McLaughlin v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 08 September 1994
• Docket Number: No. 93-1428,93-1428
• Parties: Bud McLAUGHLIN, Plaintiff-Appellee, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 861

30 F.3d 861

29 Fed.R.Serv.3d 1058

Bud McLAUGHLIN, Plaintiff-Appellee, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant-Appellant.

No. 93-1428.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 10, 1993.

Decided July 26, 1994.

Rehearing Denied Sept. 8, 1994.

Gary Matthews (argued), Robert G. Vann, Enslen, Enslen & Matthews, Hammond, IN, for appellee.

Michael L. Muenich, Albert C. Hand (argued), Nancy Beggs, Michael S. Vass, Hand, Muenich & Wilk, Highland, IN, for appellant.

Before MANION and KANNE, Circuit Judges, and WILL, District Judge. ^*

WILL, District Judge.

In this case, we review a jury's award of compensatory and punitive damages in a breach of insurance contract case. In light of the Indiana Supreme Court's recent discussion of the Indiana punitive damages standards in Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind.1993), and for the reasons articulated below, we reverse the jury's award of punitive damages.

I. BACKGROUND

In February 1990, plaintiff Bud McLaughlin purchased a new International flatbed truck for a cash price of $28,950.00 plus financing. He made improvements to the truck totalling $13,692.00 so that it could be used in his business, which involved hauling fish for stocking lakes. Also, in February 1990, McLaughlin purchased from defendant State Farm Mutual Automobile Insurance Company ("State Farm") a policy on his new truck. In early October 1990, McLaughlin requested a suspension of insurance coverage since his truck would be in storage for the winter. After discussion with his State Farm agent, he decided to retain the comprehensive coverage, but to suspend all other coverage.

On October 13, 1990, the truck was totally destroyed by fire. Two days later, McLaughlin contacted his State Farm agent to report the incident and to file an insurance claim. At the time of the fire, the truck was being stored in an A-frame structure at a development known as Birdland in Roselawn, Indiana, where McLaughlin lived in a house trailer.

McLaughlin's State Farm agent reported the loss to the State Farm Claims Office, which assigned claims representative Brian Biery to gather the relevant facts and investigate the claim. Biery examined the file, arranged to take McLaughlin's statement, authorized a credit check, ordered appropriate reports, corresponded with McLaughlin, and assigned an estimator to inspect the damaged vehicle. Claims estimator Bill Siegfried inspected the truck, took photographs, and reported that the truck was a total loss.

After receiving this report, Biery contacted Herb Miller & Associates ("Miller"), fire and arson investigation experts, to obtain a cause and origin report on the fire and an investigation of a possible motive. Miller reported that the drive shaft, which was damaged and lay in pieces on the ground, had most likely exploded in the fire. Miller further reported that the fire was incendiary, that it started from inside the locked vehicle, and that there were no signs of forced entry.

During their first interview, McLaughlin informed Biery that on the day before the fire he had made arrangements to meet several of his friends for a deerhunting trip out of town. McLaughlin was to meet his first friend--Melvin "Sonny" Dobson--at Fish-A-While Lake, a "pay lake" stocked with fish open to the public where one pays a fee to fish on the lake. When McLaughlin arrived at Fish-A-While, he received a message that Dobson had been called into work for a few hours. ¹ McLaughlin then decided to go to a local tavern--Pioneer II--to kill some time.

According to McLaughlin's original statement to Biery, Dobson met him at the bar at approximately 11:00 p.m., and they then travelled together to a restaurant at the intersection of Routes 10 and 41, where they were to meet another friend--Gene Perry. This restaurant was located approximately three miles from Birdland, where the truck was stored. When, according to McLaughlin's statement to Biery, Perry arrived at approximately 11:30 p.m., they all departed for the hunting site in Attica, Indiana.

At approximately 1:00 or 1:15 a.m., a county police officer discovered the fire at Birdland and alerted the fire department. McLaughlin, who was not informed of the fire, and the other gentlemen remained at the hunting site until mid-morning the next day. Perry and McLaughlin then drove back to Birdland so that Perry could fish on the pay lake and so that McLaughlin could travel to Fort Wayne to visit his son. Upon their arrival at Birdland around noon on October 13, 1990, McLaughlin was informed by a tenant who also lived on the Birdland property that his truck had burned during the night.

In the interview, McLaughlin also reported to Biery that he had the only set of keys to the locked vehicle at the time it burned. According to State Farm, he further informed Biery that he was behind on his truck payments and that he planned to obtain a loan from several relatives for the payments.

He also told Biery that several days before the fire he had forced three trespassers off the Birdland property and that the trespassers had threatened to get even with him. Apparently, McLaughlin speculated that the trespassers may have started the fire. McLaughlin said he had removed the battery from the truck before the fire because he was afraid that the trespassers might steal it. ² Although McLaughlin told Biery that he met Perry at the truckstop at approximately 11:30 p.m., Perry at least initially told Biery that he worked until midnight and thus could not have met McLaughlin until at least 12:30 or 12:45 a.m.

McLaughlin was provided with an Affidavit of Vehicle Fire, which he completed and returned to State Farm on October 30, 1990. The affidavit stated that he was claiming a loss of $43,000.00 on the truck, that a balance of $25,866.74 remained due to Navistar Financial ("Navistar"), who financed the purchase of the truck. The total purchase price for the truck plus the special fish-hauling equipment on it was $44,089.50, of which approximately $20,397.50 was financed through Navistar.

McLaughlin also authorized State Farm to receive information concerning his finances. Biery requested Equifax, a credit investigation company, to conduct the necessary background and credit check. Biery was informed by Equifax that McLaughlin was in arrears for a total of $5121.00 on court-ordered support payments to his ex-wife. The credit check revealed that McLaughlin owed $516.00 to Gainer Bank for payments on a van, and that he had a $233.00 delinquency on a J.C. Penney charge card.

In January 1991, State Farm took a sworn statement from McLaughlin. In this sworn statement, McLaughlin denied having any outstanding credit card debt. He also led Biery to believe that he had several profitable contracts with the county for 1991 which would have generated significant income from the truck. Biery's investigation, however, revealed that when McLaughlin purchased the truck in February 1990, he had already missed the deadlines for bidding on these county contracts.

McLaughlin also stated during this interview that he had used his ex-wife's truck to haul fish on October 12, 1990 because his own truck was in storage. ³ McLaughlin informed Biery that the only footprints around the Following this sworn interview, Biery went personally to Birdland to inspect the accident scene. He there met Nick Yacuk, who informed him that he was in the process of repossessing McLaughlin's house trailer because McLaughlin was delinquent in making his required payments. Biery also discovered that the fire department actually received the fire alarm at 1:25 a.m., and arrived at the scene at 1:32 a.m. on October 13, 1990.

truck after the fire were his own and the traffic he had permitted the previous day. It was during this interview that State Farm learned for the first time that McLaughlin had made two previous claims for fire losses. ⁴

State Farm took additional recorded statements from Betty McLaughlin, the plaintiff's ex-wife; Dobson; Perry; Russell Neswick, the plaintiff's lawyer and the owner of Birdland; and Yacuk, who had sold the plaintiff the house trailer in which he resided at Birdland and was repossessing it. In Dobson's January 1991 sworn statement, he claimed that he met McLaughlin at 10:50 p.m. and that they met Perry at 11:30 or 11:40 p.m. on October 12, 1990; his earlier statement suggested that he met McLaughlin at 10:00 p.m., and that they met Perry at 11:00-12:00 p.m. His new statement claimed that they arrived at the hunting site at approximately 1:30 or 1:45 a.m. Biery apparently became suspicious because the times in the sworn statement conflicted with Dobson's earlier statements.

Shortly thereafter, Neswick informed State Farm that he was representing McLaughlin and that "we assume your company suspects Mr. McLaughlin of committing arson" and suggested a polygraph test. Although State Farm agreed to consider the results of such a test, it is unclear whether any such test was actually performed. State Farm continued to investigate the incident. Miller advised Biery that at the time of the fire the doors were closed and there was no evidence of a break-in.

The county fire department similarly advised Biery that there were no signs of a forced entry. The state fire marshall found the cause and origin of the fire to be liquid accelerant in the interior of the vehicle; his report similarly indicated that there was no vandalism or other sign of forced entry into the vehicle. All of these reports noted that the battery and radio had been removed from the vehicle prior to the fire.

On February 14, 1991, Biery issued a report which recommended that McLaughlin's claim be denied. His report was submitted to a claim review committee, which considered it and also recommended denial of the claim. The claim review committee forwarded the file and their recommendation to State Farm's corporate headquarters for review. State Farm's...