Opinion
No. 3-735 / 02-1938.
Filed December 10, 2003.
Appeal from the Iowa District Court for Johnson County, Thomas M. Horan, Judge.
Defendant appeals from the district court's order entering judgment in favor of plaintiffs. AFFIRMED.
James Powers of Powers Beard, L.L.P., Cedar Rapids, for appellant.
Thomas Hobart of Meardon, Sueppel Downer, P.L.C., Iowa City, for appellee.
Heard by Sackett, C.J., and Mahan and Eisenhauer, JJ.
Defendant West Bend Mutual Insurance Company (West Bend) appeals from the district court's order entering judgment in favor of plaintiffs Sidney and Bonnie Bradley on their breach of contract claim. West Bend contends the district court erred in: (1) finding it failed to exercise reasonable diligence to obtain its insured's cooperation in the defense of the Bradleys' negligence claim; (2) finding its insured's lack of cooperation was not prejudicial; and (3) awarding punitive damages. We affirm.
I. Background Facts and Proceedings.
Sidney and Bonnie Bradley hired Jamie Marin to perform roofing work on their home in the spring of 1997. The roof was being replaced in connection with an extensive remodeling and redecorating project. The Bradleys' roof did not leak prior to the work performed by Marin.
Marin removed the entire roof instead of replacing it in sections. On April 30, 1997, a heavy rainstorm hit the Iowa City area. Marin did not attempt to cover the roof with plastics or canvas. As a result, water ran into the interior of the Bradleys' home.
At the time he was re-roofing the Bradleys' home, Marin's business operation was insured by West Bend. Marin notified West Bend of the damage to the Bradleys' home and on May 1, 1997, West Bend sent an adjuster, Greg Lynch, to view the damage. Lynch spoke with the Bradleys' insurer, Allied Mutual, and learned Allied would handle the claim and then look to West Bend for subrogation. Although he knew estimates for water damage frequently increase over time, Lynch never returned to the Bradley home. West Bend never directed Lynch to reassess the damage or their insured's liability.
On June 28, 1998, the Bradleys' attorney sent a letter to Lynch, including a building inspector's report concluding the Bradleys' roof needed to be replaced. Lynch called Marin and spoke to him about the work he had performed. Lynch did not speak with Marin again.
In July 1998, the Bradleys sued Marin for negligence. Marin called Lynch and advised him of the suit. Lynch picked up the original notice at Marin's home, but did not speak with Marin. West Bend and its representatives had no further contact with Marin, although they continued to defend him against the Bradleys' action.
On December 7, 1999, West Bend filed a petition for declaratory judgment against Marin, seeking to avoid insurance coverage for the Bradley claim on the ground that Marin failed to cooperate in the defense of the suit. Marin did not answer the petition and default judgment was entered against Marin on January 21, 2000, the last day of evidence in the Bradleys' trial against Marin.
In its March 2, 2000 opinion, the district court found overwhelming evidence supported the Bradleys' claim that Marin was negligent in performing work on the Bradleys' roof. The court entered judgment in favor of the Bradleys for $178,226 plus interest.
West Bend refused to pay the judgment against Marin based upon the default judgment obtained against Marin declaring it had no obligation under the policy because of Marin's failure to cooperate. On July 28, 2000, the Bradleys filed a petition against West Bend alleging breach of contract, bad faith, and fraudulent misrepresentation. The Bradleys sought to determine whether West Bend was required to pay the judgment against Marin. They further sought compensatory and punitive damages.
In its November 2002 ruling, the district court concluded the evidence failed to support West Bend's claim Marin did not cooperate in defending the suit. The court further concluded West Bend was not prejudiced by any failure by Marin to cooperate. Finally, the court found West Bend engaged in fraudulent misrepresentation and acted in bad faith, and therefore the Bradleys were entitled to punitive damages. The court entered judgment in favor of the Bradleys for $178,226 in actual damages and $100,000 in punitive damages.
II. Scope of Review.
We review for errors at law. Iowa R. App. P. 6.4. If substantial evidence supports the district court's findings of fact, we are bound by those findings. Grinnell Mut. Reins. Co. v. Recker, 561 N.W.2d 63, 68 (Iowa 1997). Evidence is substantial if reasonable minds would find it adequate to reach a conclusion. Id. We, however, are not bound by the district court's conclusions of law, and we may inquire into whether the court's ultimate conclusions were materially affected by improper conclusions of law. Id. III. Cooperation Clause.
West Bend first contends the district court erred because Marin did not abide by its cooperation clause. West Bend also contends Marin's failure to cooperate was prejudicial.
Marin's insurance policy with West Bend states that in the event of a suit, Marin was required to "[c]ooperate with us in the investigation, settlement or defense of the claim or `suit'. . . ." At trial, West Bend had the burden of going forward with the evidence of Marin's noncooperation. American Guar. Liab. Ins. Co. v. Chandler Mfg. Co., Inc., 467 N.W.2d 226, 229 (Iowa 1991).
A cooperation clause applies to conduct of the insured in the proceedings subsequent to the notice of the loss, claim or suit and prior to a determination of an insurer's liability. The purpose of a cooperation clause is to protect insurers and prevent collusion between insureds and injured parties. The question of cooperation under a policy's cooperation clause involves not only the good faith of the insured but also the good faith of the insurer.
Id. (citations omitted). The cooperation clause requires both the insurer and the insured to act diligently when a claim arises. Id. at 230. Our supreme court has determined an insurer cannot avoid its obligation on a policy because of an insured's breach of a cooperation clause unless it exercises reasonable diligence in securing the insured's cooperation. Id.
Substantial evidence supports the trial court's finding that West Bend failed to use reasonable diligence in seeking Marin's cooperation in defending the Bradleys' negligence claim. Marin was fully cooperative with West Bend when contacted. He accompanied West Bend's adjuster to the Bradley home and acknowledged he had not followed the proper standard of care when replacing the roof. No further information was sought from Marin at that time. Marin again spoke with the adjuster upon receiving original notice of the lawsuit. Again, no one attempted to illicit additional information from Marin.
West Bend contends it was unable to contact Marin following the summer of 1998. Greg Lynch testified that he went to Marin's home in an unsuccessful attempt to locate him. He left a card at the home and contends he drove by the residence several times a month to see if Marin was home. Letters were sent to Marin by both Lynch and West Bend attorney Roger Lathrop. Lathrop spoke with a woman at Marin's business who assured him she would get a message to Marin. Finally, Lathrop drove to Washington and West Liberty in an unsuccessful effort to locate Marin. However, the sheriff's department successfully served Marin with West Bend's petition for declaratory judgment. West Bend made no effort to contact Marin at that address. As the district court found:
West Bend clearly had the opportunity to gather all relevant information from Mr. Marin during the summers of 1997 and 1998 when he was available. If it had done so, it would have avoided the now claimed prejudice. Any prejudice claimed by West Bend from Marin's unavailability is of its own making and should not excuse its obligations under the insurance contract with Marin.
Substantial evidence supports the district court's conclusion that West Bend was not prejudiced by Marin's failure to cooperate because Marin could not have provided any evidence to prevent judgment from being entered against him. There is little dispute that Marin's negligence was the direct cause of the Bradleys' damage. Although West Bend contends Marin's participation was essential in determining damages, testimony by Lathrop indicates he and counsel Sizer decided West Bend did not need experts to dispute damages because they believed Allied's adjusters had done a thorough job of calculating damages. Furthermore, West Bend had several opportunities to reassess the Bradleys' damage with Marin, or to consult with Marin regarding damages, and chose not to do so.
Because West Bend failed to use reasonable diligence in obtaining Marin's cooperation in defending against the Bradleys' action, and because any failure by Marin to cooperate was not prejudicial, we affirm the district court's order finding West Bend breached its contract with the Bradleys as third-party beneficiaries.
IV. Punitive Damages.
Punitive damages may not be recovered for a mere breach of contract; it is only when the breach also constitutes an independent tort, or other illegal or wrongful act, that punitive damages become a possibility. Higgins v. Blue Cross, 319 N.W.2d 232, 235 (Iowa 1982). West Bend next contends the district court erred in awarding the Bradleys $100,000 in punitive damages because it did not act in bad faith or engage in fraudulent misrepresentation. A. Bad Faith.
West Bend's initial appeal brief only specifically challenges the district court's finding it engaged in bad faith. Its reply brief addresses both the findings of bad faith and fraudulent misrepresentation. We typically do not address on appeal claims raised for the first time in a reply brief. Sun Valley Iowa Lake Ass'n v. Anderson, 551 N.W.2d 621, 642 (Iowa 1996). However, some elements of the fraudulent misrepresentation claim are addressed in West Bend's initial appeal brief. When West Bend's briefs are read in tandem, we believe its initial appeal brief can be construed to encompass both claims.
Punitive damages are available in bad faith cases involving "positive misconduct of a malicious, illegal, or an immoral nature." Pirkl v. Northwestern Mut. Ins. Ass'n, 348 N.W.2d 633, 636 (Iowa 1984). To show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Dolan v. Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988).
The Bradleys brought suit against West Bend alleging bad faith denial of coverage. Our supreme court has refused to recognize a tort victim's bad faith claim against the tortfeasor's insurer, even though tort victims are technically third-party beneficiaries to the tortfeasor's insurance. Long v. McAllister, 319 N.W.2d 256, 262 (Iowa 1982). However, the district court determined the Bradleys could maintain a bad faith cause of action against West Bend pursuant to Iowa Code section 516.1 (1999), which gives a judgment creditor the same rights to sue an insurer as the insured would have. The district court concluded that because Marin could sue to prove bad faith denial of the claim, the Bradleys were also entitled to sue.
We fail to find a proper basis for the Bradleys' bad faith claim against West Bend. Section 516.3 requires actions brought pursuant to section 516.1 to be brought within one hundred and eighty days from the entry of judgment. The Bradleys' bad faith claim was not filed within this time frame.
B. Fraudulent Misrepresentation.
The district court also found punitive damages were available under a fraudulent misrepresentation theory of recovery. To establish fraudulent representation, a party must show by clear, satisfactory and convincing evidence: 1) a representation, 2) the falsity of the representation, 3) the materiality of the representation, 4) scienter or knowledge that the representation was false, 5) an intent to deceive, 6) justifiable reliance, 7) proximate cause, and 8) damages. Midwest Home Distributor, Inc. v. Domco Indus., Ltd., 585 N.W.2d 735, 738 (Iowa 1998). Punitive damages are available where a preponderance of clear, convincing, and satisfactory evidence shows that a defendant willfully and wantonly disregarded the rights or safety of another. Iowa Code § 668A.1(1)(a). If there is evidence bearing on the issue of willful or malicious conduct, we will not disturb the district court's findings. State Sav. Bank v. Allis-Chalmers Corp., 431 N.W.2d 383, 387 (Iowa Ct.App. 1988).
The district court found the elements of fraudulent misrepresentation were met on the following facts: After the lawsuit was filed, West Bend offered to advance the Bradleys $8000 to have their roof repaired before winter even though this would not have been covered under Marin's insurance policy. At their October 29, 1998 deposition, the Bradleys testified that the roofer who had bid $8000 to repair their roof had obtained other work. That November, the Bradleys' attorney informed West Bend the cost of replacing the roof had risen to $10,000. In a letter dated November 17, 1998, West Bend's attorney, Roger Lathrop, informed West Bend of the increased cost of roof replacement. Lathrop queried his client, "Please confirm whether you are still willing to advance money for this roof (which we clearly do not owe) in order to show our good faith. . . ." The cost of replacing the roof was later reduced to $9000, but West Bend never advanced the funds. West Bend then proceeded to represent Marin at trial, although just prior to the start of trial, unbeknownst to the Bradleys, West Bend instituted proceedings to establish it had no obligation to pay any judgment against Marin.
The court found West Bend's actions gave the outward appearance of representing and defending Marin while it never intended to pay the claim. The court concluded the Bradleys were injured by their reliance on West Bend's representations that it would cover the damages caused by Marin because the Bradleys proceeded to trial instead of accepting West Bend's settlement offer. The court further found the Bradleys did not realize they needed to be concerned about West Bend's intention to pay and therefore could not attempt to properly gather all the evidence needed to show their responsibility under the contract. Finally, the Bradleys had no opportunity to be joined as a party to West Bend's claim against Marin.
We agree the Bradleys have proven a claim of false misrepresentation. West Bend acted in willful and wanton disregard of the Bradleys' rights, and the Bradleys are entitled to an award of punitive damages. Accordingly, we affirm the district court's judgment against West Bend for $178,226 in actual damages and $100,000 in punitive damages.