The Eighth Circuit Court of Appeals recently held that, under Iowa law, an insurer is not liable for breach of contract or bad faith if its coverage decision was objectively reasonable at the time it was made. In Hallmark Specialty Ins. Co. v. Phoenix C & D Recycling, Inc., No. 20-1339, 2021 WL 2197068 (8th Cir. June 1, 2021), a fire originated from a pile of biofuel material on an insured’s power plant, causing alleged damage to buildings, wiring, equipment, and other materials. The insurer paid for a portion of the insured’s equipment losses, but not for removal and installation of wiring and equipment because the policy did not require such payment until damaged property had been repaired or replaced. While the insurer eventually paid for these items, the insured contended that the insurer should have made these payments at the time of the initial claim.
The insurer also hired an accounting firm in anticipation of the insured’s business interruption claim, and the firm requested relevant information from the insured. After providing incomplete financial information, the insured stated that its business income and extra expense loss exceeded $530,000 and demanded a $200,000 advance. Based on the information provided by the insured, the insurer’s accounting firm provided the insured with a preliminary calculation of business income and extra expense losses. In response, the insured submitted a proof of loss for $28,774.34 coupled with a letter disputing the accounting firm’s calculation. However, the insured did not provide a proposed alternative calculation or the missing financial information. Instead, it simply alleged that it had provided sufficient financial information and that, based on that information, it was entitled to a larger payment. The insurer later advanced the insured $28,774.34 under the policy’s business interruption coverage.
The insurer brought an action in district court seeking a declaratory judgment that it did not breach the insurance policy or act in bad faith when adjusting the insured’s claims. The insured brought three counterclaims, seeking punitive damages and contending that although the insurer paid all sums owed under the policy, it breached the terms of the policy, acted in bad faith, and breached its fiduciary duty to the insured by delaying the payment of policy benefits. The district court granted summary judgment to the insurer, and the insured appealed to the Eighth Circuit.
The Eighth Circuit affirmed the district court’s grant of summary judgment to the insurer. The court held, first, that the insurer had an objectively reasonable basis to initially deny the insured’s $200,000 business income interruption demand because it relied on the accounting firm’s report, which included estimates of loss calculated from the incomplete financial information provided by the insured. When challenging this calculation, the insured did not supply the missing financial information, provide an alternative calculation, or explain why the insurer’s calculation was incorrect. Based on these facts, the court found that the insurer had objectively reasonable basis for denying the insured’s demand and initially limiting its payment to $28,774.34.
The court next found that there was a reasonable basis for the insurer to deny the insured’s initial demand for the costs to remove and install wiring and equipment because the insured had not actually repaired or replaced those items at the time of the demand. The court held that, under the language of the policy and applicable Iowa law, the insurer had no duty to pay for items included in the policy’s replacement cost value category until the insured had actually repaired or replaced those items. This served as “an objectively reasonable basis” to initially deny the insured’s demand.
The court’s analysis in Hallmark stands for the proposition that an insurer should not be held liable for breach of contract or bad faith when its denial of a claim is based on objectively reasonable evidence at the time the claim is made. Nevertheless, following the example of the insurer in Hallmark, it is very important for insurers to reevaluate claims each time they receive new loss information from the insured so that their coverage positions always reflect the best information available at the time.