                IN THE SUPREME COURT OF IOWA
                               No. 07–1324

                           Filed June 11, 2010


ROYAL INDEMNITY COMPANY, as
successor in interest to Globe Indemnity
Company, a member of Royal & SunAlliance
USA, Inc.; and FEDERAL INSURANCE COMPANY,
a member of the Chubb Group of Insurance Companies,
as good faith subrogees of DEERE & COMPANY,
a Delaware corporation,

      Appellees,

vs.

FACTORY MUTUAL INSURANCE COMPANY
a/k/a FM GLOBAL a/k/a FACTORY MUTUAL
ENGINEERING, a Rhode Island limited
liability company,

      Appellant.


      Appeal from the Iowa District Court for Scott County, Mark D.

Cleve, Judge.

      Defendant insurance company appeals from a district court

judgment awarding the plaintiffs $39.5 million in damages. Defendant
contends there was insufficient evidence that it breached any contract

with the plaintiffs’ insured, and, alternatively, that the damages were not

within the contemplation of the parties, and the plaintiffs’ claim is barred

under Iowa Code section 517.5 (2001). The plaintiffs cross-appeal the

district court’s reduction of the jury’s $39.5 million damage award by a

pro tanto credit for amounts received in pretrial settlements with other

defendants, and the court’s dismissal of its negligence claim. DISTRICT

COURT JUDGMENT REVERSED IN PART, AFFIRMED IN PART, AND

REMANDED WITH DIRECTIONS.
                                     2

      Mark McCormick and Margaret C. Callahan of Belin Lamson

McCormick Zumbach Flynn, P.C., Des Moines, Robert J. Gilbertson of

Greene Espel P.L.L.P., Minneapolis, Minnesota, William H. Stanhope of

Robins, Kaplan, Miller & Ciresi L.L.P., Atlanta, Georgia, and William J.

Bush of Bush, Motto, Creen, Koury & Halligan, Davenport, for appellant.



      David L. Brown and Aaron T. Oliver of Hansen, McClintock & Riley,

Des Moines, Jeffrey J. Asperger, Bary L. Gassman, and Peter H.

Honigmann of Asperger Associates LLC, Chicago, Illinois, and Robert T.

Park of Snyder, Park & Nelson, P.C., Rock Island, Illinois, for appellees.
                                    3

BAKER, Justice.

      Factory Mutual Insurance Company (FM) appeals from the district

court judgment awarding Royal Indemnity Company and Federal

Insurance Company (hereinafter referred to collectively as (Royal)) $39.5

million in damages, contending there was insufficient evidence that it

breached any contract with Deere & Company (Deere), and, alternatively,

that the damages were not within the contemplation of the parties. FM

also asserts the claim is barred under Iowa Code section 517.5 (2001).

Royal cross-appeals the district court’s reduction of the jury’s $39.5

million damage award by a pro tanto credit for amounts received in

pretrial settlements with other defendants.      Royal also appeals the

court’s dismissal of its negligence claim. Because we find the damages

suffered were not in the contemplation of the parties and were outside

the scope of liability for any breach of duty, we reverse the judgment and

remand the case for dismissal of all claims.

      I. Background Facts and Proceedings.

      This appeal arises out of a February 20, 2001, warehouse fire that

destroyed property stored there by Deere. FM is a commercial insurance

provider, and from the 1950s through 1997, was Deere’s sole property

insurance provider.     In the mid-90s, Deere sought to broaden its

insurance coverage. FM was unwilling to provide the expanded coverage

Deere sought, so beginning in 1997, Deere purchased its primary

insurance coverage from Royal Indemnity Company and the Chubb

Group of Insurance Companies. These carriers provided coverage up to

$200 million, and FM provided Deere excess coverage above $200

million. In 1998, the amount at which FM’s excess coverage attached

rose to $400 million.
                                    4

      FM uses engineering evaluations in its underwriting process. Until

1997, the cost of FM’s loss prevention engineering services was built into

the premium it charged Deere for insurance coverage.        Typically, the

primary insurance carrier provides loss prevention engineering services

for the insured because of its greater exposure, but Deere requested that

FM continue to provide loss prevention services even though it was only

the excess coverage carrier.    FM agreed to do so under a separate

payment-for-services contract and fee unrelated to Deere’s insurance

policy premiums.

      For 1997, FM developed a service plan specifying the Deere

locations to be inspected and the frequency of those inspections.      The

loss prevention services FM offered to Deere were the same as those it

provided in conjunction with its insurance coverage. From 1997 to 2000,

however, Deere severely cut the amount of funds available for loss

prevention services.   For the year 2000, Deere budgeted $498,000 for

FM’s loss prevention services. Deere and FM agreed that this fee would

provide Deere with 3200 to 3350 hours of loss prevention services,

subject to an adjustment if the hours worked went beyond 3350.

      FM’s service plan for Deere focused on:      (1) managing change—

evaluate conceptual, planned, or occurring changes; (2) audits of human

element programs—record reviews; (3) walk-throughs of high hazard

areas; (4) spot checking of sprinkler control valves and water flow alarms;

and (5) water testing on a three-year frequency or as needed based on

facility changes.   FM’s servicing plan provided that if it found any

deficiencies during a records review, a full inspection of all valves and

alarms may be warranted.        FM agreed to provide Deere the loss

prevention services outlined in the plan through the year 2000.
                                       5

       In 2000, Deere began the process of consolidating its storage

facilities from seven Quad Cities warehouses to one centralized facility.

Deere ultimately focused on a facility owned by Petersen Properties, LC

(Petersen). Mark Dold, Deere’s manager of implements and attachments,

was in charge of coordinating the evaluation of the facility. As part of the

evaluation process, Dold advised FM that Deere required a first-

inspection-site-risk evaluation to determine whether the fire protection

system was appropriate for Deere’s storage needs. FM agreed to do an

evaluation and assigned Tim Geiger, an experienced engineer, to perform

the evaluation of the proposed facility.

       On July 31, 2000, Geiger toured the Petersen facility.              After the

tour, Geiger was asked by Tim Kelly, the FM Account Engineer, to

complete a simple COPE evaluation and email a report with his

recommendations for loss expectancies over $1 million.                A COPE is a

basic outline on the Construction, Occupancy, Protection, and Exposure

of the facility being inspected. During trial, Geiger also referred to this as

a fire special inspection. According to Geiger, this inspection is not the

same as a first-inspection-site-risk evaluation which can take up to five

full days. FM generally tests the fire alarm sprinkler systems during a
first inspection. Geiger explained that the scope of a special inspection is

determined by what the client requests, and he believed Deere asked him

to determine sprinkler specifications for the products it intended to store

in the facility.

       After touring the facility, Geiger prepared and emailed his report to

Nancy Yeager, a member of Deere’s risk management department, with

copies to Dold and Kelly.         The report contained the specifics of the

sprinkler    system   currently    installed   in   the   facility,   as   well   as

recommendations for altering the system to better protect Deere’s
                                      6

product. Geiger did not test the sprinkler system nor look at any of the

facility’s maintenance records.

      Deere made a series of additional inquiries of Geiger concerning

what modifications would need to be made to the current sprinkler

system to protect Deere’s stored products. Geiger answered them all. In

addition, FM supervised a pump acceptance test at the facility.         On

October 2, Geiger sent Dold a “punch list” letter outlining his

recommendations to bring the fire system at the facility up to FM safety

standards. In this letter, Geiger recommended that the fire alarm system

be upgraded, the sprinkler water alarms tested every month, and the

high intensity discharge lights relamped.        Deere used this list of

recommendations in negotiating with Petersen.       On October 26, 2000,

Deere entered into a lease for a portion of the warehouse and moved its

products into the facility in late November 2000 even though the punch

list items had not yet been remedied.       When Deere moved into the

warehouse, the sprinkler system still had not been tested.

      FM’s contract with Deere to provide loss-prevention services

expired on December 31, 2000. On that date, the FM/Deere insurance

relationship ended, and Royal became responsible for loss-prevention

inspections at all Deere locations.

      Early in the morning on February 20, 2001, a fire broke out in the

warehouse. The Davenport Fire Department was called, and an engine

arrived thirteen minutes after the fire was discovered. The firefighters

attached their hoses to the warehouse hydrants but found the water

pressure insufficient to put out the fire. The firefighters attempted to put

out the fire for several hours, but eventually could no longer control the

fire and retreated. The fire burned for several days, and all of Deere’s

products were destroyed. The Davenport fire chief testified he believed
                                      7

they could have extinguished the fire if there had been sufficient water

pressure.

      The Davenport fire marshal conducted a cause and origin

investigation of the fire. Deere and FM also hired experts to investigate

the cause of the fire. Neither the fire marshal nor any of the experts were

able to determine the cause of the fire. At trial, the fire marshal testified

that faulty lights were no longer being investigated as a possible cause of

the fire and the investigation was now focused on arson.        Deere’s fire

expert identified three possible causes of the fire.       These included:

(1) arson, (2) electrical failure or malfunction, and (3) an accident or

careless human act as cigarette butts were found at the fire’s point of

origin. The fire marshal and the experts were also unable to determine

why the water pressure was insufficient to extinguish the fire on the day

of the incident.

      Deere brought an action claiming Petersen negligently maintained

the warehouse fire alarm and sprinkler systems. Deere included River

Cities Management LLC 1 and FM as defendants. Royal paid in excess of

$70 million under its policy to Deere for property loss and other expenses

associated with the fire and thereby became subrogated to Deere’s claim.
      Before trial, all of the named defendants, except FM, reached

settlement agreements with Royal. A jury trial was held, and the jury

returned a verdict for Royal in the amount of $39,509,145.00. FM filed a

motion for judgment notwithstanding the verdict. FM also filed a motion

to apply the pro tanto credit rule.

      The court denied FM’s motion for judgment notwithstanding the

verdict, but granted FM’s motion for application of pro tanto credit in

      1River  City Management LLC is the property management company hired by
Petersen to manage and maintain the Quad Cities warehouse.
                                      8

part.     The court ruled FM was entitled to a credit in the amount of

$4,522,527.50, thereby reducing Royal’s judgment to $34,986,617.50.

         FM appealed from all of the court’s rulings. Royal cross-appealed.

         II. Preservation of Error.

         FM made a motion for a directed verdict at the close of plaintiff’s

case, alleging Royal did not prove FM’s conduct was the cause of Deere’s

damages and did not prove FM could be held liable for a “general

impairment” to the fire protection system. In the body of the motion, FM

argued the causation element of Royal’s negligence claim had not been

proven, but did not argue lack of causation on Royal’s breach of contract

claim.

         The court took the motion under advisement and reserved

judgment. At the close of FM’s case, FM once again renewed its motion

for a directed verdict. This time, however, FM argued lack of causation

in relation to both Royal’s negligence claim and the contract claim. With

respect to the contract claim, Royal asserted FM’s motion was untimely

unless made at the close of plaintiff’s case. The court agreed, denying

FM’s contract causation motion as untimely, but granting a directed

verdict on the negligence claim. The court also stated that in the event

the motion was timely, it also denied the motion regarding the contract

claim on the merits.

         On appeal, an appellate court’s review is limited to those grounds

raised in the defendant’s motion for a directed verdict. Konicek v. Loomis

Bros., Inc., 457 N.W.2d 614, 617 (Iowa 1990). Error must be raised with

some specificity in a directed verdict motion.      See Ragee v. Archibold

Ladder Co., 471 N.W.2d 794, 798 (Iowa 1991). A motion for judgment

notwithstanding the verdict must stand on grounds raised in the directed

verdict motion. Dutcher v. Lewis, 221 N.W.2d 755, 760 (Iowa 1974). On
                                      9

appeal from such judgment, review by an appellate court is limited to

those grounds raised in the directed verdict motion. Meeker v. City of

Clinton, 259 N.W.2d 822, 828 (Iowa 1977).

      Neither these commonly recited rules, our rules of civil procedure,

nor previous cases provide any definitive guidance on when a motion for

a directed verdict must be made. Nothing in the rules requires a motion

for directed verdict occur at the close of plaintiff’s case.     Iowa Rule of

Civil Procedure 1.945 provides that “[a]fter a party has rested, the

adverse party may move for dismissal because no right to relief has been

shown, under the law or facts, without waiving the right to offer evidence

thereafter.” This rule is permissive rather than mandatory. Christensen

v. Sheldon, 245 Iowa 674, 687–89, 63 N.W.2d 892, 900–01 (1954). Iowa

Rule of Civil Procedure 1.1003(2), on the other hand, provides:

             If the movant was entitled to a directed verdict at the
      close of all the evidence, and moved therefor, and the jury did
      not return such verdict, the court may then either grant a
      new trial or enter judgment as though it had directed a
      verdict for the movant.

(Emphasis added.) This rule contemplates that the motion for a directed

verdict is to be made at the close of all evidence.
      In Christensen, we approved the procedure of not granting motions

for directed verdict until the completion of all evidence except in the most

obvious cases. Christensen, 245 Iowa at 688–89, 63 N.W.2d at 901. We

continue to believe this to be the best course of action. Even the weakest

cases may gain strength during the defendant’s presentation of the case.

Id. at 688, 63 N.W.2d at 900 (“ ‘There is . . . a failure of justice, where the

evidence for the defense discloses a case against a defendant already

prematurely acquitted, that such acquittal ought never to take place

until there is the strongest reason to believe that such a consequence
                                          10

cannot follow.’ ” (quoting Castle v. Bullard, 64 U.S. 172, 185, 16 L. Ed.

424, 428 (1859)).

       Because in most cases it will be prudent not to consider a motion

for directed verdict until all evidence has been presented, it would be

exalting form over substance to require such motions to be made at the

close of plaintiff’s case and again at the close of all evidence.                   We

therefore hold that a motion for directed verdict need not be made at the

close of plaintiff’s case in order to preserve error.             Accordingly, FM’s

failure to argue a lack of causation on Royal’s contract claim in its

motion for a directed verdict made at the completion of Royal’s evidence

did not operate as a waiver of that argument.

       III. Contract Claim.

       FM claims the trial court erred in ruling there was sufficient

evidence for the jury to find FM breached a contract with Deere and such

breach was the proximate cause 2 of Deere’s fire loss. Royal counters that

there was substantial evidence presented at trial that FM breached its

contract with Deere and thereby proximately caused Deere’s fire loss.

       The standard of review for a district court’s denial of a motion for

judgment notwithstanding the verdict is for correction of errors at law.
Iowa R. App. P. 6.907; Crookham v. Riley, 584 N.W.2d 258, 265 (Iowa

1998). In reviewing rulings on a motion for judgment notwithstanding

the verdict, we simply ask whether a fact question was generated.

Crookham, 584 N.W.2d at 265.              We, like the district court, view the

evidence in the light most favorable to the party against whom the

motion is intended, the nonmoving party. Id.

       2Proximate cause is the term used by FM.      Throughout its brief, FM cited to
cases based on tort and contract interchangeably. For reasons that we later explain,
the theory of damages and the tests are different. R.E.T. Corp. v. Frank Paxton Co., 329
N.W.2d 416, 420 (Iowa 1983).
                                   11

      A.   Identified Breach of Contract Terms and Conditions.         To

prevail on a breach of contract claim, Royal was required to prove:

(1) the existence of a contract, (2) the terms and conditions of the

contract, (3) that [plaintiff] has performed all the terms and conditions

required under the contract, (4) the defendant’s breach of the contract in

some particular way, and (5) that plaintiff has suffered damages as a

result of defendant’s breach. Molo Oil Co. v. River City Ford Truck Sales,

Inc., 578 N.W.2d 222, 224 (Iowa 1998). FM concedes that the jury found

a contract existed between FM and Deere, but argues that the terms of

the contract were never defined, and, at most, the evidence established a

limited obligation on FM to perform the specific loss-control inspections

requested by Deere.

      “For a contract to be valid, the parties must express mutual assent

to the terms of the contract.”   Schaer v. Webster County, 644 N.W.2d

327, 338 (Iowa 2002). Mutual assent is present when it is clear from the

objective evidence that there has been a meeting of the minds. Id. To

meet this standard, the contract terms must be sufficiently definite for

the court to determine the duty of each party and the conditions of

performance. Seastrom v. Farm Bureau Life Ins. Co., 601 N.W.2d 339,

346 (Iowa 1999).      “A party breaches a contract when, without legal

excuse, it fails to perform any promise which forms a whole or a part of

the contract.” Molo Oil, 578 N.W.2d at 224.

      Deere and FM clearly entered into a contract to inspect the

Petersen facility. FM sent Geiger to perform a simple COPE evaluation

with recommendations for loss expectancies over $1 million at the

prospective Deere storage facility. Deere on the other hand asserts that

it asked for a first-inspection-site-risk evaluation to determine whether

the fire protection system was appropriate to move its product into the
                                          12

facility. It appears some miscommunication occurred between the time

Deere asked FM to inspect the facility and the time the request to

perform a simple COPE was received by Geiger.                  Deere wanted a first

inspection, and it got a simple COPE.                 These are clearly different

inspections.

       The jury could have found that the parties contracted for either a

COPE or a first-inspection-site-risk evaluation. 3 Our analysis, however,

would be the same under either determination.                   Regardless of what

miscommunication occurred between Deere and FM, FM believed at a

minimum that it was asked to do something Geiger called a “fire special

inspection.” According to FM’s own policies, this should have included

making sure the fire protection systems in the facility worked. FM was

asked to look at the sprinkler system and determine what changes were

needed to protect Deere’s product. A working fire protection system was

necessary to protect Deere’s product, yet FM did not test the sprinkler

system nor look at any of the facility’s maintenance records.                  We find

that there is substantial evidence of the terms and conditions of the

contract and that FM breached those terms and conditions.

       B.    Damages.       For Royal to succeed on its breach of contract
claim, however, it must prove that the damages resulted from FM’s

breach and were in the contemplation of the parties.                    See Kuehl v.

Freeman Bros. Agency, Inc., 521 N.W.2d 714, 718 (Iowa 1994).

       We must scrutinize the terms of the contract to determine whether

the damages were within the contemplation of the parties. The nature




       3According  to the jury instructions, the jury was required to determine the terms
of the contract. Because this was a general verdict, however, we cannot determine what
terms were found to be part of the contract.
                                      13

and terms of the contract necessarily dictate the damages recoverable.

In Kuehl we stated:

             Distinct from the general rule for damages based on
      commitment of a tort, damages based on breach of a
      contract must have been foreseeable or have been
      contemplated by the parties when the parties entered into
      the agreement.       Whether the damages were reasonably
      anticipated by the parties when the contract was formed may
      be discerned from “the language of the contract in the light
      of the facts, including the nature and purpose of the contract
      and circumstances attending its execution.” Damages which
      a reasonable person would expect to follow from breach of a
      contract are direct and thus should be awarded.

Id. (citations omitted) (quoting 22 Am. Jur. 2d Damages § 460, at 541

(1988)).   We also require that the damages have some nexus with the

breach, i.e., the damages recoverable for a breach of contract are limited

to losses actually suffered by reason of the breach and must relate to the

nature and purpose of the contract.        Midland Mut. Life Ins. Co. v. Mercy

Clinics, Inc., 579 N.W.2d 823, 831 (Iowa 1998).

      Similarly, the Restatement (Second) of Contracts provides:

      (1) Damages are not recoverable for loss that the party in
      breach did not have reason to foresee as a probable result of
      the breach when the contract was made.
      (2) Loss may be foreseeable as a probable result of a breach
      because it follows from the breach
           (a) in the ordinary course of events, or
         (b) as a result of special circumstances, beyond the
      ordinary course of events, that the party in breach had
      reason to know.

Restatement (Second) of Contracts § 351, at 135 (1981). This section is

further amplified in the comments:

      A contracting party is generally expected to take account of
      those risks that are foreseeable at the time he makes the
      contract. He is not, however, liable in the event of breach for
      loss that he did not at the time of contracting have reason to
      foresee as a probable result of such a breach. The mere
      circumstance that some loss was foreseeable, or even that
                                       14
      some loss of the same general kind was foreseeable, will not
      suffice if the loss that actually occurred was not foreseeable.
Id. § 351 cmt. a, at 135.

      In determining what damages may have been in the contemplation

of the parties, we may also look at the compensation paid by Deere for

this contract. Id. § 351 cmt. f, at 141 (stating when there “is an extreme

disproportion between the loss and the price charged by the party whose

liability for that loss is in question[,] [t]he fact that the price is relatively

small suggests that it was not intended to cover the risk of such
liability”); see also Sundance Cruises Corp. v. Am. Bureau of Shipping, 7

F.3d 1077, 1084 (2d Cir. 1993) (“[T]he great disparity between the fee

charged ($85,000) by ABS for its services and the damages sought by

Sundance ($264,000,000) is strong evidence that such a result was not

intended by the parties.”).

      An exception exists to the general rule, however, where there is a

loss “as a result of special circumstances, beyond the ordinary course of

events, that the party in breach had reason to know.”              Restatement

(Second) of Contracts § 351(2)(b), at 135. “If loss results other than in

the ordinary course of events, there can be no recovery for it unless it

was foreseeable by the party in breach because of special circumstances

that he had reason to know when he made the contract.” Id. § 351 cmt.

b, at 137.    We adopted this rule from the seminal case, Hadley v.

Baxendale, 9 Exch. 341, 344 (1854). Vogan v. Hayes Appraisal Assocs.,

Inc., 588 N.W.2d 420, 425 (Iowa 1999).

      Royal’s position is not that an adequate inspection would have

prevented the fire, nor is its position that an adequate inspection would

have revealed the system failure that allowed the fire to continue

unabated. Royal’s position is that but for FM’s breach of the contract,

Deere would not have moved into the warehouse and would not have
                                      15

suffered fire damage. Deere claims it relied upon FM’s loss-prevention-

inspection services and advice in determining whether to move its

product into the Petersen facility. Its position is that if FM had done an

adequate inspection, it would have revealed problems that were “deal

killers” and Deere would not have moved into the Petersen facility.

      It was not in the contemplation of the parties that FM would be

called upon to answer for any conceivable fire loss. Royal is not entitled

to the damages it seeks simply because a fire broke out in the warehouse

and harmed the defendant.       As previously noted, the cause of the fire

was never determined, nor was it ascertained why there was insufficient

water pressure to effectively fight the fire. There was no proof that any

deficiency that would have been revealed by an adequate inspection

either caused the fire or the lack of water pressure to fight the fire.

      Certainly FM may have contemplated damages resulting from an

inadequate inspection if that deficiency in fact caused the loss. Thus,

had the cause of either the fire or the failure of the fire protection system

been identified and tied to the inspection, the requisite nexus between

the breach and the loss would have been established, and the damages

would have been in contemplation of the parties and therefore

foreseeable.

      The record shows Deere did not want to spend a large sum for this

inspection. In fact, Deere sought to keep the fees down. We can only

conclude that the parties could not have intended for such a small fee to

cover the risk of such enormous liability.      In this case, the inspection

cost less than $6000. FM clearly did not contemplate a total guarantee

of over $30 million for such a fee.

      We further find that Royal cannot show special circumstances. It

was not contemplated, nor communicated that Deere was relying solely
                                    16

on FM’s inspection in determining whether to move into the Petersen

facility. Deere did not ask FM whether it should move in—Deere asked

for an inspection. While the inspection was certainly a component of the

decision to move into the Petersen facility, other factors such as cost,

size, proximity to the manufacturing facilities, and transportation

certainly played a part in Deere’s decision.     Although FM may have

foreseen that its inspection would influence Deere’s decision whether or

not to lease the Petersen facility, there is no evidence that Deere

communicated to FM any special circumstances that would lead FM to

believe it would be liable for any and all problems that may have resulted

from Deere leasing that facility, whether it be by fire, or tornado, or a

meteor crashing into the building. We determine that the verdict must

be overturned as the damages awarded were not in the contemplation of

the parties when they entered into the agreement, and therefore are not

foreseeable as a matter of law.

      IV. Negligence Claim.

      The court granted FM’s motion for a directed verdict on Royal’s

negligence claim.   Royal alleges the district court erred in holding the

evidence was insufficient to establish a jury question on proximate cause

in its negligence action.

      The trial court’s grant of a motion for directed verdict is reviewed

for correction of errors at law. Lawrence v. Grinde, 534 N.W.2d 414, 418

(Iowa 1995). In reviewing the grant of a motion for a directed verdict, the

court must determine whether reasonable minds could differ on the

issue presented; if so, the grant was inappropriate. Id. We view the facts

in a light most favorable to the nonmoving party. Pierce v. Staley, 587

N.W.2d 484, 485 (Iowa 1998).
                                            17

        There are two great mysteries in this case that are central to our

analysis—what caused the fire and why was there no water pressure to

put out the fire. As explained earlier, the evidence provides no answer to

either.

        Viewing the evidence in a light most favorable to Royal, a jury

could find that FM did not test the sprinkler system, did not look at any

of the facility’s maintenance records, and did not test the alarm system.

Although FM recommended that the high intensity discharge lights

should be relamped, it did not advise Deere that they were known to fail

and rain hot materials on the product stored below.

        This case was tried prior to our adoption of the duty analysis

under the Restatement (Third) of Torts in Thompson v. Kaczinski, 774

N.W.2d 829, 835 (Iowa 2009).                     The concepts embodied in the

Restatement (Third), however, have largely been adopted from various

sections of the Restatement (Second). See Restatement (Third) of Torts:

Liab. Physical Harm § 29 cmt. a, at 493 (2005) [hereinafter Restatement

(Third)] (stating that there was a limit on the scope of liability for tortious

actions under the Restatement (Second), however, components of this

limit were expressed in several different sections throughout the

Restatement (Second)).           For ease of understanding, we refer to the

consolidated standard articulated in the Restatement (Third).                    We also

note that the result under a Restatement (Second) analysis would be the

same.

        Damages awarded in a negligence action may differ from the

damages awarded for a breach of contract claim arising from the same

set of facts. 4    “We have said that tort damages are not limited by the

        4Royal did not specifically argue, either here or at the trial court level, that any
difference exists between its contract or negligence theories, citing to a mixed bag of
contract and tort cases. We have previously stated:
                                             18

reasonable contemplations of the parties. Instead, the amount of direct

injury is compensated, whether its extent was contemplated or not.”

R.E.T. Corp. v. Frank Paxton Co., 329 N.W.2d 416, 420 (Iowa 1983). This

is not to say, however, that there are no limitations.                       “No serious

question exists that some limit on the scope of liability for tortious

conduct that causes harm is required.” Restatement (Third) § 29 cmt. a,

at 493. 5

         The Restatement (Third) expresses this limitation by providing that

“[a]n actor’s liability is limited to those harms that result from the risks

that made the actor’s conduct tortious.” Id. § 29, at 493. “Central to the

limitation on liability of this Section is the idea that an actor should be

held liable only for harm that was among the potential harms—the

risks—that made the actor’s conduct tortious.” 6 Id. cmt. d, at 495–96.


-------------------------
                Almost all relationships involving professional services arise from
         an offer and acceptance that would constitute a simple contract.
         Nevertheless, a claim that a provider of professional services has failed to
         meet the standard of care that the law has placed on that party is
         essentially a negligence cause of action.
Kemin Indus., Inc. v. KPMG Peat Marwick LLP, 578 N.W.2d 212, 221 (Iowa 1998).
Because we determine that Deere has failed to prove the damages caused by FM’s
breach of contract were in the contemplation of the parties, we need not decide whether
Deere’s contract claim is simply a negligence action in disguise.
         5Under
              the Restatement (Second) of Torts, this concept was expressed by section
430, which provides:
         In order that a negligent actor shall be liable for another's harm, it is
         necessary not only that the actor's conduct be negligent toward the
         other, but also that the negligence of the actor be a legal cause of the
         other’s harm.
Restatement (Second) of Torts § 430, at 426 (1965).
         6The   Restatement (Second) expresses this same concept when it states:
         This is true since the actor’s conduct, no matter how obviously
         dangerous to those nearby, cannot be negligent toward such another
         unless the actor should have realized that the harmful effects of his
         conduct might extend so far as to bring such a point within the zone of
         apprehended danger.
                                            19
       [W]hen scope of liability arises in a negligence case, the risks
       that make an actor negligent are limited to foreseeable ones,
       and the factfinder must determine whether the type of harm
       that occurred is among those reasonably foreseeable
       potential harms that made the actor’s conduct negligent.

Id. cmt. j, at 505; see also Thompson, 774 N.W.2d at 838. The converse

is that “[a]n actor is not liable for harm when the tortious aspect of the

actor’s conduct was of a type that does not generally increase the risk of

that harm.” Restatement (Third) § 30, at 542. 7
       Royal must show both factual cause and that the loss was within

the scope of liability. It is important that we distinguish between factual

cause and scope of liability. The Restatement (Third) cites the following

example for determining scope of liability:

             Gordie is driving 35 miles per hour on a city street
       with a speed limit of 25 miles per hour with Nathan as his
       passenger. Without warning, a tree crashes on Gordie’s car,
       injuring Nathan. Gordie’s speeding is a factual cause of
       Nathan’s harm because, if Gordie had not been traveling at
       35 miles per hour, he would not have arrived at the location
       where the tree fell at the precise time that it fell. Gordie is
       not liable to Nathan because Gordie’s speeding did not
       increase the risk of the type of harm suffered by Nathan.
       The speeding merely put Gordie at the place and time at
       which the tree fell. This is true even if the type of harm
       suffered by Nathan might be found to be one of the risks
       arising from speeding in an automobile.

Id. § 30 cmt. a, Illus. 1, at 542–43. The critical question is whether, if

repeated, the risks created by the actor’s tortious conduct would make it

more likely that the type of harm suffered by the other person would also

occur. Id. at 543. “If the harm is no more likely to occur than if the
-------------------------
Restatement (Second) of Torts § 433 cmt. b, at 433.
       7Under   Restatement (Second), this limitation is expressed by the following rule:
       The actor’s conduct may be held not to be a legal cause of harm to
       another where after the event and looking back from the harm to the
       actor's negligent conduct, it appears to the court highly extraordinary
       that it should have brought about the harm.
Restatement (Second) of Torts § 435(2), at 449.
                                    20

actor desisted from the tortious conduct, the harm is not within the

scope of the actor’s liability pursuant to this Section.”    Id.; see also

Spreitzer v. Hawkeye State Bank, 779 N.W.2d 726, 742 (Iowa 2009) (in

the context of a fraudulent-representation case we held “that the tortious

aspect of the conduct increased the risk of the damages claimed”).

       This limitation on the scope of liability is important for creating

appropriate incentives to deter tortious behavior and to address

corrective-justice concerns. Restatement (Third) § 30 cmt. b, at 544.

       Limiting liability to instances in which the tortious conduct
       increased the risk of harm is essential for appropriate
       incentives in a tort system that retains a factual-cause
       requirement. . . . From a corrective-justice perspective, a
       merely serendipitous causal connection between the tortious
       aspect of the actor’s conduct and the other’s harm provides
       little reason for requiring the defendant to correct for that
       which has been wrongfully taken from the plaintiff.

Id.

       With these principles in mind, we must examine the facts to

determine whether the loss suffered is within the scope of liability, i.e.,

whether the loss was more likely to occur because of the deficiencies in

the inspection or whether the loss was merely a case of the inventory

being in the wrong place at the wrong time. Thompson, 774 N.W.2d at
838 (“The scope-of-liability issue is fact-intensive as it requires

consideration of the risks that made the actor’s conduct tortious and a

determination of whether the harm at issue is a result of any of those

risks.”).

       Under the Restatement (Third) analysis, to impose liability,

something FM did or did not do must have increased the risk to Deere’s

product.    There is no evidence that a proper or competent inspection

would have either identified the source of the fire and prevented it, or

discovered the problem with the water pressure and corrected it. Deere
                                    21

does not so claim. Deere asserts that it would not have leased the facility

had it known of the problems. Thus, Deere may have established factual

causation, i.e., but for the bad inspection, it would not have leased the

facility. See Berte v. Bode, 692 N.W.2d 368, 372 (Iowa 2005) (giving an

explanation of the but-for test).

      The question, however, is whether merely moving in increased the

risk or created the harm that destroyed Deere’s product. It was the fire

and the inability to put it out that caused the loss, and there is no

evidence connecting the inspection with the two sources of the loss. To

use the analysis of the Restatement (Third), the alleged deficiencies of the

inspection would not have made this loss more likely to occur than if the

inspection had been properly performed. An adequate inspection would

not have stopped arson or careless smoking, nor does Royal claim it

would have disclosed an electrical failure or malfunction.       No expert

testified that the lights were in fact the cause of the fire, and the fire

marshall confirmed that he was no longer investigating the lights as a

possible source of the fire. The loss of water pressure remains a mystery

as well. No problem that could have been discovered by a reasonable

inspection is thought to have been the cause of the loss. Royal’s sole

contention is that had Deere been aware of the inadequacy of the

inspection, it would not have moved its product into the Petersen

warehouse.

      We have said that even where an act may be a factual cause, “we

are convinced that an act which merely places persons in the position

where they sustain injury from an unrelated event is not for that reason

a legal cause of the injury.” Hansen v. Anderson, Wilmarth & Van Der

Maaten, 657 N.W.2d 711, 715 (Iowa 2003). In Movitz v. First National

Bank of Chicago, 148 F.3d 760 (7th Cir. 1998), a case involving a
                                    22

somewhat analogous claim, an investor purchased an office building in

Houston.    His real estate advisor failed to appropriately check the

structural soundness of the building, determine if its cooling system was

adequate for Houston’s climate, and overestimated its cash flow. Movitz,

148 F.3d at 762.     In addition, soon after the investor purchased the

building, Houston’s real estate market crashed. Id. The investor did not

seek just the repair costs or the difference in value between what was

paid for the building and what it was worth, but advanced the claim that

had it been aware of the problems, it would not have purchased the

building, thus avoiding the disastrous downturn in the Houston real

estate market. Id. at 762–63.

      The court determined the plaintiff should not be allowed to recover

any damages because “[t]he bank had no contractual or other legal

duty . . . [to] prevent the Houston real estate market from diving

overboard.” Id. at 763. In making this determination, the court cited the

case of Gorris v. Scott, 9 L.R. Exch. 125 (1874) as an example of when

but-for causation is not enough to establish civil liability for wrongdoing.

Id. at 762. In that case,

      [t]he plaintiff’s sheep were being transported on a ship
      owned by the defendant. A storm arose and the sheep were
      swept overboard to a watery death. The defendant had failed
      to equip the ship with pens for the sheep, as he was required
      to do in order to prevent the spread of disease among the
      animals. Had he complied with his duty the sheep would
      have been saved. And so the violation of the duty was a “but
      for” cause of their loss. Yet the plaintiff was not allowed to
      recover any damages.        The loss of the sheep was a
      consequence, but not a foreseeable consequence, of the
      violation of a legal duty, because the duty was to take
      precautions against a different kind of loss from the one that
      materialized.

Id. at 762–63 (citing Gorris v. Scott, 9 L.R. Exch. 125).     The Seventh

Circuit ultimately determined that “[t]he legal system [was] busy enough
                                     23

without shouldering the burden of providing insurance against business

risks.” Id. at 763.

      We agree with this analysis. FM was not an insurer against any

calamity that might befall Deere’s inventory but only for those events

whose risk of occurrence was increased by FM’s actions. Royal failed to

prove that a condition or deficiency overlooked by FM in its inspection

increased the risk of the loss that actually occurred. We hold that the

loss to Deere’s inventory was outside the scope of liability.

      V. Pro Tanto Issue and Iowa’s Immunity Statute.

      FM contends that Iowa’s inspection immunity statute, Iowa Code

section 517.5, bars Royal’s contract and negligence claims.        FM also

requested that the trial court apply the pro tanto credit rule and reduce

Royal’s verdict by the settlement amounts Royal and Deere received from

other named defendants.       Because we have determined Royal is not

entitled to recover the claimed damages, we need not decide these issues.

      VI. Disposition.

      Because we hold that the damages awarded on Royal’s contract

claim were not in the contemplation of the parties when they entered into

the agreement, and were therefore not foreseeable as a matter of law, the

verdict must be overturned. In addition, because the faulty inspection

did not increase the risk of loss, we hold the loss of Deere’s inventory was

outside the scope of liability.   The judgment is reversed, and the case

remanded for dismissal of all claims.

      DISTRICT COURT JUDGMENT REVERSED IN PART, AFFIRMED

IN PART, AND REMANDED WITH DIRECTIONS.
