Davidson v. State Farm Fire & Cas. Co.

• Decision Date: 06 August 1986
• Docket Number: No. EC85-28-LS-D.,EC85-28-LS-D.
• Court: U.S. District Court — Northern District of Mississippi
• Parties: Jimmy Lee DAVIDSON and Sandra Davidson, Plaintiffs, v. STATE FARM FIRE & CASUALTY COMPANY, Defendant.

641 F. Supp. 503

Jimmy Lee DAVIDSON and Sandra Davidson, Plaintiffs, v. STATE FARM FIRE & CASUALTY COMPANY, Defendant.

No. EC85-28-LS-D.

United States District Court, N.D. Mississippi, E.D.

August 6, 1986.

COPYRIGHT MATERIAL OMITTED

Jerry Askew, Starkville, Miss., for plaintiffs.

Robert H. Faulks, Holcomb, Dunbar, Connell, Chaffin & Willard, Oxford, Miss., for defendant.

MEMORANDUM OPINION

SENTER, Chief Judge:

In this diversity action, plaintiffs, Jimmy Lee and Sandra Davidson, sue defendant, State Farm Fire and Casualty Company, for defendant's alleged wrongful refusal to pay homeowner's insurance benefits under a policy issued to the plaintiffs. Plaintiffs pursue recovery under the theories of tortious breach of contract, intentional infliction of emotional distress, and fraud in the inducement. On April 17, 1985, the court sustained defendant's partial summary judgment motion holding defendant not liable as a matter of law for any breach of fiduciary duties. Although noting both the requirements of Rule 9(e), Fed.R.Civ.P., and plaintiffs' lack of specificity in pleading the allegations of fraud in their original complaint, the court granted the plaintiffs twenty (20) days to file an amended complaint to cure these defects. An amended complaint was in fact filed on April 30, 1986. This cause is presently before the court on defendant's motion for partial summary judgment.

I. THE BAD FAITH CLAIM

A. Factual Background

Plaintiffs filed their initial complaint with the Clay County Circuit Court on December 27, 1984, but the complaint was removed to this court by the defendant on January 21, 1985, pursuant to the terms of 28 U.S.C. § 1441. As a result of defendant's alleged misconduct, plaintiffs seek an award of compensatory damages for either damage to or loss of the contents of their home and for emotional distress allegedly caused by the defendant's denial of their insurance claim. In addition, plaintiffs seek an award of punitive damages for the alleged "bad faith" actions of the defendant. The instant motion deals with this latter claim for punitive damages as well as the claim for extracontractual damages relating to plaintiffs' allegation of suffering emotional distress.

It is uncontested between the parties that the plaintiffs took out a homeowner's insurance policy from State Farm on June 2, 1984, which covered their home and its contents located on Waverly Road in Clay County, Mississippi, near the Town of West Point. The dwelling burned down on August 5, 1984. Subsequently, plaintiffs submitted their claim for proceeds under the policy to State Farm, but the claim was formally denied on December 7, 1984, following completion of an investigation into the cause of the fire and the extent of the loss.

B. Punitive and Extracontractual Damages¹ —A Review

When an insurance company decides to deny a claim for payment under an insurance policy, the insured has the option of contesting this decision by filing suit in either state or federal court and alleging wrongful denial of the claim by the insurer. Proof must be presented to show an intentional refusal by the insurance company to pay with reasonable promptness the insured's claim and a right to the proceeds under the terms of the policy and the facts of the loss. If the insurer had a legitimate or arguable reason to deny the claim, the suit will remain one for wrongful denial, and the insured will be limited to recovering damages under the terms of the policy. If, however, the insurer had no arguable reason to deny the claim, then plaintiff's suit is referred to as "a bad faith refusal" on the part of the insurer, and a separate cause of action may exist. See generally, Blue Cross and Blue Shield of Mississippi v. Campbell, 466 So.2d 833, 847 (Miss.1984) (Robertson, J. concurring). Since the vast majority of insurance cases involves an intentional refusal by an insurance company to pay an insured's claim, the presence or absence of arguable reason is the focus of a majority of the cases in this area.

Under Mississippi law, the element of legitimate and arguable reason is defined as follows:

An arguable reason is one in support of which there is some credible evidence. There may well be evidence to the contrary. A person or insurer is said to have an arguable reason for acting if there is some credible evidence that supports the conclusions on the basis of which he or it acts.

Id., at 851 (citations omitted). Since the issue of whether State Farm in the case sub judice had a legitimate or arguable reason for denying plaintiffs' claim is expressly not presented by the instant motion, the court will defer a detailed analysis of the question until formally requested to render such a ruling, either under the procedures outlined by Rule 56, Fed.R.Civ.P., or at a trial on the merits. It should be noted, however, that the burden is on the plaintiff to show by a preponderance of the evidence that there was no legitimate or arguable basis for the insurance carrier to deny the claim. Id., supra, at 844.

In order to recover any damages above the policy limits, the insured must also show that the defendant has done to him "such a wrong as to impart insult, fraud, oppression or reckless disregard for his rights...." Weems v. American Security Insurance Co., 486 So.2d 1222, 1227 (Miss. 1986). Stated another way, to prevail on a claim for either punitive or extracontractual compensatory damages, the plaintiff must show, in addition to the absence of any arguable reason, that the insurer acted with malice or reckless disregard for his rights. Id.; Aetna Casualty and Surety Co. v. Day, 487 So.2d 830 (Miss.1986).

While the presence of a legitimate or arguable reason on the part of the insurer for denying the insured's claim will defeat a claim for punitive damages, the absence of an arguable reason does not per se establish that the insurer acted with malice or gross negligence or reckless disregard for the plaintiff's rights, since denial of the claim could be the result of an honest mistake or oversight, which would amount to ordinary and simple negligence. Weems, supra; Aetna Casualty, supra. The plaintiff must still establish the egregious nature of the insurer's actions to be entitled to punitive or extracontractual damages. The central inquiry in a motion for summary judgment as to the claim for punitive or extracontractual damages is whether there is proof sufficient to raise an issue of material fact regarding the extreme nature of the insurance company's conduct or whether as a matter of law the insurer is entitled to judgment on the "bad faith refusal" claim.

One legitimate or arguable reason for denying an insured's claim is that the fire was deliberately set by the insured or his agent. Under Mississippi law, willful incendiarism by the owner is a defense to the liability of an insurer. Sullivan v. American Motorist Ins. Co., 605 F.2d 169, 170 (5th Cir.1979); Williams v. Cambridge Mutual Fire Ins. Co., 230 F.2d 293, 294 (5th Cir.1956); Brower v. State, 217 Miss. 425, 431-32, 64 So.2d 576, 579 (1953). This holds true even if, as here, the insurance policy does not specifically exclude coverage for willful burning, because its encouragement would violate public policy. Sullivan, supra. See generally, Couch on Insurance 2d, § 74.660 at 584.

Notwithstanding this general rule, it should be noted that an insured has the right to recover on his homeowner's policy if his home is destroyed by arson committed by another in an act of criminal vandalism.

An insurance company, to prevail on an arson defense, is required to establish by a preponderance of the evidence that the fire was incendiary, that the insured had a motive for burning his home, and that the insured or his agent had an opportunity to burn the dwelling. See Vicksburg Furniture Manufacturer's, Ltd. v. Aetna Casualty Insurance Co., 625 F.2d 1167 (5th Cir.1980); Sullivan, supra; Home Insurance Company of New York v. Rawls, 151 Miss. 189, 117 So. 524 (1928). Where the insurance company knew at the time of the denial substantial facts demonstrating the foregoing elements of an arson defense, punitive damages are inappropriate and may be dismissed via the Rule 56 procedure. See State Farm Fire and Casualty Co. v. Simpson, 477 So.2d 242 (Miss. 1985); Mixon v. Prudent Life and Accident Ins. Co., 616 F.Supp. 139 (S.D.Miss. 1985), affirmed 783 F.2d 1061 (5th Cir. 1986); Gorman v. Southeastern Fidelity Insurance Co., 775 F.2d 655 (5th Cir.1985).

In support of the instant motion, State Farm has submitted to the court a number of affidavits, depositions, and responses to requests for admission which tend to support a finding of reasonableness of its decision to deny plaintiffs' claim. This evidence, which is summarized infra, also tends to support a finding that the plaintiffs had both the motive and opportunity to set a fire which was incendiary in nature.

C. The Fire Scene Investigation

On August 7, 15, and 18, 1984, an independent fire investigation team² visited the scene of the fire loss at the direction of State Farm for the purpose of determining the cause and origin of the fire.

The investigation revealed that the fire which burned plaintiffs' dwelling had three separate general areas of incendiary evidence leading to the conclusion that three fires had in fact occurred. These areas included the bedrooms, the den, and the kitchen. Furthermore, the team found flammable liquid burn patterns on the concrete slab in the bedrooms and in the den, and found numerous areas of spalling in the kitchen.³

The results of the investigation and the findings of the cause and origin experts were subsequently communicated to State Farm. Although the exact date of receipt is unknown, State Farm had received the report and considered it prior to formally denying plaintiffs' claim on December 7, 1984.

D. The Motive and Opportunity Investigation

Following the investigation by the cause and origin...