Ben Villarreal Jr., Cleo Martinez, and Lacasa Martinez Texmex, Inc. v. United Fire & Casualty Company D/B/A United Fire Group

IN THE SUPREME COURT OF IOWA
No. 14–0298

Filed January 8, 2016

BEN VILLARREAL JR., CLEO MARTINEZ, and LaCASA MARTINEZ
TEXMEX, INC.,

Appellants,

vs.

UNITED FIRE & CASUALTY COMPANY d/b/a UNITED FIRE GROUP,

Appellee.

On review from the Iowa Court of Appeals.

Appeal from the Iowa District Court for Cerro Gordo County,

Rustin T. Davenport, Judge.

An insurer seeks further review of a court of appeals decision

reversing a summary judgment granted by the district court in favor of

the insurer. DECISION OF COURT OF APPEALS VACATED; DISTRICT

COURT JUDGMENT AFFIRMED.

Eric Updegraff and Bruce H. Stoltze of Stoltze & Updegraff, P.C.,

Des Moines, for appellants.

David L. Phipps, S. Luke Craven, and Stephen E. Doohen of

Whitfield & Eddy, P.L.C., Des Moines, for appellee.
 2

MANSFIELD, Justice.

A restaurant was severely damaged by fire. The owners made an

insurance claim, but much of the claim was denied. They ultimately

sued the insurer for policy benefits. They obtained a jury verdict and

judgment against the insurer, which the insurer paid. Thereafter, they

brought a separate action against the insurer for bad faith, alleging it

had lacked a reasonable basis for its prior refusal to pay these benefits.

The district court granted the insurer’s motion for summary judgment on

the basis of claim preclusion. The court of appeals reversed.

On further review, we must now decide whether a final judgment

in a breach-of-contract suit between an insured and an insurer for policy

benefits bars a later tort action for bad faith alleging that the insurer

lacked an objectively reasonable basis for denying the claim. Under the

circumstances presented here, we conclude that it does. Accordingly, we

vacate the judgment of the court of appeals and affirm the district court’s

grant of summary judgment to the insurer.

I. Background Facts and Proceedings.

On March 8, 2007, a fire severely damaged the restaurant La Casa

Martinez in Mason City. Plaintiff La Casa Martinez TexMex, Inc., an Iowa

corporation, owned the restaurant, and plaintiffs Ben Villarreal, Jr. and

Cleo Martinez were officers and shareholders of the corporation.

Martinez also owned the building that housed the restaurant. The

corporation had purchased commercial property insurance from United

Fire & Casualty Company (“United Fire”) with coverage limits of

$386,400 for building replacement and $374,400 for personal property

replacement. The policy also provided business interruption coverage. It

listed the insured as La Casa Martinez TexMex, Inc.
 3

The record does not indicate exactly when United Fire was notified

of the fire, but it was soon after March 8. At that point, United Fire sent

a certified copy of the policy to the insured. Communications between

the insured and United Fire continued thereafter. The insured retained

local attorney Jim McGuire. On June 12, Christine Friedrich, United

Fire’s claims representative, met with Villarreal and McGuire at

McGuire’s office. Three days later, Villarreal provided United Fire with a

lengthy inventory of personal property lost in the fire. The total claimed

value of the inventory was approximately $490,000.

There was some question initially whether the building should be

repaired or replaced. Martinez had purchased the building and land a

year and a half earlier for $150,000, and it was currently assessed for

property tax purposes at $153,000. However, there was no dispute that

Martinez had made significant improvements to the property after buying

it, as the property had previously been vacant for two and a half years.

Thus, before opening the restaurant, the plaintiffs had replaced the

entire roof, the air conditioning, and the water heater; had made

significant repairs to the ceiling, the electrical systems, the bathrooms,

and the walls; and had repainted the interior and the exterior.

As compensation for business interruption losses, United Fire paid

$23,900 at the outset while asking the insured for financial information

to support this portion of the claim. Additional business interruption

payments were subsequently made totaling approximately $5200.

On June 25, Villarreal faxed a letter to United Fire with a copy to

McGuire demanding an immediate additional payment. On June 27,

Villarreal and Martinez sent another letter to Friedrich, demanding

immediate payment of $100,000. The letter threatened prompt legal

action if the payment was not received and stated in part:
 4
Throughout this process, you have been aware of our
continuing downward skid as I have verbally kept you
informed of our continuing deteriorating situation and pleas
for relief. I will reiterate, we have become impoverished due
to your flagrant disregard for our, the customer, welfare,
intentional delays, erroneous disbursal of information, lack
of returned phone calls to me and my wife and
intentional/and/or neglectful handling/servicing of this
claim.

Ms. Fried[]rich, your actions, and/or lack thereof, have
displayed unprofessionalism as well as ethical and ethnic
discrimination.

McGuire was copied on the letter.

On August 16, McGuire sent a letter to United Fire stating that his

clients must be paid or “I have no alternative but to file suit for damages

which you are responsible for in connection with the fire as well as

damages for bad faith on the part of your company.” Friedrich’s

supervisor responded on August 27 that the insured had a responsibility

to provide proof of losses and the information received by United Fire to

date was “inaccurate or incomplete.”

On September 12, McGuire sent another letter to Friedrich,

maintaining that United Fire “had intentionally delayed the negotiations

in settlement of this claim.” The letter added, “I also feel that there has

been bad faith on the part of your company for some reason or other by

intentionally delaying the settlement of this loss.”

On October 11, as authorized by the policy, United Fire took
statements under oath from Martinez and Villarreal in the presence of

McGuire. Martinez and Villarreal testified that improvements totaling

$83,500 had been made to the building after the purchase. However, no

documentation had been provided at that point to the insurer for the

majority of these improvements.
 5

By then, United Fire had paid $24,000 toward the insured’s

personal property losses. In November, United Fire made a building-

related payment of $108,310 that covered only the mortgage balance and

therefore went entirely to the mortgagee. This of course meant the

insured itself still had received nothing for the loss of the building.

On December 5, McGuire wrote Friedrich a letter seeking $35,173

for lost net profits to the business, $102,000 for payments the officers

had not received from the business, an additional $193,054 for the value

of the building, and $88,910 for additional, previously unreported

contents of the building. The letter added, “In view of the fact that there

has been such a long delay in settling, I would ask that we receive the

requested drafts within seven days from the date of this letter.”

Friedrich responded, stating among other things that she would

like to hire an appraiser to look at the property. She also complained in

a separate email about needing more information from the insured

concerning the business interruption claim. On December 27, McGuire

sent an email to Friedrich stating,

That is bull shit, Christine. We have given them more than
they need and they are intentionally delaying this and have
for months!!! They have a duty to treat their insured fairly,
not to find ways to deny them of the money that is long over
due.

On January 9, 2008, Friedrich replied by letter that United Fire did

not owe any additional amounts for business interruption, although it

offered to settle this aspect of the claim for $15,000. Regarding the

building, Friedrich asserted that the best indicator of its value was the

2006 assessed value of $112,000, “which is also supported by the total

purchase price of $150,000 in late 2005 for the structure and the land.”

Friedrich further acknowledged that her “calculations show that the
 6

amount spent on [upgrades to the building] is roughly $45,000.”

However, she offered to pay only $20,000 for the building in addition to

the prior mortgage payoff.

As for the personal property, Friedrich explained that United Fire

had already paid $84,638.79 for these losses. She offered to pay another

$20,000 in return for a release “to close this out.”

In response, McGuire provided Friedrich with an appraisal showing

the market value of the building to be $388,200—or approximately

$280,000 more than United Fire had paid for this part of the loss. On

January 28, 2008, Friedrich indicated that she would refuse to do

anything further. She informed McGuire that “United Fire Group is

maintaining its [actual cash value] payment at the $108,310.00 already

paid to the insured and an additional $20,000.00 for the improvements

made.”

On March 7, 2008, La Casa Martinez TexMex, Villarreal, and

Martinez filed a breach-of-contract action against United Fire to recover

under the insurance policy. During the course of the litigation, plaintiffs

abandoned any claim for business interruption damages but continued

to assert claims that United Fire had underpaid for the building and

personal property.

Nearly three years later, trial commenced on March 1, 2011.1

During her trial testimony, Friedrich admitted she had never determined

an actual cash value for the building. On March 4, 2011, a jury returned

verdicts for the plaintiffs in the amount of $176,690 for the additional

unpaid value of the building and $60,212 for the additional personal

1The case was dismissed once by operation of Iowa Rule of Civil Procedure 1.944
but later reinstated.
 7

property loss—a total of $236,902. Later that month, United Fire paid

this amount plus interest and costs, and received a satisfaction of

judgment.

On June 20, approximately three months after judgment was

entered in the breach-of-contract case and more than four years after the

fire, La Casa, Villarreal, and Martinez filed the present action in one

count for “bad faith.” They alleged that United Fire “had no objective

reasonable basis for denying or failing to make payment on the [building

and personal property] insurance claims”; that United Fire “knew it had

no objective reasonable basis for the denial or failure to make payment”;

and that this bad faith caused them “lost profits, lost wages, [and]

emotional distress.”

United Fire filed a motion to dismiss based on claim preclusion,

which the district court denied on February 24, 2012. Discovery then

proceeded. Trial was originally scheduled for January 15, 2013. On

November 14, 2012, United Fire filed a motion for summary judgment.

Then on November 20, United Fire filed a motion for a continuance. The

court granted the continuance over the plaintiffs’ resistance. Its order

noted that “[s]ubstantial matters need to be addressed prior to trial

including ruling on Defendant’s Motion for Summary Judgment.” Upon

receipt of this order, United Fire withdrew its pending motion for

summary judgment without prejudice.

The plaintiffs then filed a motion for removal from application of

Iowa Rule of Civil Procedure 1.944, which was granted by the court.2

2Rule 1.944(1) provides, “[E]very civil and special action . . . shall be brought to
issue and tried within one year from the date it is filed and docketed and in most
instances within a shorter time.” Iowa R. Civ. P. 1.944(1). Accordingly, a “case will be
subject to dismissal if not tried prior to January 1 of the next succeeding year pursuant
to this rule.” Id. r. 1.944(2).
 8

The court’s order stated, “Pursuant to rule 1.944 dismissal will not occur

until January 1, 2014.” Trial was later set for January 28, 2014.

However, after the trial was rescheduled, no effort was made to move the

January 1 dismissal deadline.

At Friedrich’s deposition on November 19, 2013, she acknowledged

that during the underwriting process United Fire had obtained a

valuation report of $249,744 for the building. Although a United Fire

supervisor had instructed Friedrich to schedule an appraisal of the

building in December 2007, no appraisal was ever performed. Friedrich’s

notes and a memo to her supervisor indicated that she thought the

improvements to the building were worth $71,744.83 although she

communicated to Villarreal and Martinez that United Fire estimated the

improvements at $45,000 and only increased United Fire’s offer by

$20,000 for the improvements (conditioned on a settlement).

Meanwhile, on November 6, 2013, United Fire had refiled its

motion for summary judgment, maintaining that the bad-faith claim was

barred by claim preclusion as a matter of law, that Martinez and

Villarreal were not proper parties in interest, and that the bad-faith claim

failed as a matter of law. On December 3, the plaintiffs resisted United

Fire’s motion for summary judgment. On December 13, the motion was

heard by the court and submitted.

On January 7, 2014, having not yet decided the summary

judgment motion, the court entered an order noting that the case had

been dismissed by operation of law on January 1 pursuant to rule 1.944.

Six days later, on January 13, the plaintiffs moved to reinstate the

case. United Fire opposed the motion, pointing out that nearly seven

years had elapsed since the fire and that—due to the delays in the

litigation—several of its witnesses had retired and were no longer within
 9

its control, one witness was now deceased, and one was having serious

health problems that might make him unavailable. Nonetheless, on

January 28, the court granted the plaintiffs’ motion. It pointed out that

both parties had taken part at the trial setting conference which selected

the new trial date to occur after January 1.

Yet, that same day, the district court granted United Fire’s motion

for summary judgment. The court found the bad-faith action was barred

by claim preclusion, stating,

[B]oth [the breach-of-contract and bad-faith] claims arise
from the March 8, 2007, fire loss, and United Fires’ refusal
to pay the claim. Both claims depend upon the proper
amount United Fire should have paid under its policy, and
whether United Fire had a valid basis to support its
evaluation of [the restaurant].

However, the court added that

if the plaintiffs brought their bad faith claim with the breach
of contract claim, it is likely that the bad faith action would
have been bifurcated from the breach of contract case. It is
also likely that plaintiffs would have been denied access to
the adjuster’s file until the breach of contract case had been
fully tried. Even if the cases were brought together, a second
trial might ultimately be necessary.

The court also “question[ed] whether both claims could be tried to the

same jury.” Nonetheless, the court found that “bringing both claims at

once would allow a quicker resolution of both cases.” The court went on

to reach the remaining issues, holding that Villarreal and Martinez were

not proper parties, and that fact issues existed as to whether United Fire

had breached its duty of good faith and fair dealing.

The plaintiffs appealed, and we transferred the case to the court of

appeals. In a panel decision, the court of appeals reversed the district

court’s judgment, holding the bad-faith action was not barred by claim

preclusion and United Fire was barred by issue preclusion from
 10

challenging the standing of Martinez and Villarreal. One judge on the

three-judge panel dissented and would have affirmed the district court’s

ruling that claim preclusion barred the bad-faith action.

We granted United Fire’s application for further review.

II. Standard of Review.

We review summary judgment rulings for corrections of errors at

law. Sanon v. City of Pella, 865 N.W.2d 506, 510 (Iowa 2015). Summary

judgment is appropriate only if no genuine issues of material fact exist

and the moving party is entitled to judgment as a matter of law. Iowa R.

Civ. P. 1.981(3); Nelson v. Lindaman, 867 N.W.2d 1, 6 (Iowa 2015).

III. Analysis.

A. Iowa Law of Claim Preclusion. “The Iowa law of claim

preclusion closely follows the Restatement (Second) of Judgments.”

Shumaker v. Iowa Dep’t of Transp., 541 N.W.2d 850, 852 (Iowa 1995).

Accordingly, we have previously discussed and relied upon the

Restatement (Second) of Judgments in determining whether an action is

barred by claim preclusion. See, e.g., Pavone v. Kirke, 807 N.W.2d 828,

837 (Iowa 2011); West v. Wessels, 534 N.W.2d 396, 398 (Iowa 1995);

Leuchtenmacher v. Farm Bureau Mut. Ins. Co., 460 N.W.2d 858, 860 (Iowa

1990); Lowery Invs. Corp. v. Stephens Indus., Inc., 395 N.W.2d 850, 853

(Iowa 1986); Noel v. Noel, 334 N.W.2d 146, 148 (Iowa 1983). 3

3The Restatement (Second) of Judgments—with its emphasis on a transactional
approach to claim preclusion—was published in 1982. Prior to that time, we used a
“same-evidence” approach to claim preclusion, although this did not mean we would
decline to find claim preclusion just because some evidence in the second lawsuit was
different. For example, in B & B Asphalt Co. v. T.S. McShane Co., we held that the
plaintiff, who had sued the defendants unsuccessfully for fraud over an allegedly
defective asphalt plant, could not bring a new action for express warranty, implied
warranty, and negligence. 242 N.W.2d 279, 287 (Iowa 1976). Obviously, proving a
breach of warranty or negligence would have entailed some different evidence from
proving a fraud, but we said that “[c]laim preclusion is plainly applicable” because “the
 11

For example, in Pavone, we held that claim preclusion barred a

management company’s action against a casino operator for breach of

contract based on the operator’s failure to negotiate in good faith for

management services for a Clinton casino. 807 N.W.2d at 830–32, 839.

Previously, the management company had sued the casino operator for

breach of contract based on the latter’s failure to negotiate in good faith

concerning management services for its Emmetsburg casino. Id. at 831.

Although the license for the Clinton casino was not even awarded until

after the first action over the Emmetsburg casino had been filed, we held

that once the casino repudiated its underlying contract with the

management company, the management company was obligated to claim

all damages past and prospective arising out of that repudiation. Id. at

831, 837–38.

In doing so, we relied in part on Restatement (Second) of

Judgments section 24. Id. at 837. It provides,

(1) When a valid and final judgment rendered in an action
extinguishes the plaintiff’s claim pursuant to the rules of
merger or bar . . . , the claim extinguished includes all rights
of the plaintiff to remedies against the defendant with
respect to all or any part of the transaction, or series of
connected transactions, out of which the action arose.

(2) What factual grouping constitutes a “transaction”, and
what groupings constitute a “series”, are to be determined
pragmatically, giving weight to such considerations as
whether the facts are related in time, space, origin, or
motivation, whether they form a convenient trial unit, and

__________________________________
same evidence would be probative in both actions. They arise from the same
transaction and depend on evidence of the same events.” Id.
Since we began citing the Restatement (Second) of Judgments, we have also
continued to discuss and apply the older “same-evidence” test in tandem with the more
recent transactional approach of the Restatement. See, e.g., Pavone, 807 N.W.2d at
836–39 (applying both approaches). What we have not done in the past is use the
same-evidence test to reach a different result from that under the Restatement.
 12
whether their treatment as a unit conforms to the parties’
expectations or business understanding or usage.

Restatement (Second) of Judgments § 24, at 196 (Am. Law Inst. 1982)

[hereinafter Restatement (Second)].

The comments to section 24 elaborate on this transactional

approach:

The expression “transaction, or series of connected
transactions,” is not capable of a mathematically precise
definition; it invokes a pragmatic standard to be applied with
attention to the facts of the cases. And underlying the
standard is the need to strike a delicate balance between, on
the one hand, the interests of the defendant and of the
courts in bringing litigation to a close and, on the other, the
interest of the plaintiff in the vindication of a just claim.

....

In general, the expression connotes a natural grouping
or common nucleus of operative facts. Among the factors
relevant to a determination whether the facts are so woven
together as to constitute a single claim are their relatedness
in time, space, origin, or motivation, and whether, taken
together, they form a convenient unit for trial purposes.
Though no single factor is determinative, the relevance of
trial convenience makes it appropriate to ask how far the
witnesses or proofs in the second action would tend to
overlap the witnesses or proofs relevant to the first. If there
is a substantial overlap, the second action should ordinarily
be held precluded. But the opposite does not hold true; even
when there is not a substantial overlap, the second action
may be precluded if it stems from the same transaction or
series.

Id. cmt. b, at 198–99.

The comments also make clear that a “[t]ransaction may be single

despite different harms, substantive theories, measures or kinds of

relief.” Id. cmt. c, at 199.

In Leuchtenmacher, we applied the law of claim preclusion in the

context of an alleged bad-faith failure to settle by an underinsured

motorist (UIM) carrier. 460 N.W.2d at 859. In that case, the insured was

killed in a collision with a vehicle operated by another individual. Id.
 13

Her estate sued both the tortfeasor and her own insurer for UIM benefits.

Id. The jury returned a verdict for $223,251.57. Id. The court then

entered a judgment against the insurer for $97,263, representing the

remaining policy limit for UIM benefits. Id.

At this point, the estate sued the decedent’s insurer, alleging “it

had acted in bad faith by denying the estate’s claim for [UIM] benefits,

thus forcing the estate to go to trial.” Id. The insurer moved to dismiss

for failure to state a claim, “on the theory that an action for bad-faith

failure to settle must be brought simultaneously with the claim to

recover the policy proceeds, and a bad-faith claim not so joined is barred

by claim preclusion.” Id. The district court sustained the motion to

dismiss, but we reversed. Id. at 859, 861. In our analysis, we quoted (as

we have done above) from the main text of section 24 of the Restatement

(Second) and from comment b. Id. at 860. After noting that on a motion

to dismiss, it would not be proper to consider the record of the other case

without an agreement of the parties, we concluded,

The question of whether the estate’s “bad-faith” case was
precluded by the prior suit depends on whether the cases
arose out of the same facts. We cannot conclude as a matter
of law that they did. In fact, a bad-faith claim might well be
based on events subsequent to the filing of the suit on a
policy and therefore could not be based on the “same” facts.
Accordingly, we reverse and remand for further proceedings
consistent with this opinion.

Id. at 861.

Leuchtenmacher involved a motion to dismiss where we could not

consider the record of the first proceeding. Thus, it is procedurally

distinguishable from the present case. Although we said—correctly—in

Leuchtenmacher that claim preclusion turns on whether two cases arise

out of the “same facts,” we did not say that there must be perfect overlap

between the evidence required to support the respective legal theories in
 14

the two cases. That, of course, would be inconsistent with the

Restatement passages we had just quoted at length in Leuchtenmacher.

See Restatement (Second) § 24(1), at 196 (“[T]he claim extinguished

includes all rights of the plaintiff to remedies against the defendant with

respect to all or any part of the transaction, or series of connected

transactions, out of which the action arose.”); id. § 24 cmt. b, at 199

(stating that the second action should ordinarily be precluded if there is

“a substantial overlap” in witnesses and proof with the first proceeding,

and may be precluded “even when there is not a substantial overlap”);

see also Pavone, 807 N.W.2d at 838 (noting that the second action would

involve “much of the same relevant evidence”). Still, Leuchtenmacher

does indicate that a bad-faith claim based on events subsequent to the

filing of a breach-of-contract claim would not be precluded by a judgment

in the breach-of-contract case. See 460 N.W.2d at 861. Yet here, the

bad-faith case was based on events that occurred before March 7, 2008,

when the breach-of-contract case was filed.

We believe, therefore, that Leuchtenmacher does not control the

present case and that it would be prudent to look at authorities in other

states, particularly those like Iowa, that have followed the Restatement

(Second).

B. The Prevailing Approach Taken by Other Jurisdictions to

Claim Preclusion in First-Party Bad-Faith Insurance Lawsuits. The

great majority of jurisdictions take the view 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 bad-faith

claim is based on events that predate the filing of the breach-of-contract

lawsuit. We will review some representative cases.
 15

In Salazar v. State Farm Mutual Automobile Insurance Co., the

Colorado Court of Appeals applied the Restatement’s transactional

approach and held that an insured’s bad-faith claim, which was filed

after the insured obtained a judgment awarding her UIM policy benefits,

was barred by claim preclusion. 148 P.3d 278, 279, 281–82 (Colo. App.

2006). The court noted the essence of Salazar’s bad-faith claim was

State Farm’s “evaluation of her UIM claim” and its refusal to offer more

than $100 in settlement. Id. at 279, 281. The court added that this

outcome would serve efficiency goals. Id. at 282. Instead of having

much of the evidence repeated, one could have a bifurcated trial where

the common facts were presented first, and then the jury could proceed

to the bad-faith claim if it found the insurer had breached its contract to

pay insurance benefits. See id. For these reasons, the court affirmed

summary judgment for the insurer. Id.

Powell v. Infinity Insurance Co. was an uninsured-motorist (UM)

case. 922 A.2d 1073, 1076 (Conn. 2007). The insureds sued the UM

carrier for policy benefits in the original lawsuit, obtaining damage

verdicts well in excess of policy limits, which were then reduced to policy

limits for purposes of the final judgment. Id. Subsequently, they sued

the carrier for, among other things, bad faith. Id. They alleged that the

defendant, prior to and during the course of the prior lawsuit, had acted

unreasonably in refusing to settle for policy limits. Id. at 1076–77. The

district court granted summary judgment based on res judicata. Id. at

1077.

On appeal, the Connecticut Supreme Court affirmed. Id. at 1084.

Applying the transactional test from section 24 of the Restatement

(Second), the court explained,
 16
[T]he bad faith and [statutory unfair-practices] counts in
action II also arise out of the defendant’s refusal to pay the
policy benefits despite its contractual obligations. The
plaintiffs consistently have complained of the defendant’s
wrongful failure to honor its obligation to make payments in
accordance with the terms of the uninsured motorist
insurance policy issued to Powell. Their claims turn on
essentially one event—the defendant’s refusal to pay in
accordance with the terms of Powell’s policy.

Id. at 1081. Although some of the conduct on which the plaintiffs relied

for their bad-faith and statutory claims did not arise until after the first

lawsuit was commenced, the court noted that this “merely constitute[d]

additional evidence in support of their claims.” Id. at 1082. And “even

[i]f the plaintiffs did not form a belief” the defendant had acted in bad

faith before bringing the suit for policy benefits, they could have

amended their complaint before trial. Id. (alteration in original) (internal

quotation marks omitted).

In McClain ex rel. Rutledge v. James, the Missouri Court of Appeals

cited Restatement (Second) section 24 and held as follows:

In [a prior case], Northern sought damages from his
insurer PDA for failing to properly defend, protect, and
indemnify him against McClain’s malpractice claims. His
theory was breach of contract. He won a money judgment
against PDA, now final.

Here, Northern again seeks damages from his insurer
PDA for failing to properly defend, protect, and indemnify
him against McClain’s malpractice claims. His new theories
are “bad faith” (Count VIII), “negligent claims handling”
(Count IX), and “breach of fiduciary duties” (Count X).

Northern’s new counts violate res judicata's bar on
claim splitting. Summary judgment was proper as to these
counts.

453 S.W.3d 255, 266 (Mo. Ct. App. 2014) (citations omitted).

In Viscusi v. Progressive Universal Insurance Co., the Wisconsin

Court of Appeals found that claim preclusion barred a subsequent bad-

faith claim after the insured had recovered insurance benefits in his
 17

initial breach-of-contract case. No. 2009AP942, 2010 WL 94024, at *1–2

(Wis. Ct. App. Jan. 12, 2010). The court stated, “Simply put, both the

breach of contract and bad faith claims flow from the same nexus of

facts: Progressive’s failure to pay policy benefits . . . .” Id. at *2. The

court added, “According to the Restatement, it is also of no consequence

that Viscusi would be required to present additional facts to support his

bad faith claim.” Id.

Perhaps the most cited authority in this area is the First Circuit’s

decision in Porn v. National Grange Mutual Insurance Co., 93 F.3d 31 (1st

Cir. 1996). In that case, an insured successfully sued for breach of

contract when his insurer refused to pay UIM benefits following a car

accident, and then brought a separate action for bad faith in the

handling of his claim six months later. Id. at 32. The First Circuit

affirmed summary judgment on the ground the bad-faith claims were

subject to claim preclusion. Id. The court first cited the relevant

principles from the Restatement (Second). Id. at 34. It then found those

rules supported a determination that the second lawsuit was barred. Id.

at 34–37. As the court noted,

Porn expends considerable effort characterizing the
instant action as arising out of a transaction separate from
that giving rise to the first action. In particular, Porn
maintains that the bad-faith action stems from National
Grange’s conduct in handling his insurance claim, whereas
the contract action stems from the circumstances
surrounding the car accident. Porn’s definition of the two
transactions out of which the claims arise, however, is
artificially narrow. For instance, the contract claim arises
out of more than the car accident alone. It arises out of the
accident in conjunction with National Grange’s refusal to pay
under the policy. Indeed, without the refusal to pay, no
contract breach could exist. Similarly, the factual basis of
Porn’s bad-faith claim cannot be limited to National Grange’s
conduct in handling Porn’s insurance claim. In this case,
the facts of the car accident are also probative of National
Grange’s reasonableness in refusing to pay Porn’s claim.
 18

Id. at 35.

Responding to Porn’s argument that the two claims did not form a

convenient trial unit, see Restatement (Second) § 24 cmt. b, at 199, the

First Circuit explained,

Rather than addressing the degree to which the
evidence supporting each claim overlaps, Porn challenges the
convenience of bringing the claims together on two other
grounds. First, Porn argues that evidence relevant to the
bad-faith claim, specifically evidence of the amount of
insurance available and the fact of settlement offers and
negotiations, would prejudice the insurer’s defense of the
contract claim, and therefore the two claims do not form a
convenient trial unit. However, we agree with the district
court that any potential prejudice could be resolved by
bifurcating the trial. With bifurcation, the evidence common
to both claims, which was considerable, could have been
presented at once and not “in separate lawsuits commenced
at a distance of months or years.”

Id. at 36 (quoting Porn v. Nat’l Grange Mut. Ins. Co., No. 95–140–P–H,

1995 WL 626374, at *3 (D. Me. Sept. 27, 1995)). The court reiterated

this point later in its opinion, emphasizing that the trial court likely

would have tried the contract phase first and then the bad-faith phase

before the same jury, thereby permitting Porn to argue “to the jury that

National Grange’s refusal to settle the contract action despite insufficient
evidence of a meritorious defense was more evidence of its bad faith.” Id.

at 38. “[I]n a bifurcated trial such as the district court envisioned, . . .

the jury would first be asked to determine the breach of contract claim.

Only if the insured prevailed on that claim would the second (bad-faith)

phase of the trial transpire.” Id. at 37 n.6.

Additionally, the court observed that when Porn brought his

contract suit, he “knew the facts necessary for bringing a bad-faith

claim,” even if he did not know of National Grange’s “litigation conduct,”

an additional indicator of its bad faith. Id. at 37–38.
 19

Even courts applying other claim preclusion principles have

usually concluded that the subsequent bad-faith action is barred when it

is based on conduct that preceded the first action. See Reid v. Transp.

Ins. Co., 502 Fed. App’x 157, 159–60 (3d Cir. 2012) (holding New Jersey’s

entire controversy doctrine (ECD) barred bad-faith claim that was

brought after successful litigation for breach of contract and explaining,

“Because Reid should have been aware of his bad faith claim, and the

claim could have been asserted in his initial litigation, the District Court

was correct to apply the ECD and bar Reid’s claim”); Rawe v. Liberty Mut.

Fire Ins. Co., 462 F.3d 521, 528–30 (6th Cir. 2006) (holding that res

judicata barred bad-faith claims based upon conduct that occurred

before plaintiff filed her complaint in the first lawsuit but not events that

occurred afterward); Zweber v. State Farm Mut. Auto. Ins. Co., 39

F. Supp. 3d 1161, 1164, 1169 (W.D. Wash. 2014) (holding Washington

res judicata law precluded a bad-faith lawsuit following a successful

lawsuit for recovery of UIM benefits); Chandler v. Commercial Union Ins.

Co., 467 So. 2d 244, 245, 251 (Ala. 1985) (upholding summary judgment

based on res judicata when the plaintiff filed a bad-faith suit after

prevailing in an earlier action for recovery of insurance benefits for the

loss of his truck in a fire); Lincoln Prop. Co., N.C. v. Travelers Indem. Co.,

41 Cal. Rptr. 3d 39, 45, 48 (Ct. App. 2006) (holding that “the claim for

breach of the covenant of good faith and fair dealing is part of the same

primary right asserted in Lincoln’s prior action for breach of the duty to

defend” and is barred by res judicata); Stone v. Beneficial Standard Life

Ins. Co., 542 P.2d 892, 893–94 (Or. 1975) (en banc) (finding that a bad-

faith action alleging that the insurer had refused to pay life insurance

proceeds after falsely claiming it had performed a “thorough

investigation” into the death when it in fact had performed no
 20

investigation was barred under Oregon res judicata principles because it

could have been brought with the original breach-of-contract action).

C. Two Exceptions to This Approach: (1) When the Bad-Faith

Case Is Based on Conduct that Occurred During the Prior Lawsuit;

(2) Jurisdictions Where the Bad-Faith Claim Accrues Only After the

Insured Prevails on the Underlying Claim for Policy Benefits. Neither

the court of appeals nor the plaintiffs have cited any cases where a first-

party bad-faith case proceeded beyond summary judgment when it was

based on the lack of an objective basis for claim denial and was filed

after the insured had obtained a judgment for policy benefits. Based on

our research, when the later bad-faith case has been allowed to go

forward, this has occurred because of special facts in the case—or a

special legal rule in the jurisdiction governing bad-faith claims. An

example of the former is McCarty v. First of Georgia Insurance Co., 713

F.2d 609 (10th Cir. 1983). There, the plaintiffs’ home was destroyed by

fire, and they sought benefits from their homeowners insurer. Id. at 611.

The insurer denied the plaintiffs’ insurance claim, asserting it had never

issued a policy. Id. After a lengthy investigation, the Oklahoma

Insurance Commission decided it had no jurisdiction. Id. At this point,

the plaintiffs sued for benefits on the policy, but the insurer obtained

dismissal of this suit based on the statute of limitations. Id. Ultimately,

after the insurer produced an actual copy of the insurance policy and

records indicating it had issued and approved the policy, the plaintiffs

sued the insurer for bad faith. Id.

The Tenth Circuit held the bad-faith claim was not barred by claim

preclusion because the plaintiffs had “pleaded sufficient facts to support

their theory that the company’s wrongful concealment prevented them

from asserting their tort claim in the first action.” Id. at 613. “The tort
 21

claim . . . arose only after conclusion of the first action” when the

plaintiffs obtained a copy of a policy and realized the insurer had been

deceiving them. Id. The court noted that under Oklahoma law, “where

plaintiff’s omission of an item of his cause of action was brought about

by defendant’s fraud, deception, or wrongful conduct, the former

judgment has been held not to be a bar to suit.” Id. at 612–13 (quoting

Christian v. Am. Home Assurance Co., 577 P.2d 899, 905 (Okla. 1977)).

Likewise, in Robinson v. MFA Mutual Insurance Co., the Eighth

Circuit reversed the dismissal of a bad-faith action for failure to state a

claim where the claim was based on deceit that was not uncovered until

the trial of the prior action. 629 F.2d 497, 501–02 (8th Cir. 1980).

Nevertheless, the court also noted, “Our holding on the res judicata issue

does not foreclose [the insurer] from raising the issue at a later stage in

these proceedings.” Id. at 502 n. 6.

Another example of a case where the insured was not precluded

from bringing a later first-party bad-faith lawsuit based on the insurer’s

fraudulent conduct in the earlier proceeding is Corral v. State Farm

Mutual Automobile Insurance Co., 155 Cal. Rptr. 342, 344–47 (Ct. App.

1979). In this case—decided prior to publication of the Restatement

(Second)—the court found that claim preclusion was inapplicable to a

bad-faith action derived from the insurer’s misrepresentations in the

prior proceeding that the tortfeasor was not uninsured. Id.

We now turn to the second category of exceptions to the general

rule. The Florida Supreme Court has long held that a cause of action for

first-party bad faith (which is statutory in Florida) does not accrue until

the conclusion of the underlying breach-of-contract case for policy

benefits. Blanchard v. State Farm Mut. Auto. Ins. Co., 575 So. 2d 1289,

1291 (Fla. 1991). This means, of course, that there can be no claim
 22

preclusion bar based on the prior adjudication. As explained by the

Florida Supreme Court, bringing a first-party bad-faith claim in Florida

is

premature until there is a determination of liability and
extent of damages owed on the first-party insurance
contract. This avoids the problem Blanchard dealt with,
which was the splitting of causes of action. However, a claim
brought prematurely is not subject to a summary judgment.
Such a claim should be dismissed as premature.

Vest v. Travelers Ins. Co., 753 So. 2d 1270, 1276 (Fla. 2000); see Porn, 93

F.3d at 36 (distinguishing Florida law); see also Dadeland Depot, Inc. v.

St. Paul Fire & Marine Ins. Co., 945 So. 2d 1216, 1235 (Fla. 2006) (“We

hold that the arbitration panel’s award does not bar Dadeland’s bad faith

claim against St. Paul and actually it was a condition precedent to this

statutory cause of action.”). So in Florida, dismissal of a bad-faith claim

is routine when the claim is brought before the predicate claim for policy

benefits has been resolved. See, e.g., Bele v. 21st Century Centennial Ins.

Co., ___ F. Supp. 3d ___, ___, No. 6:15–cv–526–Orl–40GJK, 2015 WL

5155214, at *2 (M.D. Fla. September 1, 2015). 4

Iowa does not follow the Florida rule that entry of a judgment for

policy benefits is a condition precedent to bringing a first-party bad-faith
action. See Handley v. Farm Bureau Mut. Ins. Co., 467 N.W.2d 247, 249

4Naturally, federal cases applying Florida res judicata law follow the Florida

approach. See Dadeland Depot, Inc. v. St. Paul Fire & Marine Ins. Co., 483 F.3d 1265,
1271–72 (11th Cir. 2007) (applying Florida law and holding that a bad-faith claim was
not barred because the plaintiff “could not have possibly asserted” it in the prior
proceeding since it did not accrue until the plaintiff established an entitlement to
payment on its contract claim).
Similarly, in West Virginia, “in order for a policyholder to bring a common law
bad faith claim against his insurer . . . the policyholder must first substantially prevail
against his insurer on the underlying contract action.” Jordache Enters., Inc. v. Nat’l
Union Fire Ins. Co. of Pittsburgh, 513 S.E.2d 692, 711 (W. Va. 1998). In addition, West
Virginia does not follow the Restatement’s transactional approach to claim preclusion.
Slider v. State Farm Mut. Auto. Ins. Co., 557 S.E.2d 883, 888 (W. Va. 2001).
 23

(Iowa 1991) (indicating the plaintiff’s bad-faith claim was “not

premature”). Nonetheless, we need to address the argument that the

approach used in other jurisdictions like Alabama, Colorado,

Connecticut, Missouri, New Jersey, Oregon, Washington, and Wisconsin

would be inefficient. As seen above, all of those jurisdictions—and

others—require the bad-faith claim to be joined with the breach-of-

contract claim whenever it could have been brought at that time. 5

D. Simultaneous Discovery and Bifurcated Trials. We

previously held in a UIM case, where the insured was seeking both policy

benefits and damages for bad faith, that it was an abuse of discretion to

stay discovery of the insurer’s files to the extent relevant to the insured’s

bad-faith case “until plaintiffs have established a prima facie case of bad

faith.” Id. at 250. Among other things, we noted that “plaintiffs ha[d] a

present right to prepare all aspects of their case for trial.” Id. We have

never previously held that it is necessary to stay discovery on a first-

party bad-faith claim until the breach-of-contract claim is resolved.

Like other jurisdictions, we have also held in the past that claim

files are discoverable in first-party bad-faith insurance litigation. See

5Although they may have been mentioned in treatises, we do not think it is
necessary to discuss claim preclusion cases that involve very different circumstances,
such as the question whether a declaratory judgment bars a bad-faith action against a
bank (not an insurer) for failure to pay under letter of credit. See Schmueser v.
Burkburnett Bank, 937 F.2d 1025, 1031 (5th Cir. 1991) (applying Texas law).
Likewise, we do not think it is necessary to discuss old Louisiana law that has
been superseded by statute. In Cantrelle Fence & Supply Co. v. Allstate Insurance Co.,
515 So. 2d 1074, 1078–79 (La. 1987), the Louisiana Supreme Court applied the Code
Napoleon to find that common law res judicata principles were inapplicable and
therefore a separate statutory bad-faith claim could be pursued after a judgment had
been obtained for insurance benefits. However, this aspect of the Code Napoleon
subsequently met its Waterloo in the Louisiana legislature, and now it appears
statutory bad-faith claims generally must be brought in the original action. See, e.g.,
Wood v. May, 658 So. 2d 8, 9 (La. Ct. App. 1995), reversed on other grounds, 663 So. 2d
739 (La. 1995).
 24

Miller v. Continental Ins. Co., 392 N.W.2d 500, 506 (Iowa 1986); Amsden

v. Grinnell Mut. Reinsurance Co., 203 N.W.2d 252, 256 (Iowa 1972).

In Squealer Feeds v. Pickering, we qualified our prior caselaw

somewhat and indicated that the insured could not obtain the contents

of claim files prepared after the insured’s claim was denied, absent a

showing of substantial need and undue hardship. 530 N.W.2d 678, 688

(Iowa 1995), abrogated by Wells Dairy, Inc. v. Am. Indus. Refrigeration,

Inc., 690 N.W.2d 38, 48 (Iowa 2004). The insured in that case conceded

that any materials in the claim file postdating the denial of coverage were

prepared in anticipation of litigation and thus constituted work product.

Id. at 687.

However, in Wells Dairy, we then overruled prior cases, including

Squealer Feeds, to the extent they adopted something other than the

following test for work product—“whether, in light of the nature of the

document and the factual situation in the particular case, the document

can fairly be said to have been prepared or obtained because of the

prospect of litigation.” 690 N.W.2d at 48 (quoting 8 Charles Alan Wright

et al., Federal Practice and Procedure § 2024, at 198–99 (2d ed. 1994)).

This means that claim files are not covered by the work product doctrine

except insofar as they contain documents that would not have been

prepared but for anticipated litigation. See Dennis J. Wall, Litigation and

Prevention of Insurer Bad Faith § 12:5 (3rd ed. 2011) (“Where the

insured’s complaint states a cause of action for first-party bad faith, the

claims adjuster’s files can generally be discovered. Work product

objections will lie in particular cases.”).

Also, we have repeatedly held that one essential element of a first-

party bad-faith claim is that the insurer lacked an objectively reasonable

basis for denying the claim. See, e.g., Wilson v. Farm Bureau Mut. Ins.
 25

Co., 714 N.W.2d 250, 262–63 (Iowa 2006) (discussing and applying this

element); Bellville v. Farm Bureau Mut. Ins. Co., 702 N.W.2d 468, 473

(Iowa 2005) (explaining the “[o]bjective element: lack of reasonable

basis”); Sampson v. Am. Standard Ins. Co., 582 N.W.2d 146, 149 (Iowa

1998) (“To be successful in a first-party bad-faith claim, a plaintiff must

prove by substantial evidence (1) the absence of a reasonable basis for

denying the claim, and (2) that the defendant knew or had reason to

know that its denial was without reasonable basis.”); Morgan v. Am.

Family Mut. Ins. Co., 534 N.W.2d 92, 96 (Iowa 1995) (“The absence of a

reasonable basis for denying the claim is an objective element. . . .

Where an objectively reasonable basis for denial of a claim actually

exists, the insurer cannot be held liable for bad faith as a matter of

law.”), overruled on other grounds by Hamm v. Allied Mut. Ins. Co., 612

N.W.2d 775, 784 (Iowa 2000). As we put it in Morgan, “Iowa law is clear

that an imperfect investigation, standing alone, ‘is not sufficient cause

for recovery if the insurer in fact has an objectively reasonable basis for

denying the claim.’ ” 534 N.W.2d at 98 (quoting Reuter v. State Farm

Mut. Auto. Ins. Co., 469 N.W.2d at 250, 254–55 (Iowa 1991)).

Based on the foregoing, during the pretrial stages of a first-party

case like this one, we see no difficulty in combining the breach-of-

contract and bad-faith claims. The plaintiffs can conduct discovery on

both claims, but the defendant can move for summary judgment if it had

an objective basis for denying the claim, regardless of what its internal

files may show on its subjective intent.

The question then becomes whether problems would arise at trial.

See Restatement (Second) § 24 cmt. b, at 199 (noting that one

consideration is whether the claims “form a convenient unit for trial

purposes”). It is true that much of the evidence in an insurer’s files
 26

might be irrelevant to the breach-of-contract case, as well as unfairly

prejudicial to the insurer. However, as the Porn court observed, this can

be solved by bifurcating the trial into two phases. See 93 F.3d at 36–38,

37 n.6; see also Tannenbaum v. Fed. Ins. Co., 608 Fed. App’x 316, 318

(6th Cir. 2015) (pointing out that the district court divided the trial into

“a breach-of-contract phase and a bad-faith phase”); First United

Pentecostal Church v. Guideone Specialty Mut. Ins. Co., 189 Fed. App’x

852, 854 (11th Cir. 2006) (“The trial was bifurcated into a liability phase

for breach of contract and a bad faith phase.”); Agrawal v. Paul Revere

Life Ins. Co., 182 F. Supp. 2d 788, 791 (N.D. Iowa 2001) (ordering

bifurcation of trials and stating that “[i]f possible . . . the same jury will

try the bad faith claim in the event that it resolves the coverage issue in

the plaintiff’s favor”); Powell, 922 A.2d at 1083 n.5 (“[A]ny potential

prejudice resulting from facts that are not related could be resolved by

bifurcating the trial.”).

A bifurcated trial actually offers efficiency gains, as contrasted with

a procedure under which the bad-faith claim would not even be filed

until the breach-of-contract claim has been adjudicated. As the

Colorado Court of Appeals observed in Salazar, “trial courts may choose

to bifurcate the trials, allowing the evidence, common to both claims, to

be presented at once and not in separate lawsuits commenced months or

years later.” 148 P.3d at 282.

Our rules of civil procedure authorize bifurcated trials. See Iowa

R. Civ. P. 1.914 (“In any action the court may, for convenience or to avoid

prejudice, order a separate trial of any claim, counterclaim, cross-claim,

cross-petition, or of any separate issue, or any number of any of them.”).

In Johnson v. State Farm Automobile Insurance Co., the court of appeals

approved the use of this rule to bifurcate the trial of an insured’s claim
 27

for UIM benefits against her insurer from the trial of her bad-faith claim

against the same insurer. 504 N.W.2d 135, 137 (Iowa Ct. App. 1993).

Notably, rule 1.914’s wording is similar to that of Federal Rule of Civil

Procedure 42(b), under which a number of the foregoing federal cases

were decided.

E. Final Observations. For all these reasons, we join the other

jurisdictions that follow the Restatement (Second) and hold a first-party

bad-faith 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. This means a

final judgment in the breach-of-contract case would bar the bringing of a

subsequent, separate bad-faith lawsuit. As in other jurisdictions, the

potential prejudice from introducing evidence relevant only to the

insurer’s bad faith can be resolved by bifurcating the trial into a breach-

of-contract phase and a bad-faith phase.

While a first-party bad-faith claim will always require some

additional proof, such a claim nonetheless challenges the same basic

conduct as the underlying breach-of-contract claim—namely, the

insurer’s refusal to pay benefits that were rightly owed. Perfect identity

of evidence is not the standard in Iowa for whether claim preclusion

applies. To the contrary, the Restatement makes clear that “a

substantial overlap” of proofs and witnesses “ordinarily” leads to claim

preclusion, and even the absence of such overlap is not fatal to claim

preclusion. See Restatement (Second) § 24 cmt. b, at 199; see also id.

§ 25, at 209 (“The rule of § 24 applies to extinguish a claim by the

plaintiff against the defendant even though the plaintiff is prepared in

the second action . . . [t]o present evidence or grounds or theories of the

case not presented in the first action . . . .”).
 28

Obviously, in Pavone, the claim relating to the second casino

involved different evidence to some extent. See 807 N.W.2d at 838.

Similarly, in Arnevik v. University of Minnesota Board of Regents, we

found that a second lawsuit for indemnification was barred by claim

preclusion even though the basis for indemnification in the second suit

was entirely different—that is, a breach of the employment contract

rather than respondeat superior. 642 N.W.2d 315, 318–21 (Iowa 2002).

We specifically rejected the plaintiff’s assertion that claim preclusion did

not apply because “different facts were necessary to prove the respondeat

superior claim than were necessary to prove [the] theory in contract.” Id.

at 321. 6

Of course, there are limits to our holding. As we observed in

Leuchtenmacher, when the bad-faith claim is based on conduct that

occurred after the breach-of-contract case was filed, that is a different

kettle of fish. 460 N.W.2d at 861. That is not the case here. Here the

plaintiffs “could have raised” the bad-faith claim in the contract action.

See Arnevik, 642 N.W.2d at 319; see also Pavone, 807 N.W.2d at 838

(noting the Clinton action “could have been fully and fairly adjudicated in

the original Emmetsburg action”). At oral argument before our court,

6The court of appeals analogized the separate lawsuits here to the separate
lawsuits that were involved in Iowa Coal Mining Co. v. Monroe County, 555 N.W.2d 418
(Iowa 1996). We think the analogy is off the mark. Iowa Coal was a mining company
that wanted to use certain strip mining sites as sanitary landfills. Id. at 424–25. In the
first action, it challenged a county ordinance as having been improperly enacted and
effecting a regulatory taking of its property. Id. at 425. In the second action, it alleged
that the county had tortiously interfered with a proposed contract with a private waste
company and that it had a prior nonconforming use for landfill purposes. Id. at 434–
36, 438–40. The thrust of the two lawsuits was entirely different. The tortious-
interference claim in the second lawsuit was based on the county’s overt campaign to
block the deal with the waste company; the nonconforming-use claim assumed the
ordinance was valid and focused on whether Iowa Coal had a prior landfilling use that it
had not discontinued. Id. at 443–45.
 29

plaintiffs’ counsel conceded a bad-faith claim could have been filed in

March 2008 as part of the action seeking recovery for policy benefits. At

that point, plaintiffs were well aware their insurance claim had been

pending for nearly a year, but United Fire had only paid $108,310 toward

the building despite the appraisal commissioned by plaintiffs showing its

value to be $388,200. The plaintiffs also knew that even United Fire

conceded Martinez had purchased the long-vacant building and land for

$150,000 and then put substantial improvements costing at least

$45,000 into it before opening their Mexican restaurant. The plaintiffs

also knew United Fire had paid nothing for various costly items of

personal property including three stove hoods (ranging from eighteen feet

to twenty four feet long) and three walk-in coolers.

The plaintiffs also believed at that time that United Fire had

ignored their “continuing deteriorating situation and pleas for relief”; that

they had “become impoverished” while the insurer engaged in

“intentional delays” and “flagrant disregard” for the customer; that

United Fire had “intentionally delayed the negotiations in settlement of

[their] claim”; and that United Fire was not treating “their insured fairly,”

and trying to find ways to deny money “long overdue.” Indeed, plaintiffs’

attorney had twice specifically accused United Fire of “bad faith.”

Undoubtedly, further evidence relevant to the plaintiffs’ bad-faith

claim surfaced during discovery in the second action. That, of course, is

the point of discovery. For the reasons already stated, we generally

believe this evidence would have come to light earlier if the two claims

had been combined in the original action. It would be difficult to argue

that the splitting of the two claims here advanced the purposes of

“judicial economy and efficiency.” See Penn v. Iowa State Bd. of Regents,

577 N.W.2d 393, 398 (Iowa 1998) (characterizing these purposes as goals
 30

of claim preclusion). More than seven years after the first action was

filed by insured against insurer, the parties’ disputes are still not

resolved. Bringing the first-party bad-faith claim in the original action

would be far more efficient—and we believe principles of claim preclusion

require this. If necessary, the trial can be bifurcated into two phases.

Again, a different case might well be presented if the bad-faith

claim could not have been asserted in the original case, but that is not

the situation here. The plaintiffs had a basis for alleging bad faith in

March 2008, when they filed their original suit, as well as ample time

thereafter to amend that suit to add a bad-faith claim.

Lastly, we address the plaintiffs’ contention that application of the

customary rules of claim preclusion here will lead to the routine

inclusion of bad-faith counts in suits for insurance recoveries. We think

not. For one thing, all counsel are bound by Iowa Rule of Civil Procedure

1.413(1). By signing a petition alleging bad-faith refusal to pay

insurance benefits or an answer denying that insurance benefits are

owed, counsel certifies that “to the best of counsel’s knowledge,

information, and belief, formed after reasonable inquiry, it is well

grounded in fact . . .” Iowa R. Civ. P. 1.413(1). Moreover, as we

discussed earlier, one element of first-party bad faith is that the denial of

the claim lacked an objectively reasonable basis. Counsel should be able

to make a preliminary assessment on this point before an action is filed

against the insurer or if need be, soon thereafter. Finally, as we have

pointed out, our decision today is not a lone ranger: Many other

jurisdictions treat the breach-of-contract claim and the bad-faith claim

as flowing from one transaction for claim preclusion purposes. We see

no indication that this approach has led to practical difficulties in those
 31

other jurisdictions, such as an unwarranted proliferation of bad-faith

claims.

IV. Conclusion.

For the foregoing reasons, we vacate the decision of the court of

appeals and affirm the district court’s grant of summary judgment to

United Fire. 7

DECISION OF COURT OF APPEALS VACATED; DISTRICT

COURT JUDGMENT AFFIRMED.

Cady, C.J., and Waterman and Zager, JJ., join this opinion.

Wiggins, J., files a dissenting opinion in which Hecht, J., joins. Appel,

J., files a separate dissenting opinion in which Wiggins and Hecht, JJ.,

join.

7Asalternative grounds for affirmance of the district court (in whole or in part),
United Fire urges that Villarreal and Martinez were not proper parties to the bad-faith
action and that plaintiffs were not entitled to relief from the January 1, 2014 rule 1.944
dismissal. Because of our disposition of this appeal, we need not reach either
argument.
 32

#14–0298, Villarreal v. United Fire & Cas. Co.

WIGGINS, Justice (dissenting).

I do not agree with the majority’s analysis; therefore, I join the

dissent. However, I write to stress that under the majority decision,

district courts should not limit discovery when a party joins a bad-faith

claim with his or her underlying tort or contract claim. Additionally,

although a court may require the jury to decide the underlying tort or

contract claim prior to having it hear further evidence and decide the

bad-faith claim, the trial should not be bifurcated when both claims are

brought in the same action. Rather, the district court should allow

discovery to proceed on both claims and try both claims in the same

trial.

The majority’s primary rationale for deciding the case the way it

does is judicial economy. Because a bad-faith claim and the underlying

tort or contract claim typically involve the same facts, the majority sees

no reason not to require the district court to try them together. However,

if our district courts do not allow discovery to proceed on both claims at

the same time or bifurcate actions in which both claims are brought,

attorneys will try each claim separately the same way they did before the

majority changed the law in this case. In other words, if district courts

continue to allow separate discovery and to bifurcate actions involving

both bad-faith and related tort or contract claims, the change in the law

the majority seeks to accomplish in its opinion would not amount to

much of a change at all.

Hecht, J., joins this dissent.
 33

#14–0298, Villarreal v. United Fire & Cas. Co.

APPEL, Justice (dissenting).

I respectfully dissent. As will be seen below, I view the case

differently than the majority. I would reverse the decision of the district

court and allow the insured’s bad-faith claim to proceed to trial.

I. Background Facts and Proceedings.

The majority’s overview of the facts and proceedings does not

present the entire picture. After the insurance company paid $108,310

on the claim but refused to pay more, the insured filed a breach-of-

contract action. The factual questions in the breach-of-contract action

were simple: what was the value of the insured’s property destroyed by

fire and did the value exceed the amount that the insurance company

had previously paid? A jury answered the question in the affirmative and

awarded the insured a verdict of $236,901.52.

At trial for the contract claim, the insurance adjuster responsible

for the insured’s claim testified she had no idea what the actual value of

the property was. This is extraordinary trial testimony: an adjuster

acting on behalf of the insurer, who had the responsibility to evaluate

and fairly pay claims, had no idea what the value of the destroyed

property was. This was powerful evidence that could be marshalled in

support of a bad-faith claim.

After obtaining a verdict in the first trial, the insured then filed its

bad-faith claim. Extensive discovery followed, including discovery of the

insurer’s claims file and deposition of the insurer’s claims attorney and

the insurer’s claims supervisor. The contested factual issues in the bad-

faith case were materially different from the underlying contract action.

In the bad-faith action, the contested factual issues focused on the

manner in which the insurer handled the insured’s claim.
 34

Given the different nature of the factual issues in the bad-faith

action, the potential scope of discovery was different, and certainly much

broader, than in the contract action in which the only contested factual

issues related to the value of the destroyed property. The insured took

advantage of the broader discovery opportunity, deposing the lawyer who

represented the insurance company in the original breach-of-contract

action and obtaining through extensive discovery claim files and various

correspondences between the insurance company and its counsel.

Compare Handley v. Farm Bureau Mut. Ins. Co., 467 N.W.2d 247, 250

(Iowa 1991) (holding discovery of insurance claim file allowed in bad-faith

action), with Johnson v. State Farm Auto. Ins. Co., 504 N.W.2d 135, 137

(Iowa Ct. App. 1993) (noting investigation file was not subject to

discovery in uninsured portion of suit which had been severed from bad-

faith claim).

After discovery, the insured developed a bad-faith case supported

by substantial evidence. The plaintiffs produced substantial evidence to

show that the claims adjuster on the file knew that the value of the claim

was in excess of what the insurer had paid but nonetheless repeatedly

refused to approve additional payments and that, although the hiring of

an appraiser was authorized to value the property destroyed, none was

ever hired.

The insurer moved for summary judgment. The district court

granted the motion on the ground that the insured was precluded by

principles of res judicata because of the insured’s failure to bring the

claim in the original action. The insured appealed. We transferred the

case to the court of appeals. A majority of the court of appeals found

that under applicable Iowa law, the insured was not precluded from

bringing a separate bad-faith claim. We granted further review.
 35

II. Discussion.

A. Overview of Iowa Law.

1. Introduction.

The proper scope of the doctrine of res judicata has been a

traditional source of controversy in American law. At the risk of

oversimplification, the dispute has centered on broad or narrow

application of the doctrine. See Edward W. Clearly, Res Judicata

Reexamined, 57 Yale L.J. 339, 339–42 (1948) (discussing the differences

between the traditional narrower view and the broader transactional

approach). The general question in the debate is how broadly a “claim”

or “cause of action” should be defined. Id. at 340–41.

As a general matter, the law has shown an ambivalence toward the

doctrine. As noted by the leading historic advocate of the broad

transactional approach to res judicata, Judge Clarke, in a dissenting

opinion before the adoption of the Restatement (Second) of Judgments,

“The defense of res judicata is universally respected, but actually not

very well liked.” Riordan v. Ferguson, 147 F.2d 983, 988 (2d Cir. 1945)

(Clarke, J., dissenting).

We have historically adopted a fairly narrow view of the doctrine of

res judicata. As is illustrated in the majority opinion of the court of

appeals, there are several Iowa precedents that have a bearing on the

res judicata issue presented in this case. The majority opinion of the

court of appeals well plowed much of the legal ground, but there are

several points worth emphasis. First, there is a clear difference between

what must be proven to support a claim of breach of contract and a bad-

faith claim. Second, our caselaw has emphasized the difference between

an identical or “same claim,” a “related claim,” and a claim that is not

based upon “the same evidence.”
 36

2. Difference between breach-of-contract and first-party bad-faith

claim. This case involves a first-party insurance bad-faith claim. A first-

party claim involves an insured’s attempt to recover against his or her

own insurance company. First-party claims were first recognized in

Gruenberg v. Aetna Insurance Co., when the California Supreme Court

emphasized that the duty of good faith is independent of the insured’s

contractual obligation. 510 P.2d 1032, 1040 (Cal. 1973) (en banc). The

Gruenberg court also held that a first-party bad-faith plaintiff may

recover for emotional distress without a showing of extreme and

outrageous conduct ordinarily associated with the common law tort of

intentional infliction of emotional distress. Id. at 1041. Because the

relationship between the insured and the insurer implicated the public

interest, the California Supreme Court has held that punitive damages

would be available in bad-faith tort situations. Egan v. Mut. of Omaha

Ins. Co., 620 P.2d 141, 146 (Cal. 1979) (en banc).

We first recognized such a claim in Dolan v. Aid Insurance Co., 431

N.W.2d 790, 794 (Iowa 1988). We noted the rationale in Gruenberg and

other cases for the bad-faith tort: that arbitrary coverage denial and

delay of payment must be addressed, that physical injury and economic

loss may occur when bargaining with the insurance company, and that

the relationship between an insurer and insured is imbued with the

public interest. Id. at 791–92 (citing Mary Elizabeth Phelan, The First

Party Dilemma: Bad Faith or Bad Business?, 34 Drake L. Rev. 1031,

1035–36 (1985)); see also id. at 791 n.1. We specifically noted that

traditional contract remedies would not compensate an insured for the

harms arising from bad-faith conduct and that the unequal bargaining

power between the insured—who has sustained a loss and sought

coverage—and the insurer requires redress. Id. at 794.
 37

As this case well illustrates, there are important differences

between a breach-of-contract claim and a first-party bad-faith claim. A

breach-of-contract claim is based upon the contractual terms and

enforces the expectations of the parties. See Magnussen Agency v. Pub.

Entity Nat’l Co.–Midwest, 560 N.W.2d 20, 25, 27 (Iowa 1997). In this

case, the breach-of-contract claim involved a contest over the value of the

destroyed property.

But a bad-faith claim is a different animal. Bad faith involves “the

knowing failure to exercise an honest and informed judgment.” Kiner v.

Reliance Ins. Co., 463 N.W.2d 9, 12 (Iowa 1990) (quoting Anderson v.

Cont’l Ins. Co., 271 N.W.2d 368, 377 (Wis. 1978)). As is apparent, “[t]he

fact that the insurer’s position is ultimately found to lack merit is not

sufficient by itself to establish the first element of a bad faith claim.”

Bellville v. Farm Bureau Mut. Ins. Co., 702 N.W.2d 468, 473 (Iowa 2005).

The factual basis and the evidence required to support a first-party bad-

faith claim is thus materially different from the evidence required to

support a breach-of-contract claim.

Because of the factual differences in the claims, discovery is also

different. In a contract claim, discovery is limited to the factual

questions related to the question of breach of contract. On the other

hand, in a bad-faith claim, broader discovery, including discovery of the

claim file, is allowed. A bad-faith claim can also give rise to difficult

discovery disputes regarding the scope of attorney–client and work-

product privileges. See generally Handley, 467 N.W.2d at 250; Johnson,

504 N.W.2d at 137.

Not only do the factual requirements of a bad-faith claim differ

from a breach-of-contract claim, the remedies are different too. The

breach-of-contract claim entitles a plaintiff to recover the benefit-of-the-
 38

bargain damages. A bad-faith claim, however, is a tort. Among other

things, compensatory, emotional distress, and punitive damages are

available against the insurance company. Dolan, 431 N.W.2d at 794.

The factual requirements and available remedies are different

because the claims protect different interests. A contract claim protects

the insured’s economic interests. See Richards v. Midland Brick Sales

Co., 551 N.W.2d 649, 650–51 (Iowa Ct. App. 1996). The tort of bad faith

protects the dignity and emotional interests of the insured and fosters

the public policy of not allowing insurers to use their superior position to

the disadvantage of their insureds. See Egan, 620 P.2d at 146; Travelers

Ins. Co. v. Savio, 706 P.2d 1258, 1273 (Colo. 1985) (en banc); Grand

Sheet Metal Prods. Co. v. Protection Mut. Ins. Co., 375 A.2d 428, 430

(Conn. Super. Ct. 1977).

Experienced plaintiffs and defense counsel recognize that the

stakes in a potential bad-faith claim are typically much higher than in an

ordinary contract action. Contract claims arise in the ordinary course of

the insurance business and are often defended on a win-some/lose-

some, cost-of-doing business basis. Bad-faith claims, however, put at

risk a dramatically greater financial and reputational interest of the

insurer and its employees. As a result, bad-faith claims often give rise to

a much more vigorous, resource-intensive defense than an ordinary

contract action, often involving the retention of experienced outside

counsel to defend the bad-faith action. As observed by one leading

commentator, high stakes bad-faith disputes “tend to bring out the

participants’ meaner sides.” Stephen S. Ashley, Bad Faith Actions

Liability & Damages § 10:1 (2d ed. 1997) [hereinafter Ashley].

3. “Same-claim” and “same-evidence” criteria distinguish identical

claims from related claims. We have considered in our caselaw the
 39

difference between an identical claim and a related claim. Our cases

indicate that an “identical claim” must be brought in the first action and

will be barred by the doctrine of res judicata if it is not joined with the

original action. When a “related claim” is involved, however, the plaintiff

has the option of bringing the claim in the original proceeding or bringing

a separate action on the related claim.

A key issue in our caselaw is distinguishing between an identical

claim and a related claim. As will be seen below, our cases tend to

emphasize that the claims must utilize the “same evidence” and involve

the “same claim” in order to be considered “identical.” By distinguishing

between identical claims and related claims, and by basing the

distinction at least in part on a “same-claim” and a “same-evidence” test,

our law tends to depart from the broad transactional approach to

res judicata often employed in federal caselaw. The distinction between

the same-evidence approach and the transactional test has been

recognized by a leading commentator. See Robert Kelly, Post-Trial Issues

in 12 New Appleman on Insurance Law Library Edition § 156.09[1][a], at

156–51 (Jeffrey E. Thomas, Laura A. Foggan, & Lorelie S. Masters eds.,

2015).

We begin our discussion of Iowa law with B & B Asphalt Co. v. T. S.

McShane Co., 242 N.W.2d 279 (Iowa 1976). In this case, the plaintiff first

filed a fraud action against the defendant. Id. at 281. After failing in the

first action, the plaintiff brought a second action based upon the same

facts alleging breach of express and implied warranties and negligence.

Id. We held the second action was barred by res judicata. Id. at 287.

We noted, “Our cases say identity of cause of action is established when

the same evidence will maintain both actions.” Id. (emphasis added).

The same-evidence approach in B & B Asphalt was firmly rooted in
 40

existing Iowa caselaw. See Young v. O’Keefe, 248 Iowa 751, 756, 82

N.W.2d 111, 114 (1957) (noting the test is “to inquire if the same

evidence will maintain both the present and the former action” (quoting

Band v. Reinke, 230 Iowa 515, 520, 298 N.W. 865, 868 (1940)));

Woodward v. Jackson, 85 Iowa 432, 435, 52 N.W. 358, 359 (1892). In B

& B Asphalt, we applied our traditional same-evidence principle in the

O’Keefe/Band/Woodward line of cases and held that the same evidence

supported both the first and second actions, and as a result, Iowa

principles of res judicata barred the second claim. 242 N.W.2d at 287.

Another case illustrating important Iowa principles of res judicata

is Westway Trading Corp. v. River Terminal Corp., 314 N.W.2d 398 (Iowa

1982). In this case, the central issue was the interesting question of

whether a party may bring separate actions claiming breach of different

provisions of a single lease. Id. at 401. Citing B & B Asphalt with

approval, we stated that in determining whether a separate action was

present, we consider “the protected right, the alleged wrong, and the

relevant evidence.” Id. (citing B & B Asphalt, 242 N.W.2d at 286). Under

the facts presented in the case, we held that res judicata did not apply.

Id. We noted that the alleged right, the alleged wrong, and the relevant

evidence were different from claims in an earlier action involving the

same contract. Id. We further emphasized, however, that the mere fact

a plaintiff could have brought the claims in one action did not bar the

bringing of successive actions. Id. at 401–02.

Another case closer to the subject matter of this case is

Leuchtenmacher v. Farm Bureau Mutual Insurance Co., 460 N.W.2d 858

(Iowa 1990). There, the insured estate sought to bring a bad-faith claim

against an insurer after a prior successful action on an uninsured

motorist policy. Id. at 859. We cited favorably B & B Asphalt and noted
 41

that the question was whether the first and second causes of action

amounted to the “same claim.” Id. at 860. We noted that “a second

claim is likely to be considered precluded if the acts complained of, and

the recovery demanded, are the same.” Id. (citing B & B Asphalt Co., 242

N.W.2d at 286). While we did not depart from our same-evidence

precedents, we recited the elastic phrases of the Restatement (Second) of

Judgments, which state that in determining whether causes of action

arose from the same transaction, the inquiry turns on whether there is “a

natural grouping or common nucleus of operative facts” and involves “a

determination whether the facts are so woven together as to constitute a

single claim.” Id. (quoting Restatement (Second) of Judgments § 24 cmt.

b (1982) [hereinafter Restatement (Second)]).

In Leutchtenmacher, the insurer filed a motion to dismiss the

claim, arguing that because the bad-faith action could have been

brought in the first action, the claim was barred as a matter of law. Id.

at 859. The Leutchtenmacher court declined to so rule. Instead, the

court held that whether the claim was precluded “depends on whether

the cases arose out of the same facts.” Id. at 861. The Leutchtenmacher

court gave an example: “In fact, a bad-faith claim might well be based on

events subsequent to the filing of the suit on a policy and therefore could

not be based on the ‘same’ facts.” Id. We concluded, however, by

emphasizing that whether the claims were precluded depended upon the

general principle of whether they arose out of the “same facts.” Id.

An additional illustrative Iowa case is Iowa Coal Mining Co. v.

Monroe County, 555 N.W.2d 418 (Iowa 1996). The case involved a classic

ongoing regulatory battle royal between an economically distressed Iowa

Coal and Monroe County. Id. at 424–26. In the first action, Iowa Coal

challenged the validity of a zoning ordinance that limited its operations
 42

in the county on a number of constitutional grounds. Id. at 425–26.

Iowa Coal did not prevail. Id.

Monroe County then passed a new but almost identical zoning

ordinance. Id. at 426. Not to be outdone, Iowa Coal launched another

action. Id. In the second action, Iowa Coal brought a claim for tortious

interference in addition to renewing its constitutional claims made in the

previous action. Id.

In Iowa Coal, Monroe County argued that the tortious interference

claim could have been brought in the original action and therefore was

barred under res judicata. Id. at 427. We rejected the assertion. We

recognized that there was evidence in the first action from which the

district court could have found intentional interference. Id. at 443.

Although there was some overlap of evidence, this was not determinative.

Id. at 443–44. We observed that evidence in support of the tortious

interference claim was different from the evidence to support the

constitutional claims in the first action. Id. at 444. Among other things,

we noted that under the tortious interference claim, Iowa Coal “had to

prove the County’s motive in its interference was to financially injure or

destroy Iowa Coal” while this showing was not required under the claims

brought in the original action. Id. We further noted that the fact the

tortious interference claim might have been litigated in the original action

was of no consequence. Id.

Finally, in Arnevik v. University of Minnesota Board of Regents, we

reprised the contours of Iowa res judicata principles. 642 N.W.2d 315

(Iowa 2002). Among other things, we noted that claim preclusion is

likely “where the ‘acts complained of, and the recovery demanded are the

same or where the same evidence will support both actions.’ ” Id. at 319

(emphasis added) (quoting Whalen v. Connelly, 621 N.W.2d 681, 685
 43

(Iowa 2000)). Additionally, we have noted that the first and second

action must be functionally the same but for the creative stylings of

counsel. See Pavone v. Kirke, 807 N.W.2d 828, 837 (Iowa 2011) (noting

that we “carefully distinguish” between the same cause of action and

related causes of action); Whalen, 621 N.W.2d at 685. The above solid

and unwavering line of authority was relied upon by the court of appeals

in holding that the bad-faith claim in this case did not need to be joined

with the original contract claim. 8

B. Application of Iowa Law. In my view, application of the same-

claim, same-evidence principles embraced in the above quintet of Iowa

cases supports the position of the insured and does not allow application

of res judicata in this case. Further, the mere fact the bad-faith claim

could have been brought earlier clearly is not determinative. See, e.g.,

Westway, 314 N.W.2d at 401–02.

It seems clear to me that, as in Iowa Coal, the evidence in a bad-

faith tort action is materially different from a contract action on the

insurance policy. A breach of contract, of course, may be present

without a valid bad-faith claim. See Bellville, 702 N.W.2d at 473.

Evidence in the breach-of-contract claim in this case was quite narrow

and focused entirely on the value of the destroyed property. And when

the claim is so limited, discovery is correspondingly limited.

8My reading of Leuchtenmacher and B & B Asphalt is supported by Huffey v. Lea,
491 N.W.2d 518 (Iowa 1992). In Huffey, we considered whether a beneficiary could
bring an action for tortious interference with a will after the beneficiary had previously
litigated a will contest involving the same parties. Id. at 519–20. We concluded that
claim preclusion did not bar the subsequent action, emphasizing the state of mind
required to support a tortious-interference action which was absent from the will
contest. Id. at 521–22. The majority opinion in this case essentially adopts the view
espoused by the Huffey dissent. See id. at 523–27 (McGiverin, C.J., dissenting).
Whether Huffey is good law after today is unclear.
 44

The nature of the bad-faith claim in this case, however, reaches

into the manner in which the claim was handled. The evidence to

support the bad-faith claim is not the same as the evidence to support

the breach-of-contract claim. A bad-faith claim can be proven only by

showing exactly how the company processed the claim, how thoroughly

the claim was considered, and why the company took the action it did.

See Brown v. Superior Ct., 670 P.2d 725, 734 (Ariz. 1983) (en banc). The

subjective state of mind of claim handlers is critical. See Kiner, 463 N.W.

2d at 12–13. Who at the insurance company knew what, when they

knew it, and other factual questions totally foreign to the contract

dispute are the guts of the bad-faith action. That is why our caselaw

allows risk-management experts to testify in bad-faith cases about the

proper risk management of a claim after the loss has occurred, an issue

distinct from the question of whether the contract was breached in the

first instance. Nassen v. Nat’l States Ins. Co., 494 N.W.2d 231, 235–36

(Iowa 1992). As noted in one recent case, “Insurance bad faith cases are

won or lost on the contents of the insurer’s claims files.” State Farm Mut.

Auto. Ins. Co. v. Howard, 296 F.R.D. 692, 695 (S.D. Ga. 2013) (quoting

Ashley at § 10:28). The claims file, however, generally has little to do

with a breach-of-contract claim.

Thus, under the same-claim, same-evidence approach emphasized

in B & B Asphalt and its progeny through Arnevik, res judicata does not

apply. The evidence needed to support a bad-faith claim goes well

beyond that which would ordinarily support a simple breach-of-contract

claim. This case presents a classic example of the different nature of the

contract and bad-faith causes of action. The contract action focused

solely on property values. The bad-faith action will focus on the postloss
 45

behavior of the insurance company in handling the claim, which was

completely irrelevant in the first action.

Further, related but separate rights are involved in the two claims.

The insurance company has a contractual duty to honor its contract, but

it has a separate duty in tort to deal with its insured in good faith. The

focus of the tort is not whether a specific contractual provision has been

breached, but whether the insurer’s “conduct [has damaged] the very

protection or security which the insured sought to gain by buying

insurance” through its handling of the claim. Rawlings v. Apodaca, 726

P.2d 565, 573 (Ariz. 1986) (en banc).

The remedies are also distinct. The recovery is not limited to the

benefit of the bargain. Instead, remedies include consequential damages,

emotional distress damages, and punitive damages. Dolan, 431 N.W.2d

at 794. The harm compensated by an award of emotional distress

damages is different from the economic harm protected in the contract

claim and, of course, requires different proof. Further, punitive damages

are available in part to support public policies inherent in the contract of

insurance. The differences in remedies demonstrate that different rights

and wrongs are being addressed in contract actions compared to bad-

faith actions.

Nothing in Leuchtenmacher is to the contrary. Leuchtenmacher

emphasized that a motion to dismiss did not lie when an insured who

had successfully litigated a contract claim against the insurer brought a

separate bad-faith action. 460 N.W.2d at 861. Leuchtenmacher

emphasized the traditional themes of identity of claim and same

evidence. Id. at 860. While Leuchtenmacher did state that “a bad-faith

claim might well be based on events subsequent to the filing of the suit

on a policy and therefore could not be based on the ‘same’ facts,” such
 46

language does not limit the situations in which a contract claim and a

bad-faith claim are not “based on the same facts.” Id. at 861. It only

provides an obvious example of how the facts in a bad-faith claim might

be different from a contract claim. Id.

The insurer also carries Restatement (Second), section 24 as a

head on a pike in support of its claim. The Restatement emphasizes that

its terms are “not capable of a mathematically precise definition” and

notes that determining whether to apply res judicata requires a “delicate

balance” between the rights of both the insurer and the insured.

Restatement (Second), § 24 cmt. b. The language of this Restatement

provision is elastic, and in any event, if it is to be applied, it must be read

in a manner consistent with the woof and weave of Iowa same-claim,

same-evidence caselaw. To the extent the Restatement is inconsistent

with our prior caselaw, I would not follow it.

I acknowledge, of course, that there is authority from other

jurisdictions that embraces a broad transactional theory of res judicata.

The majority opinion has a fistful of them. Although they could be

serially picked apart, a general observation will do. As a rule, the cases

cited by the majority glide over any same-evidence or same-claim

considerations in favor of a broader transactional approach. They also

contain a whiff of hostility to first-party bad-faith claims by minimizing

the differences between a bad-faith and a contract claim.

A good example of this gliding and minimizing with a whiff of

hostility is Porn v. National Grange Mutual Insurance Co., 93 F.3d 31 (1st

Cir. 1996). Remarkably, Porn does not grasp the difference between an

identical claim and a related claim emphasized in the Iowa cases. See

Iowa Coal, 555 N.W.2d at 442 (citing in support Westway, 314 N.W.2d at

401, and Leuchtenmacher, 460 N.W.2d at 860). Further, Porn minimizes
 47

the factual differences between a bad-faith and a contract claim,

suggesting that the claims involve only “different shadings of the facts.”

Porn, 93 F.3d at 35. In this case, the differences in the claims do not

involve “different shadings of the facts,” but a materially different

discovery, evidentiary, and remedial regime. In Porn, the court plays the

res judicata symphony in the transactional key of B flat minor, while in

our Iowa cases, the res judicata symphony is played in the same-

evidence, same-claim key of A major. In short, they have some

similarities but do not sound very much alike.

Although the majority suggests that a “great majority” of cases

supports its view, a more objective observation is made by a leading

commentator, who indicates that “[t]he courts are divided on the issue.”

Ashley at § 7:11. If we are enlisting cases to serve as penguins marching

to the sea, there are conscripts that support the traditional Iowa position

as well as the majority viewpoint. See Dadeland Depot, Inc. v. St. Paul

Fire & Marine Ins. Co., 483 F.3d 1265, 1271–72 (11th Cir. 2007) (holding

insured not barred from separate bad-faith action even though insured

could have brought claim in earlier arbitration proceeding); Schmueser v.

Burkburnett Bank, 937 F.2d 1025, 1031 (5th Cir. 1991) (noting that

under Texas law, bad-faith claim against bank requires different proof

than earlier action, seeks a different measure of recovery, and is thus not

barred by prior declaratory action); Corral v. State Farm Mut. Auto. Ins.

Co., 155 Cal. Rptr. 342, 345 (Ct. App. 1979) (contrasting bad-faith claim

with contract claim under auto insurance policy); Cantrelle Fence &

Supply Co. v. Allstate Ins. Co., 515 So. 2d 1074, 1079 (La. 1987),

superseded by statute, Act of July 18, 1990, No. 521, §§ 1–2, 1990 La.

Sess. Law Serv. 521, 521; Slider v. State Farm Mut. Auto. Ins. Co., 557
 48

S.E.2d 883, 890 (W. Va. 2001) (finding bad-faith claim not precluded by

res judicata because different evidence required).

Further, decisions embracing a same-evidence approach to

res judicata rather than a broad transactional test are well represented

in the caselaw. See, e.g., Butts v. Evangelical Lutheran Good Samaritan

Soc., 852 F. Supp. 2d 1139, 1145 (D.S.D. 2012); Lemuel v. Admiral Ins.

Co., 414 F. Supp. 2d 1037, 1061 (M.D. Ala. 2006); SMA Servs., Inc. v.

Weaver, 632 N.W.2d 770, 774 (Minn. Ct. App. 2001). But see Motient

Corp. v. Dondero, 269 S.W.3d 78, 85 (Tex. Ct. App. 2008) (noting Fifth

Circuit’s transactional test does not consider variations in the evidence).

In any event, caselaw counted on an abacus does not provide a

rule of decision or provide a basis for the obvious innovations of our prior

caselaw presented in the court’s opinion in this case. See Handeland v.

Brown, 216 N.W.2d 574, 577 (Iowa 1974) (“[W]e have no obligation to

adopt a rule just because it has generally been adopted elsewhere.

Although cases from other states may be persuasive authority, they have

no greater cogency than the reasoning by which they were decided.”).

The court of appeals correctly applied our caselaw when it declared,

“[B]ecause the protected right, the alleged wrong, the recovery sought,

and the relevant evidence in the current tort lawsuit are different than in

the prior contract lawsuit, claim preclusion does not apply to bar the

plaintiff’s tort claim.” Rather than depart from our unwavering same-

claim, same-evidence caselaw, I would hold the course.

C. Pragmatic Considerations. The majority focuses primarily on

pragmatic considerations in moving away from the same-claim, same-

evidence approach. To the extent relevant, I have a different view of the

pragmatic implications of this case.
 49

First, by requiring the bad-faith claim to be joined in the breach-of-

contract action whenever there is notice of a potential claim, we run the

risk of complicating, not simplifying, the litigation process. Prior to this

case, the parties could litigate the relatively simple and contained policy

claim first. If the plaintiff did not prevail, that would be the end of the

matter, as a bad-faith claim cannot be brought after an unsuccessful

policy claim. See Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203,

207 (Iowa 1995) (upholding denial of coverage, resulting in failure of bad-

faith claim). The majority rule may tend to unnecessarily escalate

disputes by requiring joinder of contract and bad-faith claims if the

plaintiff is on notice of such a claim.

Further, the notice question will generate litigation regarding what

plaintiffs knew and when they knew it. Moreover, the question of what

amounts to notice will generate a body of caselaw; it seems to me, at a

minimum, a mere assertion by plaintiff’s counsel of the possibility of a

future bad-faith claim—a standard lawyer’s tactic that does not amount

to notice—should not be enough. In any event, the notice feature of the

majority opinion will generate a new arena of dispute not present in

current law.

Further, the requirement that the plaintiffs join a bad-faith claim

to a contract action in order to preserve it gives rise to a number of

thorny issues. Will there be simultaneous discovery, or will discovery of

the contract claim go first? Thus, a preliminary battle must be fought at

the beginning of the litigation over proper sequencing. In this case, the

district court indicated that if the contract and bad-faith claims were

joined, discovery would proceed first on the contract claim. See Warnke

v. IMT Ins. Co., 657 N.W.2d 715, 716–17 (Iowa 2003) (per curiam); see

also Brown, 670 P.2d at 728 n.1 (“[T]here are many problems involved in
 50

allowing a claimant simultaneously to pursue both a claim under the

coverage provided by the policy and a bad-faith claim based upon the

insurer’s refusal to pay the policy claim. One could plausibly argue that

the law should not allow such simultaneous actions and that a bad-faith

claim can be pursued only after disposition of the underlying policy

claim.”). Only after the contract claim was resolved would there be

discovery on the bad-faith claim, including potential disclosure of the

claims file and other internal documents related to the insurer’s handling

of the claim. There would thus be apparently two separate juries to

consider each claim. Very little would be gained in terms of efficiency

under this scenario.

On the other hand, a court could allow simultaneous discovery on

all issues. See, e.g., Handley, 467 N.W.2d at 250. If there is

simultaneous discovery on both issues, the efficiency goals of the

majority may also be minimized as the hand-to-hand combat on

discovery issues that often accompanies a bad-faith claim may engulf the

proceedings. The complications can include questions regarding the

proper scope of work product and attorney–client privileges, whether an

exception to these privileges applies, or whether the protections generally

afforded by these privileges has been waived. See Ashley at § 10:29–:31

(discussing discovery in bad-faith cases involving attorney–client

privilege, work product, and discovery of reserves); 1 Steven Plitt &

Jordan Ross Plitt, Practical Tools for Handling Insurance Cases § 7.24

(2011); Donna Gooden Payne, Note, Insurer Bad Faith: The Need for an

Exception to the Attorney–Client Privilege, 11 Rev. Litig. 111 (1991);

Steven Plitt, The Elastic Contours of Attorney–Client Privilege and Waiver

in the Context of Insurance Company Bad Faith: There’s a Chill in the Air,

34 Seton Hall L. Rev. 513 (2004). In short, under the majority approach,
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there may be more bad-faith claims, more focus on bad-faith discovery,

and few expeditious resolutions of contract disputes.

Second, the majority opinion puts attorneys in a potentially

difficult position. The majority fires a warning shot that bringing a bad-

faith claim could give rise to sanctions yet requires the claim to be

brought in a breach-of-contract action when the claim may not be fully

developed. See Camus v. State Farm Mut. Auto. Ins. Co., 151 P.3d 678,

681 (Colo. App. 2006). The end result is that an attorney will have the

following choice: bring the claim at the onset of the litigation and risk

sanctions, or seek to develop the claim through the contract case and

amend later. The latter course, however, might run the risk that the

amendment might be denied as an undue expansion of issues. Further,

to the extent the majority’s new regime discourages plaintiff’s counsel

from bringing a bad-faith claim at the outset but requires a later

amendment dramatically broadening proceedings as the claim develops,

there is a very real prospect that continuances may be required to allow

the parties to fully develop the later claim. 9

In the end, I doubt that much efficiency will be achieved by the

majority’s approach. The chairs on the deck have certainly been
rearranged. Our prior same-claim, same-evidence precedents have been

seriously undermined, if not effectively overruled, at least in the context

of first-party bad-faith insurance litigation. Certainly little will be

achieved, and much may in fact be lost, by the majority’s departure from

this court’s long line of same-claim, same-evidence precedents. The

9The majority opinion also turns the attention of defense counsel toward
possible sanctions in bad-faith litigation. I doubt that the majority’s use of the
sanctions as bellows to blow judicial air over the hot coals of bad-faith controversies will
have a cooling effect.
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holding does, however, deny the plaintiff his day in court on this

potentially valid bad-faith claim, no question about that. I would have

thought this court would prefer to give a party a day in court rather than

pursue the speculative benefits that will supposedly result from the

court’s departure from our established caselaw.

In conclusion, I note that the majority does not overrule our cases

emphasizing the role of the same claim and the same evidence. Thus,

these factors will continue to inform our view of claim preclusion under

the Restatement (Second), section 24, and will likely produce a narrower

view of the application of the doctrine under Iowa law than under more

aggressive caselaw in other jurisdictions.

III. Conclusion.

For the above reasons, I would reverse the decision of the district

court and remand this case for trial of the bad-faith claim.

Wiggins and Hecht, JJ., join this dissent.