Hallmark Specialty Insurance Company v. Phoenix C & D Recycling, Inc.

United States Court of Appeals
For the Eighth Circuit
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No. 20-1339
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Hallmark Specialty Insurance Company
Plaintiff - Appellee
v.
Phoenix C & D Recycling, Inc.
Defendant - Appellant
R & A Properties, Inc.
Defendant
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Appeal from United States District Court
for the Southern District of Iowa - Des Moines
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Submitted: January 14, 2021
Filed: June 1, 2021
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Before COLLOTON, WOLLMAN, and SHEPHERD, Circuit Judges.
SHEPHERD, Circuit Judge.
Phoenix C & D Recycling, Inc. and its property owner, R & A Properties, Inc.,
(collectively, Phoenix) operate a trash recycling plant in Des Moines, Iowa. In July
2017, a fire began from a pile of biofuel material located on Phoenix’s property.

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Hallmark Specialty Insurance Co. (Hallmark), Phoenix’s insurer, made several
payments to Phoenix for Phoenix’s losses, but after disagreements as to those
payments arose, Hallmark filed an action with the district court1 seeking declaratory
judgment that it did not breach the insurance policy or act in bad faith when adjusting
Phoenix’s claims. Phoenix asserted three counterclaims, and after the parties filed
cross-motions for summary judgment, the district court granted Hallmark’s motion
in its entirety and granted Phoenix’s motion in part. Phoenix now appeals the district
court’s grant of summary judgment in favor of Hallmark.2 Having jurisdiction
pursuant to 28 U.S.C. § 1291, we affirm.3
I.
Phoenix operated a recycling plant in Des Moines, Iowa, recycling
construction debris and producing biofuel from wood materials. On July 6, 2017, a
fire began at Phoenix’s plant. At the time of the fire, Phoenix had nearly 18,000 tons
of biofuel on its property, and the fire originated from a pile of this biofuel located
at the southeast corner of the plant. Pursuant to a policy effective April 16, 2017,
Hallmark insured Phoenix with coverage for property damage and business
interruption of up to approximately $6.5 million. Phoenix provided Hallmark with
notice of its fire loss on or about July 10, 2017. This loss included damage to
buildings, wiring, equipment, and other materials located on Phoenix’s property.
1 The Honorable John A. Jarvey, Chief Judge, United States District Court for
the Southern District of Iowa.
2 Phoenix does not appeal the district court’s summary judgment ruling insofar
as it granted summary judgment in favor of Hallmark on Phoenix’s breach of
contract counterclaim.
3 Hallmark also filed two motions to strike, seeking to strike portions of
affidavits that Phoenix relied on in its motion for summary judgment and in its
resistance to Hallmark’s motion for summary judgment. However, because the
district court granted Hallmark’s motion for summary judgment in full, it denied
Hallmark’s motions to strike as moot. These motions to strike are not before us on
appeal.

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Hallmark assigned Bryan Jones, a “Property Claims Supervisor,” to Phoenix’s
claimed loss and subsequently hired 11 different experts and consultants to also
evaluate the loss. There are two experts and consultants pertinent to this appeal:
Larry Baxter and HSNO. Hallmark hired Baxter, a mechanical engineer, to assess
Phoenix’s wiring and equipment damage. Baxter created a report, dated July 31,
2017, that included three different estimates for equipment loss: (1) actual cash value
of $368,520; (2) replacement cost value of $1,226,400; and (3) repair cost of
$93,600. R. Doc. 38-9, at 59. Within Baxter’s report was an estimate of $124,800
for removal and replacement of wiring and equipment, including equipment removal
and installation labor cost; replacement of electrical wiring cost; and a contingency
fee. R. Doc. 38-9, at 59. In a separate report, R. Doc. 38-12, at 20, Jones
characterized the electrical wiring replacement cost as being included in the
replacement cost value category. Jones later confirmed this classification in a
supplemental declaration, stating, “Based on [Baxter’s] report, my understanding at
the time was that the electrical equipment should be depreciated and allocated as
[r]eplacement [c]ost [v]alue.” R. Doc. 47-4, at 8. On October 18, 2017,4 Hallmark
paid Phoenix $200,720 under its equipment loss coverage. This amount did not
include compensation for removal and installation of wiring and equipment because,
Hallmark contended, the policy did not require such payment until damaged property
had been repaired or replaced. Hallmark did eventually compensate Phoenix for its
damaged wiring and equipment (as well as the associated labor costs and
contingency fee): Hallmark included the $124,800 in its July 6, 2018 “compromise”
payment, which exceeded $1 million. However, Phoenix contends that Hallmark
should have paid the $124,800 for removal and replacement of wiring and equipment
on October 18, 2017.
4 Appellant’s brief characterizes this payment as occurring on October 18,
2017, and the district court characterizes this payment as occurring both on October
18, 2017, and on the following day, October 19, 2017. This discrepancy does not
affect our analysis, and for consistency, we characterize this payment as occurring
on October 18, 2017.

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Hallmark also hired HSNO, an accounting firm, in anticipation of Phoenix’s
business income interruption claim. HSNO began requesting information regarding
any such claim in November 2017. In response, on December 1, 2017, Phoenix
provided financial information for 2015, 2016, and through October 2017. At this
time, Phoenix stated that “[t]he business income/extra expense loss exceeds
$530,000,” R. Doc. 59, at 21 (alteration in original), and demanded a $200,000
advance. However, at the time of its demand, Phoenix had not provided complete
financial information to HSNO or to Hallmark—namely, financial information
covering the time period beyond October 2017. HSNO then provided Hallmark with
a preliminary calculation of business income loss totaling $28,774.34. HSNO
characterized 94.16% of the expenses included in its calculation as “non-
continuing,” meaning that no continuing payroll expenses were incorporated into the
estimate. HSNO expressly told Jones that this calculation was preliminary, as it was
subject to “additional discussions, and new information, including continuing
payroll.” R. Doc. 59, at 22. Jones then relayed this calculation to Phoenix, alerting
Phoenix of the calculation’s preliminary status. In response, Phoenix submitted to
Hallmark a proof of loss for $28,774.34 coupled with a letter disputing HSNO’s
calculation. Phoenix did not provide a proposed alternative calculation or the
missing financial information. Instead, it simply alleged that it had provided
sufficient financial information and that, based on that information, it was entitled
to a larger payment. On January 9, 2018, Hallmark advanced Phoenix $28,774.34
under the policy’s business interruption coverage.
Hallmark brought an action in district court for declaratory judgment that it
did not breach the insurance policy or act in bad faith when adjusting Phoenix’s
claims, and Phoenix brought three counterclaims, seeking punitive damages and
contending that although Hallmark ultimately paid all sums owed under the policy,
it breached the terms of the policy, acted in bad faith, and breached its fiduciary duty
to Phoenix by delaying the payment of policy benefits. The parties filed cross-
motions for summary judgment, and ultimately, the district court granted Hallmark’s

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motion for summary judgment in its entirety and granted Phoenix’s motion in part.5
We find that the district court did not err, and we affirm in full.6
II.
“We review de novo the district court’s grant of summary judgment.” Van
Dorn v. Hunter, 919 F.3d 541, 544 (8th Cir. 2019) (citation omitted). “Summary
judgment is appropriate where there is no genuine issue of material fact and the
moving party is entitled to judgment as a matter of law.” Kempf v. Hennepin Cnty.,
987 F.3d 1192, 1195 (8th Cir. 2021).
On appeal, Phoenix abandons many of the claims that it raised before the
district court and challenges only the district court’s grant of summary judgment in
favor of Hallmark on Phoenix’s bad faith claim and Hallmark’s claim for declaratory
judgment, and on Phoenix’s request for punitive damages. We agree with the district
court’s thoughtful analysis of these claims and affirm.7
“To show a claim for bad faith, a plaintiff must show the absence of a
reasonable basis for denying benefits of the policy and defendant’s knowledge or
reckless disregard of the lack of a reasonable basis for denying the claim.” Dolan v.
Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988) (citation omitted); see also Rodda
5 The district court granted Phoenix’s motion for summary judgment, denying
Hallmark’s request for attorney’s fees.
6 In its motion for summary judgment on Phoenix’s breach of fiduciary duty
counterclaim, Hallmark argued that no such cause of action was available for first-
party insurance actions. In response, Phoenix did not resist Hallmark’s motion for
summary judgment on Phoenix’s breach of fiduciary duty counterclaim. That claim
is not before us on appeal.
7 “When exercising diversity jurisdiction, as we do here, we apply the forum
state’s substantive law to any state-law claims.” May v. Nationstar Mortg., LLC,
852 F.3d 806, 813 (8th Cir. 2017). Therefore, here we apply Iowa law to Phoenix’s
bad faith claim.

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v. Vermeer Mfg., 734 N.W.2d 480, 483 (Iowa 2007) (explaining that a plaintiff must
prove that the insurer “had no reasonable basis for denying benefits under the policy”
and that “the insurer knew, or had reason to know, that its denial was without basis”
(citation omitted)). “The first element is an objective one; the second element is
subjective.” Rodda, 734 N.W.2d at 483 (citation omitted). As the district court
correctly noted, we consider the second element only if we find that the insurer did
not have a reasonable basis to deny the insured’s claim. R. Doc. 59, at 15; see also
Rodda, 734 N.W.2d at 483.
The first element is not satisfied if the “claim is ‘fairly debatable’ as to either
a matter of fact or law.” Rodda, 734 N.W.2d at 483 (citation omitted); see also
Thornton v. Am. Interstate Ins. Co., 897 N.W.2d 445, 465 (Iowa 2017) (“‘[W]here
an objectively reasonable basis for denial of a claim actually exists, the insurer
cannot be held liable for bad faith as a matter of law.’ ‘[C]ourts and juries do not
weigh the conflicting evidence that was before the insurer; they decide whether
evidence existed to justify denial of the claim.’” (second alteration in original)
(emphasis omitted) (citation omitted)). Iowa courts find several principles important
to the first element’s analysis. First, “[t]he reasonable basis for denying the
claim . . . must exist at the time the claim is denied.” Seastrom v. Farm Bureau Life
Ins. Co., 601 N.W.2d 339, 346 (Iowa 1999). Second, although an insurer may
conduct an investigation of an insured’s claims, there is no duty of investigation on
the insurer, Bellville v. Farm Bureau Mut. Ins. Co., 702 N.W.2d 468, 478 (Iowa
2005), and “an imperfect investigation, standing alone, ‘is not sufficient cause for
recovery if the insurer in fact has an objectively reasonable basis for denying the
claim,’” Villarreal v. United Fire & Cas. Co., 873 N.W.2d 714, 728 (Iowa 2016)
(citation omitted); see also Reuter v. State Farm Mut. Auto. Ins. Co., 469 N.W.2d
250, 254-55 (Iowa 1991). Third, “[t]here must be evidence that the basis for [the
insurer’s] valuation was unreasonable,” and the insurer is “not obligated to disregard
the opinion of its own expert in favor of the insured’s expert’s opinion.” Bellville,
702 N.W.2d at 475, 477 (emphasis omitted).

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On appeal, Phoenix argues that although Hallmark eventually paid all sums
owed under the policy for business interruption, Hallmark acted in bad faith when,
on January 9, 2018, it paid Phoenix only $28,774.34 rather than the $200,000 that
Phoenix demanded. Phoenix contends that, based on the financial information
Phoenix submitted to Hallmark on December 1, 2017, this payment should have
included continuing payroll costs but did not. The crux of Phoenix’s argument is
that it was unreasonable for Hallmark to rely on HSNO’s report—because, Phoenix
alleges, that report was flawed—and from this unreasonableness, bad faith can be
inferred. See, e.g., Appellant Br. 15-16 (“[B]ad faith may be inferred from a flawed
or inadequate investigation by the insurer. . . . The [district court], in allowing
Hallmark to rely on the HSNO report, fails to consider the fact that the report is
unreasonable.” (citation omitted)). In response, Hallmark points out that Phoenix
agrees that it ultimately received the total amount of business interruption benefits
to which it was entitled and only argues that Hallmark should have paid more than
$28,774.34 on January 9, 2018. See, e.g., Appellant Br. 20 (“The fact an insurer
ultimately pays benefits due under the contract does not relieve it from liability for
bad faith when it unreasonably delayed payment of those benefits.”). Hallmark
directs us to the incomplete financial information that Phoenix provided HSNO on
December 1, 2017; HSNO’s requests to Phoenix for additional financial
information; HSNO’s calculation of $28,774.34, which was preliminary and subject
to change should Phoenix provide the missing financial information; and Phoenix’s
failure to provide an alternative calculation.
Our role is confined to determining “whether evidence existed to justify
[Hallmark’s] denial of the claim”; we are not tasked with “weigh[ing] the conflicting
evidence that was before the insurer.” Thornton, 897 N.W.2d at 465 (emphasis
omitted); cf. McIlravy v. N. River Ins. Co., 653 N.W.2d 323, 330 (Iowa 2002)
(explaining that the plaintiff must “present substantial evidence to establish the
absence of a reasonable basis by [the insurer] for denying benefits” (emphasis
added)). With this in mind, we find that Hallmark had an objectively reasonable
basis to initially deny Phoenix’s $200,000 business income interruption demand.
See Dolan, 431 N.W.2d at 794; Rodda, 734 N.W.2d at 483. On January 9, 2018,

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Hallmark relied on HSNO’s report, which included estimates of loss calculated from
the incomplete financial information Phoenix had provided. HSNO indicated that
this $28,774.34 calculation was preliminary and subject to change upon receipt of
additional financial information. However, rather than supplying the missing
information, Phoenix simply reasserted its belief that it had provided sufficient
information and that, based on the financial information provided, it was entitled to
a larger payment. Phoenix did not provide an alternative calculation or explain why
Hallmark’s calculation was incorrect. Based on these facts, we find that Hallmark
had an objectively reasonable basis for denying Phoenix’s demand and limiting its
payment to $28,774.34 on January 9, 2018. See Thornton, 897 N.W.2d at 465.
Further, to the extent that HSNO’s report included any inaccuracies, “an imperfect
investigation, standing alone, ‘is not sufficient cause for recovery if the insurer in
fact has an objectively reasonable basis for denying the claim.’” Villarreal, 873
N.W.2d at 728 (citation omitted).
Phoenix next argues that Hallmark acted in bad faith when it delayed paying
the total amount owed under the policy for damage sustained to Phoenix’s wiring
and equipment. Specifically, Phoenix contends that Hallmark knew, at time of the
partial payment in October 2017, that Hallmark’s expert’s calculation for equipment
damage totaled $368,520 but nevertheless paid only $200,720 on that date. Phoenix
argues that Hallmark owed Phoenix an additional $124,800 for damage to wiring
and equipment.8 As it did in response to Phoenix’s first bad faith argument,
Hallmark similarly characterizes this argument as objecting to the timing of
8 Before the district court, Phoenix presented this as two distinct claims: first,
that Hallmark acted in bad faith in denying or delaying payment of $124,800 for the
removal and installation of wiring and equipment; and second, that Hallmark acted
in bad faith by failing to pay Phoenix on October 18, 2017, for equipment loss and
repair (i.e., that on October 18, 2017, Hallmark should have paid Phoenix $368,520
based on Baxter’s calculation for actual cash value plus $124,800 for the wiring and
equipment removal and installation). However, on appeal, Phoenix consolidates this
argument, claiming that Hallmark acted in bad faith for “fail[ing] to include
$124,800 for damage to wiring and electronic equipment necessary to operate the
Phoenix equipment.” See Appellant Br. 25.

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Hallmark’s payments. Hallmark explains, and the district court opinion confirms,
that Hallmark did pay benefits under the policy for the wiring and equipment
damage, but that Hallmark included this payment in its July 8, 2018 “compromise”
payment. See R. Doc. 59, at 18 (“[N]o reasonable juror could conclude that the full
costs of removal and installation of wiring and electrical components were not
included in the [July 6, 2018] ‘compromise’ payment.”).
We find that there was a reasonable basis for Hallmark to deny Phoenix’s
demand for an additional $124,800 in October 2017. See Dolan, 431 N.W.2d at 794;
Rodda, 734 N.W.2d at 483. Although in his report Baxter included an estimate of
$124,800 to remove and install wiring and equipment, Jones classified this estimate
as part of the replacement cost value category. Hallmark interpreted its policy as not
requiring payment for items included in the replacement cost value category until
Phoenix had actually repaired or replaced those items—which it had not done as of
October 2017. As the district court noted, “Hallmark knew that the Iowa Supreme
Court had interpreted comparable policy language as not requiring payment of
[replacement cost value] until the associated equipment was actually repaired or
replaced.” R. Doc. 59, at 17 (citing Pierce v. Farm Bureau Mut. Ins. Co., 548
N.W.2d 551, 554 (Iowa 1996)). This interpretation of the policy—and of Iowa
law—constitutes an objectively reasonable basis to deny Phoenix’s $124,800
demand in October 2017. See Thornton, 897 N.W.2d at 465.
To the extent that Phoenix argues Hallmark acted in bad faith for failing to
pay Phoenix in October 2017 for equipment loss and repair, i.e., that Hallmark
should have paid $368,520, we agree with the district court that Hallmark had an
objectively reasonable basis for denying Phoenix’s claim. Baxter’s report indicated
that the equipment’s replacement cost value was $1,226,400; that the equipment’s
actual cash value was $368,520; and that the equipment’s repair costs were $93,600.
Even though Hallmark’s October 2017 payment of $200,720 was less than Baxter’s
recommended $368,520, Hallmark had a reasonable basis to advance only $200,720.
Jones concluded that $200,720 was appropriate after considering: repair costs and
actual cash value for non-repairable items; the 20% contingencies on all amounts

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(per the policy); and the applicable $25,000 deductible (per the policy). Further,
Jones omitted the $124,800 amount (for removal and installation of wiring and
equipment) from his calculation for the reasons discussed above. There is no
evidence that this calculation was unreasonable, see Bellville, 702 N.W.2d at 477-
78, and it forms an objectively reasonable basis for denial of Phoenix’s $368,520
claim, see Thornton, 897 N.W.2d at 465. Because we find that there was a
reasonable basis for Hallmark’s denial of both the business income interruption
claim and the wiring and equipment damage claim, we need not reach the second,
subjective knowledge element. See Rodda, 734 N.W.2d at 483 (explaining that a
court needs to reach the second, subjective element only once it has found that the
insurer lacked a reasonable basis to deny the insured’s claim). Because we find that
summary judgment was appropriate on Phoenix’s bad faith claim, it follows that
summary judgment was appropriate on Hallmark’s declaratory judgment claim.
Next and finally, the district court granted summary judgment to Hallmark on
Phoenix’s request for punitive damages. The district court addressed this issue
briefly, stating in part, “Because the [district] court has resolved the underlying
substantive claims against Phoenix, Phoenix’s punitive damages claim is moot, and
Hallmark is entitled to summary judgment on that claim.” R. Doc. 59, at 41. We
agree. See, e.g., Iowa Code § 668A.1 (noting that where a party requests punitive
damages, there must be a finding, “by a preponderance of clear, convincing, and
satisfactory evidence,” that the defendant’s conduct “constituted willful and wanton
disregard for the rights . . . of another”).
III.
For the above-stated reasons, we affirm.
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