First Party Insurance Bad Faith
Iowa law requires your insurance company to exercise an honest and informed judgment when when you seek compensation or coverage for property damage or physical injuries caused by various insured events, including car accidents, motorcycle accidents, and other types of personal injury claims, such as fires or explosions, dog bites, products liability, or train or railroad, premises liability, truck, train, drunk driving, bicycle, boating, or pedestrian accidents. If your insurance company fails to do so, it may be liable for “first-party insurance bad faith.” First-party insurance bad faith refer to situations in which an insurance company wrongfully denies the claim of its own policyholder.
A first-party insurance bad faith claim allows an insured to recover more than just the policy benefits that should’ve been paid in the first place. Money damages caused by the claims denial in addition to the original coverage amount can also be recovered, along with punitive damages. A number of reasons have been cited for this extra protection in first-party insurance bad faith cases, including: (1) without this remedy, an insurance company can arbitrarily deny coverage and delay payment of a claim to its insured with no more penalty than interest on the amount owed, (2) insurers are huge operation that dwarf the individual capabilities of their policyholders; first-party insurance bad faith claims are necessary to even the playing field, and (3) policyholders are often in bad and vulnerable positions when they make their insurance claims; the right to bring a first-party insurance bad faith claim is necessary to make the insured’s position a little less vulnerable.
To win a first-party insurance bad faith case, the policyholder has to prove several elements. First, the insured has to establish that the insurer had no reasonable basis for denying the claim. Second, the policyholder also has to show that the insurer knew, or had reason to know, that its denial was without basis.
A defendant can show a reasonable basis for denying benefits and thus disprove the first element of bad faith by showing that a claim for benefits is “fairly debatable.” The Iowa Supreme Court has stated that an insurance claim is fairly debatable if it is “open to dispute on any logical basis.” It’s not enough to merely prove that the insurance company’s claims decision lacked merit. Rather, the Iowa Supreme Court has made clear that “the focus is on the existence of a debatable issue, not on which party was correct.” So an insurance claim will often be deemed “fairly debatable” if the insurer had any evidence on which to justify the denial of the claim. When an objectively reasonable basis for denial of the insurance claim existed, the insurance company cannot be held liable for first-party insurance bad faith as a matter of law. In determining whether an insurance claim is fairly debatable, courts will consider whether the insurance company properly investigated the claim and whether the results of the investigation were subjected to a reasonable evaluation and review.
Even if an insured can prove that an insurance claim was not fairly debatable and should have been paid, the policyholder still has to prove the second element of first-party insurance bad faith, which is that the insurer knew or should have know that there was no basis for its claims denial. This second element can be proved through innumerable methods. One method is the insurance company’s history of paying past similar claims. Another is internal documents from the insurance company regarding claims practices for the specific type of claim. Those are just a few examples.