk and
market risk tied with these investments and liquidity risk if
he taps the principal.
....
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Q. Notwithstanding all of those risks you mentioned,
. . . it is still your opinion as we sit here today that if
Mr. Thornton does not invade that principal of this 611- or
751,000 or potentially one million if it had been paid out
earlier, [if he] doesn’t invade that principal, his best bet is
getting that partial commutation? A. Yes.
Q. Even with all those risks we mentioned? A. Yes.
At the partial commutation hearing on March 21, 2014, Thornton
presented testimony from two experts that the commutation would be in
his best interest. Thornton also presented the budget prepared by his
brother, an accountant, showing how Thornton would use the commuted
benefits. American Interstate pointed out the proposed budget did not
account for taxes or home repair. American Interstate argued Thornton
was a poor money manager, noting he had spent the $3000 inheritance
without conferring with a financial advisor. It questioned whether
Thornton could resist dipping into the principal of any commuted funds
and referred to Thornton’s children as his “vice.”
On May 16, 2014, the deputy granted a partial commutation. The
deputy found the risk of Thornton depleting the funds to be “minimal”
and stated, “It would be hard to imagine a clearer scenario where a
partial commutation should be granted.” The deputy further noted, “The
arguments of the defendants are weak at best and appear mostly
designed to delay the inevitable commutation of benefits.” Thornton
asked the deputy to award him the costs of both of his experts. See Iowa
Code § 86.40 (2014) (“All costs incurred in the hearing before the
commissioner shall be taxed in the discretion of the commissioner.”);
Iowa Admin. Code r. 876—4.33 (noting assessment of costs may include
“the reasonable costs of obtaining no more than two doctors’ or
practitioners’ reports”). The deputy awarded Thornton costs for two
expert witnesses and signaled his disapproval of the insurer’s conduct:
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In this case, the defendants refused to agree to a partial
commutation and provided a vigorous, albeit weak defense.
Partial commutations are fairly rare. Claimant’s counsel had
to decide how much to invest in pursuing this claim, and it
was unknown exactly how much evidence would be
required. . . . The defendants essentially forced the claimant
to prove his case instead of simply agreeing to what appears
to be an obviously reasonable partial commutation in the
best interests of the claimant.
American Interstate issued the commutation check one week later and
did not appeal the deputy’s commutation decision.
Meanwhile, on January 10, 2014, while Thornton’s petition for
commutation was pending, he learned he had been approved by his bank
for a loan to purchase a home. Thornton testified he lost the chance to
buy that home because it was sold to another person while he awaited
his lump-sum payment.
D. Alternate Medical Care. In July, Dr. Rogge wrote Thornton a
prescription for a wheelchair replacement. Dr. Rogge wrote in his notes,
“Did recommend he receive new wheelchair . . . . We did give him a new
script for this today.” These notes were received by Rodgers. However,
Rodgers did not receive an order or copy of the prescription. Dr. Rogge
sent the prescription to St. Luke’s Hospital in Cedar Rapids. On
September 10, Rodgers was deposed. She stated she did not know
Thornton needed a new wheelchair, but if she was “ordered to get him
one, she would do so.” On September 17, Thornton went to St. Luke’s
Hospital to be measured. Two days later, Dr. Rogge signed the
paperwork setting forth the specifications of the new wheelchair.
On October 12, Thornton was hospitalized for bursitis in both
elbows. Hospital records stated that his left elbow was “swollen” and
“reddened” and that his pain was “very intense and he felt like his arm
was on fire.” According to hospital records, Thornton told the hospital
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staff he thought “he did bump into something last week with his elbow,
but [did] not remember anything specific.”
On October 20, Rodgers learned that the wheelchair was “in the
process of being ordered.” A vendor had inquired about the status of the
authorization and copied Thornton’s counsel, who then forwarded the
email to Abbas. The next day, Thornton filed a petition for alternate
medical care. See Iowa Code § 85.27(4) (“If the employer and employee
cannot agree on such alternate care, the commissioner may, upon
application and reasonable proof of the necessity therefor, allow and
order other care.”). At the hearing on November 4, American Interstate
conceded that “a replacement wheelchair is reasonable and necessary”
and that it had already “authorized and ordered the wheelchair.” The
deputy found that “[b]oth parties were in agreement” and ordered
American Interstate to provide a new wheelchair.
E. Bad-Faith Claim. On December 26, 2013, Thornton filed a
civil action against American Interstate alleging common law bad faith
based on its handling of his workers’ compensation claims. American
Interstate filed an answer denying bad faith. After conducting discovery,
the parties filed cross-motions for summary judgment. American
Interstate argued summary judgment was appropriate because it was
undisputed that Thornton was paid full PTD weekly benefits throughout,
and that as a matter of law, it acted reasonably in handling Thornton’s
claims. Thornton argued American Interstate unreasonably denied he
was PTD and entitled to commutation, which delayed his lump-sum
payment.
The district court partially granted Thornton’s motion for summary
judgment on the bad-faith claim and denied American Interstate’s
motion. The court rejected American Interstate’s position that bad faith
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could not occur without a denial of payment. The court stated, “Any
difference between payments owed and payments made is properly a
question of damages, not denial.” The court acknowledged American
Interstate paid Thornton the weekly workers’ compensation benefits to
which he was entitled, but concluded the insurer denied him benefits
when it refused to classify him as PTD, denied PTD status at the hearing,
moved for reconsideration of the commissioner’s adverse PTD finding,
and failed to agree to a commutation. The district court concluded,
Defendant embarked upon a course of action which first
challenged and ultimately denied Plaintiff’s PTD status and
eligibility for partial commutation, and if successful would
have cancelled Plaintiff’s benefits. Each of those is a ‘denial’
within the ambit of the bad faith tort.
The court further determined American Interstate had no reasonable
basis for denial. American Interstate was advised by counsel early on
that Thornton was likely PTD and a partial commutation was in his best
interests. Thus, the court found by March 11, 2013, American Interstate
was in bad faith as a matter of law.
The issues of damages and bad faith prior to March 11, 2013, were
tried to a jury. Thornton presented evidence on American Interstate’s
refusal to disclose wage statements and actions in resisting Thornton’s
PTD claim and partial commutation. Particularly, evidence was
presented to the jury that Baum, while working as a claims adjuster for
Thornton, had never “uncover[ed] any facts suggesting that Toby was not
permanently and totally disabled” or that “the payment of a lump sum, a
partial commutation” was not in Thornton’s best interest. Similarly,
Rodgers testified,
Q. Now, let’s go backwards from that date. From that
date up until the inception of this claim, are you aware of
any evidence that supported the conclusion that Toby
Thornton was not entitled to partial commutation? A. No.
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Q. Perm total, same question: From the date of trial
all the way back to the date of injury, are you aware of any
information supporting the conclusion that Toby Thornton
was anything other than permanently and totally disabled?
A. No.
Abbas testified that American Interstate acted in good faith
because it had a legal right to allow the deputy to decide the issues of
PTD and partial commutation. In addition, defense experts described
Abbas’s statements to opposing counsel—about litigation taking two to
three years if the claim did not settle—as a common negotiation tactic,
not bad faith.
Both parties presented evidence concerning the delay in Thornton’s
wheelchair and resulting hospital visit. When asked if the bursitis was
caused by the worn wheelchair armrests, Thornton stated, “Hard to tell if
it was the armrests or bumping into stuff. Not for sure.” Dr. Rogge
testified he suspected the arms of the wheelchair were the cause of the
bursitis, and he “hope[d]” a new wheelchair would alleviate the problem.
Regarding the delay in securing the wheelchair, Rodgers testified,
A. It’s my understanding Dr. Rogge sent the order to
St. Luke’s to work up on—with the wheelchair program,
whatever, to get his exact specifications so we could order
the wheelchair. And as soon as that was provided with exact
orders like a 10-page specification so he could get exactly
what he needed, we ordered it.
Q. Reconcile that for me with your sworn deposition
testimony in September that you knew nothing about a
wheelchair. A. I didn’t know anything about the wheelchair
at the first deposition. I didn’t know anything until you sent
me—you [sent] Cory, your e-mail—
Q. Tell us again what Dr. Rogge said about a
wheelchair July 1, 2014. A. “His wheelchair is causing
problems. It is over five years of age. We did give him a new
script for this today.”
Q. That’s what you received July 15, 2014. A. I could
guess July 15. I don’t know when we received it.
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Thornton acknowledged he needed to go to St. Luke’s to be measured
before the wheelchair could be ordered because “they had to figure out
what [he] needed before it could be ordered.”
At the close of the evidence, defense counsel moved for directed
verdict, which the district court denied. The jury was instructed that the
court had already determined American Interstate committed bad faith
by disputing Thornton’s PTD status and request for commutation.
Instruction No. 1 stated,
Members of the jury, this trial concerns a claim by
Plaintiff, Toby Thornton, that the Defendant, American
Interstate Insurance Company, acted in bad faith in failing
to pay certain workers’ compensation insurance benefits
Mr. Thornton was entitled to.
Prior to this trial, this court determined that the
defendant, American Interstate Insurance Company[,]
committed bad faith in its dealings with Mr. Thornton
beginning March 11, 2013.
It is up to you, the jury, to determine whether the
defendant committed bad faith prior to March 11, 2013. It is
also your duty to determine whether plaintiff, Toby
Thornton, was damaged by defendant’s actions and the
amount of those damages.
(Emphasis added.) Instruction No. 18 explained the elements of a bad-
faith claim, including that the plaintiff was required to prove “[t]here was
no reasonable basis for denying the claim.” Instruction No. 19 referred
back to Instruction No. 18, explaining,
With respect to proposition No. 2 in the foregoing
instruction, there has been a previous determination by the
Court that beginning March 11, 2013, the defendant did not
have a reasonable basis for its refusal to pay the Workers’
Compensation claim for permanent total disability benefits
and for a partial commutation of those benefits. That
determination is binding upon you in this case. The plaintiff
does not have to prove this element and the defendant may
not contest it. You, the jury, must determine if there was
bad faith before March 11, 2013.
(Emphasis added.)
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The jury instructions also included an explanation of damages that
could be awarded. American Interstate objected to instructions allowing
the jury to award damages for past mental pain and suffering, past
physical pain and suffering, and loss of equity in the home he had
planned to buy. Defense counsel argued, “There’s no evidence of that,
Judge.” The court overruled its objections.
The jury found American Interstate had committed bad faith as of
September 1, 2009, a date coinciding with its refusals to give wage
information and its internal recognition of PTD. The jury awarded
$284,000 in compensatory damages and $25 million in punitive
damages. Compensatory damages included past pain and suffering
($125,000), loss of use of money ($14,000), consequential damages for
attorney fees in the workers’ compensation proceeding ($118,000), and
lost home equity ($27,000).
American Interstate moved for judgment notwithstanding the
verdict, remittitur, and new trial. American Interstate renewed its
argument the district court erred in granting summary judgment and
erred in overruling American Interstate’s objections to the jury
instructions allowing awards for pain and suffering and loss of equity
damages. The district court denied the motions. American Interstate
appealed, and we retained the appeal.
II. Standard of Review.
“We review the trial court’s ruling on a motion for directed verdict
for the correction of errors of law.” Bellville v. Farm Bureau Mut. Ins., 702
N.W.2d 468, 473 (Iowa 2005). “We likewise review a district court ruling
on a motion for judgment notwithstanding the verdict for correction of
errors at law.” Gibson v. ITT Hartford Ins., 621 N.W.2d 388, 391 (Iowa
2001).
20
“A party moving for summary judgment has the burden of
establishing the absence of any genuine issue of material fact and that it
is entitled to judgment as a matter of law.” Johnson v. Farm Bureau Mut.
Ins., 533 N.W.2d 203, 205–06 (Iowa 1995). “In reviewing both the
summary judgment and directed verdict, we review the evidence in the
light most favorable to the resisting party.” Id. at 206. “The court must
consider on behalf of the nonmoving party every legitimate interference
that can be reasonably deduced from the record.” McIlravy v. N. River
Ins., 653 N.W.2d 323, 328 (Iowa 2002). Inferences are legitimate when
they are “rational, reasonable, and otherwise permissible under the
governing substantive law.” Id. (quoting Butler v. Hoover Nature Trail,
Inc., 530 N.W.2d 85, 88 (Iowa Ct. App. 1994)). “If reasonable minds may
differ on the resolution of an issue, a genuine issue of material fact
exists.” Id.
We review for correction of errors at law American Interstate’s
claim that the evidence did not support the jury instructions. Rowling v.
Sims, 732 N.W.2d 882, 885 (Iowa 2007). “When reviewing a claim that
an instruction was not supported by substantial evidence, we view the
evidence in the light most favorable to the party seeking the instruction.”
Id. “Questions of jurisdiction, authority, and venue are legal issues to be
reviewed for corrections of errors at law.” Kloster v. Hormel Foods Corp.,
612 N.W.2d 772, 773 (Iowa 2000).
III. Analysis.
A. Bad-Faith Directed Verdict. We first address whether the
district court erred in denying American Interstate’s motion for a directed
verdict on the bad-faith claim. American Interstate contends the district
court erred in granting Thornton partial summary judgment establishing
the insurer’s bad faith and in submitting the remaining case to the jury.
21
The insurer notes Thornton did not submit the workers’ compensation
policy as an exhibit and, it contends, cannot show he was deprived of a
benefit “under the policy” or that American Interstate breached any term
of the insurance contract. American Interstate argues the bad-faith
claim fails as a matter of law because Thornton at all times was paid full
weekly PTD benefits. Alternatively, American Interstate argues it had a
reasonable basis for resisting commutation because, under Iowa Code
section 85.45, the commissioner must approve a partial commutation of
benefits.
1. Error preservation. Thornton contends error was not preserved.
We find error was preserved when American Interstate moved for directed
verdict and judgment notwithstanding the verdict, reiterating the
grounds asserted in its summary judgment filings. American Interstate
consistently asserted substantially the same arguments now made on
appeal, i.e., it did not deny Thornton benefits and it had a reasonable
basis for resisting commutation. Its arguments were “both raised and
ruled upon by the district court.” Tetzlaff v. Camp, 715 N.W.2d 256, 258
(Iowa 2006). Our precedent requires no more. See Otterberg v. Farm
Bureau Mut. Ins., 696 N.W.2d 24, 28 (Iowa 2005) (“[I]f a motion for
summary judgment presented the issue to the district court and the
district court ruled on it, the rule requiring the district court to first
consider issues raised on appeal is satisfied.”). 3
3Thornton relies on State v. Ritchison, 223 N.W.2d 207, 213 (Iowa 1974). In
Ritchison, a defendant waited until his motion for directed verdict at the close of all
evidence to claim that a statute was unconstitutional. Id. We held that “in order to
preserve for review any alleged error in ruling on the constitutionality of a statute, the
party challenging the statute must do so at the earliest available opportunity in the
progress of the case.” Id. at 214. Ritchison is inapposite. American Interstate moved
for summary judgment well before trial, moved for a directed verdict at the close of
plaintiff’s evidence, and makes no claim that a statute is unconstitutional.
22
2. Did American Interstate deny Thornton a benefit under the
policy? 4 We begin our analysis with an overview of our insurance bad-
faith precedent to provide context for deciding the fighting issue whether
a workers’ compensation insurer that pays weekly benefits can be found
in bad faith. “Insurance contracts contain an implied covenant of good
faith that ‘neither party will do anything to injure the rights of the other
in receiving the benefits of the agreement.’ ” Johnson, 533 N.W.2d at 207
(quoting Kooyman v. Farm Bureau Mut. Ins., 315 N.W.2d 30, 33 (Iowa
1982)). An insured may bring a third-party bad-faith claim when “an
insurer’s bad faith refusal to settle a third-party’s claim against the
insured within the policy limits exposes the insured to monetary liability
exceeding policy limits.” Id. A first-party bad-faith claim involves “an
insured’s attempt to recover for his or her own losses allegedly covered
under the insurance policy.” Id. We view bad-faith claims by employees
against their employers’ workers’ compensation insurers as first-party
bad-faith claims, even though “[a]t first blush, a cause of action for bad
faith pursued by an employee against an employer’s workers’
compensation carrier appears to be a matter of ‘third-party’ bad faith
more than one of ‘first-party’ bad faith.” McIlravy, 653 N.W.2d at 329
n.2.
[W]hen first adopting the bad faith cause of action in the
workers’ compensation context, we determined that such a
suit is more accurately considered as one for first-party bad
faith given “the obligations that [the Code] and
administrative regulations place on the insurer.”
4Thornton speciously argues a waiver or estoppel resulted from trial testimony
by Abbas and William Scherle, an attorney and expert for American Interstate, voicing
disagreement with the court’s summary judgment ruling. We cannot fathom how their
testimony waived or estopped American Interstate from arguing it was entitled to a
directed verdict.
23
Id. (quoting Boylan v. Am. Motorists Ins., 489 N.W.2d 742, 743 (Iowa
1992)).
To establish a first-party bad-faith claim against a workers’
compensation insurer, the plaintiff must show “(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.”
Id. at 329 (quoting United Fire & Cas. Co. v. Shelly Funeral Home, Inc.,
642 N.W.2d 648, 657 (Iowa 2002)). We have defined “benefit” for
purposes of the workers’ compensation penalty provision as “[f]inancial
assistance that is received from an employer, insurance, or a public
program (such as social security) in time of sickness, disability, or
unemployment.” Schadendorf v. Snap-On Tools Corp., 757 N.W.2d 330,
338 (Iowa 2008) (alteration in original) (quoting Benefit, Black’s Law
Dictionary (7th ed. 1999)) (referring to Iowa Code § 86.13). “The two-part
test for first-party bad faith applies . . . [to] workers’ compensation
[insurance].” McIlravy, 653 N.W.2d at 329.
In Dolan v. Aid Insurance Co., we recognized a common law action
in tort for bad faith against a first-party insurer because “traditional
damages for breach of contract will not always adequately compensate
an insured for an insurer’s bad faith conduct.” 431 N.W.2d 790, 794
(Iowa 1988). We concluded allowing a remedy in tort was “justified by
the nature of the contractual relationship between the insurer and
insured.” Id. Insurance policies are contracts of adhesion, exemplifying
“inherently unequal bargaining power between the insurer and insured,
which persists throughout the parties’ relationship and becomes
particularly acute when the insured sustains a physical injury or
economic loss for which coverage is sought.” Id. We viewed the
“contractual relationship between the insurer and insured [as]
24
sufficiently special to warrant providing the insured with additional
protection.” Id. at 792.
In Boylan, we extended the tort of first-party insurer bad faith to
workers’ compensation insurers. 489 N.W.2d at 743–44. Robert Boylan
alleged his employer’s workers’ compensation insurer “delayed and then
terminated [his] workers’ compensation weekly benefits and medical
benefits, arbitrarily and capriciously, without notice and in bad faith.”
Id. at 742 (alteration in original). The district court dismissed the action,
ruling Boylan failed to state a claim. Id. We reversed and reinstated his
bad-faith action. Id. at 744. We noted the Iowa workers’ compensation
statute, by imposing a civil penalty on insurers for an unreasonable
delay or termination of benefits, demonstrated an “affirmative obligation
on the part of the employer and insurance carrier to act reasonably in
regard to benefit payments in the absence of specific direction by the
commissioner.” Id. at 743; see also Iowa Code § 86.13(4)(a) (imposing
penalty for “a denial, a delay in payment, or a termination of benefits
without reasonable or probable cause or excuse known to the employer
or insurance carrier”). We acknowledged the Act’s administrative
regulations “impose[d] an affirmative obligation to furnish medical and
hospital supplies to an injured employee,” even though the penalty
provision only applied to a denial of weekly compensation benefits.
Boylan, 489 N.W.2d at 743; see also Iowa Code § 85.27(4) (“The
treatment must be offered promptly and be reasonably suited to treat the
injury without undue inconvenience to the employee.”). “As a result of
the obligations that these statutes and administrative regulations place
on the insurer,” we concluded the relationship between a workers’
compensation insurer and employee was similar to the special, first-party
contractual relationship in Dolan. Boylan, 489 N.W.2d at 743. Thus, we
25
recognized a common law first-party bad-faith action against a workers’
compensation insurer apart from the statutory penalties provided in
section 86.13. Id. at 744.
Subsequent cases shaped the contours of common law bad-faith
claims in the workers’ compensation context. In Reedy v. White
Consolidated Industries, Inc., we concluded that self-insured employers
could be held liable for common law bad faith because they “voluntarily
assume[d] a recognized status under the workers’ compensation laws as
an insurer.” 503 N.W.2d 601, 603 (Iowa 1993). But, in Bremer v.
Wallace, we declined to expand the claim to uninsured employers,
focusing on the “common thread” in our previous decisions of “the
defendant’s status as an insurer.” 728 N.W.2d 803, 805 (Iowa 2007).
We noted that central to imposing liability for bad faith was “the
traditional insurer/insured relationship.” Id. at 806. The reason
“underlying our imposition of tort liability” was “the adhesive nature of
the insurance contract.” Id.
In McIlravy, we explained that “[b]ad faith claims are applicable to
workers’ compensation insurers because they hold the discretionary
power to affect the statutory rights of workers, which clearly reflects their
obligation to act in good faith in the exercise of this authority.” 653
N.W.2d at 329–30 (concluding that commissioner’s decision to assess
penalty under the statute did not result in issue preclusion in common
law bad-faith action because of different burden of proof). Similarly, in
Brown v. Liberty Mutual Insurance, we held that because a workers’
compensation bad-faith claim “rests on Liberty Mutual’s alleged breach
of its statutory good-faith obligation to pay benefits in advance of a
specific directive by the industrial commissioner,” the five-year statute of
limitations in Iowa Code section 614.1(4) applied, rather than the two-
26
year limitations period in section 614.1(2). 513 N.W.2d 762, 764–65
(Iowa 1994) (emphasis added).
Thus, our decisions indicate it is the nature of the workers’
compensation insurer’s relationship with the insured employees and
corresponding statutory duties that give rise to bad-faith tort liability.
For that reason, Thornton was not required to offer American Interstate’s
insurance contract into evidence at the jury trial. The fighting liability
issues concerned American Interstate’s conduct in light of its statutory
obligations, not the wording of a specific provision of its insurance
contract.
But American Interstate argues there can be no bad faith without a
breach of a specific policy term. In Bagelmann v. First National Bank, we
stated parties could not maintain a bad-faith action against their bank
when there was no “contract term to which [the bad faith could] be
attached.” 823 N.W.2d 18, 34 (Iowa 2012). When refinancing their
home, the Bagelmanns received a flood risk determination from the
bank, stating the property was not in a flood zone. Id. at 21. The bank
had hired a third party to conduct the flood-zone determination and
charged the Bagelmanns a small fee for the service. Id. After substantial
flooding damaged their home, it was discovered that the property
actually was in a flood zone. Id. at 22. We rejected the Bagelmanns’
bad-faith claim, noting,
An implied duty of good faith and fair dealing is recognized
in all contracts. But the covenant does not “give rise to new
substantive terms that do not otherwise exist in the
contract.”
As we have already discussed, the 2003 mortgage . . .
authorized the mortgagee to charge for a flood hazard
determination. But this section of the mortgage and the
determination itself make clear that the determination was
for the mortgagee’s protection, not the mortgagors’. There
was no promise to notify (let alone update) the Bagelmanns
27
concerning their flood zone status, so any allegation of bad
faith here lacks a contract term to which it can be attached.
Id. at 34 (emphasis added) (citations omitted) (quoting Mid-Am. Real
Estate Co. v. Iowa Realty Co., 406 F.3d 969, 974 (8th Cir. 2005)); cf.
Villarreal v. United Fire & Cas. Co., 873 N.W.2d 714, 728–29 (Iowa 2016)
(concluding first-party bad-faith claim based on denial of insurance
benefits arose out of the same conduct as the breach-of-contract claim).
Bad-faith claims typically arise from a breach of the insurance contract.
See Bellville, 702 N.W.2d at 474. Nonetheless, “[d]ue to the unique
nature of the insured/insurer relationship, the duty of good faith and fair
dealing . . . emanates from the special relationship which exists between
the parties, not necessarily from the terms of the contract.” Mary G.
Leary, 97 Am. Jur. Trials § 211, Westlaw (database updated May 2017).
Courts in other jurisdictions are divided on whether bad faith can
be proven without a specific breach of a policy term. See 14 Steven Plitt
et al., Couch on Insurance § 204:20 (3d ed.), Westlaw (database updated
Dec. 2016). Some courts hold a breach of contract is a prerequisite to
liability for bad faith. See Karas v. Liberty Ins., 33 F. Supp. 3d 110, 116
(D. Conn. 2014); Parks v. Safeco Ins. Co. of Ill., 376 P.3d 760, 766 (Idaho
2016); Dave’s Inc. v. Linford, 291 P.3d 427, 436 (Idaho 2012); In re United
Fire Lloyds, 327 S.W.3d 250, 254 (Tex. App. 2010); Brethorst v. Allstate
Prop. & Cas. Ins., 798 N.W.2d 467, 480 (Wis. 2011). As the California
Court of Appeals concluded, “[T]here can be no breach of the implied
covenant of good faith and fair dealing if no benefits are due under the
policy.” Brehm v. 21st Century Ins., 83 Cal. Rptr. 3d 410, 417 (2008).
“Absent [a] contractual right [to policy benefits], the implied covenant has
nothing upon which to act as a supplement, and ‘should not be endowed
with an existence independent of its contractual underpinnings.’ ” Id.
28
(quoting Waller v. Truck Ins. Exch., Inc., 900 P.2d 619, 639 (Cal. 1995)).
In these states, if benefits are “fully and promptly paid” there can be no
bad faith “no matter how hostile or egregious the insurer’s conduct
toward the insured may have been prior to such payment.” Love v. Fire
Ins. Exch., 271 Cal. Rptr. 246, 255 n.10 (Ct. App. 1990) (emphasis
omitted). The covenant of good faith “only ‘requir[es] that neither party
[to a contract] do anything that will injure the right of the other to receive
the benefits of the agreement,’ ” so if conduct does not affect the parties’
contractual rights, there is no bad faith. Capstone Bldg. Corp. v. Am.
Motorists Ins., 67 A.3d 961, 987 (Conn. 2013) (alterations in original)
(quoting Home Ins. v. Aetna Life & Cas. Co., 663 A.2d 1001, 1008 (Conn.
1995)).
Other courts recognize a claim for bad faith does not require a
breach of contract. Goodson v. Am. Standard Ins. Co. of Wis., 89 P.3d
409, 414 (Colo. 2004) (en banc); Enoka v. AIG Haw. Ins., 128 P.3d 850,
862 (Haw. 2006); LeRette v. Am. Med. Sec., Inc., 705 N.W.2d 41, 48 (Neb.
2005). These decisions focus on the special relationship between the
insurer and insured as giving rise to the good-faith obligation, rather
than the express terms of a contract.
[T]he tort of bad faith is not a tortious breach of contract, but
rather a separate and distinct wrong which results from the
breach of a duty imposed as a consequence of the relationship
established by contract. Therefore, the tort of bad faith
allows an insured to recover even if the insurer performs the
express covenant to pay claims.
Enoka, 128 P.3d at 862. This rationale has been used to extend the tort
of common law bad faith to workers’ compensation insurers. See
Travelers Ins. v. Savio, 706 P.2d 1258, 1272–73 (Colo. 1985) (en banc)
(equating relationship between workers’ compensation carriers and
29
claimants to that of insurer and insured); Hough v. Pac. Ins., 927 P.2d
858, 869 (Haw. 1996) (same).
Under Iowa law, to be liable for common law bad faith, a workers’
compensation insurer must have “denied” the employee benefits under
the policy. See Gibson, 621 N.W.2d at 396. We conclude the requisite
“denial” may occur when an insurer unreasonably contests a claimant’s
PTD status or delays delivery of necessary medical equipment. Cf.
Keystone Nursing Care Ctr. v. Craddock, 705 N.W.2d 299, 310 (Iowa
2005) (Cady, J., dissenting) (“[A] delay in the payments of benefits can
occur . . . when the employer utilizes unreasonable investigative or other
stonewalling tactics that needlessly prolong the ultimate payment of
benefits . . . .”). This rationale comports with our long-held view that
first-party bad faith arises out of the breach of the affirmative good-faith
obligations “that [our workers’ compensation] statutes and
administrative regulations place on the insurer.” Boylan, 489 N.W.2d at
743.
3. Did the district court err in deciding American Interstate was in
bad faith as a matter of law for resisting PTD status and partial
commutation? To affirm the district court’s summary judgment, we must
conclude Thornton demonstrated that no genuine issue of material fact
existed on two essential elements of his bad-faith claim: American
Interstate had no reasonable basis for denying benefits under the policy
and knew or had reason to know the denial was without basis. McIlravy,
653 N.W.2d at 329. The first element is objective; the second is
subjective. Rodda v. Vermeer Mfg., 734 N.W.2d 480, 483 (Iowa 2007). “A
reasonable basis for denying insurance benefits exists if the claim is
‘fairly debatable’ as to either a matter of fact or law.” Id. (quoting Gibson,
621 N.W.2d at 396). A fairly debatable claim is one that is “open to
30
dispute on any logical basis.” Id. (quoting Bellville, 702 N.W.2d at 473).
“Stated another way, if reasonable minds can differ on the coverage-
determining facts or law, then the claim is fairly debatable.” Bellville,
702 N.W.2d at 473.
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.
Id. (citations omitted).
Whether an issue of fact is debatable can ordinarily be decided by
the court. Id. “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. (quoting Gardner v. Hartford Ins.
Accident & Indem. Co., 659 N.W.2d 198, 206 (Iowa 2003)). “[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.” Id. at
474 (quoting State Farm Lloyds, Inc. v. Polasek, 847 S.W.2d 279, 285
(Tex. App. 1992)). In many cases, a directed verdict or summary
judgment for the insurer dismissing the bad-faith claim may be
appropriate because some evidence existed to justify its denial as a
matter of law. See, e.g., id.; Sampson v. Am. Standard Ins., 582 N.W.2d
146, 152 (Iowa 1998) (holding district court properly decided bad faith as
a matter of law when insured’s injuries were debatable); Thompson v.
U.S. Fid. & Guar. Co., 559 N.W.2d 288, 292 (Iowa 1997) (deciding as a
matter of law a claim is fairly debatable when evidence showed that
claimant ingested drugs the day before his work injury); Cent. Life Ins. v.
Aetna Cas. & Sur. Co., 466 N.W.2d 257, 263 (Iowa 1991) (holding motion
for directed verdict by insurer should have been granted because of
reasonable dispute as to value of claim).
31
Here, the district court granted summary judgment establishing
bad faith in favor of the insured, not the insurer. In so doing, the court
determined that as a matter of law no reasonable basis existed justifying
the denial and the insurer knew or recklessly disregarded that fact by
March 11, 2013. “[D]eterminations of good faith which involve intent
and motive ‘ordinarily’ are not resolvable on a motion for summary
judgment.” Nelson v. Lindaman, 867 N.W.2d 1, 13 (Iowa 2015) (quoting
Rite Aid Corp. v. Hagley, 824 A.2d 107, 119 (Md. 2003)). Bad faith can
be established as a matter of law “only when the evidence is undisputed
and only one inference can be drawn from the evidence.” McIlravy, 653
N.W.2d at 333.
First, we address whether there was a reasonable basis for
American Interstate’s denial that Thornton was PTD. American
Interstate does not argue on appeal it had a reasonable basis for denying
Thornton’s PTD status. Indeed, it would be hard-pressed to do so, since,
as early as two weeks after Thornton’s accident, it had received opinions
from a medical professional and its claims adjustor that Thornton, a
quadriplegic, was PTD. See Bellville, 702 N.W.2d at 481 (“Certainly there
may be cases in which the . . . undisputed damage items [are] so high
that there would be no reasonable basis to refuse payment . . . .”).
American Interstate internally recognized as much when setting reserves,
and its outside counsel expressly recommended that American Interstate
concede PTD status. We agree with the district court that contesting
Thornton’s PTD status under these facts constituted bad faith as a
matter of law. See Arp v. AON/Combined Ins., 300 F.3d 913, 917–18 (8th
Cir. 2002) (reinstating bad-faith claim against workers’ compensation
insurer because “[t]he medical evidence . . . conclusively demonstrates
that James has been permanently and totally disabled since the date of
32
his accident” and “[b]y denying James’s status . . . AON forced the Arps
to hire attorneys to litigate this issue before the South Dakota
Department of Labor, when this was completely unnecessary.”).
The district court, however, went too far in criticizing American
Interstate for offering to settle Thornton’s PTD claim with a closed-file
Medicare set-aside account and an annuity. The district court stressed
these payments “would end for all time [American Interstate’s]
responsibilities with respect to Plaintiff’s claim” and found that the
settlement offer would give Thornton “less than that to which [American
Interstate] knew he was entitled.” We do not view such settlement
negotiations as bad-faith conduct. To the contrary, such structured
settlements can be mutually beneficial to claimants and insurers.
Iowa Code section 85.35 specifically contemplates closed-file
settlements. Iowa Code § 85.35(3) (“The parties may enter into a
compromise settlement of the employee’s claim to benefits as a full and
final disposition of the claim.”). These settlements must be approved by
the workers’ compensation commissioner. Id. § 85.35(1). According to
the Centers for Medicare and Medicaid Services (CMS), “[t]he
recommended method to protect Medicare’s interests” in a workers’
compensation settlement is a Medicare set-aside account. Workers’
Compensation Medicare Set Aside Arrangements, Ctrs. for Medicare &
Medicaid Servs., https://www.cms.gov/Medicare/Coordination-of-
Benefits-and-Recovery/Workers-Compensation-Medicare-Set-Aside-
Arrangements/WCMSA-Overview.html (last visited Apr. 19, 2017). 5 Set-
5The CMS also offers to review and approve a Medicare set-aside proposal for
reasonableness. See Workers’ Compensation Medicare Set Aside Arrangements, Centers
for Medicare & Medicaid Servs., https://www.cms.gov/Medicare/Coordination-of-
Benefits-and-Recovery/Workers-Compensation-Medicare-Set-Aside-Arrangements/
33
aside funds are secure and unaffected by any future financial difficulties
of the insurer. Additionally, an annuity offers a lower up-front cost to
the insured, which lowers costs overall and allows win-win settlements.
An annuity may offer some tax benefits to the claimant. See W. United
Life Assurance Co. v. Hayden, 64 F.3d 833, 839 (3d Cir. 1995) (“[A]
structured settlement effectively shelters from taxation the returns from
the investment of the lump-sum payment.”). Some injured workers may
prefer periodic payments rather than a lump sum that could be
squandered.
All parties, including insurers, are entitled to engage in settlement
negotiations. Thornton testified he understood at the first settlement
meeting in February 2012 that American Interstate’s proposals were “just
a first offer on the table” and that he was free to have his attorney review
them. At mediation shortly thereafter, American Interstate restructured
its proposals, increasing the amount of the annuity it offered. 6 American
Interstate’s bad faith was in contesting Thornton’s PTD status, not in
offering structured settlement proposals.
Next, we turn to whether there was a reasonable basis for
American Interstate’s resistance to Thornton’s petition for commutation.
Commutation of benefits is governed by Iowa Code section 85.45, which
requires the commissioner (not the employer or insurer) to determine
whether commutation is in the best interest of the worker:
_______________________
WCMSA-Overview.html (last visited Apr. 19, 2017). It is recommended that the parties
submit such proposals to the CMS for review. Id.
6The district court specifically noted Thornton was statutorily entitled to
indemnity of $760,000 in present-day value, and American Interstate’s initial offer only
provided a payment of $600,000 on a lump-sum/annuity basis. However, American
Interstate at the mediation in October 2012 increased its lump sum offer to $800,000,
while Thornton’s last demand as of the following February was for a lump sum of
$1,160,000. The commissioner determined Thornton was PTD on May 23, 2013.
34
1. Future payments of compensation may be
commuted to a present worth lump sum payment on the
following conditions:
a. When the period during which compensation is
payable can be definitely determined.
b. When it shall be shown to the satisfaction of the
workers’ compensation commissioner that such commutation
will be for the best interest of the person or persons entitled
to the compensation, or that periodical payments as
compared with a lump sum payment will entail undue
expense, hardship, or inconvenience upon the employer
liable therefor.
Iowa Code § 85.45(1) (emphasis added). 7 In short, Iowa law allows for
commutation when it has been shown to the commissioner’s satisfaction
to be in the best interest of the worker. This showing must be made
whether the insurer stipulates to commutation or not. Reeves v. Nw.
Mfg. Co., 202 Iowa 136, 141, 209 N.W. 289, 291 (1926) (“In the absence
of the approval of the industrial commissioner, the terms of the
stipulation could not be enforced as a commutation of the future
payments of weekly compensation.”); 15 James R. Lawyer, Iowa Practice
Series™: Workers’ Compensation § 27:1, at 339–40 (2016–2017 ed.).
[T]he decision [of the commissioner] whether to allow
commutation must turn on the statutory guideline, best
interest of the claimant, and the focus should be on the
worker’s personal, family, and financial circumstances, and
the reasonableness of the worker’s plans for using the lump
sum proceeds.
Dameron v. Neumann Bros., Inc., 339 N.W.2d 160, 164 (Iowa 1983).
“While we encourage parties to negotiate fair settlements, we will not
7This Code section was amended this year. H.F. 518, 87th G.A., 1st Sess. § 16
(Iowa 2017). The new provision states,
Future payments of compensation may be commuted to a present worth
lump sum payment only upon application of a party to the commissioner
and upon written consent of all parties to the proposed commutation or
partial commutation, and on the following conditions . . . .
Id. The amendment is inapplicable to the claims in this appeal.
35
penalize those who prefer a final judicial determination of their rights.”
Kendall v. Lowther, 356 N.W.2d 181, 191 (Iowa 1984).
We have never decided whether a workers’ compensation insurer
can be sued in bad faith because it fails to smooth the employee’s path to
commutation by stipulating to it. American Interstate relies on an
unpublished federal trial court decision, Laughlin v. IBP, the only case
addressing whether an insurer can be sued for bad faith under Iowa law
for resisting a petition for commutation. No. C99–2105, 2001 WL
34148156 (N.D. Iowa July 23, 2001). Robert Laughlin filed several
applications for commutation that were resisted by his self-insured
employer, IBP. Id. at *1. The commissioner denied each of Laughlin’s
applications for commutation. Id. Laughlin filed a bad-faith lawsuit
against IBP based on its position resisting his applications. 8 Id. IBP
moved for summary judgment. Id. The court granted IBP’s motion
dismissing the bad-faith claim, stating,
Iowa Code § 85.45 clearly requires the industrial
commissioner to make the determination of whether the
commutation of benefits is appropriate. . . . Even if an
insurer could be held liable for resisting the application for
commutation under a bad faith standard, the statute’s
requirement that the industrial commissioner make the
decision, and not the insurer, provides IBP with a
“reasonable basis” for resisting the application.
Id. at *3. Thornton cites no contrary authority from any jurisdiction
imposing bad-faith liability on a workers’ compensation insurer or
employer for resisting commutation. But unlike the Laughlin court, we
elect to decide this case based on the factual record presented, without
8Self-insured employers are treated as insurers under the Iowa Workers’
Compensation Act. Laughlin, 2001 WL 34148156, at *2.
36
foreclosing the possibility that a bad-faith claim may arise for resisting
commutation under different facts.
In Rodda, we evaluated when a claim can be considered reasonably
debatable on a point of law. 734 N.W.2d at 485. David Rodda, an
injured employee, sued his employer for bad faith in denying him
workers’ compensation benefits. Id. at 482. The district court granted
summary judgment dismissing the bad-faith claim. Id. at 483–84. We
affirmed the summary judgment on grounds that it was “fairly debatable
whether Rodda could simultaneously receive both workers’ compensation
benefits and unemployment benefits” under Iowa law. Id. at 484. We
reasoned,
Perhaps the most reliable method of establishing that the
insurer’s legal position is reasonable is to show that some
judge in the relevant jurisdiction has accepted it as correct.
The favorable decision need not have been available to the
insurer at the time it acted on the claim. After all, if an
impartial judicial officer informed by adversarial presentation
has agreed with the insurer’s position, it is hard to argue
that the insurer could not have reasonably thought that
position viable.
Id. at 485 (quoting 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, 83 (1994)). We noted that several unpublished
cases from the workers’ compensation commissioner had reached the
same conclusion as the position taken by the employer. Id. at 484–85.
In addition, there were no Iowa court decisions on point, and the wording
of the statute was unclear. Id. We held, “This, reinforced by the
opinions by the workers’ compensation commissioner’s office, makes the
question of whether a worker can receive both forms of benefits at least
fairly debatable.” Id. at 485; see also Wilson v. Farm Bureau Mut. Ins.,
714 N.W.2d 250, 263 (Iowa 2006) (“We agree with Farm Bureau that with
37
no Iowa law on the issue, its duty to consent to be bound by the
amended judgment entry was fairly debatable.”). 9 Similarly, American
Interstate argues the Laughlin decision alone provided a reasonable basis
for American Interstate to oppose Thornton’s commutation.
Commutation is unlike the payment of weekly benefits in which
the statute commands the employer (or insurer) to take action and, thus,
establishes the type of statutory duty for which a willful and deliberate
breach can give rise to bad-faith liability in the workers’ compensation
9American Interstate argues it would not have been on notice that its conduct
resisting commutation could constitute bad faith and expose it to extra-contractual
damage claims. In wrongful-termination cases, we repeatedly have refused to allow
punitive damages the first time we hold a particular statute or regulation codifies a
public policy protecting against retaliatory discharge. For example, in Jasper v. H.
Nizam, Inc., we held punitive damages were not recoverable when we had not previously
held the requisite public policy could be based on an administrative regulation. 764
N.W.2d 751, 773–74 (Iowa 2009). We explained,
The rationale behind this rule is an employer cannot willfully and
wantonly disregard rights of an employee derived from some specific
public policy when the public policy has not first been declared by the
legislature or our courts . . . .
Id. at 774. We therefore concluded,
Although the tort of wrongful discharge in violation of public
policy has been recognized in Iowa for over twenty years, this case is
the first time we have specifically recognized a cause of action for
wrongful discharge arising from the refusal of the employee to violate
administrative rules. Additionally, there has otherwise been no
declaration that the subject matter of the administrative rules in
dispute in this case were of the type that would support a tort of
wrongful discharge. Consequently, we agree with the district court that
punitive damages were not recoverable in this case.
Id.; see also Dorshkind v. Oak Park Place of Dubuque II, L.L.C., 835 N.W.2d 293, 308
(Iowa 2013) (“[A]n employer cannot willfully and wantonly disregard the rights of an
employee based upon a violation of an administrative rule when at the time of
discharge, we did not recognize administrative rules as a source of public policy.”); Lara
v. Thomas, 512 N.W.2d 777, 782 (Iowa 1994) (“We agree that punitive damages should
not be awarded when a new cause of action for retaliatory discharge is recognized.”);
Smith v. Smithway Motor Xpress, Inc., 464 N.W.2d 682, 687 (Iowa 1990) (“[M]any of the
courts confronted with the issue have held that punitive damages should not be
awarded in the case that first recognizes the tort of retaliatory discharge due to a
workers’ compensation claim.”).
38
field. See, e.g., Iowa Code § 85.33(1) (“[T]he employer shall pay to an
employee . . . .”); id. § 85.34 (“Compensation . . . shall be payable to an
employee as provided in this section.”). By contrast, future benefits “may
be commuted” by the commissioner only if preconditions are met. Id.
§ 85.45(1). Section 85.45 imposes an affirmative burden on the employee
to demonstrate commutation is in his or her best interest. Id. This
determination involves a weighing by the commissioner of individual and
personal considerations that may be clarified when the employee testifies
at the commutation hearing. See Dameron, 339 N.W.2d at 163
(“[A]nalysis [of commutation] involves a benefit-detriment balancing of
factors, with the worker’s preference and the benefits to the worker of
receiving a lump sum payment weighed against the potential detriments
that would result if the worker invested unwisely, spent foolishly, or
otherwise wasted the fund so it no longer provided the wage-substitute
intended by our worker’s compensation law.”).
Against that legal backdrop, we conclude that American Interstate
was not in bad faith for resisting commutation because Thornton’s
petition for commutation was fairly debatable on its facts. The
reasonable basis element of a bad-faith claim “is an objective one.”
Bellville, 702 N.W.2d at 473. “A claim is ‘fairly debatable’ when it is open
to dispute on any logical basis.” Id. Thornton had never managed a
large lump sum of money. Alexander testified commutation would be in
Thornton’s best interest only if Thornton could avoid invading the lump-
sum principal. But that begs the question whether Thornton would
invade the principal. Omissions in Thornton’s proposed budget, his past
spending habits, and his lack of experience with investments gave
American Interstate a reasonable basis to question the commutation.
39
The commissioner’s role in approving commutation is not a rubber
stamp. Commutations have been denied based on concerns like those
that American Interstate raised here. See, e.g., Stoddard v.
ADM/Growmark, Iowa Workers’ Comp. Comm’n No. 1140792, 2016 WL
845695, at *1 (Feb. 26, 2016) (denying a request for commutation in part
because “neither the claimant nor his wife have even read the proposed
financial plans for investing, combined with the claimant’s poor financial
choices”); Deleon v. John Morrell & Co., Iowa Workers’ Comp. Comm’n
No. 5007832, 2013 WL 5508544, at *4 (Oct. 2, 2013) (finding that
claimant’s “lack of experience with any sophisticated financial dealings”
was a “significant detriment[]” in denying a partial commutation); Boner
v. Bethany Lutheran Home, Iowa Workers’ Comp. Comm’n No. 5022480,
2012 WL 3158931, at *4 (Aug. 2, 2012) (“A commutation should not be
granted if the evidence shows that claimant is a poor money manager or
is incapable of making wise investments.”).
We hold the district court erred by denying American Interstate’s
motion for directed verdict on the commutation claim and erred by
instructing the jury that American Interstate acted in bad faith opposing
Thornton’s commutation. That error requires a new trial on liability and
damages. Much of Thornton’s $284,000 compensatory damage award
was directly attributable to the delay in the commutation award,
including $14,000 in loss-of-use of money damages, $27,000 in loss of
home equity, and part of the $118,000 in consequential damages for
attorney fees incurred in the commutation proceedings.
In Bryant v. Parr, we held that an inconsistent verdict on two
damage claims—awarding $16,937 for past medical specials but only one
dollar for past pain and suffering—required a new trial on “all elements
of damage.” 872 N.W.2d 366, 376–78, 381–82 (Iowa 2015). Neither
40
party sought a new trial on liability. Id. at 380. We rejected the
defendant’s argument that the verdict awarding no future damages
should stand. Id. at 382. We noted the “general rule is that when a new
trial is granted, all issues must be retried.” Id. at 380 (quoting McElroy v.
State, 703 N.W.2d 385, 389 (Iowa 2005)). We also noted “the award for
one element of damages may affect another,” and “our general reluctance
to engage in speculation to uphold findings in an inconsistent verdict.”
Id. at 382.
We cannot let the jury verdict stand on liability for the surviving
bad-faith claims. In Central Life Insurance, we held a jury verdict on
first-party bad faith could not stand because the court erroneously
instructed the jury the insurer acted in bad faith by challenging an
appraisal award. 466 N.W.2d at 263. We concluded “the court’s
instructions tainted any consideration of [the insurer’s] claim that it may
have acted in good faith.” Id. Here, the trial was fatally tainted by the
erroneous instruction that “there has been a previous determination by
the Court that the defendant did not have a reasonable basis for
[contesting] a partial commutation.” The other bad-faith claims do not
cure the taint from the bad instruction.
We reverse the judgment on the jury verdict and remand the case
for an order dismissing the claim American Interstate acted in bad faith
by opposing commutation and for a new trial on the remaining bad-faith
claims.
B. Allowable Damages. “Because this case must be retried, we
will consider [American Interstate’s] other challenges to the jury
instructions.” State v. Hoyman, 863 N.W.2d 1, 16 (Iowa 2015).
American Interstate argues the court lacked subject matter jurisdiction
to award damages for delaying the purchase of Thornton’s new
41
wheelchair because the commissioner has exclusive jurisdiction for a
claim alleging the failure to provide satisfactory care. It separately
argues there was insufficient evidence to support instructing the jury on
damages for physical and emotional pain and suffering. 10 Both
American Interstate and Thornton have fully briefed these issues, and
they are likely to arise on remand. See State v. Dudley, 766 N.W.2d 606,
10Thornton contests error preservation on these arguments. American Interstate
objected to instruction No. 29, outlining damages, during the jury instruction
conference. Thornton contends this objection was insufficient to preserve error because
an instruction was later eliminated at the conference, resulting in renumbering that
instruction to No. 28. Thornton argues a bill of exceptions was necessary to clarify to
which instruction American Interstate referred. We disagree.
Under Iowa Rule of Civil Procedure 1.924, “all objections to giving or failing to
give any instruction must be made in writing or dictated into the record, . . . specifying
the matter objected to and on what grounds.” If the district court revises instructions
after objections are made, “similar specific objection to the revision or addition may be
made in the motion for new trial, and if not so made shall be deemed waived.” Id.
Objections must be “sufficiently specific to alert the trial court to the basis of the
complaint.” Olson v. Sumpter, 728 N.W.2d 844, 849 (Iowa 2007) (quoting Boham v. City
of Sioux City, 567 N.W.2d 431, 438 (Iowa 1997)).
A bill of exceptions is necessary “only to show material portions of the record of
the cause not shown by the court files, entries, or legally certified shorthand notes of
the trial, if any.” Iowa R. Civ. P. 1.1001(1). Its purpose is to “provide a factual record of
the proceedings in the event this cannot be shown in the court file or reporters’ notes.”
8 Tom Riley & Peter C. Riley, Iowa Practice Series™, Civil Litigation Handbook § 76:30,
at 866 (2016 ed.); see also Thomas A. Mayes & Anuradha Vaitheswaran, Error
Preservation in Civil Appeals in Iowa: Perspectives on Present Practice, 55 Drake L. Rev.
39, 48–49 (2006) (stating counsel may submit a bill of exceptions to preserve the record
when “the grounds for appeal concern matters presented in the unreported hearing”).
When the record before the district court is sufficient to alert the appellate court of the
grounds for appeal, no bill of exceptions is necessary to preserve error.
The jury instruction conference was reported. American Interstate objected to
instruction No. 29, the damages instruction. Specifically, American Interstate objected
as to part A of the instruction, mental pain and suffering, stating, “There’s no evidence
of past mental pain and suffering, nor is there any medical record or testimony to
establish that.” American Interstate echoed these objections as to parts B and H,
physical pain and suffering and home equity damages, respectively. Although the
number on the instruction later changed from 29 to 28, no other instruction spoke to
the types of damages recoverable. These objections were renewed in American
Interstate’s posttrial motion. We conclude American Interstate preserved error. No bill
of exceptions was required. It is patently obvious that the trial lawyers and court all
knew which instruction was at issue.
42
615 (Iowa 2009) (remanding case for new trial but addressing issues
likely to arise on remand). If we determine there was insufficient
evidence as a matter of law to instruct on certain damages, the district
court must decline to give such instructions on remand. See Coker v.
Abell-Howe Co., 491 N.W.2d 143, 150 (Iowa 1992) (reversing on other
grounds but addressing whether there was sufficient evidence to submit
jury instruction “on remand”).
1. Subject matter jurisdiction. American Interstate argues the
district court lacked subject matter jurisdiction to award damages
arising out of the delay in ordering the new wheelchair. 11 We have
previously dismissed claims by employees alleging deficient care on the
ground that the workers’ compensation commissioner has exclusive
jurisdiction over challenges to the reasonableness of medical care
provided by the employer. See Kloster, 612 N.W.2d at 775 (holding
employee dissatisfied with chiropractic care provided by employer was
required to exhaust administrative remedies with commissioner); Harned
v. Farmland Foods, Inc., 331 N.W.2d 98, 101 (Iowa 1983) (affirming
dismissal of tort action arising from employer’s failure to provide
chiropractic care to employee based on exclusive jurisdiction of
commissioner). However, these cases did not involve first-party bad-faith
claims against the workers’ compensation insurer.
In Kiner v. Reliance Insurance, we expressly held the district court
had subject matter jurisdiction over a claimant’s bad-faith claim against
a workers’ compensation insurer arising from an unreasonable denial of
11Although American Interstate failed to argue lack of subject matter jurisdiction
at the district court, a challenge to subject matter jurisdiction “may be made at any
time.” See Kloster, 612 N.W.2d at 773–74; Bailey v. Batchelder, 576 N.W.2d 334, 337–
38 (Iowa 1998) (holding the exclusivity of the Workers’ Compensation Act goes to the
court’s subject matter jurisdiction and can be raised at any time).
43
medical benefits. 463 N.W.2d 9, 11–12 (Iowa 1990). Ronald Kiner fell
while on the job and obtained a prescription for pain medications. Id. at
11. When his workers’ compensation insurer refused to pay for the
medications, he filed a bad-faith claim. Id. Rejecting the insurer’s
argument that Iowa Code chapter 85 provided the exclusive remedy, we
stated,
It is axiomatic that an employee’s rights and remedies
arising from an injury suffered in the course of employment
are exclusively provided under Iowa Code chapter 85. A
district court would ordinarily have no subject matter
jurisdiction over a claim that an employee is entitled to
workers’ compensation benefits. But this exclusivity
principle is limited to matters surrounding a job-related
injury and does not extend to subsequent dealings during
which a tort may arise by reason of bad faith on the part of
an employer’s insurer.
Id. (citation omitted) (quoting Tallman v. Hanssen, 427 N.W.2d 868, 870
(Iowa 1988)).
In Boylan, we again clarified that bad-faith claims supplement the
workers’ compensation statute. 489 N.W.2d at 744. We noted,
[I]t is unlikely that the legislature intended the penalty
provision in section 86.13 to be the sole remedy for all types
of wrongful conduct by carriers with respect to
administration of workers’ compensation benefits. By its
terms, it applies only to delay in commencement or
termination of benefits. It contemplates negligent conduct
rather than the willful or reckless acts that are required to
establish a cause of action under Dolan. In addition, no
remedy is provided under section 86.13 for delay or failure to
pay medical benefits.
Id. We specifically held that the workers’ compensation statute did not
preclude a common law bad-faith action. Id.; see also Southerland v.
Argonaut Ins., 794 P.2d 1102, 1106 (Colo. App. 1990) (stating “ongoing
difficulties in securing rehabilitation were merely a continuation of the
same difficulties that preceded the filing of the complaint and were
44
relevant as evidence of defendant’s habitual pattern in dealing with
plaintiff”). Accordingly, common law bad-faith tort claims do not fall
within the commissioner’s exclusive jurisdiction. We hold the district
court has subject matter jurisdiction over Thornton’s bad-faith claim
alleging American Interstate unreasonably delayed the delivery of his new
wheelchair.
We now turn to whether there was insufficient evidence to submit
certain elements of damages resulting from American Interstate’s bad-
faith conduct.
2. Sufficiency of the evidence. “Proposed instructions must enjoy
support in the pleadings and substantial evidence in the record.”
Vasconez v. Mills, 651 N.W.2d 48, 52 (Iowa 2002). “Evidence is
substantial if a reasonable person would accept it as adequate to reach a
conclusion.” Id. If at the close of the evidence “the record is insufficient
to support a party’s theory of recovery or defense, the court need not
submit the theory to the jury and may direct a verdict on the issue as a
matter of law.” Id.
We conclude there was sufficient evidence to submit the claims for
physical and emotional pain and suffering. We view the evidence in the
light most favorable to Thornton. A reasonable jury could find American
Interstate’s delay in ordering a replacement wheelchair was a cause of
Thornton’s pain. Rodgers knew Thornton needed a wheelchair
replacement every five years. Rodgers received Dr. Rogge’s notes stating
he wrote a prescription for a new wheelchair, yet she failed to order one
or inquire about the status of the order. Medical records from
Thornton’s hospitalization for bursitis indicate he felt like his “arm was
on fire.” Dr. Rogge testified he “suspect[ed]” the bursitis was “most likely
due to chronic irritation.” He further explained,
45
The arms of his old chair are very firm and hard. We’ve even
talked about the other day when he was in, I told him he
needs to get some type of towel or extra padding on it
because it’s just—it’s in such grave condition that it
probably did not do him any favors with this infection, and
he was hospitalized because of it.
Dr. Rogge noted he “hope[d]” a new chair would alleviate the problem
because the new chair was “going to be padded better.” This evidence
was minimally sufficient for a jury to find Thornton suffered painful
injuries attributable to American Interstate’s delay in ordering his new
wheelchair.
We decline to address the sufficiency of the evidence to support
instructions on the loss of use of money and home equity. American
Interstate’s bad faith in contesting Thornton’s PTD status delayed his
application for commutation and ultimate lump-sum award he needed to
purchase a home, but the insurer was not in bad faith for opposing
commutation. The district court will have to determine on a new trial
record whether the evidence is sufficient to submit those elements of
damage.
C. Attorney Fees. Finally, we address Thornton’s cross-appeal
requesting attorney fees incurred litigating the bad-faith action. The
district court denied Thornton’s request to submit the issue of attorney
fees incurred in the bad-faith litigation to the jury as damages. The
court also denied Thornton’s posttrial motion for attorney fees.
Thornton cites no cases allowing recovery of the attorney fees
incurred prosecuting the bad-faith action against a first-party insurer,
and we found none. Iowa follows the American rule: “the losing litigant
does not normally pay the victor’s attorney’s fees.” Rowedder v.
Anderson, 814 N.W.2d 585, 589 (Iowa 2012)). “Generally, attorney fees
are recoverable only by statute or under a contract.” Miller v. Rohling,
46
720 N.W.2d 562, 573 (Iowa 2006). There is a “rare” common law
exception to this rule, permitting recovery of attorney fees when the
defendant “has acted in bad faith, vexatiously, wantonly, or for
oppressive reasons.” Id. (quoting Hockenberg Equip. Co. v. Hockenberg’s
Equip. & Supply Co. of Des Moines, 510 N.W.2d 153, 158 (Iowa 1993)).
Thornton does not assert any statute or contract allows attorney
fees in this matter. Rather, Thornton relies on New Hampshire Insurance
Co. v. Christy, 200 N.W.2d 834, 845 (Iowa 1972). In Christy, we
recognized
an insurer who refuses, contrary to its contractual
obligation, to defend a third-party action against its insured
on the ground the policy involved affords no coverage is
liable for reasonable attorney fees incurred by the insured in
defense of the action brought against him.
Id. In such circumstances, insureds are “thrust into litigation” by reason
of the insurance company’s refusal, in breach of contract, to defend the
suit. Id. at 841. Additionally, we noted the insured may recover “an
award for expenses incurred in an action to establish insurance
coverage” when the insurance company acted in bad faith denying a
claim. Id. at 845.
Christy allows Thornton to recover his attorneys fees incurred in
the workers compensation proceedings as consequential damages caused
by American Interstate’s bad faith. These fees are akin to attorney fees
incurred to “establish insurance coverage.” Id.; see also Goodyear Tire &
Rubber Co. v. Haeger, 581 U.S. ___, ___, 137 S. Ct. 1178, 1184 (2017)
(allowing recovery of the “fees the innocent party incurred solely because
of the misconduct—. . . [that is], the fees that party would not have
47
incurred but for the bad faith”). 12 But Christy does not support awarding
additional fees incurred in prosecuting the bad-faith action. The
American rule controls. Indeed, after Christy, we made clear in Brown
Township Mutual Insurance Association v. Kress that “under the
American rule which is followed in this jurisdiction attorney fees are
ordinarily not recoverable by the prevailing party in absence of statute.”
330 N.W.2d 291, 300 (Iowa 1983). 13 As the Colorado Supreme Court
held,
Unless we are prepared to abandon the American rule for the
English rule of automatically awarding attorney fees to the
prevailing party, it would be difficult to carve out an
exception that allows an award of attorney fees that are
incidental to the bringing of a bad faith breach of contract
action. Attorney fees are incurred by most parties to most
lawsuits. If the goal were always to make the prevailing
party genuinely whole, these fees would be an element of
damage. But such is not the law.
Bernhard v. Farmers Ins. Exch., 915 P.2d 1285, 1291 (Colo. 1996)
(en banc) (“[W]e hold that Bernhard’s claim for attorney fees incurred in
bringing a bad faith breach of insurance contract action does not fit into
any exception to the American rule recognized in Colorado.”). We reach
the same conclusion.
Thornton argues this case falls into the rare common law
exception. We disagree.
12Thornton can submit the fees he incurred to establish his PTD status but not
the additional fees he incurred to obtain the commutation award. If the jury finds
American Interstate acted in bad faith in delaying the new wheelchair, Thornton may
also submit his fees incurred filing his petition for alternate medical care through the
hearing on November 4, 2014, when the wheelchair was ordered.
13TheKress court gave an additional reason for denying attorney fees: we had
not yet recognized the tort of first-party insurance bad faith. 330 N.W.2d at 300. We
recognized that cause of action five years later. See Dolan, 431 N.W.2d at 794. But the
Kress court’s alternative holding on the American rule remains good law. 330 N.W.2d
at 300.
48
[A] plaintiff seeking common law attorney fees must prove
that the culpability of the defendant’s conduct exceeds the
“willful and wanton disregard for the right of another”; such
conduct must rise to the level of oppression or connivance to
harass or injure another.
Hockenberg Equip. Co., 510 N.W.2d at 159–60. We have defined
oppressive conduct as conduct that is “difficult to bear, harsh,
tyrannical, or cruel.” Id. at 159. Likewise, connivance requires
“voluntary blindness [or] an intentional failure to discover or prevent the
wrong.” Id. (quoting Connivance, Black’s Law Dictionary (6th ed. 1990)).
“These terms envision conduct that is intentional and likely to be
aggravated by cruel and tyrannical motives. Such conduct lies far
beyond a showing of mere ‘lack of care’ or ‘disregard for the rights of
another.’ ” Id. This threshold is difficult to meet. See Williams v.
Van Sickel, 659 N.W.2d 572, 581 (Iowa 2003) (awarding common law
attorney fees when public official fabricated documents to benefit herself
to the detriment of others, but limiting recovery to fees incurred after the
forgery); Wolf v. Wolf, 690 N.W.2d 887, 896 (Iowa 2005) (“Although the
defendant’s conduct in this case was clearly willful and demonstrated a
wanton disregard for [plaintiff’s] rights, we do not believe the evidence
meets the heightened standard of oppression or connivance under the
Hockenberg test.”).
On our de novo review, we find American Interstate’s conduct does
not satisfy the Hockenberg test. American Interstate continually paid the
stipulated weekly benefits for PTD. Thornton points to American
Interstate’s failure to provide certain documents and delays during the
agency proceedings, but we find none that rose to the level of oppression
or connivance required to award common law attorney fees. More than
mere bad faith is required for this common law exception to the
49
American rule. Wolf, 690 N.W.2d at 896. We affirm the district court’s
rulings denying Thornton fees incurred prosecuting his bad-faith action.
IV. Disposition.
For those reasons, we affirm the partial summary judgment that
American Interstate contested Thornton’s PTD status in bad faith. We
reverse the district court’s partial summary judgment that the insurer
acted in bad faith for disputing Thornton’s petition for commutation. We
reverse the judgments for actual and punitive damages and remand the
case for a new trial on the remaining claims for bad faith. We affirm on
cross-appeal the ruling denying an award of attorney fees incurred
prosecuting this bad-faith action. Costs of this appeal shall be assessed
equally to each party.
DISTRICT COURT JUDGMENTS AFFIRMED IN PART AND
REVERSED IN PART; CASE REMANDED FOR NEW TRIAL.