Opinion
No. 1-770 / 00-1474.
Filed June 19, 2002.
Appeal from the Iowa District Court for Butler County, PAUL W. RIFFEL, Judge.
Grinnell Mutual Reinsurance Company appeals the district court's declaratory judgment that it was obligated to reimburse Henry Jungling, Jr., for $344,400, which he owed pursuant to a settlement agreement in a fraud suit. REVERSED.
Douglas A. Haag of Patterson, Lorentzen, Duffield, Timmons, Irish, Becker Ordway, L.L.P., Des Moines, for appellant.
David Swinton of Ahlers, Cooney, Dorweiler, Haynie, Smith Allbee, P.C., Des Moines, for appellees.
Heard by HUITINK, P.J., and MILLER and EISENHAUER, JJ.
Grinnell Mutual Reinsurance Company (Grinnell) appeals the district court's declaratory judgment that it was obligated to reimburse Henry Jungling, Jr., and Jungling Farms, Inc., (together referred to as Jungling) for $344,400, which was owed to William and Natalie Steckel pursuant to a settlement agreement in a fraud suit. Grinnell claims: (1) it is contrary to public policy to require it to pay for Jungling's losses caused by his fraud and deceit; (2) the terms of the insurance policy do not cover losses for intentional fraud; and (3) the district court erred in finding Jungling's failure to comply with the notice requirements of the policy was legally excused.
I. Background Facts and Proceedings
The Steckels filed suit against Jungling claiming fraudulent misrepresentation, based on statements made during their purchase of Jungling's farm. A jury awarded the Steckels $323,300. On appeal, we determined the district court had erred in granting Jungling's motion for directed verdict on the issue of punitive damages, and remanded for a new trial on this issue. Steckel v. Jungling, No. 96-1819 (Iowa Ct.App. Feb. 25, 1998). We determined:
The record contains ample evidence of malice on the part of Jungling. Jungling was well aware of the death loss, reduced milk production, and water problems on his farm. He sought to sell the property, but showed the property only to potential buyers outside the state of Iowa. When the Steckels directly asked Jungling about the farm's worthiness to support a dairy herd, he lied to them. He actively concealed information. In light of his knowledge about the poor prospects of his farm, Jungling required fifty-two percent downpayment from the Steckels. There is substantial evidence supporting Steckels' contention Jungling's conduct was in willful and wanton disregard for the rights of the Steckels.Id. After our decision, the parties entered into a settlement agreement for Jungling to pay the Steckels $465,000.
During this time, Jungling had a personal excess policy with Grinnell, and he made a demand under the policy for the payment of $344,400. Grinnell denied the claim, and filed the present action for a declaratory judgment. In ruling on motions for summary judgment filed by both parties, the district court determined public policy did not mandate that Grinnell should not be responsible for Jungling's intentional acts. The court noted that in other cases where insurance coverage has been denied on public policy grounds, the acts involved violence, not fraud. The case then proceeded to a bench trial, where the court concluded Jungling was entitled to a declaratory judgment that Grinnell was obligated to indemnify him for $344,400.
Grinnell voluntarily contributed $50,000 to the settlement payment, and this amount is not in contention. Also, Jungling admitted $70,600 of the jury verdict was not covered by the insurance policy. ($465,000-$50,000-$70,600 = $344,400).
II. Public Policy
On appeal, Grinnell contends insurance coverage for intentional and criminal acts committed by the insured defeats the essential premise of insurance, which is to protect an insured against contingent events. Grinnell asserts that it is contrary to public policy to require it to pay Jungling's losses which were caused by his fraud and deceit.
We will not enforce a contract which "tends to be injurious to the public or contrary to the public good." Walker v. Am. Family Mut. Ins. Co., 340 N.W.2d 599, 601 (Iowa 1983). A contract may be invalidated if it would violate any established interest of society. Rogers v. Webb, 558 N.W.2d 155, 157 (Iowa 1997); Restatement (Second) of Contracts § 178, p. 8 (1981). Our power to invalidate a contract on public policy grounds must be used cautiously and exercised only in cases free from doubt. Shelter Gen. Ins. Co. v. Lincoln, 590 N.W.2d 726, 730 (Iowa 1999). We must harmonize public policy with the freedom of parties to contract. Principal Cas. Ins. Co. v. Blair, 500 N.W.2d 67, 69 (Iowa 1993).
The central idea of insurance is that is covers fortuitous losses only and does not provide coverage for intentional losses. Altena v. United Fire Cas. Co., 422 N.W.2d 485, 487 (Iowa 1988). It is contrary to public policy to require insurers to pay for losses occasioned by willful acts. St. Paul Fire Marine Ins. Co. v. Briggs, 464 N.W.2d 535, 539 (Minn.Ct.App. 1990). "It is axiomatic in the insurance industry that one should not be able to insure against one's own intentional misconduct." Decorative Ctr. of Houston v. Employers Cas. Co., 833 S.W.2d 257, 260 (Tex.Ct.App. 1992); see also Restatement (Second) of Contracts § 195(1), p. 65 (1981) (A contract provision exempting a party for tort liability for harm intentionally caused by the party is unenforceable on public policy grounds).
One reason for this rule is that the availability of insurance may directly stimulate the intentional wrongdoer to violate the law. Ranger Ins. Co. v. Bal Harbour Club, Inc., 549 So.2d 1005, 1007 (Fla. 1989). One court has stated:
Underlying this public policy coverage bar is the concern that permitting coverage in certain circumstances will encourage insureds to engage in intentional misconduct. Barring coverage in these circumstances discourages insureds from intentionally harming others, as intentional wrongdoers cannot then rely on the availability of insurance to shield them from the civil consequences of their misconduct. Similarly, the public policy coverage exclusion bars insureds from recovering for self-inflicted wounds, thereby appropriately preventing insureds from enjoying the fruits of their wrongful acts. Thus, not only does the public policy exclusion deprive intentional wrongdoers of the economic benefits arising from coverage of their wrongful acts, it reaffirms the "moral principle [that] no person should be permitted to allege his own turpitude as a ground for recovery."St. Paul Fire Marine Ins. Co. v. Jacobson, 826 F. Supp. 155, 162-63 (E.D.Va. 1993) (citations omitted).
Thus, courts have determined it is contrary to public policy to provide insurance coverage for certain types of conduct. See Oktibbeha County Sch. Dist. v. Coregis Ins. Co., 173 F. Supp.2d 541, 544 (N.D.Miss. 2001) (intentional failure to pay overtime wages); Ranger, 549 So.2d at 1009 (intentional act of religious discrimination); Altena, 422 N.W.2d at 490 (sexual abuse); Briggs, 464 N.W.2d at 539 (willful failure to pay taxes); Cunningham Walsh, Inc. v. Atlantic Mut. Ins. Co., 744 P.2d 1317, 1320 (Or.Ct.App. 1987) (misrepresentation and deceit). But see Jacobson, 826 F. Supp. at 165 (public policy did not bar coverage of doctor who inseminated women without their knowledge).
The present case involves a claim of fraudulent misrepresentation. Similar claims of misrepresentation and deceit were raised in Cunningham. The complaint alleged the seller had intentionally deceived the purchaser with an intent to cause him to rely on the misrepresentation and to enter into a beer distribution franchise agreement. The Oregon Court of Appeals stated, "we conclude the conduct could not be insured, because to provide coverage for fraud would violate public policy." Cunningham, 744 P.2d at 1318. See also Restatement (Second) of Contracts § 196, p. 69 (1981) (A contract term unreasonably exempting a party from the legal consequences of a misrepresentation is unenforceable on grounds of public policy); 43 Am. Jur. 2d Insurance § 260, p. 334 (1982) (A person may "insure himself from all losses from any peril not occasioned by his own personal fraud."); 4 Eric Mills Holmes, Holmes' Appleman on Insurance 2d § 23.4, p. 504 (1998) ("Insurance may not indemnify an insured from fraud or intentional misrepresentation.").
"Where an insured is alleged to have willfully violated the law, knowing it will obtain financial gain therefrom at another's expense, the insured may not, as a matter of public policy, contractually exempt itself from responsibility for its actions." USX Corp. v. Adriatic Ins. Co., 99 F. Supp.2d 593, 635 (W.D.Pa. 2000). Our supreme court has also held "the general rule [is] that insurance to indemnify an insured against his or her own violation of criminal statutes is against public policy." Altena, 422 N.W.2d at 490; see also 44 C.J.S. Insurance § 288(b), p. 540 (1993) ("In general, an insurance policy is against public policy and void if its purpose and intent are to indemnify insured against a violation of law by him . . ."). One authority has stated:
It has historically been held to be contrary to public policy to insure against liability arising directly against the insured from intentional or willful wrongs, including the results and penalties of the insured's own criminal acts, which itself includes nonpayment of corporate taxes.
7 Lee R. Russ Thomas F. Segalla, Couch on Insurance § 101.22, p. 101-79 — 101-81 (1997).
It is not necessary that the insured actually be prosecuted in criminal proceedings for this public policy bar to apply. Id. ("were the allegations against [the insured] proven in a criminal prosecution, he would be guilty of sexual abuse."). See also USX Corp., 99 F. Supp.2d at 630 (discussing situation "where the underlying conduct merely is capable of being construed as a criminal act . . ."); Western Nat'l Assurance Co. v. Hecker, 719 P.2d 954, 960 (Wash.Ct.App. 1986).
Jungling's conduct has been outlined above. In this case, were the allegations against Jungling proven in a criminal prosecution, his actions would constitute a consumer fraud under Iowa Code section 714.16(2) (1999). Under the Iowa Consumer Fraud Act, it is sufficient to show a misrepresentation of any material fact with the intent that others rely on the misrepresentation. Rosen v. Bd. of Med. Exam'rs, 539 N.W.2d 345, 349 (Iowa 1995). A material misrepresentation is any untruthful statement that is likely to affect a consumer's conduct or decision with regard to a product or service. State ex rel. Miller v. Rahmani, 472 N.W.2d 254, 258 (Iowa 1991). The Iowa Consumer Fraud Act, section 714.16, is part of chapter 714, the portion of the criminal code dealing with theft, fraud, and related offenses. Consumer fraud is punishable as a simple misdemeanor. Iowa Code § 701.8.
The Iowa Consumer Fraud Act applies to sales of real estate. See Iowa Code §§ 714.16(1)(i), 714.16(2)(a).
Jungling intentionally misrepresented the condition of his farm and its suitability for a dairy herd, and this affected the Steckels' decision to buy the farm. We determine Jungling, by perpetrating a fraud upon the Steckels, committed a criminal act. We therefore conclude it is contrary to public policy to provide insurance coverage for losses caused by Jungling's fraudulent misrepresentations.
Based on our decision on the public policy issue, we do not address the other issues raised in this appeal. We conclude Grinnell is not obligated to reimburse Jungling for $344,400, which he owes to the Steckels under the settlement agreement. We reverse the decision of the district court.
REVERSED.