Two Iowa federal district courts have expressed differing views on the level of culpability that must be demonstrated to submit a punitive damages claim to a jury in an insurance bad faith case. Buhmeyer v. Case New Holland, Inc., 446 F. Supp. 2d 1035, 1047 (S.D. Iowa 2006), said that any case where bad faith can be found necessarily also satisfies the requirements for punitive damages. Niver v. Travelers Indemnity Co., 430 F. Supp. 2d 852, 860 (N.D. Iowa 2006), disagreed, and set aside a punitive damage verdict, but without clarifying exactly what is required. No Iowa case clearly resolves this dispute.

Under Iowa law, to establish an insurer's bad faith, the plaintiff must  prove (1) that the insurer had no reasonable basis for denying the plaintiff's claim or for refusing to consent to settlement, and (2) that the insurer knew or had reason to know that its denial or refusal was without reasonable basis. The first element is an objective one; the second element is subjective. In this Expert Commentary, William T. Barker and Robert C. Johnson, partners in the Chicago office of Sonnenschein Nath & Rosenthal, LLP, argue that, contrary to Buhmeyer, punitive damages may not be awarded unless the evidence permits a jury to find that the insurer either knew that it lacked a reasonable basis for delay or denial of the claim or it recklessly disregarded that lack.

The authors write that:

"An Iowa statute requires that, to recover punitive damages on any cause of action, a plaintiff must establish, “by a preponderance of clear, convincing, and satisfactory evidence, [that] the conduct of the defendant from which the claim arose constituted willful and wanton disregard of the rights or safety of another.” Case law establishes that where there is no showing of “personal spite, hatred, or ill will,” the statute requires a showing of “legal malice.” “Legal malice is shown by wrongful conduct committed or continued with a willful or reckless disregard for another’s rights. Necessarily, then, a claim for punitive damages must be supported by something more than merely negligent conduct.

Another formulation of the legal malice standard is that “’the actor has intentionally done an act of unreasonable character in disregard of a known or obvious risk that was so great as to make it highly probable that harm would follow, and which thus is usually accompanied by a conscious indifference to the consequences.’” 

The latter formulation could be read to support Buhmeyer. Denying a claim is an intentional act. If the denial was in bad faith, then there can have been no reasonable basis, meaning that the act was (in a sense) of an unreasonable character. But the authors argue that this view cannot be reconciled with the rule that bad faith requires more than negligence, and that a higher level of culpability is both required by Iowa cases in other contexts. They submit that: "it cannot be true that Iowa law permits punitive damages whenever insurance bad faith is proven. Only clear and convincing evidence that the insurer knew it lacked a reasonable basis or recklessly disregarded that lack can support punitive damages."