Chicago Import, Inc. v. Amercan States Insurance Company

Filing 341

MEMORANDUM Opinion and Order: For the foregoing reasons, each party's motion for summary judgment is granted in part and denied in part. Summary judgment is granted for Chicago Import on American States's sixth affirmative defense (insure d's neglect). Summary judgment is granted for American States on Count III of Chicago Import's complaint (bad-faith delay). In all other respects, the motions 323 and 327 are denied. Signed by the Honorable Manish S. Shah on 5/8/2015. Mailed notice. (mgh, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
CHICAGO IMPORT, INC.,
Plaintiff,
No. 09 CV 2885

v.

Judge Manish S. Shah

AMERICAN STATES INSURANCE COMPANY,
Defendant.
MEMORANDUM OPINION AND ORDER
A fire broke out at Chicago Import, Inc.’s warehouse, causing damage.
Chicago Import asked its insurer, American States Insurance Company, for
payment. A lengthy investigation ensued. Eventually Chicago Import sued, alleging
that by delaying, and by refusing to pay, American States breached the parties’
contract and violated Illinois insurance law prohibiting bad-faith handling of
claims. American States contends that it does not have to pay because the fire was
deliberately set by Chicago Import (or at least caused by its neglect), and because
Chicago Import fraudulently inflated the extent of the damage. American States
urges that, at a minimum, its positions on those issues prove that its investigation
was not conducted in bad faith. Each party moved for summary judgment on
numerous issues. The motions are granted in part and denied in part, as explained
below.
I.

Legal Standards
Summary judgment is appropriate if the movant shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a

matter of law. Spurling v. C & M Fine Pack, Inc., 739 F.3d 1055, 1060 (7th Cir.
2014); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). A genuine dispute as to
any material fact exists if “the evidence is such that a reasonable jury could return
a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
248 (1986). In determining whether a genuine issue of material fact exists, the court
must construe all facts and reasonable inferences in the light most favorable to the
nonmoving party. CTL ex rel. Trebatoski v. Ashland Sch. Dist., 743 F.3d 524, 528
(7th Cir. 2014). “When the material facts are not in dispute, the existence and
interpretation of a contract are questions of law that the court may decide on a
motion for summary judgment.” Citadel Group v. Wash. Reg’l Med. Ctr., 692 F.3d
580, 587 (7th Cir. 2012).
II.

Analysis
A.

Exclusion for Neglect

On April 23, 2007, for unknown reasons, a sprinkler head at the warehouse
sprayed water, damaging some inventory. PSOF ¶ 1.1 Chicago Import submitted an
insurance claim, which American States paid. DSOF ¶ 16. The spraying sprinkler
head was discovered by a Chicago Import employee, who called the alarm company
and the Chicago Fire Department. PSOF ¶¶ 4, 6. The Fire Department turned off
the water supply and replaced the sprinkler head. PSOF ¶¶ 7–8. After the sprinkler
head was replaced, Fire Department employees told the Chicago Import employee

The facts are taken from the parties’ Local Rule 56.1 statements. “DSOF” refers to
American States’s statements, with Chicago Import’s responses [328]. “PSOF” refers to
Chicago Import’s statements, with American States’s responses [338].
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that “everything was okay” with the system. PSOF ¶ 10. But three weeks later,
when the fire broke out, the sprinkler system was off. DSOF ¶ 23.
Under the parties’ contract, American States is not required to pay for
damage caused by Chicago Import’s “[n]eglect . . . to use all reasonable means to
save and preserve property from further damage at and after the time of loss.”
DSOF ¶ 72. American States argues that this provision bars coverage because the
damage was caused by Chicago Import’s failure to turn the sprinkler system back
on after the April repairs. [324] at 4. Chicago Import denies that it knew the system
was off; it says it left such matters to the Fire Department. [327] at 2, 4.
Chicago Import argues that its duty to protect against “further” damage “at
and after the time of loss” has no application to alleged pre-loss neglect, such as
failing to turn on the sprinkler system. [327] at 5–6. Chicago Import relies on the
Appleman insurance-law treatise and Tuchman v. Aetna Casualty & Surety
Company, 44 Cal.App.4th 1607, 1616 (2d Dist. 1996), which address the issue in the
context of nearly identical insurance provisions. Appleman notes that “[i]t is often
required by the policy that loss is not covered when caused ‘by neglect of the insured
to use all reasonable means to save and preserve the property at and after a fire or
when the property is endangered by fire in neighboring premises.’. . . This provision
has, of course, no application to negligence of the insured before the origin of the
fire. It applies, rather, to situations where no proper diligence was used by the
insured at the time of, or following a fire, to save property from destruction.” 5 John
Alan Appleman & Jean Appleman, Insurance Law and Practice § 3115 (1970). And

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Tuchman found that the language “at and after the time of loss” led “to one
conclusion only”—that pre-loss neglect did not bar coverage. Tuchman, 44
Cal.App.4th at 1616.
American States argues that Chicago Import’s neglect was not pre-loss
neglect because it occurred after the April sprinkler incident, which also resulted in
a loss. [324] at 5; [337] at 3. American States compares this case to Bass v. Illinois
Fair Plan Association, 98 Ill.App.3d 549 (1st Dist. 1981). In Bass, fires occurred in
both June and July 1974, and the parties settled the resulting claims. After a third
fire broke out in September, the insurer denied coverage, arguing that the insured
failed to adequately protect the property “at and after” the June and July losses. Id.
at 551 & n.1. The jury found for the insurer and the appellate court affirmed
because there was sufficient evidence that the insured failed to board up the
property after the first two fires. Id. at 552. In Bass, the first and second losses
resulted from the same type of harm; the jury was entitled to find that a reasonable
insured would have protected the property from further such harm. In contrast, in
this case, the losses resulted from entirely different types of harms—water and fire.
If a wayward sprinkler head requires an insured to take all reasonable measures to
protect against a later fire, the distinction between pre- and post-loss neglect is
meaningless—once an insured makes a single claim the distinction is forever lost,
regardless of the timing of, or dissimilarity between, the losses.2 Bass is not that
On the issue of dissimilarity, the present case is notable. It would have been neglect not to
turn off the sprinkler system while investigating and fixing the wayward sprinkler head;
but American States argues that that very action is part of Chicago Import’s “neglect” in
the context of the fire.
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broad. American States’s complaints are about pre-loss neglect, which does not bar
coverage. Accordingly, Chicago Import’s motion for summary judgment on this issue
is granted.3
B.

Exclusion for Fraud

Under the parties’ contract, American States is not required to pay “in any
case of fraud, intentional concealment or misrepresentation of a material fact” by
Chicago Import. DSOF ¶ 72. American States moves for summary judgment,
arguing that Chicago Import misrepresented: (1) the total inventory owned by
Chicago Import at the time of the fire; (2) the value of certain specific items; and
(3) Chicago Import’s practices concerning inventory tracking. [324] at 13. Chicago
Import cross-moves for summary judgment, arguing that American States adduced
no evidence to support its fraud defense. [327] at 14.
“Ordinarily, the existence of fraud is a question of fact to be determined by
the jury, or by a trial court sitting without a jury.” Gregory’s Cont’l Coiffures &
Boutique, Inc. v. St. Paul Fire & Marine Ins. Co., 536 F.2d 1187, 1192 (7th Cir.
1976). The cases cited by American States deviated from this ordinary rule, but
under circumstances quite different from those here. For example, in Passero v.
Allstate Insurance Company, 196 Ill.App.3d 602 (1st Dist. 1990), the insureds made

Even if the exclusion applied, whether Chicago Import was neglectful turns on genuinely
disputed facts, including whether any Chicago Import employee knew or reasonably should
have known that the sprinkler system was off. See DSOF ¶¶ 24–25; PSOF ¶¶ 9, 11–14, 16.
Furthermore, Chicago Import’s neglect would bar its recovery only to the extent that the
damage would have been less had the system been on. See Henri’s Food Prods. Co. v. Home
Ins. Co., 474 F.Supp.889, 892 (E.D. Wis. 1979). That extent is not established by the
undisputed facts.
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the following statements under oath: (1) their stereo was purchased for $962.95; (2)
the receipt they submitted to the insurance company for the stereo was the original;
(3) they received no employee discount when purchasing the stereo; (4) they owned
video equipment worth $1,500; and (5) the receipt they submitted for the video
equipment was the original. Id. at 604–05. Those were lies. The insureds received
an employee discount on the stereo, so they paid less than half what they had
claimed; they never purchased video equipment; and they forged both receipts. Id.
at 605. They “neither attempt[ed] to deny nor to explain their misrepresentations.”
Id. at 606. Although materiality is “ordinarily a jury question,” under these
exceptional circumstances, the court found materiality as a matter of law. Id. at
610–11.
Tenore v. American & Foreign Insurance Company, 256 F.2d 791 (7th Cir.
1958), also cited by American States, is similar. The court conducted a bench trial
and the facts showed a drastic difference between the actual value of the insured
merchandise (guns) and what the insured had claimed. Id. at 793. And the insured’s
valuation was facially fraudulent: “Although many of the guns were in the junk
class with missing parts, cracked stocks, sawed-off barrels, and practically all were
more than fifty years old, [the insured] swore in his testimony and in the proofs of
loss that they were each worth $60.60, the catalog wholesale value of a new gun.
This was intentional false swearing as a matter of law.” Id. at 793. Again, the
exceptional circumstances permitted deviation from the rule that “[o]rdinarily the

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question of fraud is a question of fact to be determined by a jury or by the trial court
if sitting without a jury.” Id.4
The Tenore court wrote that the outcome may have been different if the
insured’s dishonesty concerned only a portion of the merchandise. Id. at 794. On
that ground, the Seventh Circuit distinguished Tenore in a case in which the alleged
misrepresentation concerned just $900 out of a claim for nearly $32,000:
The finding of this court in Tenore that the plaintiffs there
“knowingly and wilfully made false statements with regard to a
material matter with an intent to defraud,” was based on the fact
that the plaintiffs grossly overvalued practically all of the items.
The court conceded that if the plaintiffs had overvalued a smaller
number of items, “and had displayed some effort to make an honest
valuation as to the other items,” the result would have been
different. In the case at bar, the apportionment of the subsidiary’s
loss to L & S was of a negligible amount in comparison with the
amount of the total claim. This statement of fact does not prove
wilful misrepresentation.
L & S Enters. Co. v. Great Am. Ins. Co., 454 F.2d 457, 460 (7th Cir. 1971) (internal
marks and citations omitted); see also Fitzgerald v. MFA Mut. Ins. Co., 134
Ill.App.3d 1007, 1010 (5th Dist. 1985) (“[M]ateriality . . . is a question of fact for the
jury. . . . If some effort is displayed at making an honest valuation of a loss, the
court should not find fraud or misrepresentation as a matter of law but should
submit the question to the jury.”) (internal citations omitted).
Lykos v. American Home Assurance Company, 452 F.Supp. 533 (N.D. Ill. 1978), also cited
by American States, is similar. The case was tried and the evidence clearly demonstrated
material misrepresentation: “In one instance plaintiff[s] included a claim for a clock on
which they placed a value of $2,000. Upon trial the only clock that plaintiff[s] could show
was damaged was a clock costing $200. Plaintiffs also included in their claims all their
tables, chairs and dining room equipment. Pictures of the dining room introduced into
evidence showed most of the tables and chairs intact after the fire.” Id. at 535. Given the
circumstances, while acknowledging that fraud is ordinarily a question for the jury, the
court was able to rule as a matter of law (on a post-trial motion). Id. at 536.
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The circumstances here are far from those in Passero and Tenore. Chicago
Import maintains that its valuation of the inventory was true and accurate, and it
cites the opinions of two experts. [327] at 10. American States has not shown, as a
matter of law, that Chicago Import’s number was inflated. Instead, American States
observes that its own expert was not able to arrive at the same number, using a
different method, based on Chicago Import’s records. Thus, it argues, Chicago
Import must have either: (i) inflated its claim; or (ii) made some (unspecified)
misrepresentation in or concerning the records on which American States’s expert’s
opinion was based. [324] at 10; [337] at 5. American States has not identified the
misrepresentation in or concerning the records. It does not point to a false entry, or
a statement by Chicago Import that the application of a certain method of
accounting to the records would result in a particular value for the claim. In short,
American States has not shown, as a matter of law, that Chicago Import made a
material misrepresentation concerning either the total value of the inventory it
owned at the warehouse or the records it turned over.
That doesn’t mean, however, that Chicago Import is entitled to summary
judgment. The parties’ experts disagree dramatically on the value of the inventory
that Chicago Import owned at the time of the fire. One source of the disagreement is
that the parties disagree sharply about whether Chicago Import actually owned the
items that were in the warehouse. PSOF ¶¶ 52, 54. Whether Chicago Import in fact
owned the items cannot be resolved on the undisputed facts. A jury could find that

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Chicago Import did not own the items, and that it submitted a claim based on the
value of items it knew it did not own.
Similarly, whether Chicago Import’s statements about the value of certain
video tapes constitute material misrepresentations cannot be determined at the
summary judgment stage. American States argues that Chicago Import “routinely”
paid only $0.50 per tape, but asked for $1.00 per tape in its claim. [324] at 11. But
Chicago Import submitted evidence that it sometimes paid up to $2.00 for tapes.
DSOF ¶¶ 66–68; [325-39] at 48–50.5 The evidence does not show, as a matter of law,
that Chicago Import’s valuation was false. And even if Chicago Import’s valuation
was incorrect, under L & S Enterprises, that fact alone does not constitute a
material misrepresentation as a matter of law. See 454 F.2d at 460.
Regarding Chicago Import’s inventory tracking, American States argues that
Chicago Import’s owner “testified under oath that Chicago Import took yearly
inventories,” and that this testimony was a material misrepresentation. [324] at 14.
There are two problems with that argument. First, both the testimony and the
supposedly contradictory evidence are imprecise. The full extent of the testimony is
the following question and answer:
Q: How often, sir, do you conduct a physical inventory at your
locations?
A: We do mostly like end of year, like in January.

Chicago Import’s response to DSOF ¶ 66 references “Exhibit Q” but it appears that the
reference should have been to “Exhibit AA.”
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DSOF ¶ 54; [325-11] at 146:13–16. The supposedly contradictory evidence is equally
vague. DSOF ¶¶ 51–55, 60; [325-30] at 22:7–24:8; [333-3] at 96:24–98:20. The
owner’s later affidavit states that Chicago Import “did not maintain a strict
schedule as to when and how inventories were performed.” DSOF ¶ 60. The
affidavit is not inconsistent with the deposition—certainly not to the extent that one
can be found to be a misrepresentation as a matter of law. “Mostly” doing
inventories in January is consistent with not having a strict schedule. The second
problem with American States’s argument is that American States has not
suggested how any misrepresentation about inventory tracking was material.
Materiality is required.
Accordingly, as to fraud, the parties’ motions are denied.
C.

Exclusion for Arson

American States argues that it is not obligated to pay Chicago Import’s claim
because Chicago Import deliberately set the fire. [324] at 18. If that was
undisputed, or indisputable, American States would be entitled to summary
judgment. DSOF ¶ 72 (policy excludes damages caused by Chicago Import’s
criminal acts). Not surprisingly, the issue is disputed. [327] at 14. Chicago Import
cross-moved for summary judgment, arguing that American States relies on nothing
but speculation for this defense. [327] at 19.
To succeed on its arson defense, American States must prove that Chicago
Import caused the fire and the fire was “of an incendiary nature.” Moore v. Farmers
Ins. Exchange, 111 Ill.App.3d 401, 408 (2d Dist. 1982). Evidence that Chicago
Import had a motive and opportunity to set the fire can support an inference that it
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did so. Id. at 409–10. On motive and opportunity, American States notes the
following: not long before the fire, Chicago Import increased its policy limit from $2
million to $5 million; Chicago Import had experience making claims for fire damage;
and several employees were present when the fire started (and the owner was only
five minutes away). [324] at 15–16. Chicago Import responds that it was “extremely
profitable” and that it had $100,000 of merchandise delivered to the warehouse on
the day of the fire—facts that it contends are inconsistent with a conclusion that it
deliberately set the fire. [327] at 18; PSOF ¶¶ 57, 87. Chicago Import suggests that
independent electricians were responsible. It notes that electrical problems caused a
loud explosion and required repairs, and the fire began shortly after Commonwealth
Edison employees performed those repairs. [327] at 14–15; PSOF ¶¶ 39–44. The
evidence does not irrefutably prove that Chicago Import caused the fire; nor does it
compel the opposite conclusion. The evidence on each side is sufficient to send the
inquiry to the jury.
American States argues that there is “no real dispute that the fire at the
warehouse was incendiary in nature.” [324] at 15. In support, it cites the report of a
Bureau of Alcohol, Tobacco, Firearms and Explosives agent. Id. Chicago Import says
there is a dispute, and points to conclusions from (i) a fire investigator hired by
American States; (ii) a fire investigator from the Chicago Fire Department, and
(iii) an arson detective from the Chicago Police Department. [327] at 15–16.
Although American States questions the weight of the evidence cited by Chicago

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Import ([337] at 10), weighing the evidence is a job for the jury, not the court at
summary judgment.
American States argued that its arson defense could be decided as a matter of
law, but it cited no case in support. [324] at 14. The four cases it cited all sent the
issue to the jury.6 One case it cited, Morris v. Auto-Owners Insurance Company, 239
Ill.App.3d 500 (4th Dist. 1993), is particularly instructive. In Morris, four out of five
investigators concluded that the fire was of incendiary nature, and the fifth
concluded that it was “suspicious in origin” and “more intentionally set than
accidentally set.” Id. at 503–04. The door to the building was found unlocked, and
one of the insureds—who had keys—was no more than a block away when the fire
started. Id. at 504. The other insured kept changing his alibi and took two
polygraph tests, which both showed signs of “purposeful noncooperation.” Id. at
504–05. Finally, their business was doing poorly, so they stood to benefit financially
from the fire. Id. at 506. Given the totality of the evidence, the insurer was entitled
to judgment as a matter of law that its delay in settling the claim was not vexatious
or unreasonable. Id. at 509. Nonetheless, the question of whether the insureds
actually committed arson, voiding their policy, went to the jury. The jury found that
they did not, so the insurer paid the claim. Id. at 502. The same pattern occurred in
Lummis v. State Farm Fire & Casualty Company, 469 F.3d 1098 (7th Cir. 2006)
(Indiana law). In Lummis, the insured’s claim of bad-faith delay was denied at
See Dough, Inc. v. Badger Mut. Ins. Co., 1997 U.S. Dist. LEXIS 16676 (N.D. Ill. 1997);
Fittje v. Calhoun County Mut. County Fire Ins. Co., 195 Ill.App.3d 340 (4th Dist. 1990);
Moore, 111 Ill.App.3d 401; and Morris v. Auto-Owners Ins. Co., 239 Ill.App.3d 500 (4th Dist.
1993).
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summary judgment due to evidence of arson, but the ultimate question of arson
went to the jury, which found for the insureds. On the persuasive strength of these
cases, and due to the genuine dispute of fact, I deny both parties’ motions for
summary judgment concerning arson.
D.

Good-faith Investigation

Because American States has adduced sufficient evidence to go to the jury on
its defenses of fraud and arson, it is entitled to summary judgment that it did not
investigate Chicago Import’s claim in bad faith. Morris, 239 Ill.App.3d at 506
(judgment as a matter of law warranted if insurer “reasonably relied upon evidence
sufficient to form a bona fide dispute.”); State Farm Mut. Auto. Ins. Co. v. Smith,
197 Ill.2d 369, 380 (2001).
III.

Conclusion
For the foregoing reasons, each party’s motion for summary judgment is

granted in part and denied in part. Summary judgment is granted for Chicago
Import on American States’s sixth affirmative defense (insured’s neglect). Summary
judgment is granted for American States on Count III of Chicago Import’s complaint
(bad-faith delay). In all other respects, the motions [323] and [327] are denied.

ENTER:
___________________________
Manish S. Shah
United States District Judge

Date: 5/8/15

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