Smith v. PHH Mortgage Corporation et al
OPINION AND ORDER: GRANTS 63 MOTION for Partial Summary Judgment on Count II of Plaintiff's Complaint by Defendant Nationwide Affinity Insurance Company and DISMISSES Count II of the Plaintiff's Complaint. The Court DENIES the Plaintiff's request for punitive damages. The Court DENIES the Plaintiff's Motion to Strike the Defendant's Appendix 76 as moot. Signed by Chief Judge Theresa L Springmann on 8/28/2017. (lhc)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
FORT WAYNE DIVISION
NATIONWIDE AFFINITY INSURANCE
COMPANY and PHH MORTGAGE
CORPORTATION, d/b/a/ PHH MORTGAGE
CAUSE NO.: 1:15-CV-10-TLS
OPINION AND ORDER
On December 5, 2014, Plaintiff Pam Smith filed a Complaint [ECF No. 3] in Dekalb
Superior Court against Defendants Nationwide Affinity Insurance Company (Nationwide) and
PHH Mortgage Corporation (PHH), alleging breach of contract and bad faith. The Plaintiff also
sought declaratory judgment and injunctive relief against PHH. PHH removed the case to this
Court on January 12, 2015. On November 11, 2016, the Court granted the parties’ joint
stipulation to dismiss PHH. [ECF No. 60]. This matter is now before the Court on Defendant
Nationwide’s Motion for Partial Summary Judgment [ECF No. 31] as to the Plaintiff’s bad faith
claim (Count II). For the reasons stated in this Opinion and Order, the Court finds that the
Defendant is entitled to summary judgment on Count II.
The following facts are undisputed. Before and on April 4, 2014, the Plaintiff maintained
a homeowner’s insurance policy [ECF No. 64-1] with Nationwide. The Policy excludes coverage
for “any loss arising out of any act an ‘insured’ commits or conspires to commit with the intent
to cause a loss.” (Policy at 27, ECF No. 64-1.) The Policy also excludes coverage if an insured
has “intentionally concealed or misrepresented any material fact or circumstance; engaged in
fraudulent conduct; or made false statements” relating to the insurance. (Id. at 30–31.)
On April 4, 2014, a fire1 occurred at the Plaintiff’s house, located at 922 South Ijams
Street in Garrett, Indiana. (See Fire Loss Documents, ECF No. 64-4.) At the time of the fire, the
Plaintiff lived in the house with four of her children, including her 19-year old son, Austin
Carroll, and her four dogs. (P. Smith Stmt. 3–4, ECF No. 64-16.) The day before the fire, the
Plaintiff maintains that she took her younger children and their friends to the Children’s Museum
in Indianapolis on an overnight trip. (Id. at 18–19.) She also carried, in her purse, $5,000 in cash
that she had previously received from Nationwide on a separate insurance claim. (P. Smith
Second Stmt. 24–26, ECF No. 64-14.) Carroll, who remained at home alone, stated that he made
dinner on the stove the night before the fire, went to bed, and awoke at around 1:00 AM due to
black smoke in his bedroom. (A. Carroll Stmt. 3, 5; ECF No. 64-17.) Upon noticing the smoke,
he maintains that he jumped out of his window, ran to the front of the house to get the dogs out,
and called the fire department. (Id.) The same day, after learning about the fire from her son, the
Plaintiff made a claim under the Policy. Also on the same day, Nationwide’s claims adjuster met
with the Plaintiff and advanced her money to cover her immediate expenses.
Nationwide’s Investigation of the Cause of the Fire
Nationwide’s cause-and-origin investigator, Jim Hunter, was assigned to the case. Four
days after the fire, he inspected the house, took photographs, reviewed the Garrett Volunteer Fire
The parties contest whether there was the one fire, one fire with two points of origin, or two
separate fires. The Court’s analysis of whether there is truly a material factual dispute regarding the
number of fires is a part of this Opinion and Order, but in general, for the purposes of this Order, the
Court will refer to the fire(s) at issue as a single fire.
Department’s (VFD) report, collected evidence, and interviewed the Plaintiff and her son.
Though the house sustained smoke damage, the Plaintiff does not contest Nationwide’s
conclusion that the damage did not constitute a total loss and instead, the house was in such a
condition would allow for remodeling. (P. Smith Second Stmt. 47–48.)
Hunter also determined that there were two separate fires in the house: one in the kitchen
on the stovetop, where newspapers were stuffed underneath the grate of one of the gas burners;
and one in the hallway, where there was an unusual burn pattern indicating the presence of an
ignitable liquid trailer. (Hunter Report 7, ECF No. 51-2.) Hunter took samples of the carpet and
pad from the hallway and laboratory testing confirmed that the ignitable liquid on one sample
was gasoline residue. (Id. at 6.) Ultimately, Hunter opined that the cause of the two fires was
“the result of an intentional human act[;] this is an incendiary fire.” (Id. at 7.)
According to Nationwide, because it had reason to believe that the fire was intentionally
set, the case was assigned to Christopher Lease of Nationwide’s Special Investigations Unit
(SIU) to determine who set the fire. Lease maintains that he examined the house, canvassed the
neighborhood, and interviewed the Plaintiff and Carroll. (Lease Dep. 108:17–110:8, ECF No.
64-12.) From his interview of the Plaintiff, Lease noted that one month earlier, the Plaintiff’s
basement flooded due to a sewer backup and she had received $10,000 from Nationwide. From
his examination of the house, Lease determined that although the Plaintiff cleaned her basement
after the sewer backup, she did not have the damage repaired. (P. Smith Stmt. 8–9; Case
Manager System (CMS) Notes 21–22, ECF No. 64-13.)
Lease also spoke with the Garrett VFD Chief and confirmed that the VFD found two
separate fires in the house. (Lease Dep. 106:12–16; CMS Notes 21.) Though the VFD
categorized the fire as still “under investigation,” they did not investigate the fire because the
VFD did not have any certified fire investigators. (Lease Dep. 105:14–106:11; CMS Notes 21.)
Lease did not talk to the firefighters who were at the scene of the fire, nor did he receive any
photos from the VFD, though he requested photos on at least one occasion. (Lease Dep. 108:2–
9.) The VFD Fire Marshal ultimately informed Lease that they were not interested in
investigating the fire any further. (Id. at 263:2–12.) Lease also learned from the Garrett Police
Department (PD) that Carroll had previously “vandaliz[ed] mailboxes.” (Id. at 109:11–110:8.)
During a recorded interview with Lease, the Plaintiff confirmed that Carroll had been caught
vandalizing mailboxes and a golf course. (P. Smith Second Stmt. 12–13.)
During his interview with the Plaintiff, Lease disclosed that Hunter found two points of
origin of the fire: the first emanating with the newspapers on the stove and the second due to the
presence of gasoline in the hallway. (Id. at 38–39.) Lease then explained that the evidence “leads
to Austin [Carroll].” (Id. at 40.) Though neither party contests the content of the interview, the
parties have differing interpretations of the inferences resulting from Lease’s statement in the
following portions of the interview:
I know you filed bankruptcy a couple of years ago and you’re getting back
on your feet and doing everything that you can. And I think you’re doing the right
thing. I think you’re doing everything that you can.
You’re working hard and you’re paying your bills, and you’re doing
everything, um, Austin is too. It doesn’t seem like Austin’s a bad kid.
Um, so now, we have, I’m stuck in a situation, here, and, obviously, um,
when law enforcement requests my information or my file . . . I have to turn it
over. I have to turn it over. I have to turn it over to the State Fire Marshal’s office,
um, and, yeah, the department of insurance, National Insurance Crime Bureau and
Garrett Fire Department or whomever, okay?
No one has requested that, obviously. I wanted to take the opportunity to
first meet with you.
And try to figure out what is the best thing we can do okay? . . . [H]e’s
only 19 and, you know, you’re, you’re not too old yourself. I mean you’ve got a
life too, I mean, um, in time you’d have quite a few grandchildren, probably.
(Id. at 40, 41, 43–44.)
He then asked the Plaintiff, “What do you want Nationwide to do?” and she replied
“Like, figure out what happened.” (Id. at 45.) Lease replied back, “I’m, okay, I’m certain as to
what happened.” (Id.) Lease informed the Plaintiff that if she wished to continue to pursue her
claim, Nationwide would move forward with requests to obtain the Plaintiff’s financial records
and conduct an examination under oath (EUO) of both the Plaintiff and Carroll. (Id.) If the claim
was denied, then Nationwide would have to report “everything” to the National Insurance Crime
Bureau and the Indiana Department of Insurance, “[a]nd, then they follow up with any possible
criminal charges.” (Id. at 46.) Alternatively, Nationwide would conclude the investigation if she
decided to no longer pursue her claim. (Id. (“[T]he other thing is, is if you withdrew your claim
then I stop here.”).)
The Plaintiff explained that she was “not gonna just let it go. I mean . . . I lost my house.”
(Id.) She also expressed doubts that Carroll burned the house down, stating “[W]hether anybody
did come in or not I don’t know. I wasn’t there. . . . So it’s possible that somebody did, I don’t
know. But you’re trying to say Austin did it.” (Id. at 47.) Lease affirmed, “[T]he evidence,
certainly, points that way . . . .” (Id.) Lease explained that his canvassing of the neighborhood led
him to the conclusion that the neighborhood was safe and Carroll told him that he did not have
any enemies, so it was unlikely that someone broke in and started the fire. (Id. at 48). Lease also
confirmed with the Plaintiff that there had been no threats or harassing phone calls against her.
(Id.) The Plaintiff maintained that she believed Carroll could not have done it. (Id. (“[T]here’s no
way that he would want to lose his house.”).) The interview concluded with Lease affirming that
as long as the Plaintiff wished to continue to pursue her claim, Nationwide would continue with
the investigation and both the Plaintiff and Carroll would have to submit to EUOs.
Lease subsequently interviewed Carroll, who confirmed that there were newspapers near
the stove, though Carroll stated he did not know how they got under the burner. (Carroll Second
Stmt. 24, ECF No. 64-15.) Lease explained that the evidence indicated Carroll started the fire:
Lease: And I know how much you love your mother.
Lease: I mean, you’d probably do anything for you[r] mother.
Lease: And I think she’d do anything for you.
Lease: Right, and the reason I wanted to talk to you both, you know, both
of you here today is because once this can, continues to grow then the Indiana
State Fire Marshal might want my file, the Indiana Department of Insurance,
National Insurance Crime Bureau, I don’t know, anyone that requests my file I
have to legally turn it over to them.
Lease: But we’re not, we’re not at that stage and no one’s asked for my
information, okay. I haven’t even talked to the State Fire Marshal.
Lease: Okay? Um, and I just want to be clear that if, if you were, ‘cause
you seem just as, you seem like a good kid and you know, you know, and
everything points to a bad choice of, you know, renovate the house, maybe, get a
little bit of insurance money. . . .
Lease: And then, I told her [the Plaintiff], I said, well, let me talk to Austin
[Carroll] because if I talk to Austin and we can straighten this out then I don’t
have to go any further.
Lease: I don’t have to do anything. I don’t have to talk to Indiana State
Fire Marshal, the County Prosecutor, or anything of that nature, you know what I
Lease: Um, with that being said do you understand everything that I j-,
I’ve explained to you?
Carroll: I’m just, I know I didn’t do it, so, it’s, like, freaking me out ‘cause
somebody tried killing me.
Lease: Okay. You had nothing . . .
Carroll: No [cries].
Lease: Nothing at all to do with this?
(Id. at 26–28.) Lease told Carroll that the fire appeared intentional because someone took time to
place newspapers underneath the burners and pour gasoline in the hallway. (Id. at 28–29.)
Carroll again denied starting the fire, Id. at 29 (“I swear I did not do anything . . . .”), and
affirmed to Lease that he and his mother would be willing to take a polygraph test. (Id.)
Ultimately, various Nationwide employees, as well as Lease, decided to deny the
Plaintiff’s claim. Nationwide sent the Plaintiff a denial letter [ECF No. 64-10] and Lease
reported her claim to National Insurance Crime Bureau. (Lease Dep. 83:21–24; Corp. Rep. Dep.
30:8–17, ECF No. 69-25.) No one from Nationwide ever communicated with any prosecutor or
any law enforcement agency. (Corp. Rep. Dep. 31:5–15, 51:9–20.)
The Plaintiff’s Financial Situation
Nationwide also learned about the Plaintiff’s financial situation. The Plaintiff had filed
for bankruptcy two years before the fire, had one medical bill as outstanding, and had about $200
in her checking account and no savings. (Smith Second Stmt. 5, 15, 25.) She also stated that from
the $10,000 Nationwide provided her for the damage to her basement, she spent half of it on
cleaning supplies and equipment, and had the other half on her person, in cash, when she went to
Indianapolis the night of the fire. (Id. at 16–18; 24–26.) She maintained she was going to
eventually use that money to repair the basement. (Id.) Additionally, during her EUO, she
testified that, at the time of the fire, her expenses exceeded her income. (Smith EUO 15:13–15,
ECF No. 64-23.)
Moreover, the Plaintiff submitted her Sworn Proof of Loss form, after its deadline,
claiming $159,000 in losses. (Sworn Proof of Loss, ECF No. 64-8.) Nationwide maintains that
the Plaintiff did not provide the necessary documentation to support that figure and accordingly,
Nationwide required her to resubmit the proof of loss. Following the EUOs, the Plaintiff’s
attorney eventually provided Nationwide with the required financial documents. (CMS Notes 5.)
From its review of the Plaintiff’s supporting documentation, Nationwide learned that she had
$100 in overdraft fees in the months leading up to the fire, and about $1,000 left in her bank
account. (P. Bank Records 3, 7, 9, ECF No. 64-26.) Additionally, the Plaintiff had caught up
with her mortgage payments only about 24 hours before the fire. (Id.)
Throughout its investigation, Nationwide advanced money to the Plaintiff for the living
expenses, incidentals, and mileage for her and her family, paid for a company to secure longterm housing for her and her family, and financed long-term housing for them. (Check Listing,
ECF No. 64-3.) In total, Nationwide’s payments from the date of the fire (April 4, 2014) through
one month after her claim was denied (December 4, 2014) totaled over $56,000: Nationwide paid
$26,833.87 on housing for the Plaintiff and her family, advanced her $3,525.84 for their
additional living expenses, spent $9,367.26 to clean the clothing and other contents of their
house, and paid $16,276.07 to pack and store the contents of the house in a storage unit. (Id.)
The day after Nationwide stopped paying for the Plaintiff’s housing, she filed this lawsuit
against Nationwide alleging: (1) breach of contract, arising from Nationwide’s denial of
coverage for the claim under the Policy, and (2) bad faith, purportedly arising from
Nationwide’s: (a) handling of the claim and (b) ultimate decision to deny the claim.
(Compl. ¶¶ 7–15, ECF No. 3.)
On January 27, 2017, Nationwide filed a Motion for Partial Summary Judgment [ECF
No. 63] as to the Plaintiff’s bad faith claim (Count II), along with a Memorandum in Support
[ECF No. 65] and several exhibits [ECF Nos. 64-1 to 64-27]. The Plaintiff filed a Response
[ECF No. 68] on March 24, 2017, along with several exhibits [ECF Nos. 69-1 to 69-32];2 and
Nationwide filed a Reply on April 19, 2017 [ECF No. 74], along with several exhibits [ECF Nos.
75-1 to 75-3]. The Motion for Partial Summary Judgment is fully briefed and ripe for ruling.3
STANDARD OF REVIEW
Summary judgment is warranted when “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.” Fed. R.
Civ. P. 56(a). Summary judgment is the moment in litigation where the nonmoving party is
The Plaintiff appears to ask for judgment as a matter of law that Nationwide acted in bad faith.
(See Pl. Resp. Br. 2, ECF No. 68.) However, the proper procedure for moving for judgment as a matter of
law, pursuant to the local rules for this Judicial District, is to file a separate motion. See N.D. Ind. L.R 7-1
(“Motions must be filed separately.”).
Also before the Court is a Motion to Strike [ECF No. 76] the Defendant’s Second Appendix,
[ECF Nos. 75-1 to 75-3], filed by the Plaintiff on April 19, 2017. On April 24, 2017, the Defendant
submitted a Response [ECF No. 77], and on April 30, 2017, the Plaintiff filed a Reply [ECF No. 78]. On
May 15, 2017, the Court granted [ECF No. 80] Nationwide’s Motion for Leave to File the attached
Surreply [ECF No. 79-1] in Support of her Motion to Strike.
The Plaintiff argues that the referenced exhibits—which were attached to the Defendant’s
Reply—were improperly filed. The Plaintiff maintains that though she consented to an extension of time
for the filing of Nationwide’s Reply brief, she did not consent to the submission of additional evidentiary
materials. Moreover, she claims that Local Rule 56-1(c) does not state that a moving party can file
supporting materials to their reply brief. Ultimately, the Plaintiff argues that “[t]he summary judgment
procedure . . . gives the non-moving party only one chance to designate evidence” and it would be unjust
to the Plaintiff to allow the Defendant another opportunity to designate evidence. (Mot. to Strike 2, ECF
No. 76). The Defendant argues that the Plaintiff misinterprets the procedure because the Court has wide
discretion to allow parties to amend or supplement evidence, citing Seventh Circuit precedent in which a
motion to strike supplemental materials file in support of a reply brief was denied. (Resp. to Mot. to
Strike 2, ECF No. 77 (citing Beck v. Univ. of Wisc. Bd. Of Regents, 75 F.3d 1130, 1134 n.1 (7th Cir.
Because the Court did not rely upon the materials in Nationwide’s Second Appendix, the Court
denies the Plaintiff’s Motion to Strike as moot.
required to marshal and present the Court with evidence on which a reasonable jury could rely to
find in his favor. Goodman v. Nat’l Sec. Agency, Inc., 621 F.3d 651, 654 (7th Cir. 2010). A court
should only deny a motion for summary judgment when the nonmoving party presents
admissible evidence that creates a genuine issue of material fact. Luster v. Ill. Dep’t of Corrs.,
652 F.3d 726, 731 (7th Cir. 2011) (first citing United States v. 5443 Suffield Terrace, 607 F.3d
504, 510 (7th Cir. 2010), then citing Swearnigen–El v. Cook Cnty. Sheriff’s Dep’t, 602 F.3d 852,
859 (7th Cir. 2010)). A court’s role in deciding a motion for summary judgment “is not to sift
through the evidence, pondering the nuances and inconsistencies, and decide whom to believe.
[A] court has one task and one task only: to decide, based on the evidence of record, whether
there is any material dispute of fact that requires a trial.” Waldridge v. Am. Heochst Corp., 24
F.3d 918, 920 (7th Cir. 1994). Material facts are those that are outcome determinative under the
applicable law. Smith v. Severn, 129 F.3d 419, 427 (7th Cir. 1997). Although a bare contention
that an issue of material fact exists is insufficient to create a factual dispute, a court must
construe all facts in a light most favorable to the nonmoving party, view all reasonable inferences
in that party’s favor, Bellaver v. Quanex Corp., 200 F.3d 485, 491–92 (7th Cir. 2000), and avoid
“the temptation to decide which party’s version of the facts is more likely true,” Payne v. Pauley,
337 F.3d 767, 770 (7th Cir. 2003).
Nationwide requests partial summary judgment only on the Plaintiff’s bad faith claim
(Count II), which the Plaintiff alleges arises from Nationwide’s: (a) ultimate decision to deny the
claim and (b) its handling of the claim, including its investigation. In its Motion, Nationwide
argues that the Plaintiff’s bad faith claim fails as a matter of law because: (a) a reasonable jury
would find that it had a rational, principled basis for denying coverage and (b) Indiana does not
recognize a bad faith claim on the basis of claims handling. Even if the Court finds that a cause
of action exists for bad faith claim handling, Nationwide asserts it acted in good faith while
handling the Plaintiff’s claim. The Court will examine each of these arguments.
Denial of Coverage
In Indiana, an insurance company can be found liable in tort for a bad faith denial of
payment on an insurance claim. Lummis v. State Farm Fire & Cas. Co., No. 1:04-CV-008, 2005
WL 1417053, at *6 (S.D. Ind. June 16, 2005); Erie Ins. Co. v. Hickman, 622 N.E.2d 515, 519
(Ind. 1993). To prove bad faith denial, the insured must establish that the insurer denied liability
“knowing there is no rational, principled basis for doing so.” Lummis, 2005 WL 1417053, at *6
(citing Woodley v. Fields, 819 N.E.2d 123, 133 (Ind. App. 2004)). In other words, to infer bad
faith, there must be an “absence of any reasonable ground” for the denial of payment. Hoosier
Ins. Co. v. Mangino, 419 N.E.2d 978, 983 (Ind. App. 1981). “Poor judgment or negligence do
not amount to bad faith; the additional element of conscious wrongdoing must also be present.”
Woodley, 819 N.E.2d at 133 (citing Colley v. Ind. Farmers Mut. Ins. Grp., 691 N.E.2d 1259,
1261 (Ind. Ct. App. 1998). This inquiry is distinct from what Nationwide will have to provide to
defeat the Plaintiff’s breach of contract claim. As the Court explained in Lummis:
To defeat the breach claim, [the defendant] will have to prove that [the
plaintiff] in fact caused or procured the fire. That question is not at issue [in] this
motion. For even if it turned out that [the defendant] was wrong in its basis for
denying the claim and thus was in breach of the insurance contract—a question on
which the Court states no opinion—[the defendant] could still be found not liable
on the bad faith claim if there was a legitimate, albeit incorrect, basis for believing
that [the plaintiff] caused or procured the fire.
Lummis, 2005 WL 1417053, at *6; see also Dean v. Ins. Co. of N. Am., 453 N.E.2d 1187, 1194
(Ind. Ct. App. 1983).
The Plaintiff also seeks punitive damages in this case. “[T]he initial inquiry is whether
[the] plaintiff [has] raised a genuine issue of fact as to whether a tort has been committed.
‘Only after it is determined that a tort has been committed is the question of punitive damages
breached.’” Lummis, 2005 WL 1417053, at *6 (citing Colley, 691 N.E.2d at 1261 n.2). This is
because in Indiana, “the mere finding by a preponderance of the evidence that the insurer
committed the tort will not, standing alone, justify the imposition of punitive damages.” Id.
(citing Erie, 622 N.E.2d at 520). Punitive damages on a bad faith claim require “clear and
convincing evidence that the insurer knew there was no legitimate basis for the denial.” Friedline
v. Shelby Ins. Co., 774 N.E.2d 37, 40 (Ind. 2002); Erie, 622 N.E.2d at 520; see also McLaughlin
v. State Farm Mut. Ins. Co., 30 F.2d 861, 870 (7th Cir. 1994) (reversing jury award of punitive
damages where evidence of bad faith was insufficient to meet clear and convincing standard of
proof, but noting that “[t]he jury could, on the other hand, have found that the denial of coverage
was unreasonable and therefore tortious”).
Accordingly, the first issue on this pending Motion is whether a reasonable juror could
find by a preponderance of the evidence that Nationwide denied coverage to the Plaintiff with
knowledge that it lacked any reasonable ground for the denial. Lummis, 2005 WL 1417053, at *7
(“To infer bad faith for an insurer’s denial of payment on a claim, there must be an absence of
any reasonable ground for the denial.”) (internal quotation marks and citation omitted).
“Circumstantial evidence of arson can provide reasonable grounds for denying a claim.” Id.
(citing Mangino, 419 N.E.2d at 986–87). Thus, “[c]ircumstantial evidence that the fire was
intentionally set and that the insured has both a motive and opportunity to set or procure a fire
can support an inference of arson by the insured.” Id.; Cincinnati Ins. Co. v. Compton, 569
N.E.2d 728, 729–30 (Ind. Ct. App. 1991); Dean, 453 N.E.2d at 1194–95.
In this case, Nationwide determined that the fire was intentionally set, the Plaintiff had
the financial motive to procure the fire, and the Plaintiff had the opportunity, with Carroll’s help,
to set the fire. As a result, Nationwide argues that it had a rational, principled basis to deny the
Plaintiff’s claim. In particular, Nationwide maintains that the following facts supporting its basis
for denial of the claim:
There were newspapers stuffed underneath one of the burners in the kitchen, and the
hallway tested positive for the presence of gasoline on the carpet, thus indicating that the
fire was intentional.
Jim Hunter, a certified cause-and-origin investigator, determined that the fire was
The Plaintiff’s monthly expenses exceeded her income, she had a pending overdraft fee,
and she had $200 in her checking account and no savings.
The Plaintiff had been behind on her mortgage for at least five months prior to the fire,
but she brought it current less than 24 hours before the fire.
The Plaintiff previously received $10,000 from Nationwide for damage resulting from
flooding to her basement, but she did not use the money to repair her basement.
The Plaintiff took $5,000 in cash and kept it on her person the day of the fire.
The house was in poor condition and thus, it did not appear that the Plaintiff
demonstrated care towards it.
The amount the Plaintiff claimed in her Sworn Proof of Loss was greater than the amount
she valued her property and assets when filing for bankruptcy two years prior to the fire.
Carroll had a history of vandalizing property.
Carroll was the only individual in the home, along with the dogs that “everyone is scared
of.” (Carroll Second Stmt. 6). Thus, it was unlikely an intruder broke into the house.
The Plaintiff and Carroll affirmed that they have no enemies and never received
threatening phone calls.
The fire happened 12 hours after the Plaintiff took her other children on an overnight trip.
The Plaintiff agrees that the dispute “is whether it was rational and principled for
Nationwide to take that position” that the fire was caused by the Plaintiff’s act of arson.”4 (Pl.
Resp. Br. 22). However, the Plaintiff argues that Nationwide’s ultimate decision to deny her
claim was not rational and principled, but rather, “[i]t was wholly irrational and unprincipled for
Nationwide to deny Smith’s claim because Nationwide knew—all along—that [the cause of the
fire was not arson by the Plaintiff].” (Id.) In support, the Plaintiff provides reasons including:
The Plaintiff and Carroll repeatedly denied involvement in the fire and were willing to
take a polygraph test to prove their position;
Carroll himself discovered the fire and called 911;
Important papers and family pets were in the house when the fire started, therefore it is
unlikely the Plaintiff conspired to destroy her own valuables;
The Plaintiff adds that the issue is also “whether the Smith fire was an arson fire.” (Id.) Though
the Plaintiff does not otherwise argue that Nationwide must prove the cause-in-fact of the fire, to ensure
consideration of any potential argument, the Court holds that demonstrating whether the Plaintiff’s act of
arson was the cause-in-fact of the fire is not at issue in this Motion for Partial Summary Judgment. The
Motion is instead constricted to the bad faith claim. Thus, the relevant inquiry is whether Nationwide’s
denial of the Plaintiff’s claim based on its determination that the fire was arson caused by the Plaintiff
was rational and principled. See Lummis, 2005 WL 1417053, at *6, *9. In other words, for the purposes
of this Motion, the cause-in-fact of the fire is not at issue, but rather whether Nationwide’s eventual denial
of the Plaintiff’s claim was rational. Id.
Neither Nationwide nor Jim Hunter reviewed the fire department’s photographs which
show there was only a single fire;
The Garrett VFD determined the fire was not suspicious;
Lease used scare tactics and misrepresentations to try to get the Plaintiff to drop her
Nationwide did not refer the matter to a prosecutor, as it is obligated to do under Indiana
law after making an arson determination; and
The Plaintiff’s expert witness, Charles Miller, has opined that Nationwide did not
reasonably weigh the evidence.
Accordingly, the Plaintiff claims that Nationwide “manufacture[d] a reason to deny [the]
Plaintiff’s claim.” (Id. at 2.)
The Court holds that Nationwide has demonstrated, on the basis of facts that are not
subject to genuine dispute, that it had a rational, principled reason to deny the Plaintiff’s claim on
the basis of its determination that the fire was intentional, that the Plaintiff had the financial
motive to set the fire, and that the Plaintiff had the opportunity, with Carroll, to set the fire.
First, Nationwide articulated a rational, principled basis for why it believed the fire was
intentional—it relied upon the Report of a veteran cause-and-origin investigator who detailed
why he believed the fire to be intentional, including newspapers under the burner and gasoline in
the hallway. Second, Nationwide has shown a rational, principled basis to conclude that the
Plaintiff had the financial motive to set the fire by determining that the Plaintiff was in a grim
financial situation and paid off her mortgage less than 24 hours before the fire. See Clifford v.
State Farm Fire & Cas. Ins. Co., No. 3:10-CV-221, 2011 WL 2326969 at *18–19 (N.D. Ind.
June 7, 2011) (holding that the insurer had a rational and principled basis to deny the claim
because the plaintiff had the potential of a financial benefit from recovering under the policy,
was behind on payments, and caught up with premiums five days before the fire). Finally,
Nationwide has established a rational, principled basis to conclude that the Plaintiff, with Carroll,
had an opportunity to set the fire because he was the only individual at home, the house did not
show signs of a break in, and neither the Plaintiff nor Carroll were threatened prior to the fire.
Sexson v. State Farm Fire & Cas. Co., 61 F. App’x 267, 271 (7th Cir. 2003) (dismissing a badfaith claim because the insurer presented evidence that the insured had opportunity to set the fire
because insured had the key to the house and was the last person to leave the house).
Though the Plaintiff argues that Nationwide incorrectly interpreted these facts, and
instead the facts “support alternative inferences from those Nationwide” drew, that is not the
correct standard. An insurer’s “reading of the evidence does not have to be accurate, it just
cannot be irrational.” Clifford, 2011 WL 2326969, at *19. Nationwide has demonstrated that it
reviewed the facts, rationally weighed them, and made a principled decision. Additionally,
Nationwide did not deny the Plaintiff’s claim with “a state of mind reflecting dishonest purpose,
moral obliquity, furtive design, or ill will.” Colley, 691 N.E.2d at 1261. Notably, because the
Plaintiff does not contest the facts themselves, there are no genuine issues of material fact
preventing a grant of summary judgment. The Court finds that there is no “evidence from which
a reasonable jury could conclude that [the insurer] lacked a rational, principled basis for [denying
the Plaintiff’s] claim . . . so her bad faith claim cannot survive summary judgment.” Id. In fact,
the Plaintiff does not contest her financial motive or Nationwide’s determination that she had the
opportunity, through Carroll, to set the fire. Rather, the Plaintiff disputes that Nationwide’s
conclusions that: (1) the fire was intentional and (2) if it was intentional, that she was the one
involved in setting the fire.
Nationwide Had a Rational Basis to Determine the Fire was Intentional
The Plaintiff’s counterarguments regarding whether the fire was intentional center on her
dispute with Nationwide’s reliance on Hunter’s Report and Lease’s investigation, both of which
concluded that the fire was intentionally set. The Plaintiff alleges that Nationwide was aware that
Hunter’s Report and Lease’s investigation were flawed in their conclusions and nevertheless
relied upon them to support its denial of the Plaintiff’s claim.
In support of her argument that Hunter’s Report and Lease’s investigation were flawed,
the Plaintiff argues that both Hunter and Lease purposefully ignored the Garrett VFD’s
determination that there was nothing suspicious about the fire. In this manner, the Plaintiff
contests the application of Lummis to her case by arguing that the fire department determined the
fires were intentionally set in Lummis. Here, however, the Garrett VFD made no such finding;
the VFD “did not believe the fire was suspicious,” and identified only one fire. (Pl. Resp. Br. 21,
24 (citing Claim Log 14, ECF No. 69-3; Chief Werkheiser’s Decl., ECF No. 69-29; VFD Report,
ECF No. 69-31 (“interior crews located a small fire in the kitchen + hallway area”)).)
Though the Plaintiff is correct that Chief Werkheiser “did not observe anything
suspicious about the fire,” and only physically saw one fire, Werkheiser made no conclusion
regarding the cause-and-origin of the fire. (Werkheiser Decl. ¶ 7.) In fact, Werkheiser explained
that he is not a certified fire investigator, “nor is any other Garrett Firefighter.” (Id. at ¶ 8.)
Accordingly, Nationwide had a rational, principled basis for determining that the Garrett VFD’s
Report was not an expert opinion regarding the cause-and-origin of the fire. Hunter, who is a
certified fire investigator, provided a reasoned explanation regarding how he determined that the
fire had two points of origin and appeared to be intentional—he found newspapers stuffed under
the grate of one of the kitchen burners, he smelled gasoline in the hallway, saw a burn pattern
typical to that of using an ignitable liquid, and samples from the hallway tested positive for
gasoline. (See Hunter Report 4–6.) Therefore, Nationwide had a rational, principled basis for
relying on Hunter’s expert opinion. See Thompson Hardwoods, Inc. v. Transp. Co., No. NA
0074CHK, 2002 WL 440222, at *5 (S.D. Ind. Mar. 15, 2002) (it is rational for the insurer to rely
upon an expert “for purposes of the bad faith claim, . . . so long as [the expert] could offer . . a
reasoned explanation for his opinion”).
Accordingly, although the VFD made no finding on the cause-and-origin of the fire, this
does not mean Nationwide acted in bad faith when making its own determination regarding the
cause-and-origin of the fire. The rationale in Lummis is still applicable: “To prevail on their bad
faith claim, the [Plaintiff] must show the absence of any reasonable ground for [the Defendant’s]
denial of payment on the [Plaintiff’s] policy. They would also have to show conscious
wrongdoing by [the Defendant].” 2005 WL 1417053, at *9 (internal citations and quotation
marks omitted). In the case at hand, the Plaintiff cannot demonstrate the absence of any
reasonable ground for Nationwide’s denial, nor is there any evidence that Nationwide engaged in
Moreover, the Court finds that the Plaintiff’s argument contesting whether there were two
fires is immaterial because the issue is not the number of fires, but whether it was irrational for
Nationwide to conclude that the fire was intentionally set. In other words, the intentionality of
setting the fire, as opposed to the number of fires, is the root of the dispute. Even if Nationwide
incorrectly determined that there were two fires, which the Plaintiff argues evidences
Nationwide’s carelessness and bad faith, an insurer’s “reading of the evidence does not have to
be accurate, it just cannot be irrational.” Clifford, 2011 WL 2326969, at *19. Here, Nationwide
has rationally explained how it concluded that there were two separate origin points for the fire
and that it was intentionally set.
Additionally, the Indiana Supreme Court has held that “the lack of a diligent investigation
alone is not sufficient to support an award” of bad faith. Erie, 622 N.E.2d at 520. Thus, even if it
is true that Lease and Hunter should have interviewed the firemen who were at the scene of the
fire and should have tried harder to obtain the VFD’s photographs, this lack of diligent
investigation does not amount to an element of culpability. Id. (“A bad faith determination
inherently includes an element of culpability.”).
Nationwide Had a Rational Basis to Determine the Plaintiff was Responsible for
Intentionally Setting the Fire
The Plaintiff argues that even if Nationwide rationally concluded that the fire was
intentional, Nationwide acted in bad faith when concluding that the Plaintiff and Carroll were the
cause of the fire. In support, the Plaintiff argues that she and Carroll continue to maintain they
did not start the fire, Carroll himself called 911, family pets were in the house at the time of the
fire, and the Plaintiff’s important papers and/or personal effects were destroyed during the fire.
Though these arguments may serve as support for the Plaintiff in her breach of contract claim,
where the cause-in-fact of the fire is at issue, these facts do not demonstrate that Nationwide was
irrational and unprincipled when weighing all of the facts, both for and against the Plaintiff,
concluding that the evidence shows the Plaintiff was responsible for the fire, and denying the
Plaintiff’s claim. In Lummis, the plaintiffs’ similarly argued that they lost irreplaceable property
in the fire and they consistently maintained they did not start the fire. Lummis, 2005 WL
1417053, at *9. The Lummis court held that:
This evidence may be highly relevant in deciding whether [the defendant] was
wrong in determining that [the plaintiff] procured the fire, so that it breached its
contact with [the plaintiff]. But, the possibility that a jury could disagree with [the
defendant’s] determination will not defeat summary judgment on a bad faith
claim. For purposes of this motion, the question on [the plaintiff’s] bad faith claim
is whether a juror could find by a preponderance of the evidence that [the
defendant] knew it had no rational, principled basis for suspecting that Lummis
procured the fire.”
The Plaintiff further alleges that Nationwide did not have a rational, principled basis to
determine that she caused the fire because Nationwide had already “made up [its] mind that the
fire was caused by arson” and thus, “manufacture[d] a reason to deny [the] Plaintiff’s claim.” (Pl.
Resp. Br. 2, 10.) In support of this contention, the Plaintiff claims that Nationwide rejected the
Plaintiff’s Sworn Proof of Loss estimate for no reason. However, the Plaintiff provides no basis
why Nationwide’s explanation for rejecting the Sworn Proof of Loss—that the Plaintiff
submitted her the estimate without the necessary paperwork to back up her claim—is irrational.
Similarly, the Plaintiff contends that Nationwide’s decision to pay for the Plaintiff’s housing and
other incidentals, but failure to subsequently “demand reimbursement” is evidence that
“Nationwide does not believe its stated reason [arson] for denying [the Plaintiff’s] claim.” (Pl.
Resp. Br. 11.) The Plaintiff’s argument again suffers from the same flawed logical leap—the
Plaintiff cites to no evidence connecting Nationwide’s payments to the Plaintiff for her housing
and incidentals as based upon Nationwide’s alleged belief that the fire was not caused by arson.
Furthermore, the Plaintiff argues that Nationwide’s actions of failing to notify the
authorities of the suspected arson and to turn over its files also establishes that Nationwide did
not believe the fire was caused by arson. Though it does not appear that Nationwide turned over
its files to the authorities, Nationwide reported its conclusion that the fire resulted from arson
committed by the Plaintiff to the Indiana State Fire Marshal and the National Insurance Crime
Bureau. (CMS Notes 21 (“Told [Chief Werkheiser] that . . . the fire(s) were set and an accelerant
was used. He said he would call Indiana SFM [State Fire Marshal] . . . .”).) The Plaintiff also
does not contest that Lease spoke to the Fire Marshal. Although Nationwide did not turn over its
files, Nationwide provides a rational explanation for why it did not do so—the fire department
told Lease it did not want to investigate the fire. Of course, Nationwide could have established a
more thorough record of reporting the claim to the authorities and/or prosecutor. However, that
Nationwide did not do so does not rise to the level of a bad faith claim denial, especially since
Nationwide did alert the fire department and the National Insurance Crime Bureau.5
The Plaintiff additionally alleges that Nationwide acted in bad faith in its investigation
and “handling of the claim.” (Compl. ¶ 14). Though the Plaintiff incorporates many of the same
arguments she made earlier, which the Court has already addressed, the crux of the Plaintiff’s
argument rests on the Plaintiff’s allegations that Lease’s actions, and in particular, his interviews
of the Plaintiff and Carroll, evidence bad faith.
Before turning to the substance of the arguments, the Court looks first to the contention
raised by Nationwide—that Indiana does not recognize a bad faith claim on the basis of “claims
handling.” Nationwide points to the holding in Monroe Guaranty Insurance Co. v. Magwerks
Co., in which the Indiana Supreme Court analyzed the plaintiff’s argument that “the duty to deal
The Court rejects the opinions offered by the Plaintiff’s expert witness, Charles Miller, for
purposes of this Motion. Miller does not provide facts supporting his opinion, but offers only conclusory
opinions. See Krieg v. Progress W. Ins. Co., No. C049109, 2006 WL 895100, at * 7 (Cal. Ct. App. Apr. 7,
2006) (“An expert’s conclusory opinions regarding the reasonableness of an insurer’s conduct are
insufficient to establish a triable issue of fact on that question.”).
in good faith includes also the manner of handling the claim.” 829 N.E.2d 968, 976 (Ind. 2005).
There, the court held, “[W]e decline at this time to expand on the extent of the duty an insurer
owes to its injured beyond those we have already expressed in [Erie].” Id. In Erie, the Indiana
Supreme Court detailed the following as falling under the duty to act in good faith: “(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 settlement of his claim.” 622 N.E.2d at 519. Accordingly, the Magwerks court went
on to analyze the bad faith claims handling claim under the applicable prongs of Erie. In other
words, the Magwerks court held that there is no cause of action for bad faith claims handling, but
the allegations of bad faith claims handling may include elements of deceiving the insured, for
example, and a court can analyze claims pursuant to these prongs of Erie.
In Klepper v. Ace American Insurance Co., the Indiana Court of Appeals was confronted
with the same issue and affirmed Magwerks, holding in a footnote that the plaintiff’s argument
suffered from the same defect as the plaintiff’s argument in Magwerks: “Likewise, . . . the
[plaintiff] has not developed an argument for expanding the scope of an insurer’s duty to deal in
good faith beyond that described in [Erie] . . . .” 999 N.E.2d 86, 98 n.11 (Ind. Ct. App. 2013).
Accordingly, Nationwide maintains that Indiana has refused to recognize a bad-faith claim based
on an insurer’s claim handling practices.
Recently, two cases summarized the analysis in Magwerks and its progeny. In Dennerline
v. ProNational Insurance Co., the court held, “Contrary to [insureds’] assertion, the Court was
not confused about the Indiana Supreme Court’s decision [in Magwerks]. The Indiana Supreme
Court has not recognized bad faith handling of a claim or expanded the obligations that it set
forth in [Erie].” No. 1:05-CV-LJM, 2006 WL 1344059, at * 2 (S.D. Ind. May 16, 2006). The
court in Telamon Corp. v. Charter Oak Fire Insurance Co. was similarly faced with an allegation
that an insurer handled a claim in bad faith. The Telamon court held that “neither the Indiana
Supreme Court nor the Indiana Court of Appeals has recognized a claim for bad faith claims
handling. Thus, in accordance with Magwerks, the court will analyze Telamon’s claim under the
four obligations articulated in [Erie].” 179 F. Supp. 3d 851, 856 (S.D. Ind. 2016). Accordingly,
though the Magwerks court rejected the bad faith handling claim, the Magwerks court then
analyzed the insured’s bad faith claim under the Erie obligations as laid out above. The Telamon
court followed the same approach, and accordingly this Court does the same.
Here, the Plaintiff’s allegation concerning Nationwide’s claims handling practice is
essentially a claim that Nationwide deceived the Plaintiff and also exercised an unfair advantage
to pressure the Plaintiff into settlement of her claim. The bulk of the Plaintiff’s support for this is
her argument that during her interview with Lease, he “made thinly-veiled, obvious threats that if
[she] did not drop her claim then Nationwide would be forced to see to it that Austin, her son,
would be criminally prosecuted and jailed.” (Pl. Resp. Br. 2.)
In particular, the Plaintiff points out that Lease told the Plaintiff, “When law enforcement
requests my information or my file . . . I have to turn it over” “[a]nd, then they follow up with
any possible criminal charges.” (Smith Second Smnt. 46.) “[T]he other thing is, is if you
withdrew your claim then I stop here.” (Id.) The Plaintiff establishes that this is a misstatement
of Indiana law because Indiana law requires that an insurer notify the authorities via written
notice if the insurer suspects arson. “There is no provision in the statute that says Nationwide can
wait and see if the insured withdraws her claim before the duty to report arises. Accordingly, as
soon as Nationwide had ‘reason to believe’ there was arson, it was duty bound by Indiana law to
report that arson to the proper law enforcement authorities and provide its file to them.” (Pl.
Resp. Br. 15). Therefore, the Plaintiff maintains that Lease lied to her about Nationwide’s legal
requirements for when to turn over his file because Nationwide did not believe the fire was
caused by arson.
The Plaintiff further argues that Lease lied to the Plaintiff when he told her that he was
“certain” as to what happened the night of the fire, even though Lease had not officially
determined who caused the fire because Nationwide’s investigation was not complete. (Smith
Second Stmt. 45.) As additional evidence of Lease’s tactics, the Plaintiff points out that during
his deposition, Lease stated that he had to comply with the duty of good faith “for the most part”
and depending “on the circumstances.” (Lease Dep. 66:12–24.)
Nationwide argues that the Plaintiff’s allegations of threats by Lease are false, especially
because the Plaintiff did not report these threats to anyone, including her attorney. Moreover,
Nationwide maintains that Lease was relaying to the Plaintiff the status of the investigation, as an
insurer is obligated to do, and was not threatening the Plaintiff. Nationwide argues that Lease:
was confronted with two intentionally set fires that happened when Smith’s then
19-year-old son Carroll—who has a history of destroying property—was home
alone. Faced with these facts, Lease’s decision to speak with [the Plaintiff] first to
provide her the opportunity to weigh her options and make an informed decision
about whether to pursue her claim cannot reasonably be construed as evidence of
(Def.’s Reply Br. 10, ECF No. 74).
It appears that Lease informed the Plaintiff about the findings of Nationwide’s
investigation and then questioned her about whether she was involved in the fire, as he had
grounds to do based upon the evidence available to him. In fact, as Nationwide argues, an insurer
acts in bad faith when consciously concealing the results of its cause-and-origin investigation.
See Colley, 691 N.E.2d at 1260 (“[T]he Colleys contend that Indiana Farmers handled their
insurance claim in bad faith by concealing its arson investigation.”); see also Clifford, 2011 WL
2326969, at *14 (“Evidence that an insurer told an insured’s acquaintances that he committed
arson does not show that it used unfair pressure against him.”). Lease then informed the Plaintiff
that she would likely have to undergo EUOs. This does not constitute bad faith—though the
Plaintiff may perceive EUOs as onerous and difficult, it is not bad faith for an insurer to tell an
insured that pursuit of their claim will be time consuming and/or difficult. See Eli Lilly & Co. v.
Zurich Am. Ins. Co., 405 F. Supp. 2d 948, 958 (S.D. Ind. 2005) (“Lilly does assert that Zurich
made attempts to dissuade Lilly from pursuing the coverage issue in litigation, but it did so only
by reminding Lilly that litigation would be costly and time consuming, both of which are of
course true. In sum, we find no evidence to support a finding of bad faith . . . on these claims.”).
Even though Lease’s interview technique may have been arguably accusatory, it does not
rise to the level of conscious wrongdoing required for a finding of bad faith. Colley, 691 N.E.2d
at 1261 (“Poor judgment or negligence do not amount to bad faith; the additional element of
conscious wrongdoing must also be present.”). Furthermore, although Lease misrepresented the
law when he incorrectly suggested that he would not have to report the arson if the Plaintiff
withdrew her claim, Lease did inform the Plaintiff that he would have to turn over his materials
and findings if asked by the authorities. His misstatement of law, even if considered careless,
does not evidence the requisite level of bad faith. Lilly, 405 F. Supp. 2d at 958 (“Lilly suggests
that Zurich acted in bad faith because it failed to properly investigate and apply Indiana law.
However, an inadequate investigation or flawed interpretation of Indiana law does not constitute
bad faith.”). Therefore, Plaintiff’s reliance upon Liberty Mutual Insurance Co. v. Parkinson is
inapplicable here—in Liberty, the insured was “given incorrect information regarding her
coverage” and was “actively dissuaded from filing a claim that was clearly covered under her
policy.” 487 N.E.2d 162, 164 (Ind. Ct. App. 1985). Here, there is no evidence that Nationwide or
Lease purposefully or maliciously provided incorrect information to the Plaintiff regarding her
In sum, even after analyzing the Plaintiff’s claim pursuant to the parameters in Erie,
Nationwide’s conduct does not rise to the level of bad faith. Among its other actions, Nationwide
met with the Plaintiff and began its investigation as soon as the claim was filed, advanced her
money for her necessary expenses, investigated for six months after receiving a cause-and-origin
report that the fire was caused by arson, paid for the Plaintiff’s expenses for one month after
denying the claim, and had a rational basis to conclude that the Plaintiff caused the arson because
newspapers were stuffed under the kitchen burner and gasoline was present in the hallway.
Nationwide’s investigation was not required to be perfect, and there is no evidence from which a
jury could find that Nationwide committed conscious wrongdoing.
For the reasons stated above, the Court GRANTS the Defendant’s Motion for Partial
Summary Judgment [ECF No. 63] and DISMISSES Count II of the Plaintiff’s Complaint. The
Court accordingly DENIES the Plaintiff’s request for punitive damages. Finally, the Court
DENIES the Plaintiff’s Motion to Strike the Defendant’s Appendix [ECF No. 76] as moot.
SO ORDERED on August 28, 2017.
s/ Theresa L. Springmann
CHIEF JUDGE THERESA L. SPRINGMANN
UNITED STATES DISTRICT COURT
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