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06/28/96 STATE FARM GENERAL INSURANCE COMPANY v.

June 28, 1996

STATE FARM GENERAL INSURANCE COMPANY, PLAINTIFF AND COUNTERDEFENDANT-APPELLEE,
v.
BEST IN THE WEST FOODS, INC., NO. 2, D/B/A SUPER BUY GROCERY, AND CHRISTOS STEFOS, DEFENDANTS AND COUNTERPLAINTIFFS-APPELLANTS, AND FRANK J. FAKHOURI, ODETTE F. FAKHOURI, DEMETRIOS KAMETAS, FIRST NATIONAL BANK OF EVERGREEN PARK, JOSEPH WESTMORELAND, LUCILLE DYE, VIRGINIA ASKEW, CARL ASKEW, A MINOR, RENITA MOORE, ALFREDA INGRAM, JESSIE MAE DOTSON, NIESHA DOTSON, A MINOR, LINDA FLEMING, ELIZABETH HALL, JAMES DAVIS, SHIRLEY ASKEW, AND ANDREW ASKEW, DECEASED, DEFENDANTS.



Appeal from the Circuit Court of Cook County. The Honorable Lester Foreman, Judge Presiding.

Released for Publication August 13, 1996.

The Honorable Justice Egan delivered the opinion of the court: Zwick, P.j., and McNAMARA, J., concur.

The opinion of the court was delivered by: Egan

JUSTICE EGAN delivered the opinion of the court:

On July 4, 1988, at around noon, there was a natural gas explosion at a store operated by one of the defendants, Best in the West Foods, Inc., d/b/a Super Buy Grocery (Best Foods). Best Foods was an insured under a policy issued by the plaintiff, State Farm General Insurance Company (State Farm), for the period March 1, 1988, to March 1, 1989.

In January 1989, Best Foods provided State Farm with a proof of loss, in which it requested $564,665 for the "contents" it lost and $297,763 for its loss of "earnings." On October 25, 1989, State Farm denied Best Foods' claim for these amounts under a policy provision that declared the policy void if an insured intentionally concealed or misrepresented a material fact relating to the insurance.

On January 10, 1990, State Farm filed a complaint for a declaratory judgment against the defendants. It alleged that Best Foods had made intentional misrepresentations of material fact in connection with its claim. It alleged that Best Foods had overstated the contents and earnings it lost as a result of the explosion and asked the court to declare that Best Foods was not entitled to coverage because the policy was void. On May 10, 1990, Best Foods filed a counterclaim against State Farm in which it alleged that State Farm had breached the insurance policy by denying its claim because Best Foods had complied with all of the terms and conditions of the policy.

After Best Foods completed its case during the bench trial on the complaint and counterclaim, State Farm filed a motion for a finding in its favor under section 2-1110 of the Code of Civil Procedure (735 ILCS 5/2-1110 (West 1992)). On April 8, 1994, the judge granted this motion and entered judgment for State Farm on its complaint and on Best Foods' counterclaim. Best Foods appeals this order and the judge's denial of its motion to vacate the April 8 order under section 2-1203 of the Code of Civil Procedure (735 ILCS 5/2-1203 (West 1992)).

The parties presented the following evidence. On October 29, 1987, Best Foods purchased the assets and inventory of Buy Rite Foods, a grocery store, and Roo-Pul Liquors, a liquor store, both located at 3948 West Roosevelt Road in Chicago. Best Foods, whose sole shareholder was Christos Stefos, began leasing these premises from defendants Frank and Odette Fakhouri. Best Foods' purchase of Buy Rite and Roo-Pul was financed in part through a loan from defendant First National Bank of Evergreen Park (First National), who was an additional insured under State Farm's policy with Best Foods. Best Foods began operating Super Buy Grocery at 3948 West Roosevelt on November 15, 1987. At the time of the explosion on July 4, 1988, section I of Best Foods' policy provided Best Foods with coverage for business personal property, such as inventory and equipment, and for loss of income. Section II of the policy covered Best Foods for business liability.

On July 5, 1988, when State Farm learned of Best Foods' claim, it hired Walter Churan, an independent adjustor with expertise in claims like Best Foods'. Other experts State Farm retained determined that the explosion at the grocery store was caused by a space heater that fell from the ceiling and ruptured a gas line. On July 12, 1988, Best Foods hired Nemerowski, Kaplan & Radek, one of several public adjusting firms Churan recommended. Art Radek, a member of the firm, assisted Best Foods in adjusting its claim.

On September 23, 1988, State Farm received a partial proof of loss in which Best Foods requested $100,000. State Farm issued Best Foods a check for $100,000, which State Farm's claim superintendent David Armstrong described as an "advance payment" to help the insured with "any financial burdens they may have on the claim until the claim is finally resolved." According to Armstrong, State Farm was not suspicious that Best Foods' claim was overstated at the time it issued the $100,000 check. He explained that, at that time, the only documents State Farm had received in support of the claim were the partial proof of loss and a list Radek had provided to Churan with replacement and installation values of equipment lost in the explosion.

In December 1988, State Farm ended Churan's work on the Best Foods claim because it transferred the claim to its Senior Referral Unit (SRU), which handled labor-intensive investigations. According to Armstrong, the SRU was not a settlement unit.

On December 16, 1988, Dennis Schulkins, the superintendent of the SRU, sent a letter to Stefos requesting documentation of his claim. On January 24, 1989, State Farm received Best Foods' proof of loss, which Stefos had signed. At the time he submitted the proof of loss, Stefos also provided State Farm with financial documents for Best Foods. State Farm sent these documents to John Peters, an accountant whom State Farm hired in December 1988 to evaluate Best Foods' records and to identify the amounts in the proof of loss.

Peters provided State Farm with a report in February 1989, which indicated that Peters had found support for $300,000 of Best Foods' claim. In his report, he also suggested questions State Farm should ask Stefos at his examination under oath.

In March 1989, State Farm conducted an examination under oath of Raymond Sawyer, Best Foods' accountant, who maintained the books for Best Foods between November 1987 and July 1988. In March and May, State Farm conducted an examination of Stefos.

Peters reviewed the testimony in these examinations under oath and provided State Farm with a final report in August 1989. He explained in this report that he had determined from financial statements and his examination of testimony that $303,665 of the contents claim was a claim for lost inventory, and the remaining $261,000 was a claim for lost equipment. He concluded in this report that there was no documentation to support the claimed $303,665 inventory loss, and the documentation and testimony supported an inventory value of only $150,000. He concluded that the claimed $261,000 equipment loss was also overstated and that the value of the lost equipment was no more than $151,026. Finally, Peters reported that Best Foods had no earnings loss claim because, based on Best Foods' financial history, it would have lost $364,059 in the year following the explosion and, therefore, saved money by not continuing in business.

After considering this report, the documentation Best Foods had submitted and the examination under oath testimony, Schulkins recommended that the claim be denied because Stefos had made material misrepresentations regarding lost earnings, the profitability of the store, the amount of inventory in the store and the amount of equipment in the store. On October 29, 1989, State Farm sent Stefos a letter informing him of its decision to deny his claim.

In count I of the declaratory judgment complaint, State Farm alleged that defendant Best Foods had made intentional misrepresentations of material fact in connection with its claim:

"a. BEST IN THE WEST claimed a loss of inventory in the amount of $303,665. The actual value of the inventory at the time of the loss was approximately $150,000.

b. BEST IN THE WEST submitted an actual cash value claim in the amount of $261,000 for equipment. The equipment claimed to be lost has an actual cash value of approximately $151,000.

c. BEST IN THE WEST further claimed to have purchased $110,000 worth of equipment during 1987 and 1988 which was supposed to have been destroyed by the fire and explosion. The insured did not purchase equipment of this value during those years.

d. BEST IN THE WEST submitted a claim for loss of earnings in the amount of $297,753 for the twelve month period following the loss. The actual loss of earnings for a twelve month period of suspension would be approximately [$364,000], a negative loss.

e. BEST IN THE WEST claimed it was a profitable business at the time of the fire. An analysis of the records revealed BEST IN THE WEST's business was not profitable but rather was ...


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