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Iowa Bad Faith Law—Can Iowa Policyholders Hold Insurers Accountable for Wrongful Claims Conduct?


First-party bad faith is a well-established common law cause of action in Iowa that allows insureds to hold their insurance companies accountable for unreasonable claim denials or delays. Iowa has recognized first-party bad faith claims against insurers since the 1988 case of Dolan v. Aid Insurance Company. 1 To prove a first-party bad faith claim in Iowa, the policyholder must show:

  1. The insurer had no reasonable basis for denying benefits under the policy, and
  2. The insurer’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.

The Iowa Supreme Court commented on the rationale and need for a bad faith cause of action:

We found it was ‘appropriate to recognize the first-party bad faith tort to provide the insured an adequate remedy for an insurer’s wrongful conduct’ because traditional breach of contract damages would not always be adequate to compensate for bad faith and the alternative remedy of intentional infliction of emotional distress was inadequate due to its limited applicability. …We also found that recognition of the tort was justified by the nature of the contractual relationship between the insurer and insured.’…

We explained,

Although we do not believe this relationship involves the same fiduciary duties as in the third-party situations, . . . we have frequently noted that insurance policies are contracts of adhesion. This is due to the inherently unequal bargaining power between the insurer and insured, which persists throughout the parties’ relationship and becomes particularly acute when the insured sustains a physical injury or economic loss for which coverage is sought. Recognition of the first-party bad faith tort redresses this inequality. 2

Where a claim is “fairly debatable,” the insurer is entitled to debate it, whether the debate concerns a matter of fact or law. “This test creates an objective standard and makes clear the intentional nature of the tort” of bad faith. Further, “[i]t is appropriate, in applying the test, to determine whether a claim was properly investigated and whether the results of the investigation were subjected to a reasonable evaluation and review.” 3

Iowa does not recognize a statutory basis for bad faith. In Bigfoot Co-op A Inc v Nationwide Mutual Insurance Company, 4 a court recently dismissed the policyholder’s claim of unfair settlement practices under the Iowa Insurance Code Section 507B.4(3)(j). fn The rationale was based on the interpretation that Chapter 507B of the Iowa Code does not create a private cause of action. The court referenced Iowa Supreme Court precedent, which held that the Iowa Code was intended to be regulatory in nature, providing the state insurance commissioner with administrative enforcement powers rather than creating a private right of action for policyholders. The court emphasized that multiple state decisions and prior federal court rulings consistently upheld the interpretation that Chapter 507B does not create a private cause of action for insureds against insurers.

Consequently, the court granted the defendant’s motion to dismiss the unfair settlement practices claim.

The bottom line is that bad faith is recognized in Iowa at common law but not under Iowa statutory law. Iowa first-party bad faith claims can arise when an insurer unreasonably denies or delays payment on a valid claim by its own insured. Examples may include denying a claim without a reasonable basis, failing to properly adjust or investigate a claim, or simply delaying payment of policy benefits on a valid claim without a reasonable basis.

Thought For The Day

“Is this heaven?”
“No, it’s Iowa.”
—Shoeless Joe Jackson, as portrayed by Ray Liotta and Ray Kinsella, played by Kevin Costner in the movie, Field of Dreams


1 Dolan v. Aid Ins. Co., 431 N.W.2d 790 (Iowa 1988).
2 De Dios v. Indem. Ins. Co. of N. Am., 927 N.W.2d 611, 616 (Iowa 2019).
3 Dolan, 431 N.W.2d 790.
4 Bigfoot Co-op A Inc v Nationwide Mut. Ins. Co., No. 23-CV-1016 (N.D. Iowa July 16, 2024).

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