Opinion
No. 4-652 / 03-1395
Filed January 13, 2005
Appeal from the Iowa District Court for Pottawattamie County, James M. Richardson, Judge.
An insurer brings a certiorari action challenging the district court's denial of its motion for sanctions. WRIT SUSTAINED; CASE REMANDED.
James A. Pugh of Morain, Burlingame Pugh, P.L.C., West Des Moines, for plaintiff.
Joseph J. Hrvol of Joseph J. Hrvol, P.C., Council Bluffs, for defendant.
Heard by Sackett, C.J., and Vogel, Zimmer, Hecht, and Eisenhauer, JJ.
Farm Bureau Mutual Insurance Company (Farm Bureau) brings a certiorari action challenging the district court's denial of its motion for sanctions against its insureds, Rodney and Marie Guilliams, and the Guilliams' attorney, Joseph Hrvol. Because we conclude the district court erred in denying the motion for sanctions, we sustain the writ, and remand this matter to the district court for further proceedings on the motion.
I. Background Facts and Proceedings.
Rodney and Marie Guilliams had an insurance policy with Farm Bureau. The policy, which provided coverage on the Guilliams' mobile home for property losses caused by fire, contained an exclusion for intentional acts. On May 17, 2001, the Guilliams' mobile home and its contents were destroyed by a fire. It is undisputed that the fire was the result of arson. The Guilliams filed a claim with Farm Bureau for the loss.
Farm Bureau's investigation revealed the following facts. The mobile home was unoccupied at the time of the fire because the Guilliams had purchased and were residing in another home. Their efforts to sell the mobile home had not been successful. Rodney Guilliams had been unemployed for a year prior to the fire and was experiencing financial difficulties. The Guilliams had removed the mobile home from the market after the death of Rodney's brother, as they were planning on moving to Missouri, to be near Rodney's mother. Rodney kept two five-gallon cans of gas at the empty trailer, which he asserted were for his lawn mower. Rodney knew Ron Flowers, one of the two individuals charged with setting the mobile home on fire. Rodney became acquainted with Flowers while both were incarcerated in the Pottawattamie County Jail and considered him to be a friend. Despite Rodney's significant financial difficulties, he took out an advance of $2,500 on his credit card to assist Flowers in paying his bail after Flowers was arrested on the arson charge. Rodney claimed that, at the time he provided the bail money, he did not know the true reason for Flowers's incarceration.
Guilliams was incarcerated at that time for failure to pay child support.
In December 2001 Farm Bureau made a written settlement proposal to the Guilliams. According to a claims adjuster, while Farm Bureau was suspicious at this point in time, it did not feel it had enough information to deny the claim. That changed, however, after Farm Bureau received information implicating Rodney Guilliams in the arson.
Although Farm Bureau asserts there was never an agreement reached as to the precise settlement amount, the issue of settlement was ultimately adjudicated in favor of the Guilliams based on Farm Bureau's answer to the Guilliams' petition. In its answer, Farm Bureau admitted its settlement offer was accepted, but claimed any agreement was void or voidable as a result of fraud. Farm Bureau's motion to amend its answer to assert that no agreement was reached was denied because the motion was not timely filed.
On January 29, 2002, Flowers, who had a criminal record, entered into a plea agreement with the State. In exchange for Flowers' cooperation with the arson investigation, Flowers was permitted to plead guilty to arson in the third degree with the understanding that the State would recommend probation with placement in a community corrections facility. Flowers then made an unsworn statement to an assistant county attorney. The statement, made after Flowers had an opportunity to review both police and Farm Bureau investigative documents, alleged that Rodney Guilliams had solicited Flowers to commit the arson. It further alleged Flowers had told Guilliams to place gasoline in the mobile home, so that Flowers would not be seen carrying it; and that Flowers then burned the trailer with the assistance of James Spencer, an individual whom Flowers had solicited to assist in the arson.
On February 5, 2002, Farm Bureau sent the Guilliams' counsel, Joseph Hrvol, a letter stating that it had received new information from the county attorney, in the form of the statement from Flowers. On March 11 Farm Bureau provided attorney Hrvol a letter stating the company had no liability for the Guilliams' claim, as "he" (Rodney Guilliams) had burned or procured the burning of the property, and misrepresented his knowledge as to the cause of the fire. On April 24 a trial information was filed charging Rodney Guilliams with solicitation of a felony.
The prosecution resulted in a directed verdict for judgment of acquittal, because Flowers' claims could not be corroborated.
On May 16, 2002, the Guilliams commenced an action against Farm Bureau, alleging breaches of the insurance contract and the settlement agreement, as well as a first-party bad faith claim. The lawsuit proceeded to trial, and the jury returned verdicts in favor of Farm Bureau on all of the Guilliams' claims.
The court denied Farm Bureau's requests to direct a verdict on the bad faith claim.
Following trial, Farm Bureau sought sanctions pursuant to Iowa Rule of Civil Procedure 1.413(1), against both the Guilliams and attorney Hrvol, for filing an allegedly frivolous first-party bad faith claim. The district court denied the motion without hearing, and without elaboration. Farm Bureau then filed a petition for writ of certiorari challenging the court's order. The petition was granted by the supreme court, and now comes before us for disposition.
II. Standard of Review.
We review the district court's denial of the sanctions request for an abuse of discretion. Weigel v. Weigel, 467 N.W.2d 277, 280 (Iowa 1991). In this context, a district court's exercise of discretion is "unreasonable" when it is not based on substantial evidence. See Schettler v. Iowa Dist. Court, 509 N.W.2d 459, 465-66 (Iowa 1993). Any erroneous applications of law within the exercise of that discretion will be corrected by this court. Weigel, 467 N.W.2d at 280. If we find such error or an abuse of discretion, "[w]e may . . . annul the proceedings wholly or in part, or prescribe the manner in which either party may proceed, but we may not substitute an amended order for that of the district court." Harris v. Iowa Dist. Court, 570 N.W.2d 772, 776 (Iowa Ct.App. 1997).
III. Legal Principles.
Iowa Rule of Civil Procedure 1.413(1) requires the signatory of a petition to have read the petition, be acting without improper motive, and certify that to the best of his knowledge, information, and belief, formed after a reasonable inquiry, the pleading . . . is (1) well grounded on the facts and (2) warranted either by existing law or by a good faith argument for the extension, modification, or reversal of existing law.
Weigel, 467 N.W.2d at 280 (citation omitted). If rule 1.413(1) has been violated, some form of sanction is mandatory. Iowa R. Civ. P. 1.413(1); Harris, 570 N.W.2d at 776; see also Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203, 208 (Iowa 1995).
Farm Bureau asserts the Guilliams and attorney Hrvol violated the reasonable inquiry requirement of rule 1.413(1), because a reasonable inquiry would have revealed the first-party bad faith claim was neither well grounded in fact nor warranted by law. The reasonableness of the inquiry necessarily turns on the facts available at the time of the filing, and whether the filing was based on a plausible view of the law. Weigel, 467 N.W.2d at 280. The test is an objective one, of "reasonableness under the circumstances, . . . and the standard to be used is that of a reasonably competent attorney admitted to practice before the district court." Id. at 281; see also Mathias v. Glandon, 448 N.W.2d 443, 445 (Iowa 1989).
While both parties seem to contend certain pertinent case law requires clarification, the Guilliams have not advocated for the extension, modification, or reversal of any existing law.
Because this matter involves a first-party bad faith claim, the issue turns on whether the insurance claim was fairly debatable:
[T]o establish a claim for first-party bad faith, the insured must prove two facts: (1) that the insurer had no reasonable basis for denying benefits under the policy and, (2) the insurer knew, or had reason to know, that its denial was without basis. The first element is objective, the second subjective. If a claim is "`fairly debatable,' the insurer is entitled to debate it, whether the debate concerns a matter of fact or law." "Whether a claim is fairly debatable is appropriately decided by the court as a matter of law."United Fire Cas. Co. v. Shelly Funeral Home, Inc., 642 N.W.2d 648, 657 (Iowa 2002) (citations omitted).
IV. Analysis.
In light of the foregoing principles, the question for the district court was whether a reasonably competent counsel, based on information known at the time of filing, could make any "rational argument based on the evidence or law" that the Guilliams' claim was not in fact fairly debatable at the time it was denied by Farm Bureau. See Cohen v. Iowa Dist. Court, 508 N.W.2d 78, 82 (Iowa Ct.App. 1993) (defining frivolous claims). Stated another way, the court was required to ascertain whether the information, as viewed by a reasonably competent attorney, revealed an objectively reasonable basis for the insurance company's denial.
If a reasonable person could look at the facts available to Farm Bureau at the time it denied the Guilliams' claim, and conclude Farm Bureau had a reasonable basis for denying the claim, then the denial was objectively reasonable, and the claim was fairly debatable as a matter of law. See Sampson v. American Standard Ins. Co., 582 N.W.2d 146, 150 (Iowa 1998) (defining when a claim is fairly debatable as a matter of law). If the claim was fairly debatable as a matter of law, then a reasonably competent counsel could not make a plausible argument in support of a first-party bad faith claim, and filing such a claim would violate rule 1.413(1). See id. ("when an objectively reasonable basis for denying the claim exists, the insurer as a matter of law cannot be held liable for bad faith"); Weigel, 467 N.W.2d at 280 (requiring claim to be well grounded in fact and warranted by existing law or by a good faith argument for the extension, modification, or reversal).
On the other hand, if there was a factual dispute as to whether Farm Bureau acted reasonably — if a reasonable fact-finder could conclude Farm Bureau had not exercised an honest and informed judgment in deciding to deny the claim — the "fairly debatable" question is not subject to resolution as a matter of law. See Nassen v. National Sales Ins. Co., 494 N.W.2d 231, 236 (Iowa 1992) (defining fairly debatable standard and concluding, under particular facts of the case, that fairly debatable question was one for the jury). In such case, a reasonably competent attorney could plausibly argue the known facts substantially supported a claim that the denial was unreasonable. Under these circumstances, no violation of rule 1.413(1) would occur. See Weigel, 467 N.W.2d at 280.
Farm Bureau asserts it had an objectively reasonable basis for denying the claim, and that a reasonably competent attorney with the knowledge of the Guilliams and attorney Hrvol would have realized as much, given the evidence that Rodney Guilliams both solicited arson and misrepresented his knowledge of the crime. The Guilliams and attorney Hrvol counter that a jury could have found Farm Bureau acted unreasonably in denying their claim, because the only new information Farm Bureau received after agreeing to settle the claim was Flowers' statement. They assert this unsworn statement was an insufficient basis on which to deny the Guilliams' claim, because it was made by an individual with a criminal record, and was given in consideration of reduced charges and after an opportunity to review both police investigative reports and Rodney's statements to Farm Bureau investigators. We believe Farm Bureau has the better argument.
We agree with the Guilliams and attorney Hrvol that a reasonable fact finder could conclude, based on certain circumstances surrounding Flowers' statement, that the statement was not credible. However, a reasonable person could also find, in light of previously known and undisputed facts, that the statement was sufficiently reliable and credible to raise a fair debate about the validity of the Guilliams' claim.
The court must look to all the information Farm Bureau had received up to the time it denied the claim, and which was within attorney Hrvol's knowledge at the time the petition was filed. This includes not only Flowers' statement and its surrounding circumstances, but also the fact that Rodney Guilliams was experiencing significant financial difficulties, that the mobile home was vacant and had been put up for sale, that Rodney had placed up to ten gallons of gas in the trailer, that Rodney knew Flowers and considered him to be a friend, that despite financial difficulties he provided Flowers with bail money, that he had taken Flowers to the mobile home, and that Flowers had no apparent motive to commit arson beyond monetary gain.
Under the circumstances presented here, reasonable individuals could differ as to the credibility and weight to be afforded Flowers' statement. It therefore logically follows that Farm Bureau's reliance on the statement in denying the Guilliams' claim was objectively reasonable. Thus, the first-party bad faith claim was unsupported as a matter of law.
V. Conclusion.
Given the totality of the evidence, we cannot conclude the district court's denial of the sanction request was supported by substantial evidence. By fling the first-party bad faith claim, the Guilliams and attorney Hrvol violated rule 1.413(1). The district court erred in concluding otherwise.
Because rule 1.413(1) was violated, the district court was required to impose some level of sanctions. See Harris, 570 N.W.2d at 776; Johnson, 533 N.W.2d at 208. Accordingly, we sustain the writ, and vacate the district court order that denied Farm Bureau's motion for sanctions. This matter is remanded to the district court for further proceedings on the motion not inconsistent with this opinion.
WRIT SUSTAINED; CASE REMANDED.
Vogel, Hecht, and Eisenhauer, JJ., concurring; Sackett, C.J., dissenting.
I respectfully dissent. The district court did not abuse its discretion. I would annul the writ.