The opinion of the court was delivered by: FRANK H. EASTERBROOK
EASTERBROOK, Circuit Judge.*Most of the facts in this diversity action have been stipulated. A bench trial on November 15, 1991, provides the foundation for resolving the remaining disputes. I adopt all of the stipulated facts, repeating them only to the extent necessary for background. This opinion contains the findings of fact and conclusions of law required by Fed. R. Civ. P. 52.
In August 1988 Gilbert and Jerome Purze sought a policy of insurance on some of the buildings they hold in the name of Park Place Investments Partnership. The Purze brothers buy buildings at tax sales. After paying the delinquent taxes buyers must wait two years, until the possibility of redemption expires, to obtain a tax deed. Park Place bought the building at 709 West 43d Street in Chicago ("the building") in this way, obtaining the tax deed shortly before they included this parcel, with 31 others, in their application for insurance. Their agent issued a binder requiring American Alliance Insurance Co. to supply the insurance while it decided whether to accept the risk.
A fire occurred in the Building on August 23, 1988, before American Alliance had completed its underwriting investigation. Arson caused the blaze, which damages the Building's central core but left the outer walls (and much of the interior) suffering only from smoke and water damage. The loss exceeded the policy limit of $ 100,000 on the Building, and the Purzes applied to American Alliance for indemnification of this sum plus $ 6,000 in lost rentals (the policy set a limit of $ 10,000 in lost business income for this property), less the $ 1,000 deductible. American Alliance sent Eugene R. LaBelle to investigate. LaBelle, formerly a public prosecutor, has investigated approximately 400 claims on behalf of American Alliance.
An informant identified the two arsonists, low-lifes who frequented the area. LaBelle naturally was interested in the possibility that someone with an interest in the Building had secured their services, directly or indirectly. Sometimes an old building is worth more dead than alive (perhaps the Building would serve best if razed to make way for new construction, or if displaced by a parking lot), and it does not hurt to collect insurance along the way. LaBelle sought information from the Purzes.
The policy contains three clauses requiring insureds to provide American Alliance with information. Part C under "Common Policy Conditions" provides:
We may examine and audit your books and records as they relate to this policy at any time during the policy period and up to three years afterward.
Part 10(g) under "General Provisions" provides:
Part 10(i) adds for good measure that the insured must "cooperate in the investigation or settlement of the claim". These provisions collectively are the "cooperation clause". Still another provision of the policy states that compliance with its requirements is a condition to payment of any claim.
LaBelle interviewed Gilbert Purze on September 27, 1988, Jerome Purze on November 11, and Edward Stawicki, the manager of Park Place Investments, the same day. These interviews were recorded and later transcribed. Each was brief and general; none was under oath. (The Stawicki interview came to 17 pages, Gilbert Purze's to 38 pages, and Jerome Purze's to 83 pages.) LaBelle inquired about the nature of their business, including the procedures for tax sales. In light of these interviews and other information he had received (on which more below), LaBelle wanted to investigate further. American Alliance retained counsel, who December 1988 sent the Purzes a demand for documents, to be followed by statements under oath in January 1989. The Purzes sent American Alliance copies of the deed to the property and the policy of insurance, but nothing more. (For brevity, I write of communications between "American Alliance" and "the Purzes", although all of these were by and between their lawyers.)
The Purzes had not furnished any other information by February 3, 1989, when American Alliance served them with a comprehensive demand for access to all documents relating to all of their businesses, including telephone and bank records plus tax returns. The Purzes furnished no documents in response to this letter, but in March they authorized three banks to provide American Alliance with information about their financial condition, in order to allay any fears that deteriorating solvency may have driven them to desperate measures. Each letter told the bank to disclose information about "loans, demand deposit accounts and certificates of deposit . . . and [the Purzes'] general creditworthiness", but "without minute disclosure of their assets and earnings." A manager of each bank testified that he understood this letter to allow the release of general information (such as: "The Purzes have a net worth in the low seven figures.") but would not permit American Alliance to inspect any document. American Alliance was not interested in vague assurances and never spoke with the banks. LaBelle wanted to see the files, without filtration, so he could draw his own conclusions.
American Alliance demanded that the Purzes appear for examination under oath on April 3. The Purzes did not show up, nor did they produce Stawicki for the examination American Alliance had set for April 4. Later that month American Alliance warned the Purzes that "continued refusal to cooperate with . . . policy conditions and our investigation will result in" refusal to pay the claim. In mid-May the Purzes volunteered to take an oath in support of the statements they had given to LaBelle the prior fall and to arrange access to trust records if American Alliance would specify which land trusts it was interested in. The letter concluded: "At this point, it might be ...