IN THE COURT OF APPEALS OF IOWA
No. 18-0615 Filed July 3, 2019
ESTATE OF JOSHUA NAEVE, BY ITS ADMINISTRATORS, THAD NAEVE and NANCYE NAEVE, THAD NAEVE, INDIVIDUALLY, and NANCYE NAEVE, INDIVIDUALLY, Plaintiff-Appellants,
vs.
FBL FINANCIAL GROUP, INC., Defendant-Appellee. ________________________________________________________________
Appeal from the Iowa District Court for Polk County, Jeanie K. Vaudt, Judge.
Appellants appeal a district court order granting FBL Financial Group, Inc.’s
motion to dismiss appellants’ civil petition at law. AFFIRMED IN PART,
REVERSED IN PART, AND REMANDED.
Bruce H. Stoltze of Stoltze & Stoltze, PLC, Des Moines, for appellants.
S. Luke Craven, David L. Phipps, and Stephen E. Doohen of Whitfield &
Eddy, P.L.C., Des Moines, for appellee.
Heard by Doyle, P.J., and Tabor and Mullins, JJ. 2
MULLINS, Judge.
Appellants appeal a district court order granting FBL Financial Group, Inc.’s
(FBL) motion to dismiss appellants’ civil petition at law forwarding claims of bad
faith, interference with contract, and conspiracy or aiding and abetting bad faith.
I. Background Facts and Proceedings
The petition alleged the following facts. Joshua Naeve died in August 2013
as a result of a motor-vehicle accident involving a vehicle in which he was a
passenger; he was nineteen years of age. Joshua’s parents, Thad and Nancy
Naeve, were appointed as administrators of Joshua’s estate in September. The
driver of the vehicle was insured by an automobile liability insurance policy up to
$1.5 million. Several parties, including the Naeves, made demands for damages
alleged to have been incurred as a result of the driver’s negligence. The entirety
of the coverage available under the policy was used to settle multiple claims, which
ultimately included remittance of $500,000 to the Naeves in return for a release
from liability.
The Naeves had an insurance policy with Farm Bureau Property & Casualty
Insurance Company (Farm Bureau), which included underinsured motor-vehicle
coverage providing the named insureds—Thad, Nancy, and Joshua—with
insurance benefits covering damages exceeding the amount paid by the driver’s
policy up to the policy limit under the Farm Bureau policy. FBL is the “corporate
parent” of Farm Bureau. In return for a management fee, FBL manages all aspects
of Farm Bureau’s operations, including the management of all claims made under
underinsured policies made by insureds of Farm Bureau. Under the 3
circumstances, the Farm Bureau policy provided the Naeves with insurance
benefits up to $250,000.
The Naeves filed an underinsurance claim with Farm Bureau in June 2014.
The petition alleged Farm Bureau, under the management and at the direction of
FBL, rejected the claim asserting it could not evaluate it until it received information
regarding the settlement received from the driver of the vehicle. Although Farm
Bureau was made aware the Naeves’ claim exceeded the limits of the driver’s
policy, Farm Bureau refused to pay the Naeves underinsurance benefits. The
Naeves hired an attorney and, on April 29, 2015, filed a breach-of-contract lawsuit
against Farm Bureau. Farm Bureau, under the management and direction of FBL,
continued to contest the Naeves’ entitlement to proceeds under the
underinsurance policy. The matter proceeded to a jury trial. The jury returned a
verdict against Farm Bureau and in favor of the Naeves, and the court entered
judgment against Farm Bureau in the amount of $250,000, the amount to which
the Naeves were entitled under the circumstances, plus court costs and interest
until paid, which Farm Bureau satisfied in June 2016.
In September 2017, appellants filed a petition at law against FBL forwarding
claims of bad faith, interference with contract, and conspiracy or aiding and
abetting bad faith. Generally, appellants’ claims were based on FBL’s conduct as
manager of Farm Bureau in relation to the underinsurance claim and resulting
litigation. FBL moved to dismiss the petition for failure to state a claim upon which
any relief may be granted. See Iowa R. Civ. P. 1.421(1)(f). Specifically, FBL
argued appellants’ claims were barred by the doctrine of claim preclusion, stating
“all facts alleged by Plaintiffs giving rise to their . . . claims against FBL . . . occurred 4
before Plaintiff’s initial suit against Farm Bureau under the policy,” Farm Bureau
and FBL are in privity, and the claims were therefore required to be forwarded “at
the same time as claims for contractual damages arising out of the same
transaction.” FBL alternatively argued appellants’ claims stemming from the Farm
Bureau policy do not extend to FBL, because FBL was not a party to the
contractual relationship. Appellants filed a resistance.
Following an unreported hearing, the district court entered an order granting
FBL’s motion to dismiss. As to count one, bad faith, the court concluded: “Because
there was a valid and final judgment previously rendered and Farm Bureau was in
privity with FBL, the Naeves’ bad faith claim against FBL is barred by the doctrine
of claim preclusion” because “bad faith claims against an insurer must be brought
at the same time as claims for contractual damages arising out of the same
transaction.” As to count two, interference with contract, the court determined the
claim does not apply to FBL due to the relationship among the parties. As to count
three, conspiracy or aiding and abetting bad faith, the court essentially repeated
the conclusion it reached under count one and additionally concluded the claim
does not extend to FBL. As noted, the appellants appeal.
II. Standard of Review
Appellate review of a district court ruling granting a motion to dismiss is for
correction of errors at law. Ackerman v. State, 913 N.W.2d 610, 614 (Iowa 2018).
“A motion to dismiss should only be granted if the allegations in the petition, taken
as true, could not entitle the plaintiff to any relief.” King v. State, 818 N.W.2d 1, 9
(Iowa 2012) (quoting Sanchez v. State, 692 N.W.2d 812, 816 (Iowa 2005)).
Denying a motion to dismiss is appropriate unless the petition “on its face shows 5
no right of recovery under any state of facts.” Ritz v. Wappello Cty. Bd. of
Supervisors, 595 N.W.2d 786, 789 (Iowa 1999) (quoting Schaffer v. Frank Moyer
Constr., Inc., 563 N.W.2d 605, 607 (Iowa 1997)). “[W]e view the petition in the
light most favorable to the plaintiff, and will uphold dismissal only if the plaintiff’s
claim could not be sustained under any state of facts provable under the petition.”
Ackerman, 913 N.W.2d at 614 (quoting Berry v. Liberty Holdings, Inc., 803 N.W.2d
106, 108 (Iowa 2011)). We accept as true the petition’s factual allegations but not
its legal conclusions. Hedlund v. State, 875 N.W.2d 720, 724 (Iowa 2016). We do
not consider facts contained in the motion to dismiss. See McGill v. Fish, 790
N.W.2d 113, 116 (Iowa 2010).
III. Analysis
We first address counts one and three, which alleged bad faith on the part
of FBL, the latter by way of aiding and abetting or conspiracy. Because both
causes are rooted in the same operative facts and based on the allegation that
FBL breached a duty of good faith, we consider them together. “The Iowa law of
claim preclusion,” a branch of res judicata,1 “closely follows the Restatement
(Second) of Judgments.” Villarreal v. United Fire & Cas. Co., 873 N.W.2d 714,
719 (Iowa 2016) (quoting Shumaker v. Iowa Dep’t of Transp., 541 N.W.2d 850,
852 (Iowa 1995)). The general rule of merger provides that “[w]hen a valid and
final personal judgment is rendered in favor of the plaintiff,” “[t]he plaintiff cannot
thereafter maintain an action on the original claim or any part thereof.”
1 The doctrine of res judicata includes both claim and issue preclusion. Pavone v. Kirke, 807 N.W.2d 828, 835 (Iowa 2011). Uses of the term in this opinion are references to claim preclusion. 6
Restatement (Second) of Judgments § 18 (Am. Law Inst. 1982). When a plaintiff’s
claim is extinguished by the rule of merger, “the claim extinguished includes all
rights of the plaintiff to remedies against the defendant with respect to all or any
part of the transaction, or series of connected transactions, out of which the action
arose.” Id. § 24(1); accord Villarreal, 873 N.W.2d at 720.
What factual grouping constitutes a “transaction”, and what groupings constitute a “series”, are to be determined pragmatically, giving weight to such considerations as whether the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether their treatment as a unit conforms to the parties’ expectations or business understanding or usage.
Restatement (Second) of Judgments § 24(2).
Both parties and their privies are bound by and entitled to the benefits of
claim preclusion. See, e.g., Montana v. United States, 440 U.S. 147, 153 (1979)
(“Under res judicata, a final judgment on the merits bars further claims by parties
or their privies based on the same cause of action.”); Shumaker, 541 N.W.2d at
852 (noting the general rule is that claim preclusion extends to privies of a party). 2
2 The concept of parties and their privies under Iowa law appears to have been influenced, at least in part, by the Restatement (First) of Judgments. See Restatement (First) of Judgments § 83 (Am. Law Inst. 1942) (“A person who is not a party but who is in privity with the parties in an action terminating in a valid judgment is . . . bound by and entitled to the benefits of the rules of res judicata.”); see also Stucker v. Muscatine Cty., 87 N.W.2d 452, 456 (Iowa 1958) (noting res judicata is available to parties and their privies (citing Restatement (First) of Judgments §§ 82–83)); Hawley v. Davenport, R.I. & N.W. Ry. Co., 45 N.W.2d 513, 516 (Iowa 1951) (“The general rule is that the doctrine of res judicata is available only to the parties to a prior adjudication and their privies.” (citing Restatement (First) of Judgments §§ 82–83)). However, the concept of privity is not as apparent in the Second Restatement. The Second Restatement was released in 1982, but our supreme court began relying on tentative drafts of it before that time. See, e.g., Ideal Mut. Ins. Co. v. Winker, 319 N.W.2d 289, 291–92 (Iowa 1982); Westway Trading Corp. v. River Terminal Corp., 314 N.W.2d 398, 402 (Iowa 1982); Nat’l Equip. Rental Ltd. v. Estherville Ford, Inc., 313 N.W.2d 538, 542 (Iowa 1981); Village Supply Co., Inc. v. Iowa Fund, Inc., 312 N.W.2d 551, 554 (Iowa 1981); Hunter v. City of Des Moines, 300 N.W.2d 121, 123–26 (Iowa 1981); Wunschel Law Firm, P.C. v. Clabaugh, 291 N.W.2d 331, 337 (Iowa 1980); Citizens for Washington Square v. City of Davenport, 277 N.W.2d 882, 885 (Iowa 1979); In re Evans, 267 N.W.2d 7
“A person who is not a party but who is in privity with the parties in an action
terminating in a valid judgment is . . . bound by and entitled to the benefits of the
rules of” claim preclusion. Restatement (First) of Judgments § 83; accord Pavone,
807 N.W.2d at 836. Claim preclusion “generally embraces in its entirety the effect
of a judgment as preventing the parties and their privies from relitigating in a
subsequent proceeding a controversy or issue already decided by a former
judgment.” Stucker, 87 N.W.2d at 456. Claim preclusion may bar matters never
actually litigated when the party against whom it is asserted had a full and fair
opportunity to litigate the claim against a party or privy in a prior action. See
Arnevik v. Univ. of Minn. Bd. of Regents, 642 N.W.2d 315, 319 (Iowa 2002). The
term “privy” includes, among other things, “those who control an action although
not parties to it” and “those whose interests are represented by a party to the
action.” Restatement (First) of Judgments § 83 cmt. a.
48, 51 (Iowa 1978); Wright v. Haskins, 260 N.W.2d 536, 540–42 (Iowa 1977); Edmundson v. Miley Trailer Co., 252 N.W.2d 415, 420 (Iowa 1977). It appears the court began using the final version of the Second Restatement for claim-preclusion considerations shortly thereafter. See Noel v. Noel, 334 N.W.2d 146, 148 (Iowa 1983). However, the concept of parties and privies, which appears to have been partially influenced by the First Restatement, has continued to be a branch of claim preclusion under Iowa law, although the First Restatement has not been expressly referenced. See, e.g., Pavone, 807 N.W.2d at 836; Colvin v. Story Cty. Bd. of Review, 653 N.W.2d 345, 348 (Iowa 2002); Penn v. Iowa State Bd. of Regents, 577 N.W.2d 393, 398 (Iowa 1998); Shumaker, 541 N.W.2d at 852; Riley v. Malone, 499 N.W.2d 18, 20 (Iowa 1993). Due to the apparent lack of privity guidance in the Second Restatement as compared to the First Restatement, coupled with the indication that the privity concept was influenced by the First Restatement, we will turn to the First Restatement for additional guidance. But that is not to say the Second Restatement has no say on who is entitled to the benefits of claim preclusion. The court has also applied section 51 of the Second Restatement, which extends the effects of claim preclusion as to damages to nonparties who are vicariously liable to the injured person. See Shivvers v. Hertz Mgmt. Co., 595 N.W.2d 476, 481 (Iowa 1999); Kimmel v. Iowa Realty Co., Inc., 339 N.W.2d 374, 378 (Iowa 1983). 8
Appellants challenge the district court’s conclusion that FBL was in privity
with Farm Bureau and therefore entitled to the benefits of claim preclusion.
Appellants’ petition alleged FBL to be the “corporate parent” and manager of “all
aspects” of Farm Bureau and variously alleged Farm Bureau acted “under the
management and at the direction of FBL” in relation to both the underlying
insurance claim and the resulting litigation. “[W]here the one in control of the action
. . . controls it because of his connection with the transaction out of which the suit
arose, he is bound by and entitled to the benefits of the rules of res judicata . . . .”
Id. § 84 cmt. b. Further, as “corporate parent” of Farm Bureau, FBL’s “interests
[were] represented by a party to the action.” See id. § 83 cmt. a. Finally, “the
status test for privity is broadly applied if the party against whom claim preclusion
is invoked had a full and fair opportunity to litigate the claim.” Shivvers, 595 N.W.2d
at 481. Appellants were on notice of FBL’s involvement, and could have litigated
the claims along with the claims against Farm Bureau but did not. Upon our review
of the petition, which shows FBL was highly involved with and interested in the
underlying claim and the resulting litigation, we agree with the district court that
FBL was in privity with Farm Bureau.
We turn to whether appellants’ bad-faith claims were precluded. Our
conclusion that FBL and Farm Bureau were in privity renders appellants’ bad-faith
causes of action no different from claims of first-party bad faith. As noted, when a
plaintiff’s claim is extinguished by the rule of merger, “the claim extinguished
includes all rights of the plaintiff to remedies against the defendant with respect to
all or any part of the transaction, or series of connected transactions, out of which 9
the action arose.” Restatement (Second) of Judgments § 24(1). Our supreme
court has held:
[A] first-party bad-faith claim based on denial of insurance benefits without a reasonable basis ordinarily arises out of the same transaction as a breach-of-contract claim for denial of those same benefits. This means a final judgment in the breach-of-contract case would bar the bringing of a subsequent, separate bad-faith lawsuit.
Villarreal, 873 N.W.2d at 728–29. That being said, “a bad-faith claim based on
events subsequent to the filing of a breach-of-contract claim [are] not precluded by
a judgment in the breach-of-contract case.” Id. at 721–22 (emphasis added)
(discussing Leuchtenmacher v. Farm Bureau Mut. Ins. Co., 460 N.W.2d 858, 861
(Iowa 1990)); accord id. at 729 (“[W]hen the bad-faith claim is based on conduct
that occurred after the breach-of-contract case was filed, that is a different kettle
of fish.”).
Here, as to the bad-faith claims, counts one and three, the petition in this
case (“second petition”) alleged conduct on the part of FBL that occurred both
before and after the filing of the petition at law against Farm Bureau (“first petition”)
in April 2015. Obviously, appellants “could have raised” the pre-first-petition
allegations concerning bad faith in the breach-of-contract action, and any claim of
bad faith on the part of FBL in relation to those allegations is therefore barred by
the doctrine of claim preclusion. See id. at 729–30.
As to the post-first-petition allegations, the second petition first complained
of Farm Bureau’s denials for lack of information in its answer to the first petition as
a result of the failures of Farm Bureau and FBL to fully and fairly investigate and
evaluate the claim. This complaint likewise relates to the alleged pre-first-petition
failures of the entities in denying the claims and “could have been raised” in the 10
first petition. See id. at 729. Next, the second petition complained of the entities’
“continuously contesting” of liability and damages during litigation on improper
bases by (1) “the intentional obtaining of economic evidence to artificially limit the
calculation of, and jury consideration of, loss of accumulation of” the estate and
(2) “improperly assert[ing] and request[ing] the court to bar testimony, evidence
and recovery as to the loss of consortium claims.” FBL’s conduct during the
proceedings in the first lawsuit, although occurring post-first-petition, was a part of
the series of connected transactions out of which the breach-of-contract action
arose. Although post-petition conduct may give rise to a separate and subsequent
bad-faith claim, in this case it is clear Farm Bureau’s response to, or behavior
during, the first lawsuit was not new or different conduct, but was merely a
continuation of the same consistent responses to the appellants’ claims for
additional policy benefits. It is the alleged unreasonable denial of their claims for
policy benefits which the appellants claim gave rise to the pre-first-petition claims
of bad faith. Making the same denials in response to the breach-of-contract lawsuit
is not new conduct, and claims relating to that conduct are therefore extinguished
by the valid and final judgment in that case. See Restatement (Second) of
Judgments § 24. Simply stated, the bad-faith claims could have been raised in the
first petition. The complained of conduct on the part of FBL during the proceedings
could have been presented to the jury as evidence in support of the claims.
Consequently, we agree with the district court’s conclusions on FBL’s motion to
dismiss as to counts one and three.
Because we may affirm “a district court ruling on a ground other than the
one upon which the district court relied provided the ground was urged in that 11
court,” and we realize the liberality accorded notice pleadings and the burden of
sustaining a pre-answer motion to dismiss, we will consider an alternative theory
FBL raised in its motion to dismiss but was not addressed in the district court’s
ruling. See DeVoss v. State, 648 N.W.2d 56, 61 (Iowa 2002). FBL’s motion
asserted dismissal was necessary because there was no contractual relationship
between FBL and the Naeves, and there was no special relationship that would
establish a duty of good faith. The Naeves resisted that allegation in its brief in
resistance to the motion.
While this case was pending on appeal, our supreme court decided a case
which gives guidance on this issue. “In Iowa, the bad-faith cause of action arises
from (1) the special contractual relationship between insurer and insured, (2) the
specific statutory and administrative duties imposed on insurers, or (3) some
combination of the two.” De Dios v. Indem. Ins. Co. of N. Am., ___ N.W.2d ___,
___, 2019 WL 2063289, at *1 (Iowa 2019) (deciding a certified question as to
whether Iowa law recognizes a claim of bad faith against a third-party claims
administrator in a workers’ compensation case). The court quoted with apparent
approval from Couch on Insurance:
An insurer cannot delegate its duty of good faith. Therefore, an agent of the insurer, while acting on the insurer’s behalf by carrying out the insurer’s contractual obligations, is under the same duty of good faith as the insurer itself. Under varying circumstances, the good faith requirement has been held to also apply to attorneys of the insured. This duty, however, only runs so far. While an insurer’s agent may be subject to the insurer’s duty of good faith, the agent does not also incur personal liability to the insured. The lack of contractual privity prevents courts from finding such liability, even in cases where the agent in question is a reinsuring subsidiary. 12
Id. at *8 (quoting 14 Lee R. Russ & Thomas F. Segalla, Couch on Insurance
3d § 198:17, at 198-38 to 198-39 (3d ed. 2018 Update)).
Iowa has chosen to follow the majority of jurisdictions that have considered
the issue of whether a bad-faith claim arising out of denial of insurance benefits
may be brought against a third-party administrator or any other entity that is not in
privity with the insured, and have denied such claims.
Various policy reasons have been given for this majority rule. “An adjuster owes a duty to the insurer who engaged him. A new duty to the insured would conflict with that duty and interfere with its faithful performance. This is poor policy.” Also, “in most cases this [new duty] would be redundant, since the insurer also would be liable for unreasonable investigation or claims handling.”
Id. at *10 (alteration in original) (citations omitted).
The Naeves’ second petition makes it clear there was no insurance or other
contract between them and FBL. Accordingly, FBL owed Naeves no duty of good
faith; thus there is no liability for the alleged bad faith of FBL. We affirm the district
court’s dismissal of counts one and three.
As to count two, interference with contract, the Naeves’ petition generally
alleged FBL wrongfully interfered with the insurance contract between the Naeves
and Farm Bureau. The district court concluded, “Based upon the relationship of
the parties, the claim of interference with a contract does not apply as to FBL.” A
recent decision of another state’s high court considered “whether a parent
company may be held liable for tortious interference with a contractual relationship
between its wholly-owned subsidiary and a third party.” Sparkman v. Consol
Energy, Inc., 571 S.W.3d 569, 570 (Ky. 2019). Following the Restatement
(Second) of Torts, the court held “a parent company has a qualified privilege to 13
interfere with the contractual relations of its wholly-owned subsidiary unless it
employs wrongful means, or its interference is not in the economic interest of the
subsidiary.” Id. (emphasis added); see also id. at 571–72 (collecting cases
reaching the same conclusion).
Although Iowa appellate courts have not previously considered the issue,
we have likewise followed the Second Restatement of Torts when deciding other
claims of interference with contract. See, e.g., Kern v. Palmer Coll. Of Chiropractic,
757 N.W.2d 651, 663–644 (Iowa 2008); Green v. Racing Ass’n of Cent. Iowa, 713
N.W.2d 234, 244 (Iowa 2006); Nesler v. Fisher & Co., Inc., 452 N.W.2d 191, 194–
95 (Iowa 1990); RTL Distrib., Inc. v. Double S Batteries, Inc., 545 N.W.2d 587,
590–91 (Iowa Ct. App. 1996). The Kentucky Supreme Court, following the
Tennessee Supreme Court, defined “wrongful means” as “acts which are wrongful
in and of themselves, such as misrepresentations of facts, threats violence,
defamation, trespass, restraint of trade, or any other wrongful act recognized by
statute or common law.” Sparkman, 571 S.W.3d at 572 (quoting Waste
Conversion Sys., Inc. v. Greenstone Indus. Inc., 33 S.W.3d 779, 784 (Tenn.
2000)). Our supreme court has similarly described wrongful means as “conduct
that is dishonest, fraudulent, malicious, or otherwise wrongful.” Kern, 757 N.W.2d
at 663–64. In this case of first impression, we are disinclined to find as a matter of
law that Iowa courts should not consider the viability of a claim against a parent
corporation for interference with a contract between a subsidiary corporation and
a third party.
At the motion to dismiss stage, “we view the petition in the light most
favorable to the plaintiff, and will uphold dismissal only if the plaintiff’s claim could 14
not be sustained under any state of facts provable under the petition.” Ackerman,
913 N.W.2d at 614. Per Sparkman, a parent company (FBL) has a qualified
privilege to interfere with the contractual relations of its subsidiary (Farm Bureau)
unless either of the following occur: (1) the parent company employs wrongful
means or (2) the interference is not in the economic interest of the subsidiary. 571
S.W.3d at 570. We therefore disagree with the district court’s dispositive finding
that the relationship among the parties, alone, relieves FBL of any liability. Further,
as to wrongful means, the Naeves’ petition provided detailed charges of allegedly
improper and intentional acts on the part of FBL. Although De Dios indicates a
third-party claims administrator is not liable for bad faith under the common law,
interference with contract is a separate cause of action and does not require bad
faith, only intentional and improper interference. See Nesler, 452 N.W.2d at 194
(quoting Restatement (Second) of Torts § 766). Viewing the petition in the light
most favorable to the Naeves, we find the allegations concerning improper means
sufficient to survive a motion to dismiss on the interference-of-contract claim.3
Viewing the petition in the light most favorable to the Naeves, we find the
court erred in granting FBL’s motion to dismiss the interference-with-contract
claim.
3 Having reached this conclusion, we offer no opinion on the viability of any other theory. We likewise offer no opinion specifically as to whether the cited section or some other section of the Restatement (Second) of Torts may ultimately prevail, or whether the facts will not support the claim at all. We only decide there are sufficient allegations to survive the motion to dismiss. 15
IV. Conclusion
We affirm the dismissal of the Naeves’ bad-faith claims. We reverse
dismissal of the interference-with-contract claim. We remand for further
proceedings.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.