SEXSON v. STATE FARM FIRE AND CASUALTY COMPANY, (S.D.Ind. 2002)

JOHN DANIEL TINDER, United States District Judge.

This case comes to the court because of a dispute in the aftermath of a fire that occurred on June 19, 2000. The fire occurred at 4533 North Payton Avenue, which is rental property owned by Plaintiff John Sexson. The property was insured by Defendant State Farm Fire and Casualty Company ("State Farm") at the time of the fire. After an investigation, State Farm concluded that Sexson had a motive and opportunity to start the fire. Furthermore, State Farm concluded that Sexson made material misrepresentations concerning the proof of loss and the origin of the fire. Thus, State Farm denied coverage under the insurance policy.

On March 29, 2001, Sexson filed this lawsuit against State Farm alleging breach of the insurance contract and bad faith. Cross motions for partial summary judgment have been filed. Sexson seeks summary judgment on his breach of contract claim. State Farm seeks summary judgment on Sexson's bad faith and punitive damage claims. For the following reasons, the court DENIES Sexson's motion for partial summary judgment and GRANTS State Farm's motion for partial summary judgment.

A. MOTIONS FOR SUMMARY JUDGMENT

The purpose of summary judgment is to "pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Summary judgment is appropriate when there are no genuine issues of material fact, leaving the moving party entitled to judgment as a matter of law. FED. R. CIV. P. 56(C). The moving party must show there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). A factual issue is material only if resolving the factual issue might change the suit's outcome under the governing law. Clifton v. Schafer, 969 F.2d 278, 281 (7th Cir. 1992). An issue is genuine if there is sufficient evidence for a reasonable jury to return a verdict in favor of the non-moving party on the evidence presented. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Baucher v. Eastern Ind. Prod. Credit Ass'n, 906 F.2d 332, 334 (7th Cir. 1990).

B. UNDISPUTED MATERIAL FACTS

The facts in this case are undisputed for the cross motions for summary judgment.

In response to State Farm's motion for partial summary judgment on the bad faith claim, Sexson provided an additional statement of material fact. It provides:

Employees of the Defendant, State Farm Fire Casualty Company ("State Farm") have interviewed Sexson's friends, neighbors, business associates, former spouse, and credit providers by asserting the fact that Sexson was a criminal, and that State Farm needed to document his criminal activity, when such assertion was unwarranted in an attempt to harass, vex, and intimidate Sexson from pursuing his claim.

Plaintiff's Additional Fact in Response to Defendant's Cross-motion for Partial Summary Judgment. This statement of material fact is supported by a supplemental affidavit from Sexson. State Farm objected to this statement of material fact and the supplemental affidavit. The Court sustains the objection, because Sexson does not have any basis for asserting personal knowledge of State Farm's method of interviewing witnesses or its intentions when it conducted the interviews. Thus, the statement of material fact and Sexson's supplemental affidavit were not considered in ruling on the cross motions for summary judgment.

On June 19, 2000, a fire occurred at rental property located at 4533 North Payton Avenue. Plaintiff Sexson owned the house damaged by the fire. State Farm insured the rental property at the time of the fire subject to the terms and conditions of a Rental Dwelling Policy. Following the fire, Sexson made a claim under the insurance policy issued by State Farm.

The policy provides coverage for "the dwelling on the residence premises shown in the Declarations used principally as a private residence, including structures attached to the dwelling." (Pl.'s Ex. A. at 2.) The policy also contained certain conditions for coverage. One condition provides: "If you or any person insured under this policy causes or procures a loss to property covered under this policy for the purpose of obtaining insurance benefits, then this policy is void and we will not pay you or any other insured for this loss." (Pl.'s Ex. A at 9.) Another condition for coverage provides: "This policy is void as to you and any other insured, if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstances relating to this insurance, whether before or after a loss." (Pl. Ex. A at 14.)

The Lawrence Fire Department conducted an investigation into the cause of the fire and suspected arson. Once arson was suspected Aimee Macaluso, a State Farm Senior Claims Representative, became involved and investigated the June 19, 2000 fire at 4533 North Payton Avenue. The Court will now outline the investigation and the conclusions reached by State Farm based on the investigation.

Start Farm hired Donan Engineering Co., Inc. ("Donan") to perform a cause and origin investigation concerning the June 19, 2000 fire. Donan's senior fire and explosion investigator, Larry D. Heaton, conducted the cause and origin investigation. On June 23, 2000, Heaton inspected the property. As a result of Heaton's inspection and analysis, he concluded: (1) the fire was incendiary in nature; (2) the fire originated on a range top in the kitchen; and (3) the cause of the fire was due to paper products being ignited by heat produced by one or more burners. Heaton's findings were incorporated into Macaluso's investigative report.

Macaluso also learned that at the time the Lawrence Fire Department entered the building to fight the fire, they found newspaper, melted plastic, and cloth debris on the top of the stove. Brian Millard, C.F.E.I., of the Lawrence Fire Department, took the paper and cloth debris, the large left front burner, and the small left rear burner. He tested these items for the presence of any ignitable liquids, and the small left rear burner revealed the presence of gasoline.

On November 13, 2000, Macaluso met with Ken Lightle, Lawrence Fire Department's lead arson investigator for this matter, and inspected the stove top which was locked in an evidence storage room. The two right burner switches or knobs were on the "High" position, and the two left burner switches or knobs were in the "Off" position.

The same day, Macaluso spoke with an Indiana Power Light ("IPL") representative. The electricity to the rental property was disconnected on June 14, 2000. On June 16, 2000, Sexson called IPL to have the electric bill put in his name and ordered the electricity to be reconnected on June 19, 2000. The IPL representative informed Macaluso that the power at the property was turned on between 8:30 a.m. and 8:45 a.m. on the morning of June 19, 2000.

For at least one year prior to the fire, Sexson had been trying the sell the rental property at 4533 North Payton Avenue.

Neil Rumer and Sonya Rumer, the previous tenants, moved out of the house prior to the fire. They lived in the house between six months to a year before the fire. Sonya Rumer called Sexson about two weeks prior to the fire to advise him that they could not pay the rent and would move out. After Neil and Sonya moved out of the house, Neil returned three times to retrieve their personal property. Neil went to the property for the second time on June 15, 2000. Neil found that the front door lock had been changed, but the back door was unlocked. The third time, Neil came back with his brother to remove some property from the garage, they did not enter the house. Neil Rumer said that as he was leaving the property for the last time, Sexson came to the house.

According to Neil Rumer, he was at a going away party for his brother and drove him to the airport on June 18, 2000. On June 19, 2000, Neil said he clocked in for work at the John Deere Dealership in Mooresville, Indiana, at 6:45 a.m. State Farm obtained Neil's time card which indicates that he clocked in at 6:45 a.m. and did not punch out until 12:20 p.m. for lunch. Neil reported his suspicion that Sexson had something to do with the fire, but his opinion is purely conjecture and presents no issue of fact.

On July 11, 2000, Macaluso took Sexson's recorded statement. Sexson said that he owned the property since 1994, and thought the Rumers lived there approximately twelve months. Sexson stated that he was having problems with the Rumers not paying the rent on time. Sexson went to see Neil Rumer on June 12, 2000, but no one was there. Sexson peered through the window and saw several boxes. He spoke with a neighbor, Linda Gay, who told him that she had not seen anyone for a couple of weeks. Linda Gay resided at 4543 North Payton Avenue.

Upon discovering that the house was "mostly empty" he decided to take some of the remaining items: (1) a refrigerator, (2) an aluminum ladder, (3) a work bench, (4) a "dolly", (5) and a grinder. All of these items belonged to either the Rumers or Sonya Rumer's mother. Sexson held onto these items to ensure that he was paid back rent. Sexson said that he changed the lock on the front door and put a chair against the door knob of the back door. Only Sexson had a key for the front door.

Sexson stated that on June 16, 2000 Neil Rumer telephoned him at 10:00 a.m. Neil was angry that Sexson took some of his possessions. Neil told Sexson that he already removed the remaining property from the home and was going to remove the items in the garage. Sexson went to the house to meet Neil. Neil was loading up his truck when Sexson arrived. A few seconds later, Neil "spun" out of the driveway and left. Sexson went into the house, locked it up and left. According to Sexson that was the last time he was at the house prior to the fire.

On the morning of June 19, 2000, Sexson received a call from Linda Gay around 9:00 a.m. advising him that the house was on fire. Sexson said that he was at home doing paperwork when he received the call, and that no one else was with him. He arrived at the house approximately two hours later. Sexson stated that he did not have any problems with the house prior to the fire. In fact, he indicated that he had made several renovations since he purchased it. Sexson stated that he has no idea how the fire started, but suspects that Neil Rumer started the fire.

On the day of the fire, Linda Gay left her home for work at approximately 7:45 a.m. and did not see anything or smell anything unusual at that time. Around 9:00 a.m. she received a call from Donna Chambley, who told her that the rental property at 4533 North Payton Avenue was on fire. After hearing about the fire, Gay left work and went home to make sure her property was safe. When she arrived at her home, she called Sexson to tell him about the fire.

On September 27, 2000, Tim Hulett, an attorney hired by State Farm, took Sexson's statement under oath. Sexson again denied any involvement in starting the fire. He thought Neil Rumer set the fire. Sexson acknowledged that on June 16, 2000, he called the electric company to connect the power to his rental property.

After conducting the investigation, Macaluso concluded that Sexson had the motive and opportunity to cause, or to participate in causing, the fire at his rental property on June 19, 2000. She also concluded that Sexson made material misrepresentation to State Farm during its investigation. Based on Macaluso's conclusions, State Farm denied Sexson's claim on December 18, 2000.

C. DISCUSSION

The task for this court is to decide issues of Indiana law as the court believes the Supreme Court of Indiana would decide them. In the insurance policy State Farm assumed a duty to indemnify Sexson for certain risks subject to the policy terms and conditions. The State Farm insurance policy expressly provides: "If you or any person insured under this policy causes or procures a loss to property covered under this policy for the purpose of obtaining insurance benefits, then this policy is void and we will not pay you or any other insured for this loss." (Pl. Ex.'s A at 9.) This provision and Indiana law prevents a guilty party from profiting from his wrongdoing. See American Economy Ins. Co. v. Liggett, 426 N.E.2d 136, 140 (Ind.App. 1981). Thus, "the basic function of the court is to see that no one profits by wrongdoing." Hoosier Ins. Co. v. North South Trucking, 684 N.E.2d 1164, 1169 (Ind.App. 1997).

The Court will begin by considering Sexson's motion for partial summary judgment on the breach of contract claim. Sexson has established his right to recovery of the insurance proceeds absent evidence that his conduct falls within an exclusion. Sexson has shown the existence of an insurance contract and the fire damage at his rental property. However, State Farm has presented evidence showing that Sexson had a motive and an opportunity to commit or participate in the arson. After considering all of the evidence, the Court concludes that a reasonable jury could find that Sexson started or participated in starting the fire. Therefore, a genuine issue of material fact remains and Sexson's motion for partial summary judgment is denied.

In Indiana, "case law instructs that an insurer raising an arson defense must establish the truth of its claim of willful burning by the insured by a preponderance of the evidence." Dean v. Ins. Co. of North America, 453 N.E.2d 1187, 1194 (Ind.App. 1983), citing Continental Ins. Co. v. Jachnichen, 10 N.E. 636 (Ind. 1887). Accord Godwin v. Farmers Ins. Co. of America, 631 P.2d 571 (Ariz.Ct.App. 1981); Rist v. Commercial Union Ins. Co., 376 So.2d 113 (La. 1979). An insurer may establish the truth of an arson defense with circumstantial evidence. Hoosier Ins. Co. Inc. v. Mangino, 419 N.E.2d 978, 986 (Ind.App. 1981) (circumstantial evidence is sufficient to prove arson).

First, State Farm presented evidence of the fire's incendiary origin and nature. After the fire, the Lawrence Fire Department conducted an investigation and suspected arson. Larry D. Heaton, a senior fire and explosion investigator for Donan, conducted an inspection of the premises on June 23, 2000. He concluded that the fire was incendiary in nature, the fire originated on a range top in the kitchen, and the cause of the fire was due to paper products being ignited by heat produced by one or more burners. Brian Millard, C.F.E.I., of the Lawrence Fire Department, found the presence of gasoline on the small left rear burner of the kitchen stove. Furthermore, the visual inspection of the stove top after the fire revealed that the two right burner switches or knobs were in the "High" position.

Second, State Farm presented evidence showing that Sexson had an opportunity to start the fire. Indiana Power Light (IPL) had disconnected the electrical power to the rental property on June 14, 2000. On June 16, 2000, Sexson called IPL to have the electric bill put in his name and ordered the electric to be reconnected on June 19, 2000. He changed the lock on the front door, and stated that he locked the door when he left the property on June 16, 2000. At the time of the fire, Sexson said that he was at home doing paperwork and that no one else was with him.

Third, State Farm presented evidence showing the Sexson had a motive to start the fire. For at least one year prior to the fire, Sexson had been trying to sell the rental property. Based on the evidence presented by State Farm a reasonable jury could infer that Sexson started the fire. Thus, a genuine issue of material fact remains for the jury to decide and Sexson's motion for partial summary judgment is denied.

The Court will now consider State Farm's motion for partial summary judgment on the bad faith and punitive damage claims. Indiana law has long recognized that there is a legal duty implied in all insurance contracts that the insurer deal in good faith with its insured. The tort of bad faith for the breach of the insurer's duty to deal with its insured in good faith was first recognized in Indiana in Erie Insurance Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993). The Indiana Supreme Court made some observations and stated: "The obligation of good faith and fair dealing with respect to the discharge of the insurer's contractual obligation includes the obligation to refrain from (1) making an unfounded refusal to pay policy proceeds; (2) causing an unfounded delay in making payment; (3) deceiving the insured; and (4) exercising any unfair advantage to pressure an insured into a settlement of his claim." Id. at 519.

Furthermore, the Court stated: "We also note that this new cause of action does not arise every time an insurance claim is erroneously denied. For example, a good faith dispute about the amount of a valid claim or about whether the insured has a valid claim at all will not supply the grounds for a recovery in tort for the breach of the obligation to exercise good faith. That insurance companies may, in good faith, dispute claims, has long been the rule in Indiana." Id. at 520. In other words, a bad faith determination inherently includes an element of culpability. Colley v. Indiana Farmers Mutual Ins. Group, 691 N.E.2d 1259, 1261 (Ind.App. 1998). In this case, Sexson has not presented any evidence of bad faith other than State Farm's failure to pay the claim. While an unfounded refusal to pay policy proceeds may be a breach of good faith, a good faith dispute of a claim is not. See Hoosier Ins. Co. Inc. v. Mangino, 419 N.E.2d 978, 987-988 (Ind.App. 1981) (an insurance company is not required to either pay or litigate at its peril). Sexson has not presented any evidence to show that this is something more than a good faith dispute over the validity of his claim. State Farm clearly has sufficient evidence to dispute the validity of Sexson's claim. Because Sexson has failed to produce evidence upon which a reasonable jury could find bad faith, summary judgment on this claim is appropriate.

Even if Sexson could establish the tort of bad faith, it is clear that Sexson is unable to recover punitive damages. Punitive damages may be awarded "only if there is clear and convincing evidence that the defendant `acted with malice, fraud, gross negligence, or oppressiveness which was not the result of a mistake of fact or law, honest error or judgment, overzealousness, mere negligence, or other human failing, in the sum [that the jury believes] will serve to punish the defendant and to deter it and others from like conduct in the future.'" Hickman, 622 N.E.2d at 520. Sexson failed to produce evidence upon which a reasonable jury could find that State Farm acted with malice or oppressiveness. Sexson also failed to produce evidence upon which a reasonable jury could find that State Farm committed gross negligence or fraud. Thus, State Farm is entitled to summary judgment for any punitive damage claim stated in Sexson's compliant.

D. CONCLUSION

For the foregoing reasons, partial Summary Judgment will be GRANTED to Defendant State Farm Fire and Casualty Company; John Sexson's motion for partial summary judgment is DENIED. Because of the pendency of the breach of contract claim, no judgment will be entered on the punitive damage claim until judgment is rendered on that claim, too.

ALL OF WHICH IS ORDERED.