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In Villarreal v. United Fire & Cas. Co., 2016 WL 97328, (Iowa Jan 8, 2016), the Iowa Supreme Court held that an insured is typically required to bring its bad faith claim in the same lawsuit as the breach of contract claim, and a subsequent lawsuit asserting the bad faith claim is subject to claim preclusion.

In Villarreal, Ben Villarreal purchased commercial property insurance from United Fire & Casualty Company (United Fire). A dispute arose between Villarreal and United Fire after a fire loss, and Villarreal sued for breach of contract. Villarreal prevailed on the breach of contact claim and, three months later, filed a separate bad faith lawsuit, alleging United Fire lacked a reasonable basis to deny the claim. In response, United Fire asserted an affirmative defense of claim preclusion, arguing the judgment in the breach of contract lawsuit barred the bad faith claim in the subsequent lawsuit.

The Iowa Supreme Court first cited to the body of case law that stands for the proposition that “a breach of contract verdict in favor of the insured and against his or her insurer precludes a subsequent action for first-party bad faith, at least where the claim is based on events that predate the filing of the breach of contract lawsuit.” Claim preclusion generally applies to any claim that arises out of the same transaction or set of events as a claim that has already been determined in a prior action and, as the court noted, “a first-party bad-claim 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.”

Next, the court explained that claim preclusion is applied liberally, as “perfect identity of evidence is not the standard in Iowa for whether claim preclusion applies.” Rather, in the insurance context, a defendant insurer need show only a “substantial overlap” of proof and witnesses between the bad faith claim and the breach of contract claim.

There was no dispute that Villarreal “could have raised” the bad faith claim in the breach of contract action because he was aware of United Fire’s alleged bad faith conduct when the first lawsuit was filed. For instance, Villarreal was only paid a fraction of the coverage to which he believed he was entitled. Further, his attorney had twice accused United Fire of bad faith.

Although Villarreal argued that some of the evidence supporting its bad faith claim was not uncovered until discovery was conducted in the subsequent bad faith case, the court found this fact unpersuasive because the new information would have come to light in the first lawsuit if both the bad faith and breach of contract claims had been asserted and litigated in that action. The court placed great weight on “judicial economy and efficiency” in deciding the bad faith claim in the second lawsuit was barred in light of the judgment in the first lawsuit.

Tressler Comments

Under Iowa law, like most states, an insured is generally not permitted to split its claims by bringing a breach of contract claim in one lawsuit, and a bad faith claim in a subsequent lawsuit. Even though the court may choose to bifurcate discovery or trial of the claims, the insured must assert them in a single lawsuit. The question left open inVillarreal is whether an insured can bring a bad faith claim based on conduct that post-dates the filing of the breach of contract lawsuit – for example, litigation conduct – in a subsequent action. The specific nature and timing of the litigation conduct (assuming litigation conduct is even actionable as bad faith) will likely factor heavily in the application of claim preclusion in such a scenario.