Insurer Forced to Pay Now Accused of Bad Faith

     (CN) – After winning a big payout from the insurer that initially refused full coverage, two restaurateurs have a case for bad faith, an Iowa appeals court ruled.
     The dispute stems from a United Fire & Casualty Co. commercial property insurance policy that Cleo Martinez and her husband, Ben Villarreal Jr., bought for their restaurant, La Casa Martinez Tex Mex Inc., in October 2006.
     The policy covered up to $386,400 for building replacement and $374,400 for personal property replacement, according to a Jan. 14 ruling in Martinez and Villarreal’s case.
     The couple had sued the insurer initially after a fire destroyed La Casa on March 8, 2007.
     United Fire paid the property’s mortgager $108,310, and a jury eventually found that its failure to pay the remaining amount due under the policy amounted to a breach of contract.
     After the couple recovered nearly $237,000 in compensatory damages, the plaintiffs petitioned the insurer in 2011 for bad faith.
     Seeking punitive damages, Martinez and Villarreal claimed that United Fire “knew it had no objective reasonable basis for the denial or failure to make payment.”
     United Fire moved to dismiss, alleging that the couple’s failure to assert it in the prior petition barred them from bringing it up now.
     Though the Cerro Gordo County District Court granted United Fire summary judgment, the Iowa Court of Appeals reversed, 2-1, Wednesday.
     “We believe the alleged wrong in the first action was United Fire’s breach of contract by failing to pay the amounts owed under the insurance policy, while the alleged wrong in this tort action is United Fire’s knowing and intentional failure to conduct its claim process and claim administration in a nontortious manner-a scope of conduct much broader than a mere failure to pay,” Judge Thomas Bower wrote for the majority (emphasis in original).
     “We further note the recovery available in the contract action is not the same as the recovery the plaintiffs’ seek in the tort action,” Bower added.
     The couple may assert a bad-faith claim in their new suit, the majority ruled.
     “United Fire’s file notes, discoverable only in the tort action, show its own attorney recognized the differences between the evidence needed for the breach-of-contract claim and the evidence needed for a potential bad-faith claim,” Bower wrote. “In the file notes the attorney explained that if the first lawsuit for breach of contract had asserted bad faith, he would need to withdraw as an attorney and be a witness. But, as the first lawsuit did not assert bad faith, he explained he would not have to withdraw and would not need to testify.”
     The ruling also notes that “some of the evidence of bad faith occurred as late as during the first trial, for example, the surprising trial testimony of United Fire’s primary claims adjuster that she had no opinion of the actual value of the building, in contrast to her file documentation, discoverable in the tort action, wherein she did, in fact, place a fair value on the building.”
     United Fire failed to persuade the court that La Casa is the policy’s sole named insured.
     “In the contract action United Fire stipulated Villarreal and Martinez were insureds under the United Fire policy rather than leaving that issue for the jury to determine,” Bower wrote.
     Judge Christopher McDonald dissented, holding that the plaintiffs’ second action is the “same claim” as that brought in their first, which also arose out of unpaid insurance benefits.

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