Iowa Code § 516.1 and Common Law:
Iowa Code § 516.1 states that “[a]ll policies insuring the legal liability of the insured, issued in this state by any company, association or reciprocal exchange shall . . . contain a provision providing that, in event an execution on a judgment against the insured by returned unsatisfied in an action by a person who is injured or whose property is damaged, the judgment creditor shall have a right of action against the insurer to the same extent that such insured could have enforced the insured’s claim against such insurer had such insured paid such judgment.”
The standard set forth in North Iowa State Bank v. Allied Mutual Insurance Co., states that Iowa Courts “recognize a bad-faith cause of action in an insurer’s representation of an insured in a third-party liability claim.” The insurer, in handling a claim which might exceed the policy, owes a fiduciary duty to the insured to act responsibly in settlement negotiation to prevent exposure of the insured to unreasonable risk. This places a duty on the insurer to investigate the claim and take affirmative action as necessary to protect the interest of the insured. “The fiduciary duty required of an insurer in a third-party claim arises only when the insured is required to represent the insured's position against a third party.”
An insurer may reject a demand for settlement but only if it has a reasonable basis to believe that the demand is unreasonable. “When there is clear and definite evidence that a claim can be settled within the policy limits for a reasonable figure and when the proposal is not conditional, and the insurer fails to settle, it is liable for bad faith.” To support this, it must appear not only that the settlement proposition was reasonable, but that the insurer had no fair basis for its judgment that it was not reasonable. A mere mistake in judgment is not enough to show bad faith.
Evidence of bad faith in settlement practices can include: (1) failure to investigate a claim properly; and (2)failure to negotiate settlement and/or keep an insured advised of the status of settlement negotiations and provide accurate information as to settlement possibilities. The insurer also has a duty to advise the insured “of the expected consequences of his failure to settle.”
In third-party, common law, bad faith claims,“[i]f the insurer has exercised good faith in its dealing with the insured and if the settlement proposal has been fully and fairly considered and decided against, based upon an honest belief that the action could be defeated or the judgment held within the policy limits, and in which respect . . . counsel have honestly expressed their conclusion, the insurer cannot be held liable even though there is a mistake of judgment in arriving at its conclusion.
 471N.W.2d 824, 828-29 (Iowa 1991).
 Id.at 829.
 Johnson v. American Family Mut. Ins. Co., 674 N.W.2d 88, 90 (Iowa 2004).
 Ferris v. Employers Mut. Casualty Co., 255 Iowa 511, 523 (1963).
 Henke v. Iowa Mut. Home Casualty Co., 250 Iowa 1123, 1129 (1959).
 Kooyman v. Farm Bureau Mut. Ins. Co., 315 N.W.2d 30, 35-36 (1982).
 Id.at 36.
 Walter v. Grinnell Mut. Reinsurance Co., 2007 Iowa App. LEXIS 287 at *7-8 (2007)(citing Ferris, 255 Iowa at 518.
Chartwell Law represents the interests of insurers and employers, as such, we continue to continue to monitor the legal landscape. If you have any questions about issues associated with right of action for bad faith claims, our attorneys are available to help. Please contact your Chartwell Law attorney.