Opinion
No. 3-110 / 01-1945
Filed May 14, 2003
Appeal from the Iowa District Court for Linn County, Douglas S. Russell, Judge.
The insured appeals the district court's rulings granting the insurer a declaratory judgment that its policy did not provide the insured coverage for losses incurred by the faulty installation and the settling of underground pipes and dismissing a related counterclaim and cross-claim against an insurance agency and its agent. AFFIRMED.
Matthew L. Preston of Brady O'Shea, P.C., Cedar Rapids, for appellant.
Robert M. Hogg and Patrick M. Roby of Elderkin Pirnie, P.L.C., Cedar Rapids, for plaintiff-appellee.
Brenda K. Wallrichs of Moyer Bergman, P.L.C., Cedar Rapids, for third-party defendants-appellees.
Heard by Sackett, C.J., and Huitink and Vogel, JJ.
The defendant insured appeals the district court's rulings granting the plaintiff insurer a declaratory judgment and directed verdict that its policy did not provide the insured coverage for losses incurred by the faulty installation and the settling of underground pipes and dismissing a related counterclaim and cross-claim against an insurance agency and its agent. We affirm.
I. BACKGROUND FACTS AND PROCEEDINGS.
Paul Brundell formed Northwind Developers, L.L.C. (Northwind) for the purpose of developing land into residential lots for resale. Northwind's first project was Mulberry Ridge, located near Marion, Iowa. Northwind hired Ace General Construction (Ace) to make improvements to the land, such as the installation of sewer mains, water mains, and storm sewer mains. The work was to be completed by November 1, 1998; however as the work progressed Brundell became concerned with delays by Ace. On January 27, 1999, Brundell called Duane Smith, an insurance agent who had previously provided commercial general liability insurance coverage for the project. Without specifying the problems he was having with Ace, Brundell inquired of Smith about purchasing coverage for the pipes being installed at Mulberry Ridge. Smith, through his agency, Insurance Services Corporation (ISC), contacted United Fire Casualty Company (United Fire) to inquire whether it could issue a policy for pipes. United Fire subsequently issued a policy to Northwind.
On July 16, 1999, the City of Marion informed Brundell it had completed an inspection of the sanitary system and determined significant portions were inadequate or improperly installed. The City refused to accept the sanitary sewer system and advised Northwind the problems needed to be corrected before it would accept the system.
Northwind then made a claim under the policy issued by United Fire for the costs of correcting the sewer system. United Fire investigated the claim and determined the cost of the remedial work to be between $500,000 and $600,000. It concluded the problems were either caused by Ace's inadequate workmanship or settling in the ground. United Fire consequently denied nearly the entire claim, offering to pay for only $3,375 worth of the damages to pipes on the ground surface. It based its denial on language in the insurance policy excluding inadequate or defective workmanship and settling as causes of loss.
The policy covered "underground pipes," but it specifically excluded losses resulting from such causes as settling, defective materials, and workmanship.
On February 15, 2000, United Fire filed an action seeking a declaratory judgment that it owed no coverage under its policy with Northwind regarding losses Northwind suffered due to damage to the underground pipes. Northwind filed a counterclaim asserting a breach of contract and subsequently brought a cross-petition against ISC and Duane Smith asserting claims of negligence, negligent misrepresentation, and breach of contract relating to the insurance coverage dispute.
Northwind filed a pretrial statement, which the district court had required the parties to file. That statement did not mention the doctrine of reasonable expectations as part of Northwind's theory of recovery. Just prior to the trial, Northwind filed proposed instructions that raised a reasonable expectations theory. During the trial, the district court excluded evidence on reasonable expectations of Northwind as an insured. The court concluded the presentation of an issue that was not raised in the pleadings nor the pretrial statement resulted in prejudice to United Fire. Northwind made an offer of proof on the reasonable expectations theory.
At the close of evidence, the court granted a directed verdict for United Fire as well as Smith and ISC. The court determined United Fire owed no coverage under the policy. It also determined because ISC and Smith had not been informed of any particular risks for which Brundell claimed he sought coverage, they had breached no duty. Northwind appeals.
II. STANDARDS OF REVIEW.
We review alleged errors concerning the admission of evidence under an abuse of discretion standard. See Williams v. Hedican , 561 N.W.2d 817, 823 (Iowa 1997).
Our standard of review concerning appeal from the grant of a motion for directed verdict is for correction of errors at law. Mensink v. American Grain, 564 N.W.2d 376, 379 (Iowa 1997). In such cases, we review the evidence presented in the light most favorable to the nonmoving party to determine whether a fact question was generated. Id. Where substantial evidence does not exist to support each element of a plaintiff's claim, the court may sustain the motion. Olson v. Nieman's Ltd., 579 N.W.2d 299, 313 (Iowa 1998). "Evidence is substantial if reasonable minds could accept it as adequate to reach the same findings." Id.
III. UNITED FIRE.
As noted, the trial court granted United Fire a declaratory judgment that it owed no coverage to Northwind under the policy, finding the policy's exclusions applied to the loss. It also directed the verdict on Northwind's claim against United Fire, relying on its conclusion in the declaratory judgment action that none of the causes of loss for which Northwind sought recovery was covered by the policy issued by United Fire. The reasonable expectation theory was thus essential to Northwind because it would allow the court to find coverage for the losses, by avoiding the policy exclusion based on Northwind's expectations of coverage.
Northwind's appeal regarding United Fire presents the issue of whether its failure to raise the "reasonable expectations" issue, either in the pleadings or in the pretrial statement, supports the district court's preclusion of such evidence into the record. Northwind asserts an insured's reasonable expectation in procuring suitable insurance is simply a fact issue subsumed in an insured's breach of contract claim and thus need not be separately pled in order to be raised at trial. It does not appear that any Iowa appellate opinion squarely addresses whether the issue of reasonable expectations must be specifically pled.
Iowa is a notice pleading state. See Iowa R.Civ.P. 1.402. Under notice pleading, a petition need not identify a specific legal theory; it is sufficient if the prima facie elements of a claim are stated, and this is fair notice to the defendant. Soike v. Evan Matthews Co., 302 N.W.2d 841, 842 (Iowa 1981) (citing Lamantia v. Sojka, 298 N.W.2d 245, 247 (Iowa 1980)). However, the petition must apprise a defendant "of the incident out of which the claim arose and of the general nature of the action." Lamantia, 298 N.W.2d at 247. Under the requirement that the petition set forth a claim for relief, the claim is not the equivalent of a cause of action. Rieff v. Evans, 630 N.W.2d 278, 292 (Iowa 2001). We do not require a pleading of ultimate facts that support the elements of the cause of action. Id.
Northwind makes a compelling case that the district court erred in excluding evidence of Northwind's reasonable expectations for lack of asserting the theory in the pleadings. Northwind's answer and counterclaim likely satisfied the requirements of notice pleading, which of course does not require any specific legal theory to be identified. It also sufficiently apprised United Fire "of the incident out of which the claim arose and of the general nature of the action." Lamantia, 298 N.W.2d at 247. However, because we believe the second issue — Northwind's failure to disclose the theory of reasonable expectations in the court-ordered pretrial statement — is dispositive, we do not rest our decision on the specificity or precise nature of the pleadings.
Thus we address whether the court acted within its discretion when it excluded the reasonable expectations evidence based on Northwind's failure to specify the theory in its required pretrial statement. We first note issues raised by the pleadings may be narrowed by pretrial conference. See Lamantia v. Sojka, 298 N.W.2d 245, 247 (Iowa 1980); see also Iowa R.Civ.P. 1.604 ("[A pretrial] order shall control the subsequent course of the action. . . ."). In the pretrial order here, the court required the parties to file a written statement setting forth "[s]pecific legal theories of recovery or defense including elements of each cause of action or affirmative defense and specifications of negligence of fault." Northwind's pretrial statement is silent on its intent to pursue the theory. It provides no specific indication a reasonable expectations theory is at issue nor does it set forth the elements necessary to prove the claim.
We conclude the district court acted within its discretion in excluding evidence of the reasonable expectations theory based on its absence from Northwind's pretrial statement. The reasonable expectations theory is quite distinct, and although perhaps in some sense "derivative" of a breach of an insurance contract claim, it requires proof of specific elements. Benavides v. J.C. Penney Life Ins. Co., 539 N.W.2d 352, 356 (Iowa 1995). For example, an insured can utilize the doctrine of reasonable expectations to avoid an exclusion that (1) is bizarre or oppressive, (2) eviscerates a term to which the parties have explicitly agreed, or (3) eliminates the dominant purpose of the policy. Id. As a prerequisite to the applicability of this doctrine, the insured must prove "circumstances attributable to the insurer that fostered coverage expectations" or show that "the policy is such that an ordinary layperson would misunderstand its coverage." Id. at 357.
Because of the specificity of proof required for this theory, we believe the district court acted within its discretion to determine fairness dictates that unless addressed in the pretrial statement required in this case, United Fire should not be required to defend against a reasonable expectations claim. Without putting United Fire on notice that the specific theory of reasonable expectations is at issue, United Fire would be hard-pressed to defend it factually and legally. The purpose of a pretrial statement is to clarify the issues, determine what is actually in dispute, and allow the court and parties to conduct the trial accordingly. See, e.g., Lamantia, 298 N.W.2d at 247. Here, the trial court required the parties to state all "specific legal theories of recovery or defenses including elements of each cause of action." Even if Northwind was not bound to list reasonable expectations as a "specific legal theory," it should have been listed as an "element" of the breach of contract cause of action. Accordingly, we find the trial court did not abuse its discretion in excluding this evidence.
IV. ISC and SMITH.
The district court directed the verdict on Northwind's cross-claim against Duane Smith and ISC. Northwind contends it introduced significant evidence of negligence on the part of Smith, thus making a directed verdict inappropriate on this claim.
In January of 1999 when Brundell expressed concerns about Ace's work, he contacted Duane Smith seeking property coverage for the underground pipes. The evidence at trial shows that Brundell, at most, informed Smith of his concerns with Ace's timeliness, and that he did not discuss with Smith any workmanship issues with Ace. He did not mention any of the specific complaints with the quality of Ace's work or any other potential causes of loss he feared when seeking coverage. Smith informed Brundell he would contact United Fire about issuing such a policy, and United Fire subsequently advised it could provide property coverage for the pipes. As issued, the policy covered "underground pipes," but it specifically excluded losses resulting from such causes as settling and workmanship. When Northwind later made a claim on the underground pipe, United Fire denied coverage, based on its finding the inoperability of the system was due to inadequate workmanship, faulty materials, or settling. There does not appear to be any evidence in the record the sewer's failures were due to any other causes.
As the district court noted, generally an insurance agent owes his or her principal the use of such skill as is required to accomplish the object of the employment. Collegiate Mfg. Co. v. McDowell's Agency Inc., 200 N.W.2d 854, 857 (Iowa 1972). If the agent fails to exercise reasonable care, diligence, and judgment in this task, the agent is liable to the principal for any loss or damage occasioned thereby. Id. However, an expanded agency agreement, arrangement or relationship, sufficient to require a greater duty from the agent than the general duty, generally exists when the agent holds himself out as an insurance specialist, consultant or counselor and is receiving compensation for consultation and advice apart from premiums paid by the insured. Sandbulte v. Farm Bureau Mut. Ins. Co., 343 N.W.2d 457, 464 (Iowa 1984).
The district court analyzed this question assuming the expanded agency duty applied. It noted that no evidence was presented that Brundell made any specific reference to any particular risks for which he sought coverage. When Brundell called Smith seeking coverage Brundell did not mention anything about coverage for faulty workmanship, defective design, or settling of the pipes, and thus Smith could not have been aware of any of the specific risks it was facing. Northwind argues the expanded agency analysis from Sandbulte is irrelevant to this case and that its action seeks recovery on the contention ISC and Smith breached the general duty to use reasonable care, diligence, and judgment in procuring coverage. See Collegiate Mfg., 200 N.W.2d at 857.
As noted, there is no evidence Brundell advised Smith of any specific risks for which he was seeking insurance coverage, and he did not request a type of coverage that would explicitly cover those risks. Thus, substantial evidence does not exist which would support recovery under the expanded duty discussed in Sandbulte.
However, even if the expanded agency analysis is not at issue, and if analyzed under general standards of negligence, we conclude the district court properly directed the verdict on Northwind's claim against ISC and Smith. It is significant there was testimony that no insurance policy even existed which would cover poor workmanship. Witnesses called by both Northwind and the defendants testified to this. Northwind did not provide any evidence of an existent type of policy which would have covered the losses claimed here. In the absence of any evidence there was any available coverage that would have covered losses due to poor workmanship, there is not substantial evidence Smith breached any duty in procuring coverage based on Brundell's request. The coverage that would have applied to Northwind's loss simply was not available.
Moreover, although our supreme court has recognized an insurance agent owes a duty to his principal to exercise reasonable skill, care and diligence in effecting the insurance coverage requested, see Wolfswinkel v. Gesink, 180 N.W.2d 452, 456 (Iowa 1970), the only evidence presented in this case was that Northwind was provided what Brundell requested, that is, property damage insurance for the pipes.
Accordingly, we affirm the district court's declaratory judgment and order granting a directed verdict.