                       United States Court of Appeals
                         FOR THE EIGHTH CIRCUIT
            _____________

            No. 96-2354NI
            _____________

Thomas K. Berglund; Sally Berglund,   *
                                      *
                  Appellees,          *
                                      *
      v.                              *
                                      *
State Farm Mutual Automobile          *
Insurance Company,                    *
                                      *
                Appellant.            *
____________________                  *
                                      *
State of Iowa,                        *
                                      *
                  Intervenor.         *
                                          Appeals from the United States
            ____________                  District Court for the Northern
                                          District of Iowa.
            No. 96-2359NI
            ____________

Thomas K. Berglund; Sally Berglund,   *
                                      *
                  Appellants,         *
                                      *
      v.                              *
                                      *
State Farm Mutual Automobile          *
Insurance Company,                    *
                                      *
                Appellee.             *
____________________                  *
                                           *
State of Iowa,                             *
                                           *
                     Intervenor.           *
                                     _____________

                             Submitted: May 22, 1997
                                 Filed: August 26, 1997
                                  _____________

Before McMILLIAN, FAGG, and HANSEN, Circuit Judges.
                           _____________

FAGG, Circuit Judge.

        This diversity case arises from a motor vehicle accident at an intersection in rural
Iowa. Thomas K. Berglund ran a stop sign and struck a van. The van’s driver, Ronald
Jalas, and his spouse, Pamela Jalas, suffered back and closed head injuries. Their four-
year-old daughter, Jazelle, was killed. Two of the Jalases’ other children had died
before. At the time of the accident, an automobile insurance policy issued by State
Farm Mutual Automobile Insurance Company insured Thomas and Sally Berglund for
up to $500,000 per accident. The Berglunds also had a $1 million excess liability
insurance policy with Grinnell Mutual Reinsurance Company that applied only after
other insurance was exhausted. The Jalases eventually sued the Berglunds. Given State
Farm’s contractual duty to defend insureds against third parties, the company hired an
attorney to represent the Berglunds in the lawsuit. The case was tried and a jury
awarded the Jalases $1,897,703.80 in damages, about $1.4 million more than State
Farm’s policy limit. After Grinnell Mutual paid the excess insurance of $1 million, the
Berglunds personally owed the Jalases about $400,000.

       The Berglunds later brought this lawsuit asserting State Farm acted in bad faith.
A jury agreed, based on State Farm’s actions in defending the Berglunds and in


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negotiating a settlement. The jury awarded damages of $515,831.42 for the excess
judgment and interest, $4000 for Sally Berglund’s emotional distress, and $15,000 in
punitive damages. The district court denied State Farm’s motion for judgment as a
matter of law on the issues of bad faith and punitive damages, but granted State Farm’s
motion on the issue of emotional distress damages. State Farm appeals, and the
Berglunds cross-appeal. We affirm the bad faith and punitive damage ruling, but
reverse the emotional distress ruling.

       State Farm first contends the district court erroneously denied its motion for
judgment as a matter of law on the Berglunds’ bad faith claim. We review the denial
de novo. See Chadima v. National Fidelity Life Ins. Co., 55 F.3d 345, 347 & n.5 (8th
Cir. 1995) (same standard under federal or Iowa law). In doing so, we consider the
evidence in the light most favorable to the Berglunds, resolve all evidentiary conflicts
in their favor, and give them the benefit of all reasonable, favorable inferences. See
Norton v. Caremark, Inc., 20 F.3d 330, 334 (8th Cir. 1994). We affirm the denial if
reasonable jurors could reach different conclusions from the evidence. See id.

       State Farm asserts the jury could not reasonably find State Farm acted in bad
faith during settlement negotiations. In Iowa, an insurer has a duty to exercise good
faith in settlement negotiations. See Kooyman v. Farm Bureau Mut. Ins. Co., 315
N.W.2d 30, 33-34 (Iowa 1982). This duty arises from insurance policy provisions
giving the insurer control over the settlement and trial. See id. at 32-33. When an
“‘insurer recognizes the probability that an adverse verdict will exceed policy limits,
the boundaries of “good faith” become compressed in favor of the insured.’” See id.
at 34 (quoting 7C J. Appleman, Insurance Law & Practice § 4712, at 443 (1979)). In
assessing good faith, the test is whether the insurer has approached the matter of
settlement as if policy limits do not exist. See id.

      Before the underlying trial, the Jalases offered to settle for $1.51 million. The
Berglunds had general liability insurance of $500,000 under the State Farm policy,

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excess liability insurance of $1,000,000 with Grinnell Mutual, and $10,000 from their
own funds contributed towards settlement. Thus, it was financially possible to settle
the case. State Farm did not question the Berglunds’ liability. The jury could
reasonably find State Farm believed the judgment would exceed its policy limits of
$500,000. State Farm’s claims committee valued the claim at $200,000, but several
committee members felt the claim was undervalued. Because of its uncertainty, the
committee sent the claim to State Farm’s bodily injury claim consultant at corporate
headquarters for evaluation. He believed the case had “a great deal of explosive
potential in terms of jury reaction to the very tragic situation in which the injured
parties found themselves, and in order to protect [the Berglunds] . . . [State Farm]
should be willing to spend the full amount of the policy limits [of] $500,000.” About
a month before trial, the consultant sent a memo to regional claims management
advising payment of $500,000, then the consultant left on vacation. The divisional
claims superintendent also believed a judgment in excess of State Farm’s limits was
likely. Yet the best offer communicated to the Jalases was $300,000. The jury could
reasonably find State Farm did not ignore its policy limits during settlement
negotiations.
         Relying on Wierck v. Grinnell Mut. Reinsurance Co., 456 N.W.2d 191 (Iowa
1990), State Farm contends the Berglunds were required to show the Jalases offered
to settle for an amount within State Farm’s $500,000 limit, and the Berglunds failed to
do so. In Wierck, only one insurance company was involved and that company offered
its full policy limit to the plaintiffs, who wanted more money. See id. at 193-94. The
total amount of insurance coverage and funds available from the insured could not meet
the plaintiff’s demand. That is not our situation. The majority of courts that have
decided the issue hold that when, as here, an insured is not judgment proof or an excess
insurer exists, absence of an offer to settle within policy limits is not dispositive of the
question of the primary insurer’s bad faith. See Delancy v. St. Paul Fire & Marine Ins.
Co., 947 F.2d 1536, 1550 n.31 (11th Cir. 1991) (Georgia law) (citing cases); Kivi v.
Nationwide Mut. Ins. Co., 695 F.2d 1285, 1287 (11th Cir. 1983) (Florida law); see also


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Iowa Nat’l Mut. Ins. Co. v. Auto-Owners Ins. Co., 371 N.W.2d 627, 629 (Minn. Ct.
App. 1985) (insurer need not settle if it believes in good faith that settlement at
proposed figure it is required to contribute is greater than amount jury will award).
According to these courts, an offer to settle within policy limits is just one factor to
consider in deciding a primary insurer’s bad faith, rather than a prerequisite to
recovery. See General Accident Fire & Life Assurance Corp. v. American Cas. Co.,
390 So. 2d 761, 765-66 (Fla. Ct. App. 1980). We believe the Iowa Supreme Court
would adopt this view if squarely presented with the issue in our context. See Warford
v. State Farm Mut. Auto. Ins. Co., 69 F.3d 860, 862 (8th Cir. 1995) (role of federal
court in diversity case). To hold otherwise would relieve State Farm of its obligation
to negotiate settlement in good faith to protect its insured when settlement is impossible
within its own limits, but possible because of other available funds. Of course, our
decision is not binding on the Iowa Supreme Court, which in its wisdom may view the
matter differently. We conclude a jury could reasonably find State Farm acted in bad
faith in failing to offer its limits.

        State Farm also contends no reasonable jury could find State Farm’s failure to
offer its policy limits proximately caused the judgment over $1.5 million. State Farm
blames Grinnell Mutual, even though State Farm never offered its policy limits to
invoke Grinnell Mutual’s excess insurance. A senior claims attorney for Grinnell
Mutual testified he would not have contributed $1 million towards settlement, but
Grinnell’s risk reinsured supervisor testified she believed as early as a month before
trial that a $800,000 verdict was a very real possibility, and the company would have
contributed $300,000. Other experts testified the claim was worth more than the
offered settlement of $1.51 million. Until State Farm offered its limits, however,
Grinnell Mutual had no obligation to pay anything or to evaluate seriously the Jalases’
claim. Further, the Jalases’ attorney testified that in his experience, both he and his
clients become “weak-kneed” in the face of substantial offers, and Grinnell Mutual’s
risk reinsured supervisor testified that about half the plaintiffs demanding over $1
million accept lesser amounts. Under the circumstances, we believe a jury could

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reasonably find the case would have been settled, and State Farm’s failure to offer its
policy limits proximately caused the excess judgment. Thus, we need not decide
whether State Farm acted in bad faith in defending the lawsuit brought by the Jalases.

       State Farm next contends the district court erroneously denied its motion for
judgment as a matter of law on punitive damages. State Farm asserts the jury should
have been instructed that it could not award punitive damages unless State Farm’s
conduct was malicious, illegal, or immoral. Iowa Code § 668A.1, enacted in 1986,
codifies Iowa law on punitive damages. See Vlotho v. Hardin County, 509 N.W.2d
350, 356 (Iowa 1993). Section 668A.1 provides for punitive damages when the
defendant acts with “willful and wanton disregard for the rights or safety of another.”
Iowa Code § 668A.1(1)(a) (1997). The Iowa Supreme Court defines “willful and
wanton” in § 668A.1(1)(a) as an “intentional[] . . . act of an unreasonable character in
disregard of a known or obvious risk that was so great as to make it highly probable
that harm would follow.” Vlotho, 509 N.W.2d at 356 (reckless indifference standard).
Punitive damages are proper when the defendant commits an intentional tort, like bad
faith, and the defendant’s conduct meets the standard in § 668A.1. See White v.
Northwestern Bell Tel. Co., 514 N.W.2d 70, 77 (Iowa 1994).

       The district court properly instructed the jury on punitive damages under Iowa
law in jury instruction twenty-seven. Contrary to State Farm’s contention, the evidence
was sufficient to meet the Iowa standard. The jury could reasonably conclude State
Farm committed acts of indifference and disregard for the Berglunds’ rights during the
underlying lawsuit.

      Finally, State Farm contends the district court should have granted a new trial
because the court improperly admitted evidence of Sally Berglund’s emotional distress.
The district court instructed the jury it could compensate Sally Berglund for her
emotional distress as an element of damage for bad faith. The court instructed the jury
on both noneconomic damage, such as pain and suffering, and economic damage, such

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as medical care costs. The jury awarded Sally $4000, all for economic damage. After
the trial, the district court overturned the award because the court believed the Iowa
Supreme Court would not permit recovery for emotional distress as consequential
damages in a third-party bad faith case. In their cross-appeal, the Berglunds contend
the Iowa Supreme Court would permit recovery. We agree.

        The Iowa Supreme Court has already permitted recovery of emotional distress
damages on a claim that an insurer acted in bad faith by failing to pay an insured’s
claim. See Nassen v. National States Ins. Co., 494 N.W.2d 231, 237-38 (Iowa 1992).
We see no reason to permit emotional distress damages for bad faith failure to pay a
direct claim, but not for failure to exercise good faith in representing an insured against
a third party. Indeed, the Iowa Supreme Court has recognized that in the third-party
situation, the insurer has a clear fiduciary duty to act affirmatively in the best interest
of the insured, but in the first-party context, the insurer’s duty is not as rigorous. See
Pirkl v. Northwestern Mut. Ins. Ass’n, 348 N.W.2d 633, 635 (Iowa 1984).

       Further, most courts that have decided the issue permit recovery of emotional
distress damages for breach of a liability insurer’s duty to act in good faith in
representing an insured against a third party. Viewing the action as sounding in both
contract and tort, rather than contract alone, the courts have held an insured may prove
and recover the full range of tort damages when an insurer refuses to settle with a third
party in bad faith. See Crisci v. Security Ins. Co., 426 P.2d 173, 178-79 (Cal. 1967);
Lira v. Shelter Ins. Co., 913 P.2d 514, 517 (Colo. 1996); Campbell v. State Farm Mut.
Auto. Ins. Co., 840 P.2d 130, 139 (Utah Ct. App. 1992). In addition to recovering the
amount of the verdict against the insured that exceeds policy limits, the insured may
potentially recover for emotional distress, injury to reputation or credit rating, and
punitive damages. See Campbell, 840 P.2d at 139. Because the Iowa Supreme Court
characterizes bad faith failure to settle a third party’s claim against an insured as a tort,
see Pirkl, 348 N.W.2d at 635 n.2, we believe the Iowa Supreme Court would permit
Sally Berglund to recoup emotional distress damages for State Farm’s bad faith.

                                            -7-
Otherwise, the Berglunds would not get a full recovery. See Clark-Peterson Co. v.
Independent Ins. Assocs., Ltd., 514 N.W.2d 912, 915 (Iowa 1994).

       Some of the courts permitting recovery of emotional distress damages require the
plaintiff to show an injury to property, such as payment of the excess judgment or
seizure of assets, before recovering for emotional distress. See Continental Ins. Co. v.
Superior Court, 43 Cal. Rptr. 2d 374, 383-84 (Cal. Ct. App. 1995). This requirement
is meant to avoid fictitious claims, analogous to the physical injury requirement for the
independent emotional distress tort. See Crisci, 426 P.2d at 179. If the Iowa Supreme
Court would require a showing of injury to property, the Berglunds have made it.
Because of the substantial excess judgment, the Jalases filed a lien on the Berglunds’
farm, so the Berglunds have lost the use of their farm equity and face judicial
enforcement of the lien.

       In their cross-appeal, the Berglunds also contend the district court erroneously
denied their motion to alter or amend the judgment challenging the awarded rate of
prejudgment interest. See Fed. R. Civ. P. 59(e). State law governs prejudgment
interest in this diversity action. See Happy Chef Sys., Inc. v. John Hancock Mut. Life
Ins. Co., 933 F.2d 1433, 1435 (8th Cir. 1991). Iowa Code § 535.3 provides for 10%
interest on monetary judgments from the date the action was commenced. See id.
Because the jury had already awarded 6.36% accrued interest on the excess verdict, the
district court awarded prejudgment interest at a rate of 3.64% to reach the 10%
statutory rate, but to avoid double recovery. Prejudgment interest is awarded to make
the claimant whole because the claimant has been denied the use of money that is
legally due. See Winter v. Cerro Gordo County Conservation Bd., 925 F.2d 1069,
1073 (8th Cir. 1991); In re Marriage of Baculis, 430 N.W.2d 399, 401 (Iowa 1988).
Here, the district court awarded prejudgment interest at a rate that ensured the
Berglunds received 10% total interest for the lost value of the use of the money
awarded. Because the Berglunds received compensation at the statutory rate, we
conclude the district court did not abuse its discretion in denying the Berglunds’

                                          -8-
motion. See Twin City Const. Co. v. Turtle Mountain Band of Chippewa Indians, 911
F.2d 137, 139 (8th Cir. 1990) (standard of review).

       In sum, we affirm the district court’s denial of State Farm’s motion for judgment
as a matter of law on the issues of bad faith and punitive damages, reverse the district
court’s grant of judgment as matter of law on the issue of emotional distress damages,
affirm the district court’s denial of the Berglunds’ motion to alter or amend the
judgment with respect to prejudgment interest, and remand for further proceedings
consistent with our opinion.

      A true copy.

             Attest:

                     CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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