Evidence of an insurer’s post-filing-of-litigation conduct is admissible in Iowa and can be probative of bad faith

Evidence of an insurer’s post-filing-of-litigation conduct is admissible in Iowa and can be probative of bad faith

January 11, 2018

After a 2011 tornado damaged two buildings on its premises in Iowa, B&F Jacobson Lumber & Hardware, L.L.P. (“B&F”) submitted a property damage claim to its insurer, Acuity, A Mutual Insurance Company (“Acuity”). In response to the claim, Acuity issued a check for over $60,000, an amount initially thought to be equal to the value of B&F’s buildings. The check bore the notation “Settlement in Full-ACV” notwithstanding an Iowa regulation generally precluding insurers from indicating to a first-party claimant on a payment draft, check, or letter, that the payment is final or a release of any claim.

B&F subsequently learned that the damage was more extensive than previously thought and the previously paid sum was inadequate, but Acuity claimed that B&F released its claim and would not open it or issue a new appraisal. B&F filed suit, alleging that Acuity refused a new appraisal and withheld payment of a $5,000 deductible in bad faith. Following several motions and appeals, the trial court entered an order compelling an appraisal, which resulted in an award to B&F of $83,000 in additional damages. At the conclusion of the appraisal process, only B&F’s bad faith claim remained for resolution by the trial court.

The trial court precluded admission of evidence related to Acuity’s conduct after the filing of litigation, holding that the evidence was irrelevant to a bad faith claim and that public policy otherwise prevented its admission. A jury subsequently found that Acuity had not acted in bad faith. B&F appealed.

The Court of Appeals of Iowa noted that the issue of the admissibility of an insurer’s post-litigation conduct had not been previously addressed by the Iowa Supreme Court. Importantly, however, the Supreme Court had acknowledged that actions constituting bad faith may arise after the filing of litigation. Consequently, the appellate court reasoned, the analysis of bad-faith conduct does not necessarily end on the date of the filing of a lawsuit.

The appellate court found that the trial court had not balanced the probative value of the evidence with the potential for unfair prejudice before determining that all post-filing evidence was inadmissible. Contrary to the trial court’s approach, the appellate court held that where adjusting conduct contrary to an Iowa regulation continued post-petition, that conduct may bear on the reasonableness of the insurer’s decision and its state of mind when it evaluated and denied the underlying claim and be probative of bad faith. Such conduct may also be probative of the reasonableness of continued delay in payment.

Consequently, evidence that Acuity relied on the original payment as being a final resolution was probative of the argument that Acuity denied the claim for an improper purpose—it would not have an effect on Acuity or its counsel to defend the claim.

Ultimately, because the appellate courts found that much of B&F’s evidence was held inadmissible without proper justification and B&F was therefore prejudiced, it reversed the trial court’s decision and remanded for a new trial

[B&F Jacobson Lumber & Hardware, L.L.P. v. Acuity, A Mut. Ins. Co., No. 16-1134, 2017 WL 6513961 (Iowa Ct. App. Dec. 20, 2017)]

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