Iowa Appeals Court Reduces Insurance Award to Swine Farm

On April 29, 2020, the Iowa Court of Appeals issued an opinion concerning an insurance company’s alleged breach of contract with a hog farmer. The court concluded that the farmer’s equipment was damaged by a power surge, but that the electrical system for the buildings was not harmed by a power surge. The court also modified the loss-of-income award to be within policy limits.

Background

A farm operator owned several insured hog-confinement buildings. In June of 2015, a thunderstorm caused power outages in two of the hog buildings. After the back-up generator also failed, the farmer was able to restart the generator. When the building power was out, most of the hogs died from lack of ventilation.

After the generator restarted, the electrical system resumed functioning normally. However, following the storm, various farm equipment failures increased. In September, the farmer filed a claim with his insurance company claiming the lightning storm damaged the electrical system. The policy for the farmer’s confinement buildings only covered replacement costs for specific events, including a power surge. It also provided coverage for the farm equipment and any loss-of-income.

The insurance company hired an electrical engineer to determine the cause of the damage. The engineer visited the property twice and prepared reports each time. In the first report, the engineer ruled out lightning, stating the malfunctions were caused by a power surge from high winds. He also found signs of corrosion which would lead to the types of issues reported. In a second report, the engineer stated there was no evidence of damage due to a high-voltage power surge, but rather he attributed the damage to corrosion. The insurance company determined the damage was caused by the aging electrical system. Therefore, the farmer’s claims were not covered by the insurance policy. The farmer then filed this lawsuit against the insurance company alleging breach of contract. 

At trial, the court heard testimony regarding the higher rate of farm equipment failure after the storm. One electrician testified that while he never determined the cause of the outages, he did recommended a rewiring of the buildings. The electrician explained that the eighteen-year old electrical system was older, but he clarified that did not necessarily mean the electrical system needed “serious remodeling.” The insurance company’s electrician indicated he did not view any lightning damage at the property, and even if there was, the equipment would fail immediately rather than over a period of several weeks.  In its ruling, the trial court determined that a power surge was the cause of all the damage to the property and awarded the farmers $171,246.99 in property damages and $175,500.00 for loss-of-income damages, plus interest and costs. The insurer appealed.

Cause of Damage to Electrical System and Farm Equipment

On appeal, the insurance company argued that the damages to the electrical systems were not caused by a power surge.  An insured party has the burden of proving that both the property and the damage claimed are covered under the existing policy. In this case, the farmer’s insurance policy only covered damages caused by certain events. The insurance policy at issue in this case covered damages caused by power surge but would not cover damages caused by corrosion.  

In the first report submitted to the insurance company, the electrical engineer believed that a power surge and corrosion caused the damage. After specifically examining the electrical system, the electrical engineer concluded that the malfunctions were from corrosion. The farmer testified that the electrical system worked after the storm. In light of these facts, the court found that substantial evidence did not support the trial court’s finding that the electrical system issues could be attributed to a power surge. The court thus reversed the trial court’s award of damages for the electrical system.

Conversely, the court noted that farm equipment such as fan motors, washing machines, and dryers began to fail at an increased rate after the storm. This included machines which had never experiences malfunctions before. The electrical engineer’s initial report concluded that the equipment failures were due to a power surge event. In light of this evidence, the court affirmed the district court finding that the equipment damage was covered under the policy. The court remanded to the district court to recalculate damages for costs not including the electrical system.

Loss-of-Income Damages

Each building’s coverage limit was $15,000 with a $2,500 deductible. The insurance company claimed that the trial court’s award of $175,500 for loss-of-income exceeded the policy limits.

Here, the farmer did not deny the policy limits, but claimed that the loss of income was due to delays caused by the insurance company and, in essence, a bad faith denial. However, the farmer sought monetary damages and brought a breach of contract claim, not a bad-faith claim.

The court ruled that the terms of the policy must apply equally to both parties according to the agreed upon coverage. The court thus found that the loss-of-income coverage was limited to $15,000 per building.