Hamed v. General Acc. Ins. Co. of America

• Decision Date: 11 March 1988
• Docket Number: No. 87-1919,87-1919
• Citation: 842 F.2d 170
• Parties: Mohammed HAMED, Khalil Awwad and Michigan Foods, Inc., Plaintiffs-Appellees, v. GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 170

842 F.2d 170

Mohammed HAMED, Khalil Awwad and Michigan Foods, Inc. Plaintiffs-Appellees, v. GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, Defendant-Appellant.

No. 87-1919.

United States Court of Appeals Seventh Circuit.

Argued Jan. 19, 1988.

Decided March 11, 1988.

Tamara Renner, Sweeney Pfeifer & Blackburn, South Bend, Ind., for defendant-appellant.

David S. Stevens, East Chicago, Ind., Robert G. Berger, Highland, Ind., for plaintiffs-appellees.

Before BAUER, Chief Judge, POSNER, Circuit Judge, and WILL, Senior District Judge. ^*

WILL, Senior District Judge.

Defendant-appellant, General Accident Insurance Company of America ("General"), a Pennsylvania corporation, issued a standard business owner's insurance policy to Michigan Foods, Inc. ("MF"), plaintiff-appellee, an Indiana corporation. The individual plaintiffs Mohammed Hamed and Khalil Awwad owned MF. Insurance coverage for the business personal property was limited to $75,000. The business dwelling was not owned by either MF or the individual plaintiffs and was not insured under this policy. The policy provided that General was not obligated to pay proceeds in the event of any fraud, misrepresentation or concealment on the part of MF.

On March 25, 1985, MF's business property burned down. A preliminary investigation by the local police and fire departments revealed that signs of a "forced entry" were found at the premises but that such signs seemed staged. Thomas Cairnes, an independent adjuster hired by General, testified at trial that Awwad was cooperative and gave a statement at the scene of the fire.

On May 14, 1985, Cairnes sent the plaintiffs a letter requesting that they submit a proof of loss. The plaintiffs filed a proof of loss on May 23, 1985. On June 21, 1985, Roger Ullery, General's South Bend office manager, informed the plaintiffs by letter that a decision would be made within 30 days of their examination under oath. Awwad gave a sworn statement on June 11, 1985, and a second on September 10, 1985.

During this time, General was transferring all of its South Bend cases to its Indianapolis office. Michael Cook assumed responsibility for this case. He testified that the file was not reviewed in June or July and only "skim[med]" in August, 1985.

On September 26, 1985, Awwad's attorney notified General that the plaintiffs' financial condition was very poor and requested a prompt settlement of their claim. General neither replied nor responded until after this suit was commenced on December 12, 1985, almost nine months after the fire. General filed its answer denying the claim on May 16, 1986, more than one year after the fire, and almost a year after the claim was filed, and asserted arson as an affirmative defense. This was the first notification by General that the claim was denied or that the plaintiffs were suspected of arson.

A jury returned a verdict in favor of MF, awarding $75,000 in actual damages (the policy limit) and $100,000 in punitive damages. The actual damages to merchandise and equipment was stipulated to be $89,588.45. Magistrate Rodovich denied General's motion for judgment notwithstanding the verdict. His decision was initially based on the fact that General did not move for a directed verdict at the close of all the evidence. General had moved for a directed verdict at the close of the plaintiffs' case but failed to renew its motion at the close of all the evidence. Additionally, however, Magistrate Rodovich denied General's motion on the ground that the jury verdict was clearly supported by the evidence. Judgment was entered on December 31, 1986 in favor of MF and against General for $175,000. Thereafter, on May 26, 1987 judgment was entered in favor of General against the named individual plaintiffs, Hamed and Awwad. General has appealed only the $100,000 punitive damages judgment for MF on the jury's verdict. We affirm.

Analysis

Under Indiana law, an insurer is obligated to "deal in good faith with the insured. This duty is breached when an insurer fails to settle a claim that could not in good faith be disputed." Liberty Mutual Insurance Co. v. Parkinson, 487 N.E.2d 162, 164 (Ind.App.1985). Punitive damages for breach of contract can be imposed where: (1) the conduct in issue constitutes an independent tort (e.g., economic duress, Vernon Fire & Casualty Insurance Co. v. Sharp, 264 Ind. 599, 349 N.E.2d 173, 180 (1976)); or (2) "elements of fraud, malice, gross negligence or oppression mingle in the controversy ... provided that the public interest is served by the deterrent effect of punitive damages awarded." Hoosier Insurance Co., Inc. v. Mangino, 419 N.E.2d 978, 981 (Ind.App.1981). See also, Art Hill Ford, Inc. v. Callender, 423 N.E.2d 601 (Ind.1981); Hibschman Pontiac Inc. v. Batchelor, 266 Ind. 310, 362 N.E.2d 845 (1977). Despite these two grounds for punitive damages, Indiana courts are reluctant to impose such damages.

[P]unitive damages should not be allowable upon evidence that is merely consistent with the hypothesis of malice, fraud, gross negligence or oppressiveness. Rather some evidence should be required that is inconsistent with the hypothesis that the tortious conduct was the result of a mistake of law or fact, honest error of judgment, over-zealousness, mere negligence or other such noniniquitous human failing.

Travelers Indemnity Company v. Armstrong, 442 N.E.2d 349, 362 (Ind.1982). In addition, the imposition of punitive damages must be supported by clear and convincing evidence. Id. at 363.

General's investigation concluded, among other things, that (1) the fire was of incendiary origin; (2) the operators of MF, immediately prior to the fire, drastically increased their inventory so as to give the appearance that the business was thriving; (3) the forced entry marks were staged; and (4) MF personnel were seen removing boxes of property within two hours of the fire although they testified at trial that they had left the premises four and one half hours prior to the fire and did not remove any property.

An investigation by Barker and Herbert Analytical Laboratories, hired by the building owners' insurance company (State Farm Insurance Co.), concluded that the fire had multiple areas of origin and accelerants were used. The business dwelling had an alarm triggered by opening a rear door, movement in the store, or removal of the last dollar bill from the cash register. Only the last dollar bill was left in the cash register prior to the fire. General's investigation concluded that the fire was planted by someone from within the building.

Although there was substantial evidence that the fire was the result of arson, there was no direct evidence that the plaintiffs were responsible for the fire. In addition, the value of the property destroyed was not in dispute.

[T]he evidence at trial established that although several investigations revealed that the fire was of incendiary origin, there was no indication that the plaintiffs or someone acting on their behalf had started the fire. In fact, the Cairnes investigation was the only one done at the request of General Accident. The State Farm Insurance Company had issued an insurance policy to Michael Fields, the owner of the building, and General Accident was furnished a statement given by Mr. and Mrs. Fields to State Farm. General Accident relied on that statement without attempting to question the Fields or to verify some of the information provided by the Fields. Much of the Fields' statement was shown to be inaccurate at trial.

The evidence was sufficient to allow the jury to find that after October 10, 1985 [30 days after Awwad's final sworn statement], General Accident could not in good faith dispute the amount of its liability. In fact, on October 20, 1986, the parties filed a stipulation that Michigan Foods' total inventory at the time of the fire was $29,375 for the merchandise and $60,213.45 for the equipment. The total stipulated loss was $89,588.45. The jury awarded $75,000 in compensatory damages which represented the policy limits. Because the plaintiffs' loss exceeded the policy limits, the jury award was reasonable.

District Court Order Denying Defendant's Motion for Judgment Notwithstanding the Verdict, at 4-5.

While arson can be established by circumstantial evidence, (see, Gregory's Continental Coiffures & Boutique, Inc. v. St. Paul Fire & Marine Insurance Company, 536 F.2d 1187 (7th Cir.1976)), the lack of evidence establishing a reasonably strong nexus between the plaintiffs and the alleged arson negated a good faith defense for General. The following summary of the evidence by Magistrate Rodovich is persuasive.

The arson defense was not supported by the evidence. Larry Hardy from the Hammond Fire Department and Michael Stevens from the Hammond Police Department were at the scene of the fire and conducted investigations. Both individuals testified that they had no opinion as to who started the fire. In addition, Cairnes testified that he did not know who set the fire. Ullery testified that an independent investigator, John Walker, investigated and reported that the fire was arson, but there was nothing in the report implicating the plaintiffs in the fire. Finally, Michael Cook, a claims manager for General Accident, stated in his deposition that he did not see anything in the file which showed that the plaintiffs started the fire.

This is a case in which a...