Burleson v. Illinois Farmers Ins. Co., IP88-318-C.

Citation725 F. Supp. 1489
Decision Date23 October 1989
Docket NumberNo. IP88-318-C.,IP88-318-C.
PartiesRichard BURLESON, Plaintiff, v. ILLINOIS FARMERS INSURANCE CO., Defendant.
CourtUnited States District Courts. 7th Circuit. United States District Court (Southern District of Indiana)

John C. Trimble, Indianapolis, Ind., for plaintiff.

Michael E. Brown, Kightlinger & Gray, Indianapolis, Ind., for defendant.

ORDER ON DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

McKINNEY, District Judge.

This diversity action comes before the Court on the defendant's motion for summary judgment. The issues raised have been briefed as of August 16, 1989, and are ready for resolution. For the reasons set forth below, the Court GRANTS IN PART and DENIES IN PART the motion. The plaintiff cannot recover consequential damages in this good faith dispute, but he can seek pre-judgment interest.

I. FACTUAL AND PROCEDURAL BACKGROUND1

Plaintiff Richard Burleson owned a home at 3749 Alsace Drive in Indianapolis, and insured the home through defendant Illinois Farmers Insurance Company, Policy No. 36-90168-67-79. On or about February 28, 1987, a fire occurred at the home causing substantial damage. On March 10, 1987, detective Ed Burhenn swore out a probable cause affidavit wherein he concluded that Burleson had committed arson. That same day an Information was filed in the Marion County Superior Court charging Burleson with damaging property with the intent to defraud Farmers Insurance Company.

On February 23, 1988, after submitting claims to Farmers Insurance without avail, plaintiff filed this action for breach of contract in state court. In his prayer for relief, Burleson seeks damages under the insurance policy, as well as consequential damages flowing from the alleged breach of contract and prejudgment interest. This cause was properly removed to this federal district court on March 16, 1988. Thereafter, on August 23, 1988, plaintiff was acquitted of the arson charge in Marion Municipal Court.

Farmers Insurance has filed the present motion for summary judgment arguing that Burleson is not entitled to consequential damages beyond policy limits and that prejudgment interest is not available in this case. Plaintiff vigorously opposes the motion on both grounds. As will be seen, resolution of these issues turns not so much on the facts of this case but rather on the ascertaining the proper interpretation of Indiana law.

Before addressing these two issues, it is first necessary to set forth the governing standards for summary judgment.

II. SUMMARY JUDGMENT STANDARDS

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Further, Rule 56(e) provides:

When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleadings, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.

Since the Supreme Court's trilogy of decisions on summary judgment, see Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); and Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986), it is clear that the mandatory aspects of Rule 56 must be followed by the district courts, and, as a result, summary judgment must be entered where appropriate. Decisions of the Seventh Circuit reflect this change in attitude as well. See, e.g., Herman v. City of Chicago, 870 F.2d 400, 404 (7th Cir. 1989); Spellman v. Commissioner, 845 F.2d 148, 152 (7th Cir.1988); Collins v. Associated Pathologists, Ltd., 844 F.2d 473 (7th Cir.1988).

With these standards at hand, the Court will now discuss the whether consequential damages and prejudgment interest are precluded as a matter of law in this case.

III. DISCUSSION

A. Consequential damages are precluded as matter of law where the insurer disputes coverage in good faith:

1. Background.

Besides seeking to recover the policy limits, plaintiff also seeks an award of consequential damages caused by the carrier's alleged breach of contract. Specifically, Burleson seeks to recover damages that resulted from a foreclosure on his mortgage that occurred after Farmers Insurance refused to pay his claim. Farmers Insurance seeks summary judgment on this issue, arguing that its refusal to pay is in good faith as evidenced by the criminal information filed by the Marion County Prosecutor's Office against Burleson.

The parties' interpretations of relevant Indiana law on this issue are diametrically opposed. Although there are scores of cases dealing with punitive damages in bad faith cases, such decisions appear to be of little value here where good faith is involved and where consequential or "excess" (i.e., compensatory) damages are sought rather than punitive or exemplary damages. In order to address this issue and predict what the Indiana Supreme Court would do,2 this Court must engage in a somewhat lengthy discussion of the subject matter. The ultimate conclusion of the analysis is that while it is a question of fact under contract law analysis as to whether consequential damages are recoverable in this case, the Indiana Supreme Court would invoke public policy considerations to deny such damages where the insurer denies the claim in good faith.

To begin with, the dispute in this individual case mirrors the tension in this area of the law around the country. This is perhaps best summed up by an annotation on this subject where the following is written:

With regard to the right of an insured or other beneficiary under an insurance policy to recover consequential ... damages for such failure or delay in making payment, in the absence of ... statutory penalties, there is a decided difference of opinion among the jurisdictions. The right to such consequential damages, under the general rule that damages recoverable for a breach of contract are such as may reasonably be considered as arising naturally from the breach of contract itself, is supported by some modern authority. On the other hand, the rule that damages for breach of a contract to pay money are limited to the amount owing under the contract, with interest, frequently has been applied to deny the recovery of consequential damages resulting from failure or delay in making payment under an insurance contract.

Annot., Insurer's Liability for Consequential or Punitive Damages for Wrongful Delay or Refusal to Make Payments Due Under Contracts, 47 A.L.R.3d 314, 317-18 (1973).

Examples of the tension in this area can be found in many jurisdictions. Compare Hayseeds, Inc. v. State Farm Fire & Casualty, 352 S.E.2d 73 (W.Va.1986) (allowing consequential damages, including attorneys' fees, for the net economic loss cause by delay in settlement), with Giovannitti v. Nationwide Insurance Co., 690 F.Supp. 1439 (W.D.Pa.1988) (rejecting consequentials under Pennsylvania law). And, the split of authority and the importance of the issue have not evaded the commentators' attention. See, e.g., Appleman, Insurance Law and Practice §§ 8877-8879 (1981) (discussing various and divergent approaches courts have taken on this issue); Kornblum, Defense of a First-Party Extra-Contract Claims Action, 29 Am.Jur.Trials 481 (1982); Note, The Availability of Excess Damages for Wrongful Refusal to Honor First Party Insurance Claims—An Emerging Trend, 45 Fordham L.Rev. 164 (1976). Several articles from an Indiana Continuing Legal Education Forum seminar, including one written by one of the attorneys in this case, show that the issue has not bypassed Indiana practitioners even though it has not been squarely addressed by the Indiana appellate courts. See Insurance Law, §§ 6-8 (ICLEF 1983).3

2. Indiana Law.

In Indiana, there appear to be no cases directly on point. On the one hand, Indiana does allow recovery of punitive damages in insurance bad faith cases if a sufficiently malicious state of mind is proven by clear and convincing evidence. See, e.g., Sexton v. Meridian Mutual Insurance Co., 337 N.E.2d 527 (Ind.App.1975); Liberty Mutual Insurance Co. v. Parkinson, 487 N.E.2d 162 (Ind.App.1985); Kornblum, Advani, A review of Indiana "bad faith law," 31 Res Gestae 374 (1988). These Indiana cases allow punitive damages as a "special contractual remedy" and not as an independent tort. Liberty Mutual, 487 N.E.2d at 165. Yet, such cases have little relevance here, for plaintiff is not seeking punitive damages nor is he claiming bad faith. Moreover, the undisputed facts of this case show that such a bad faith claim could not survive summary judgment anyway. Hoosier Insurance Co. v. Mangino, 419 N.E.2d 978 (Ind.App.1981) (on strikingly similar facts in an alleged arson case, the Court of Appeals reversed a punitive damage award on the grounds that evidence of the incendiary origin of the fire demonstrated that the insurer did not act in bad faith in contesting liability).

On the other hand, several Indiana cases do involve awards of pure consequential damages that were not disturbed on appeal. See Farm Bureau Mutual Insurance Co. v. Dercach, 450 N.E.2d 537 (Ind. App.1983); Lloyds of London v. Lock, 454 N.E.2d 81 (Ind.App.1983); Transport Insurance Co. v. Terrell Trucking, 509 N.E.2d 220, 226 (Ind.App.1987); Liberty Mutual Insurance Co. v. Parkinson, 487 N.E.2d 162 (Ind.App.1985). As both parties rely on these cases, each opinion deserves close scrutiny in this instance.

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