The Iowa Supreme Court found that a separate action against the insurer for bad faith, filed after judgment was entered against the insurer on breach of contract, was barred by claim preclusion. Villarreal v. United Fire & Cas. Co., 2016 Iowa LEXIS 1 (Jan. 8, 2016). The insureds' restaurant was severely damaged by a fire on March 8, 2007. The insureds held a commercial property policy with United Fire with coverage limits of $386,400 for building replacement and $374,000 for personal property replacement. The insureds purchased the building and land a year and a half before the fire for $150,000, and the current property tax assessment was $153,000. At an examination under oath, the insureds testified that improvements of $83,500 had been made to the building after purchase. No documentation was presented for the majority of the improvements, however. In June, the insureds presented a lengthy inventory of personal property lost in the fire. The total claimed value of the inventory was $490,000. Also in June 2007, the insureds' attorney started writing letters to United Fire demanding immediate payment and threatening to sue. In August, one such letter threatened a suit for bad faith on the part of United Fire. By November, United Fire had paid $24,000 for the insureds' personal property losses and $108,310 for the building. The building payment went entirely to the mortgagee, so the insureds had received nothing for the loss of the building. The insureds filed a breach of contract suit against Untied Fire on March 7, 2008. Three years later, in March 2011, the jury returned a verdict for the insureds in the amount of $176,690 for the additional unpaid value of the building and $60,212 for the additional personal property. On June 20, 2011, three months after judgment was entered on the breach of contract action and more than four years after the fire, the insureds filed a new action in bad faith. The trial court granted United Fire's motion for summary judgment, finding that the bad faith action was barred by claim preclusion. Both the breach of contract and bad faith claims arose from the March 8, 2007 fire loss and United Fire's refusal to pay the claim. The court of appeals reversed. The Iowa Supreme Court noted that a great majority of jurisdictions held that a breach of contract verdict in favor of the insured and against the insurer precluded a subsequent action for first-party bad faith, at least where the bad faith claim was based on events that predated the filing of the breach of contract lawsuit. The court joined these other jurisdictions, determining that a final judgment in the breach of contract case would bar bringing a subsequent, separate bad faith lawsuit. The potential prejudice from introducing evidence relevant only to the insurer's bad faith could be resolved by bifurcating the trial into a breach of contract phase and a bad faith phase. A different result would be likely where the bad faith claim was based on conduct that occurred after the breach of contract case was filed. But here, the insureds had a basis for alleging bad faith in March 2008, when they filed their original suit, as well as ample time thereafter to amend that suit to add a bad faith claim.
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