Nevadacare, Inc. D/b/a I/hx Iowa Health Solutions, Inc. Vs. Department Of Human Services And Kevin W. Concannon, In His Official Capacity As Director, Department Of Human Services

IN THE SUPREME COURT OF IOWA
No. 08–0952

Filed April 30, 2010

NEVADACARE, INC. d/b/a
i/hx IOWA HEALTH SOLUTIONS, INC.,

Appellant,

vs.

DEPARTMENT OF HUMAN SERVICES and
KEVIN W. CONCANNON, in His Official Capacity
as Director, Department of Human Services,

Appellees.

Appeal from the Iowa District Court for Polk County, Carla T.

Schemmel, Judge.

A party to a series of contracts appeals a district court order

denying its breach of contract claims and requiring it to pay the

prevailing party’s attorney fees. AFFIRMED IN PART, REVERSED IN

PART, AND CASE REMANDED.

Michael A. Dee of Brown, Winick, Graves, Gross, Baskerville and

Schoenebaum, P.L.C., Des Moines, David L. Brown of Hansen,

McClintock & Riley, Des Moines, and Matthew G. Weber and Stephen G.

Masciocchi of Holland & Hart, LLP, Denver, Colorado, for appellant.

Mark E. Weinhardt, David Swinton, Margaret C. Callahan, and

Danielle M. Shelton of Belin Lamson McCormick Zumbach Flynn, Des

Moines, for appellees.
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WIGGINS, Justice.

In this appeal, we must decide if the district court properly

determined that NevadaCare, Inc. d/b/a i/hx Iowa Health Solutions, Inc.

was not entitled to damages under a series of contracts setting capitation

rates payable to it. We must also decide whether the district court

correctly awarded the department of human services and Kevin W.

Concannon (hereinafter collectively referred to as “DHS”) attorney fees

under the contracts. On our review of the record, we find DHS did not

breach its contracts with NevadaCare. We find, however, that only one of

the contracts entitled DHS to attorney fees and litigation costs.

Accordingly, we affirm the judgment of the district court granting

judgment in favor of DHS on all claims on the merits, reverse the

judgment of the district court awarding DHS attorney fees and litigation

costs, and remand the case to the district court for further proceedings

to determine an appropriate award of attorney fees and litigation costs

limited to the contract for fiscal years 2004 and 2005.

I. Background Facts and Proceedings.

After closely and carefully scrutinizing the record, we find the

record supports the following facts found by the district court. Beginning

in fiscal year 1998, NevadaCare entered into a series of contracts with

DHS in which NevadaCare agreed to provide managed health care

services as a health maintenance organization (HMO) for enrollees in

Iowa’s Medicaid program. In consideration for providing its services,

DHS agreed to pay NevadaCare monthly capitation payments for each

Medicaid enrollee enrolled with NevadaCare. DHS paid the monthly

capitation rates regardless of whether the Medicaid enrollees received

medical services from NevadaCare in that month. This relationship

lasted until February 1, 2005. During this period, the parties entered
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into a series of five contracts. Three separate contracts covered fiscal

years 1998, 1999, and 2003. One contract covered fiscal years 2000 to

2002, while another contract covered fiscal years 2004 to 2005. The

contracts were risk-based contracts, meaning they did not guarantee

NevadaCare a profit. Thus, if NevadaCare’s actual costs of providing

managed health care services to its enrollees were greater than the

capitation payments it received, it could incur losses under the

contracts.

At the time the parties entered into their first contract, the Centers

for Medicare and Medicaid Services (CMS) mandated that capitation rates

be less than the upper payment limit (UPL) to ensure the managed care

delivery model was more cost efficient than the traditional fee-for-service

model. See 42 C.F.R. § 447.361 (1997). The contracts define UPL as the

projected cost of providing services to an actuarially equivalent

population in a fee-for-service program. In accordance with this federal

mandate, the Iowa Administrative Code required capitation rates to be

actuarially determined for the beginning of each new fiscal year and

stated, “[t]he capitation rate shall not exceed the cost . . . of providing the

same services on a fee-for-service basis.” Iowa Admin. Code r. 441—

88.12(2) (1997). Rather than employ its own actuaries to calculate these

rates, DHS contracted with the actuarial accounting firm Milliman

U.S.A., Inc. f/k/a Milliman & Robertson, Inc., to calculate the capitation

rates.

The contracts for fiscal years 1998, 1999, and 2000 called for

capitation payments to NevadaCare at 97% of the UPL. For the fiscal

years 2001, 2002, and 2003, these capitation payments increased to

98% of the UPL. In fiscal year 2004, CMS promulgated a new regulation

allowing states to set capitation rates above the UPL if necessary to
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achieve actuarial soundness. See 42 C.F.R. § 438.6(c) (2004). Thus, in

fiscal year 2004, DHS abandoned its UPL rate-setting methodology and

instead applied a new managed care methodology, which attempted to

project the actual cost for a reasonably efficient managed care

organization to provide services to Medicaid enrollees for the upcoming

fiscal year. Under this new methodology, Milliman developed and used

an actuarial tool referred to as degrees of health management to identify

a projected cost range for each rate category. Milliman then set specific

capitation rates for each category at various points within the actuarially

projected ranges. This new methodology was more complex than the

previous UPL methodology that DHS utilized in its earlier contracts.

Each contract required DHS to calculate the capitation rates it

would pay NevadaCare. Consequently, each contract contained an

addendum consisting of a report prepared by Milliman describing the

actuarial work it performed and the methodology it used to calculate the

capitation rates for the applicable contract. The reports also contained

capitation rate charts, which laid out the results of Milliman’s work.

These rate charts provided the specific capitation rates DHS paid

NevadaCare on a monthly basis for each Medicaid enrollee enrolled in

NevadaCare’s plan.

Before entering each contract, NevadaCare had the opportunity to

review the entire contract, including the capitation rates contained in the

rate charts, and decide whether to enter into the agreement. NevadaCare

financially analyzed the rates to see if they were consistent with its

budget, but it never employed its own actuaries to review the accuracy of

the rates. It is undisputed that from fiscal years 1998 to 2005,

NevadaCare consistently entered into the contracts in issue and DHS

paid the capitation rates listed in the rate charts.
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The language dealing with the capitation rates for each contract is

as follows:

Fiscal year 1998

In full consideration of contract services rendered by the
HMO, the DEPARTMENT agrees to pay the HMO monthly
payments based on the HMO’s decisions concerning optional
services and reinsurance as specified in Addendum VI at the
capitation rates established for counties within the identified
regions as outlined in ADDENDUM XV. Capitation rates are
calculated on an actuarial basis recognizing payment limits
set forth in 42 CFR 447.361.

Fiscal year 1999

In full consideration of contract services rendered by the
HMO, the DEPARTMENT agrees to pay the HMO monthly
payments based on the HMO’s decisions concerning optional
services and reinsurance as specified in Addendum VI at the
capitation rates established for counties within the identified
regions as outlined in ADDENDUM XV. Capitation rates are
calculated on an actuarial basis recognizing payment limits
set forth in 42 CFR 447.361. Capitation payments received
shall be payment in full for services provided by the HMO
and there shall be no adjustments retroactively to reflect the
actual cost of services provided.

Fiscal years 2000, 2001, and 2002

In consideration of Contract Services rendered by the HMO,
the Department shall make a monthly capitated payment to
the HMO. The monthly capitated payment will be
established based on the Enrollee’s age, sex and county of
residence as established in Addendum XII. Capitation rates
calculation methodology is outlined in Addendum XII.

Fiscal year 2003

In consideration of Contract Services rendered by the MCO
[managed care organization], the Department shall make a
monthly capitated payment to the MCO. The monthly
capitated payment will be established based on the
Enrollee’s age, sex and county of residence as established in
Addendum XI. Capitation rate calculation methodology is
outlined in Addendum XI.

Fiscal years 2004 and 2005

In consideration of Contract Services rendered by the MCO,
the Department shall make a monthly capitated payment to
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the MCO. The monthly capitated payment will be
established based on the Enrollee’s age, sex and county of
residence as established in Addendum XI. Capitation rate
calculation methodology is outlined in Addendum XI.
In 2004 NevadaCare did not receive a new actuary report from

DHS relating to the calculation of the fiscal year 2005 capitation rates.

NevadaCare contacted DHS and requested the report but was told that

there was no need for a new report because the capitation rates would

not be changed for the upcoming fiscal year. From this point, the

relationship between NevadaCare and DHS started to deteriorate.

NevadaCare began to believe DHS was not properly setting the capitation

rates and requested information about DHS’s rate-setting practices;

however, DHS did not comply with its requests. Thus, on October 6,

2004, NevadaCare filed an action alleging, in part, that DHS had violated

the contracts at issue, as well as state and federal law, by setting

improper capitation rates. Specifically, NevadaCare claimed DHS did not

calculate the capitation rates on an actuarially sound basis. On

November 29, 2004, NevadaCare exercised its option to terminate the

fiscal years 2004 through 2005 contract with DHS. Due to a

contractually required sixty-day notification period, the effective date of

the termination was February 1, 2005. We will discuss other facts

pertinent to deciding this appeal later in this opinion.

After dealing with extensive pretrial motions, the district court held

a bench trial. In its decision, the district court concluded it could find no

breach of the contracts since both parties performed pursuant to the

specific capitation rates contained within the rate charts of the contracts.

NevadaCare filed a motion to enlarge and amend the district court’s

findings of fact, conclusions of law, ruling, and judgment. The district

court denied NevadaCare’s motion.
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In its final judgment on the merits, the district court gave the

parties thirty days to present any claims for attorney fees and expenses.

DHS filed an application for attorney fees and litigation costs as well as a

supporting brief and affidavit. DHS claimed each contract, except the

fiscal year 1998 contract, contained provisions entitling DHS to attorney

fees and litigation costs. DHS requested the district court to award

reasonable and necessary attorney fees and expenses in the amount of

$2,987,757.41 and court costs taxed in the amount of $7,877.82.

NevadaCare resisted DHS’s application for attorney fees and

litigation costs. NevadaCare argued DHS had no basis to recover

attorney fees related to the fiscal years 1999 through 2003 contracts

because those contracts only contained indemnification provisions and

did not contain explicit fee-shifting provisions. Consequently,

NevadaCare sought to reduce DHS’s reasonable and necessary attorney

fees and costs to $366,931.49.

In ruling on DHS’s application for attorney fees and litigation costs

the district court concluded the indemnification provisions as well as the

fiscal years 2004 to 2005 fee-shifting provision required NevadaCare to

pay for the litigation expenses and attorney fees DHS had incurred in

this case. As a result, the court granted DHS’s application and ordered

NevadaCare to pay DHS $1,942,912.20 in attorney fees and litigation

expenses. After receiving this ruling, NevadaCare filed its notice of

appeal.

II. Issues.

We must decide if the district court properly interpreted the

contracts. In doing so, we must determine if the contracts required DHS

to calculate the capitation rates on an actuarially sound basis. After

interpreting the contracts, we must next determine if substantial
 8

evidence supports the district court’s judgment. Finally, we must

determine whether the district court correctly awarded DHS its attorney

fees and litigation expenses under the contracts.

III. Analysis.

A. The Capitation Rates Issue.

1. Standard of review. A breach-of-contract claim tried at law to

the district court is reviewed by us for correction of errors at law.

EnviroGas, L.P. v. Cedar Rapids/Linn County Solid Waste Agency, 641

N.W.2d 776, 780 (Iowa 2002). The district court’s findings of fact have

the effect of a special verdict. Iowa R. App. P. 6.907 (2009). “The trial

court’s ‘legal conclusions and application of legal principles are not

binding on the appellate court.’ ” EnviroGas, L.P., 641 N.W.2d at 781

(quoting Land O’Lakes, Inc. v. Hanig, 610 N.W.2d 518, 522 (Iowa 2000)).

We will reverse a district court’s judgment if we find the court has

applied erroneous rules of law, which materially affected its decision.

Falczynski v. Amoco Oil Co., 533 N.W.2d 226, 230 (Iowa 1995). In

contrast, the district court’s findings of fact are binding on us if they are

supported by substantial evidence. Id.

In this case, NevadaCare urges us to apply a more exacting

standard when reviewing the district court’s judgment, due to the district

court’s alleged wholesale adoption of DHS’s proposed findings of fact and

legal conclusions. Both parties filed proposed findings of fact and

conclusions of law. It appears the district court’s findings of fact quoted,

essentially verbatim, from DHS’s proposed findings of fact. Moreover, the

district court’s conclusions of law also quoted at length from DHS’s

proposed conclusions of law.

We have recognized counsels’ submission of proposed findings of

fact and conclusions of law can be extremely valuable in assisting the
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district court, especially in highly technical or complicated cases. Kroblin

v. RDR Motels, Inc., 347 N.W.2d 430, 435 (Iowa 1984). Nonetheless, we

have criticized the practice of a district court’s verbatim adoption of the

proposed findings of fact and conclusions of law prepared by a prevailing

attorney because “the decision on review reflects the findings of the

prevailing litigant rather than the court’s own scrutiny of the evidence

and articulation of controlling legal principles.” Rubes v. Mega Life &

Health Ins. Co., 642 N.W.2d 263, 266 (Iowa 2002); see also United States

v. El Paso Natural Gas Co., 376 U.S. 651, 656–57, 84 S. Ct. 1044, 1047,

12 L. Ed. 2d 12, 17 (1964) (noting the court preferred findings “drawn

with the insight of a disinterested mind” rather than counsel’s proposed

findings adopted verbatim by the trial court).

We have refused to adopt a higher standard of review under similar

circumstances. See Quality Refrigerated Servs., Inc. v. City of Spencer,

586 N.W.2d 202, 205 (Iowa 1998); Care Initiatives v. Bd. of Review, 500

N.W.2d 14, 16 (Iowa 1993). We have recognized, however, where a

district court adopts a prevailing counsel’s proposed findings of fact and

conclusions of law verbatim, we must scrutinize the record more

carefully when conducting our appellate review. Rubes, 642 N.W.2d at

266. Accordingly, due to the district court’s verbatim adoption of DHS’s

proposed findings of fact and conclusions of law, we will scrutinize the

record more closely and carefully when performing our appellate review.

Id.

We once again encourage our district courts not to adopt verbatim

the proposed findings of fact and conclusions of law prepared by counsel.

It is the district court’s duty to independently determine the facts,

articulate the controlling law, and apply the controlling law to the facts.
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A court should never abdicate this essential duty of the judicial branch of

government to counsel or the parties before the court.

2. Principles of contract interpretation. The determination of the

intent of the parties at the time they entered into the contract is the

cardinal rule of contract interpretation. Walsh v. Nelson, 622 N.W.2d

499, 503 (Iowa 2001). If the principal purpose of the parties is

ascertainable from the words and other conduct of the parties in light of

all the circumstances, we give those words and conduct great weight

when interpreting the contract. Pillsbury Co. v. Wells Dairy, Inc., 752

N.W.2d 430, 436 (Iowa 2008). When interpreting the meaning of a

contract we may also look to extrinsic evidence such as, “ ‘the situation

and relations of the parties, the subject matter of the transaction,

preliminary negotiations and statements made therein, usages of trade,

and the course of dealing between the parties.’ ” Fausel v. JRJ Enters.,

Inc., 603 N.W.2d 612, 618 (Iowa 1999) (quoting Restatement (Second) of

Contracts § 212 cmt. b, at 126 (1979)). However, the most important

evidence of the parties’ intentions at the time they entered into the

contract is the words of the contract. Pillsbury Co., 752 N.W.2d at 436.

3. Application of contract principles. Although the language of the

contracts dealing with the capitation rates varies from year to year, we

interpret the contracts as requiring the capitation rates to be set on an

actuarially sound basis. We reach this conclusion for the following

reasons. First, all the contracts contain language that indicates the

capitation rates were to be computed on an actuarially sound basis. The

contracts for fiscal years 1998 and 1999 specifically require the

capitation rates to be set on an actuarial basis. Even though the

contract for fiscal years 2000 to 2002 does not include a reference to

actuarial basis in the paragraph concerning the capitation rates,
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addendum XII to the contract states, “[c]alculation of the SFY 2000 HMO

rate setting was based on program and policy adjustments and trend

adjustments applied to the analysis performed in setting the SFY 1999

rates.” This sentence indicates Milliman calculated the capitation rates

in this contract the same way it calculated the rates in the contract for

fiscal year 1999. Finally, addendum XI to the contract for fiscal year

2003 specifically refers to “the actuarial soundness of the rates,” while

addendum XI to the contract for fiscal years 2004 and 2005 contains a

certification acknowledging Milliman calculated the rates by following

“generally accepted actuarial principles and practices.”

Second, both federal and state law requires the capitation rates to

be computed on an actuarially sound basis. See 42 U.S.C.

§ 1396b(m)(2)(A)(iii) (1992) (requiring payments to be made on an

actuarially sound basis); 42 C.F.R. § 438.6(c)(2) (2001) (same); 42 C.F.R.

§ 434.61 (1996) (requiring CMS to determine that the capitation rates are

computed on an actuarially sound basis); Iowa Admin. Code r. 441—

88.12(2) (requiring capitation rates to be actuarially determined for the

beginning of each new fiscal year). DHS hired an actuarial firm to

compute the rates. In some of the contracts, the parties cited the

applicable federal regulations. Both parties were versed in Medicaid law,

recognized their dealings involved the Medicaid program, and understood

that any contract must comply with the applicable law for setting

capitation rates. There is no reason to believe both parties would have

intended to enter into a contract that did not comply with the applicable

Medicaid regulations.

The district court interpreted the contracts as contracts for the

specific rates contained in the charts attached to each contract. We

disagree with the district court’s interpretation by finding the contracts
 12

required the capitation rates contained in the charts to be computed on

an actuarially sound basis.

4. Substantial evidence of actuarially sound capitation rates.

Normally, we would be required to remand the case to the district court

to decide if the capitation rates were computed on an actuarially sound

basis. However, the district court found, even if there was a contractual

promise requiring the rates to be actuarially sound, “the concept of

actuarial soundness is, as an actuarial matter, susceptible [to] a wide

range of appropriate capitation rates in any given situation and multiple

methodologies for calculating those rates.” The district court further

found NevadaCare failed to carry its burden of proof that the rates

contained in the charts attached to the contracts were not actuarially

sound. In other words, the district court found NevadaCare did not

establish that the capitation rates were not computed on an actuarially

sound basis. Therefore, we need not remand the case; rather, we can

review the record to determine whether substantial evidence supports

the district court’s finding that NevadaCare did not establish the

capitation rates were not computed on an actuarially sound basis.

In arguing the capitation rates were not computed on an

actuarially sound basis, NevadaCare presented testimony from two

consulting actuaries. These actuaries spent considerable time reviewing

and reconstructing the Milliman reports. The consulting actuaries took

the data DHS provided Milliman and recalculated the capitation rates

based on their own assumptions and judgments to obtain rates that they

opined were actuarially sound.

The first area of concern addressed by the consulting actuaries

involved the inclusion of certain data when determining the capitation

rates for fiscal years 2004 and 2005. The consulting actuaries
 13

determined Milliman improperly used data from foster care children

claims, dental claims, and three-legged claims 1 in determining the

capitation rates for fiscal years 2004 and 2005. The error in using foster

care claims and dental claims data to compute actuarially sound

capitation rates was that NevadaCare did not cover those claims. The

error in using three-legged claims data to compute actuarially sound

capitation rates was that Milliman did not properly account for the

refund portion of these claims when it calculated the actual cost of the

claims. The consulting actuaries concluded that by using this data, the

capitation rates set in fiscal years 2004 and 2005 could not be

actuarially sound. They determined these errors caused DHS to pay

NevadaCare approximately six million dollars more than it should have

been paid if the correct data had been used to set the capitation rates for

those years.

At trial, the actuary for Milliman who oversaw the preparation of

the reports acknowledged that the foster care children claims, dental

claims, and three-legged claims data should not have been included

when Milliman prepared the reports. He further testified the inclusion of

this data did not affect the actuarial soundness of the capitation rates.
DHS also had its own consulting actuary testify regarding the Milliman

reports. As to using the data from foster care children claims, dental

claims, and three-legged claims, the consulting actuary agreed that

Milliman should not have used this data when it set the capitation rates

for fiscal years 2004 and 2005. He did point out, however, that this six

million dollar error was in favor of NevadaCare; therefore, it was a

nonissue.

1A three-legged claim is a claim that was paid, refunded, and then repaid at a

different reimbursement rate.
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Based on this testimony, substantial evidence supports a finding

that the capitation rates for the fiscal years 2004 to 2005 contract were

not calculated on an actuarially sound basis. However, this breach does

not entitle NevadaCare to recover damages. An essential element of a

breach of contract claim is that the breach caused a party to incur

damages. Kern v. Palmer Coll. of Chiropractic, 757 N.W.2d 651, 657–58

(Iowa 2008). The inclusion of this data caused NevadaCare no damage.

Consequently, NevadaCare cannot base a claim for breach of contract

upon the inclusion of this data.

Nevadacare also claimed the capitation rates were not actuarially

sound in eleven additional respects. Its consulting actuaries opined that

the areas responsible for the unsoundness are (1) errors in encounter

data, (2) calculation of claims incurred but not received, (3) inadequate

legislative adjustment for tobacco settlement proceeds, (4) trending that

does not reflect actual experience, (5) demographic changes, (6) reduction

for co-pays not taken, (7) below cost administrative allowance, (8)

inappropriate lag on payment, (9) inadequate MediPASS savings, (10)

maternity adjustments errors, and (11) reinsurance issues. The basis for

the consulting actuaries’ opinions is that the adjustments made by the

Milliman actuaries in these eleven areas were not in conformance with

generally accepted actuarial principles. NevadaCare’s consulting

actuaries further opined that the method they used to calculate the

capitation rates is the only way to determine the capitation rates on an

actuarially sound basis.

DHS’s actuarial experts opined that in each of the eleven areas,

any adjustments made by the Milliman actuaries were dependent on the

judgment of the actuaries. They also opined that any adjustments made
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by the Milliman actuaries were in conformance with generally accepted

actuarial principles.

When we review a finding for substantial evidence, we view the

evidence in a light most favorable to the district court’s judgment.

EnviroGas, L.P., 641 N.W.2d at 781. “ ‘Evidence is substantial for

purposes of sustaining a finding of fact when a reasonable mind would

accept it as adequate to reach a conclusion.’ ” Land O’Lakes, Inc., 610

N.W.2d at 522 (quoting Falczynski, 533 N.W.2d at 230). “Evidence is not

insubstantial merely because we may draw different conclusions from

it[.]” Raper v. State, 688 N.W.2d 29, 36 (Iowa 2004). The ultimate

question is whether the evidence supports the court’s finding, not

whether it would support a different finding. Id.

The testimony provided by DHS’s actuarial experts constitutes

substantial evidence that the capitation rates were determined on an

actuarially sound basis. Actuarial science is a discipline that assesses

risk in the insurance industry based upon the application of

mathematical and statistical methods. It is not an exact science. An

actuary must have an understanding of math, probabilities, statistics,

finance, and economics. An actuary does not just crunch numbers.

Rather, an actuary reviews data, analyzes its significance, and makes

certain judgments relating to adjustments that need to be made to the

data before the actuary can assess the insurance risks and set insurance

premium rates. Different assumptions and judgment calls concerning

the data made by different actuaries will lead to different risks and

premium rates. Just because two actuaries determine different premium

rates by analyzing the same set of data does not mean the premiums

were not determined on an actuarially sound basis by both actuaries. As

long as the differences are caused by assumptions and judgment calls
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made by the actuaries in accordance with generally accepted actuarial

standards and principles, the final rates calculated by the actuaries are

computed on an actuarially sound basis. See Actuarial Standards

Board, Introduction to the Actuarial Standards of Practice § 4.5.3 (2008)

(recognizing it is appropriate, if not inevitable, for actuaries to exercise

their professional judgment when projecting the effect of contingent

future events).

Here, there is substantial evidence that the judgments and

assumptions used by the Milliman actuaries would not have been the

same as those used by the consulting actuaries hired by NevadaCare.

Nevertheless, substantial evidence supports the finding that the

judgments and assumptions made by the Milliman actuaries were in

accordance with generally accepted actuarial standards and principles.

Accordingly, we affirm the judgment of the district court that NevadaCare

has failed to prove the capitation rates contained in the five contracts

were not determined on an actuarially sound basis.

B. Other Contractual Claims. NevadaCare raises three further

claims for reversal based on the district court’s interpretation that the

contracts were contracts for the capitation rates contained in the charts

attached to each contract, rather than contracts requiring the rates to be

computed on an actuarially sound basis. First, NevadaCare claims DHS

breached the covenant of good faith because the contracts did not

comply with the legal requirement that the capitation rates be computed

on an actuarially sound basis. Second, NevadaCare claims the contracts

should be reformed so that the rates are computed on an actuarially

sound basis. Third, NevadaCare claims the law of promissory estoppel

requires the contracts to be interpreted so that the rates are computed

on an actuarially sound basis.
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We have interpreted the contracts as requiring that the rates be

computed on an actuarially sound basis. Therefore, we need not address

these issues in this appeal.

C. Attorney Fee Award.

1. Standard of review. We review a challenge to a district court’s

grant of attorney fees for an abuse of discretion. City of Des Moines v.

Housby-Mack, Inc., 687 N.W.2d 551, 554 (Iowa 2004); Vaughan v. Must,

Inc., 542 N.W.2d 533, 541 (Iowa 1996); Green v. Iowa Dist. Court, 415

N.W.2d 606, 608 (Iowa 1987). We will reverse a court’s discretionary

ruling only when the court rests its ruling on grounds that are clearly

unreasonable or untenable. Gabelmann v. NFO, Inc., 606 N.W.2d 339,

342 (Iowa 2000). When reviewing an attorney fees award for an abuse of

discretion, we will correct erroneous applications of the law. Everly v.

Knoxville Cmty. Sch. Dist., 774 N.W.2d 488, 492 (Iowa 2009).

2. Analysis. As a general rule, unless authorized by statute or

contract, an award of attorney fees is not allowed. W.P. Barber Lumber

Co. v. Celania, 674 N.W.2d 62, 66 (Iowa 2003). Iowa Code section 625.22

authorizes a court to award reasonable attorney fees in an action where

“judgment is recovered upon a written contract containing an agreement

to pay an attorney’s fee.” Iowa Code § 625.22 (1997). A written contract

must contain an express provision regarding attorney fees and litigation

expenses in order for a court to include attorney fees and litigation

expenses in a favorable judgment. EFCO Corp. v. Norman Highway

Constructors, Inc., 606 N.W.2d 297, 301 (Iowa 2000). When a contract

contains a clear and express provision regarding attorney fees, the

court’s award must be for reasonable attorney fees. Ales v. Anderson,

Gabelmann, Lower & Whitlow, P.C., 728 N.W.2d 832, 842 (Iowa 2007).
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NevadaCare argues the indemnification provisions contained in the

fiscal years 1999 through 2003 contracts did not entitle DHS to recover

attorney fees; instead, the indemnification provisions only provided for

the recovery of attorney fees and costs incurred in connection with third-

party claims. DHS claims the court properly awarded the fees under the

indemnification provisions in the contracts. The contract for fiscal year

2003 contained an indemnification provision that stated:

The MCO agrees to defend, indemnify and hold the State of
Iowa and the Department, and their officers, agents and
employees, harmless from any and all liabilities, damages,
settlements, judgments, costs and expenses, including
reasonable attorney’s fees of the Attorney General’s Office,
and the costs and expenses and attorney fees of other
counsel required to defend the State of Iowa, the Department
and their officers, agents and employees related to or arising
from:

• Any breach of this Contract;

• Any negligent or intentional act or omission of the MCO, its
officers, owners, employees, agents, board members,
Providers or subcontractors or any other person in
connection with the services provided under this Contract;

• Claims for infringement of patents, trademarks, trade
secrets, copyrights or other intellectual property right;

• The MCO’s performance or attempted performance of this
Contract;

• Any failure by the MCO to comply with all local, state and
federal laws and regulations;

• Any failure by the MCO to make all reports and any
payments required to conduct business in the State of
Iowa, including, but not limited to, federal and state
withholding; taxes; and other fees or costs required of the
MCO; or

• Any failure by the MCO to adhere to the confidentiality
provisions of this Contract.
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(Emphasis added.) The fiscal years 1999, 2000 to 2002, and 2004 to

2005 contracts contain substantially similar indemnification provisions.

The contracts for fiscal years 1999 through 2003 did not contain specific

fee-shifting provisions.

Currently, there is a split of authority as to whether an

indemnification provision applies to claims between the parties to the

agreement or only to third-party claims. Some jurisdictions have held

attorney fees are recoverable under a general indemnity provision. See,

e.g., Caldwell Tanks, Inc. v. Haley & Ward, Inc., 471 F.3d 210, 216 (1st

Cir. 2006) (holding Massachusetts law contains no assumption that

indemnity provisions are restricted to third-party claims); Atari Corp. v.

Ernst & Whinney, 981 F.2d 1025, 1031–32 (9th Cir. 1992) (finding the

plain meaning of “indemnify” is not to compensate for losses caused by

third parties, but merely to compensate for loss in general); Kraft Foods

N. Am., Inc. v. Banner Eng’g & Sales, Inc., 446 F. Supp. 2d 551, 577 (E.D.

Va. 2006) (stating “the plain meaning definition of indemnification does

not limit reimbursement to losses suffered as a result of third party

claims”); Nova Research, Inc. v. Penske Truck Leasing Co., 952 A.2d 275,

288–89 (Md. 2008) (citing jurisdictions that have interpreted indemnity

provisions to include first-party attorney fees); Coady v. Strategic Res.,

Inc., 515 S.E.2d 273, 275–76 (Va. 1999) (finding the terms of the

indemnification provision were broad and all-encompassing and allowed

for the payment of attorney fees between the parties).

Other jurisdictions have found indemnification provisions do not

authorize the award of attorney fees with regard to claims between the

parties to the agreement because indemnification provisions only apply

to third-party claims. See, e.g., Oscar Gruss & Son, Inc. v. Hollander, 337

F.3d 186, 198–200 (2d Cir. 2003) (holding under New York law,
 20

indemnification provision only applied to third-party suits and thus, did

not authorize award of attorney fees between parties to the contract);

Canopy Corp. v. Symantec Corp., 395 F. Supp. 2d 1103, 1115 (D. Utah

2005) (holding the use of the word “defend” in the indemnification

provision indicates the parties intent for the provision only to apply to

third-party claims); Nova Research, Inc., 952 A.2d at 284–85, 287–89

(stating whether or not indemnification provision covers fees incurred in

third-party litigation or also covers fees incurred in litigation between the

parties themselves is a matter of contract interpretation, and ultimately

holding provision was not intended to cover first-party attorney fees as

well as citing numerous jurisdictions that have reached a similar

conclusion); Colonial Pipeline Co. v. Nashville & E. R.R., 253 S.W.3d 616,

624 (Tenn. Ct. App. 2007) (holding indemnity provision applied only to

suits brought by third parties because applying the provision to a

dispute between the contracting parties would yield an absurd result).

In Iowa, we have held an indemnification clause that uses the

terms “indemnify” and “hold harmless” indicates an intent by the parties

to protect a party from claims made by third parties rather than those

brought by a party to the contract. Estate of Pearson v. Interstate Power

& Light Co., 700 N.W.2d 333, 344–45 (Iowa 2005). Therefore, a party to a

contract cannot use an indemnity clause to shift attorney fees between

the parties unless the language of the clause shows an intent to clearly

and unambiguously shift the fees. Cf. McNally & Nimergood v. Neumann-

Kiewit Constructors, Inc., 648 N.W.2d 564, 571 (Iowa 2002) (holding

“indemnification contracts will not be construed to permit an indemnitee

to recover for its own negligence unless the intention of the parties is

clearly and unambiguously expressed”).
 21

The district court found the phrase, “Any breach of this Contract,”

and similar language contained in the other indemnity provisions allowed

the award of attorney fees for the 1999 through 2003 contracts. We do

not believe this language or any other language in the 1999 through

2003 contracts shows clearly and unambiguously an intent by the

parties to shift the attorney fees incurred in a breach of contract action

between the parties. Under these contracts, NevadaCare was required to

contract with physicians to provide medical services to Medicaid

recipients. NevadaCare was responsible for reimbursing the physicians

for their services. If a physician claimed a breach of duty by DHS, the

Medicaid provider, the potential existed for the physician to sue DHS. If

DHS was sued and the disagreement between Medicaid and the

physician was caused by NevadaCare’s breach of the contract between

NevadaCare and DHS, this provision of the contract would indemnify

DHS for “any and all liabilities, damages, settlements, judgments, costs

and expenses, including reasonable attorney’s fees of the Attorney

General’s Office, and the costs and expenses and attorney fees of other

counsel required to defend” DHS.

Furthermore, the addition of an explicit fee-shifting provision in

the contract for fiscal years 2004 and 2005 supports a finding that the

parties did not clearly and unambiguously intend the indemnity

provisions in the 1999 through 2003 contracts to shift the attorney fees

between the parties. From fiscal year 1999 forward, each contract

entered into by the parties had substantially similar indemnification

provisions. The contract for fiscal years 2004 and 2005, however, had

an explicit fee-shifting provision. It provided:

In the event the state agency should prevail in any legal
action arising out of the performance or non-performance of
 22
the contract, the Health Plan shall pay, in addition to any
damages, all expenses of such action including reasonable
attorney’s fees and costs. The term “legal action” shall be
deemed to include any administrative proceedings, as well as
all actions at law or equity.

If the indemnification provisions in the contracts for fiscal years 1999

through 2005 were intended by the parties to be fee-shifting provisions,

there would be no reason for the parties to include a specific fee-shifting

provision in the contract for fiscal years 2004 and 2005.

Therefore, the language used in the indemnity clauses in the 1999

through 2003 contracts does not clearly and unambiguously evidence an
intent by the parties to shift the attorney fees between the parties. As a

result, the district court’s award of attorney fees based on the

indemnification provisions contained in the contracts for fiscal years

1999 to 2003 was error.

The contract for fiscal years 2004 and 2005 does have an

enforceable fee-shifting provision. The party seeking to recover such fees

must prove that the services were reasonably necessary and the charges

were reasonable in amount. Ales, 728 N.W.2d at 842; Green, 415

N.W.2d at 608. Therefore, we reverse the judgment of the district court

awarding attorney fees under the contracts for fiscal years 1999 through

2003. We remand the case to the district court to determine a

reasonable amount of attorney fees and litigation costs for the services

reasonably necessary to defend the contract for fiscal years 2004 and

2005 in the district court and on appeal.

IV. Disposition.

We affirm the judgment of the district court granting judgment in

favor of DHS on all claims on the merits. We reverse the judgment of the

district court awarding attorney fees and litigation costs in favor of DHS

and remand the case to the district court for further proceedings to
 23

determine an appropriate award of attorney fees and litigation costs

limited to the contract for fiscal years 2004 and 2005. We assess costs

on appeal equally between the parties.

AFFIRMED IN PART, REVERSED IN PART, AND CASE

REMANDED.