Summary: A severe flood struck Cedar Rapids, Iowa in 2008, damaging the insured’s manufacturing facility and impacting its business operations, leading to claims of property damages exceeding $35 million and business interruption losses exceeding $26 million. Two insurers equally shared responsibility for payment of claims under the same insurance policy. They paid only $20 million, contending the policy’s flood sublimits had been reached. The insured then filed a first-party claim for breach of contract and bad faith. After the insured rested its case at trial, the U.S. District Court for the Northern District of Iowa directed a verdict against the insured on the bad faith claim. Then after the insurers rested their case, they won a directed verdict on the breach of contract claim. The Eighth Circuit affirmed.
Penford Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 662 F.3d 497 (8th Cir. 2011)
The insured, a producer of starch for the paper industry and gasoline-additive ethanol, had a plant sitting on a 29-acre parcel occupying three different flood zones designated A, B, and C. In 2008, the insured bought flood insurance from the National Flood Insurance Program and additional insurance from the two insurers. Though losses of up to $300 million were covered under the policy, specific sublimits capped the insurers’ exposure depending upon the specific peril. The flood peril sublimit was $50 million “per occurrence and annual aggregate,” which was further limited by specific flood zone sublimits for the insured’s plant: $10 million in Zone A and $10 million in Zone B.
On June 13, 2008, the Cedar River breached a dike system surrounding the plant, eventually cresting 12 feet higher than the previous record set in the 1920s. The flood extensively damaged the insured’s plant and shut down operations. In the following months, the insured and its insurers disagreed regarding what losses were subject to the flood sublimits, whether payments were made timely, and how much was due under the policy.
After the insured filed suit against the insurers, the parties completed discovery and sought summary judgment. The district court found the policy ambiguous regarding what losses were subject to the flood sublimits, and decided that the parties’ intent would be determined based on extrinsic evidence. At trial, in addition to directing verdicts in favor of the insurers, the court also found no unreasonable delay in payments made, noting the insurers complied with the policy’s requirement of paying claims within 30 days of receiving a sworn proof of loss.
On appeal, the insured argued that (1) the trial evidence did not as a matter of law resolve the ambiguity in the policy (which according to the insured should have been construed against the insurers as the purported drafters of the policy); (2) the parties’ intentions when contracting involved a question of fact that should have been determined by a jury rather than the district court; and (3) the insurers unreasonably delayed payment in the face of obvious, extensive losses.
The Eighth Circuit turned the first argument around on the insured, noting there was “back-and-forth” in the drafting process and that under applicable Iowa law, “[w]hen a claim is ‘fairly debatable,’ the insurer is entitled to debate it, whether the debate concerns a matter of fact or law.” Because the policy was ambiguous (according to the district court) regarding what losses were subject to the flood sublimits, the policy was “susceptible of two reasonable interpretations,” giving the insurers a reasonable basis for denying coverage for certain losses. Under Iowa law, when there is an “objectively reasonable basis” for denying a claim, “the insurer cannot be held liable for bad faith as a matter of law.” Therefore, the district court properly determined the question of bad faith as a matter of law.
Regarding the insured’s second argument concerning the parties’ intentions, the Eighth Circuit noted the insured had authorized an employee of the insured’s insurance broker to “represent and assist” the insured in all discussions and transactions with insurers relating to the procurement of insurance. In deposition testimony, the broker’s employee admitted she shared the insurance underwriters’ understanding that the $10 million flood sublimits would apply to both property damage and business interruption losses. This evidence was undisputed, established the mutual intent of the parties, and left no role for the jury.
Finally, regarding the insured’s third argument on the timeliness of payment, the Eighth Circuit noted the insurers complied with the policy’s requirements, paying all claims (up to the $20 million sublimits) within 30 days of submission.
By Tim Sansone
