United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
MANISH S. SHAH, District Judge.
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).
A. Exclusion for Neglect
On April 23, 2007, for unknown reasons, a sprinkler head at the warehouse sprayed water, damaging some inventory. PSOF ¶ 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 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.  at 4. Chicago Import denies that it knew the system was off; it says it left such matters to the Fire Department.  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.  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 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.  at 5;  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. Bass is not that 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.
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.  at 13. Chicago Import cross-moves for summary judgment, arguing that American States adduced no evidence to support its fraud defense.  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 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 ...