Earlier this week, I was in Austin, Texas, attending a deposition with Chip Merlin on a hail damage claim. Texas is known for their barbeque so we decided to try out The County Line BBQ on Lake Austin. If you are in Austin, I highly recommend it.
This led me to today’s blog topic – a property insurance case involving damage to a barbeque restaurant.
In Habecker v. Peerless Insurance Company, the plaintiffs alleged that their insurer wrongfully denied benefits under a commercial property insurance policy covering plaintiffs’ business premises – a barbeque restaurant damaged by an overnight fire in early 2005. The fire did relatively minor harm to the building itself but caused extensive smoke damage to the company’s fixtures, equipment, and inventory.
Here, the issue involved an insured’s duty to cooperate. Plaintiffs submitted a claim against the policy. The relevant policy language provided as follows:
3. Duties In The Event Of Loss Or Damages
a. You must see that the following are done in the event of loss or damage to Covered Property:
* * *
(5) At our request, give us complete inventories of the damaged and undamaged property. Include quantities, costs, values and amount of loss claimed.
(6) As often as may be reasonably required, permit us to inspect the property proving the loss or damages and examine your books and records. Also permit us to take samples of damaged and undamaged property for inspection, testing and analysis, and permit us to make copies from your books and records.
* * *
(8) Cooperate with us in the investigation or settlement of the claim.
After an initial investigation, the insurer refused coverage, asserting that plaintiffs had breached material policy terms by failing to cooperate with the investigation. The insurer had discovered that the fire giving rise to the claim was an arson and demanded tax records/authorizations from the insured. Plaintiffs brought an action to enforce their rights to coverage, and the insurer filed a motion for summary judgment on lack of cooperation grounds.
The Court discussed Pennsylvania law governing an insured’s duty to cooperate:
Under Pennsylvania law, an insured has a duty to cooperate in good faith with an insurer’s investigation of a covered loss. See Kids Wear Aramingo, Inc. v. Am. Motorists Ins. Co., No. Civ. A. 92-1739, 1992 WL 310296, at *1 (E.D.Pa. Oct.21, 1992) (holding that insureds must cooperate with the insurer in a“reasonable and substantial manner”); Butler Candy Co. v. Springfield Fire & Marine Ins. Co., 296 Pa. 552, 146 A. 135, 138 (Pa.1929)(stating that an insured’s compliance “is to be determined by reasonableness” and that the insured must engage in “[a]n honest effort to produce” documents requested by the insurer). An insured’s failure to cooperate excuses an insurer’s coverage obligations if the breach is material and prejudicial to the insurer’s interest. Brethren Mut. Ins. Co. v. Thomas, No. 3:04cv1509, 2006 WL 2376248, at *3 (M.D.Pa. Aug.14, 2006); Forest City Grant Liberty Assocs. v. Genro II, Inc., 438 Pa.Super. 553, 652 A.2d 948, 951 (Pa.Super.Ct.1995). The insured’s breach must exceed a “mere technical departure” from the terms of the policy. Paxton Nat’l Ins. Co., 513 Pa. 627, 522 A.2d 531, 532 (Pa.1987) (quoting Conroy v. Commercial Cas. Ins. Co., 292 Pa. 219, 140 A. 905, 907 (Pa.1928)). Instead, it must “result [ ] in a substantial prejudice and injury to the [insurer’s] position in the matter.” Id.; see also Conway v. State Farm Ins. Co., No. Civ. A. 98-832, 1998 WL 966030, at *1 (E.D.Pa. Nov.20, 1998) (“[A] material breach by the insured of its contractual duty to cooperate will relieve an insurer from liability under the policy where it prejudices the insurer.”) Whether an insured’s actions constitute a material breach of the duty to cooperate is a question of fact. Forest City, 652 A.2d at 951.
Here, the Court held that the insured’s failure to provide a detailed inventory or authorizations for the release of tax records warranted the entry of summary judgment in favor of the insurer. The court further explained that that tax records were relevant because “(r)eview of an insured’s tax records…enables the insurer to evaluate whether the fire was intentionally set to extract value from a faltering business.”
In granting summary judgment dismissing the complaint, the Court observed:
The Habeckers . . . have not discharged their insurance duties in good faith. Distilling the instant action to its essence, the Habeckers seek to compel Peerless to provide an insurance payout without the insureds first identifying the damaged property for which they sought coverage, without providing complete access to the business’ records, without keeping Peerless apprised of salvage efforts, and after remaining non-communicative for approximately 20 months. No reasonable jury could conclude that the Habeckers assisted Peerless in good faith with a timely investigation of their claim. They simply cannot expect an insurance payment after failing to comply with Peerless’ itinerant reasonable requests for material information. The motion for summary judgment will be granted.
While this case was in Pennsylvania, it is a good reminder to policyholders in all states to read and review their policies and be aware of the duties you have once a loss occurs. If you fail to cooperate in good faith with the insurer’s requests in the investigation of a covered loss, your claim could be denied. If you have any questions regarding the duties in your particular policy, it is prudent that you contact an experienced insurance professional for an opinion.
1 Habecker v. Peerless Ins. Co., 1:07-CV-0196, 2008 WL 4922529 (M.D. Pa. Nov. 14, 2008).
2 Id. at p. 11.