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Habecker v. Peerless Insurance Co.


November 14, 2008


The opinion of the court was delivered by: Judge Conner


The matter sub judice is a diversity action in which plaintiffs allege that defendant insurance carriers wrongfully denied benefits under a commercial property insurance policy covering plaintiffs' business premises. Plaintiffs submitted a claim against the policy after a fire that occurred in early 2005. Following an initial investigation, defendants refused coverage, asserting that plaintiffs had breached material policy terms by failing to cooperate with the investigation. Plaintiffs subsequently brought this action to enforce their rights to coverage, and defendants filed a motion for summary judgment (Doc. 13) on lack of cooperation grounds. For the reasons that follow, the motion will be granted.

I. Statement of Facts*fn1

In approximately 2000, plaintiffs Gerald and Dolores Habecker (collectively "the Habeckers"), opened a barbecue business under the corporate name Doe & Jerry's Barbecue Company ("the Barbecue Company"). (Doc. 14-3 at 62; Doc. 18, Ex. E at 12; Doc. 18, Ex. G at 11.)*fn2 They leased property in Wormleysburg, Pennsylvania, where the Barbecue Company operated a restaurant and catering facility. The business obtained a commercial property insurance policy from defendant Peerless Insurance Company ("Peerless"). (See Doc. 14-2 at 6-100; Doc. 14-3 at 1-59.) The policy contains the following provisions pertinent to the instant matter:

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.

(Doc. 14-2 § E.3.a, at 55.)*fn3

The Habeckers operated the Barbecue Company until January 17, 2005, when an overnight fire damaged the business premises. (Doc. 14 ¶ 1; Doc. 18 ¶ 1.) The fire did relatively minor harm to the restaurant building but caused extensive smoke damage to the Barbecue Company's fixtures, equipment, and inventory. (Doc. 14 ¶ 2; Doc. 18 ¶ 2; Doc. 14-6 at 17-19.) The Habeckers filed a claim against the Peerless policy the next day, (Doc. 18, Ex. B.), and they cooperated with the initial investigation of their claim. Peerless separately deposed them on March 25, 2005, (Doc. 18, Exs. F, G), and Gerald Habecker ("Habecker") voluntarily submitted to a polygraph test administered by law enforcement officials, (Doc. 14-7 at 11-12). He furnished the business's security records and arranged for the Barbecue Company's accountant to transmit its financial information to Peerless. (Doc. 18-2 ¶ 5.) He also submitted to an interview with James Caruso ("Caruso"), a special investigator for Peerless, a few weeks after the fire. (Doc. 18, Ex. C.)

Peerless retained Bradley Schriver ("Schriver"), an independent causeand-origin investigator, to identify the source of the fire. (Doc. 14 ¶ 7; Doc. 18 ¶ 7.) Schriver visited the restaurant the day after the fire and concluded that it had been intentionally started by dousing several cardboard boxes in a storage room with an accelerant and setting them alight. (Doc. 14-3 at 61, 68.) Investigations conducted by local police and fire officials reached a similar conclusion. (Id. at 66.)

The restaurant premises featured a security alarm system that continuously monitored all exterior doors and windows. Each employee authorized to open or close the restaurant received a unique security code to access the system. (Doc. 14-7 at 8.) Habecker maintained a list of all employees' codes in his office. (Id.; Doc. 18, Ex. G at 69.) Whenever an employee armed or disarmed the system, it recorded the date, time, and identity of the employee. (Doc. 14-7 at 9.) Security records from the evening of the fire document no forced entry attempt and indicate that the security code assigned to employee Leann Witman was used to enter the building at 11:40 p.m. (Id. at 21-22; Doc. 18, Ex. D.)

During the initial investigation, Peerless also retained Tom Baker ("Baker"), an independent claims adjuster, to assess the Habeckers' damages. (Doc. 14 ¶ 6; Doc. 18 ¶ 6.) On January 27, 2005, Habecker and Baker conducted a walk-through inspection of the premises during which they documented the extent of the fire damage. (Doc. 14 ¶¶ 8-9; Doc. 18 ¶¶ 8-9.) Baker instructed Habecker to prepare an inventory of equipment, supplies, foodstuffs, and other business property for which he and his wife sought insurance coverage. (Doc. 14 ¶ 10; Doc. 18 ¶ 10.) As part of the inventory, Baker specifically requested the manufacturer, age, and model number for all durable goods. (Doc. 14 ¶ 10; Doc. 18 ¶ 10.) Baker also cautioned Habecker against discarding any nonperishable articles pending Peerless's coverage decision. (Doc. 14-6 at 32-33, 139-40.)

Habecker prepared the business inventory during the weeks immediately following his conversation with Baker and electronically saved it on his home computer. (Id. at 21-22, 42, 141-45.) He mailed it to Baker upon completion, (Id. at 46), but Baker never received it, (Doc. 14-5 at 6). On February 24, 2005, Baker sent Habecker a letter stating that he had not received the inventory. (Id. at 6, 14; Doc. 14-6 at 203.) He received no reply from Habecker. (Doc. 14-5 at 11.) Had Baker received the inventory, he would have handled it according to his usual practice, which included documenting receipt of it, contacting Peerless for further instruction, and forwarding a copy of it to Peerless. (Id. at 10-11.) Peerless did not obtain a copy of it prior to the instant lawsuit. (Doc. 14-2 ¶ 5, at 2.) By early May 2005, the Habeckers had not received any insurance proceeds, and they retained an attorney, who continues to represent them in the instant dispute. Their attorney sent Peerless a notice of representation on May 2, 2005. (Doc. 14-6 at 62-63, 146.)

During the same period, Peerless contacted the Internal Revenue Service ("IRS") for copies of the Barbecue Company's tax records. An IRS official confirmed that the Barbecue Company's file contained potentially pertinent information but would not discuss the content without authorization from the Habeckers. (Id. at 147.) On June 6, 2005, Peerless's counsel sent a letter to the Habeckers' attorney that stated:

It is... my understanding that more than one request has been made of the Habeckers for an inventory of property damaged or destroyed by the fire. The Habeckers need to complete this task.

While no final decision has been made in regard to the disposition of this claim, the claim cannot be processed in any event until the insureds provide a complete and accurate inventory. (Id. at 147-48.) The letter also requested that the Habeckers authorize Peerless to obtain the Barbecue Company's tax information from the IRS. (Id.) Neither the Habeckers nor their attorney responded to the letter. (Doc. 14 ¶¶ 25-26; Doc. 18 ¶¶ 25-26.)

A second letter from Peerless's counsel to the Habeckers' attorney followed on July 11, 2005:

Since my June 6 correspondence to you, I have heard nothing regarding the requested release of information from the Internal Revenue Service, nor have I heard anything in regard to the inventory of damaged property. Neither the investigation into this incident nor the processing of the Habeckers' claim can proceed until these two things are taken care of. Would you please respond to my June 6, 2005 letter at your first opportunity. (Doc. 14-6 at 155.) The letter prompted no response from either the Habeckers or their attorney. (Doc. 14 ¶¶ 27-28; Doc. 18 ¶¶ 27-28.)

On October 6, 2005, Peerless's counsel transmitted a final letter to the Habeckers' attorney that read, in pertinent part, as follows:

It is now the beginning of October and I have not received the Internal Revenue records release authorizations, nor have I received an inventory from the Habeckers. In addition, I have not received a telephone call or any other explanation giving any rationale or reason why my written requests could not be honored. The lack of responsiveness has delayed the investigation and disposition of this claim.

Please be advised that at this point, Doe & Jerry's Barbecue is in violation of [the policy provisions that impose a duty of cooperation,] and the claim for insurance proceeds... is hereby declined for failure to cooperate.

... [T]he Habeckers have still not completed the basic requirements necessary to perfect a claim, e.g., the production of an inventory. One possible explanation for this could be that they have decided to abandon their claim, an eventuality that is consistent with the recent complete lack of responsiveness from the Habeckers.

You have been placed on notice of the specific grounds for the disposition of this claim by Peerless....

If you have... additional information that would be important to the coverage determination that has been made, please let me know promptly of such items.

(Doc. 14-6 at 156-59.) This letter, like the previous once, went unanswered. (Doc. 14 ¶ 30; Doc. 18 ¶ 30.)*fn4

In approximately May 2005, an attorney for the Habeckers' landlord informed them that the landlord planned to remove damaged articles from the leased premises. (Doc. 14-6 at 61.) Neither the landlord nor the Habeckers advised Peerless of pending repossession, which the landlord completed in June 2005. (Id. at 60.) Peerless alleges that it did not learn of the removal until Gerald Habecker's deposition on September 27, 2007. (Doc. 14-2 ¶ 7, at 3; Doc. 14-6 at 61-62.) A Peerless official testified that insureds are required to retain damaged property to enable Peerless to assess the value of the loss and to exercise salvage rights to the property.*fn5 (Doc. 14-2 ¶¶ 2, 9-10, at 1, 3.) Neither Peerless nor the Habeckers sought to reclaim the property after removal by the landlord.

The Habeckers commenced this action in state court in January 2007, approximately twenty months after they last communicated with Peerless. Defendants removed the action to federal court on February 1, 2007. Plaintiffs aver that defendants breached their coverage obligations under the policy. Defendants respond that they are excused from coverage by virtue of plaintiffs' lack of cooperation with the loss investigation. The parties have fully briefed these issues, which are now ripe for disposition.

II. Standard of Review

Through summary adjudication the court may dispose of those claims that do not present a "genuine issue as to any material fact" and for which a jury trial would be an empty and unnecessary formality. See FED. R. CIV. P. 56(c). It places the burden on the non-moving party to come forth with "affirmative evidence, beyond the allegations of the pleadings," in support of its right to relief. Pappas v. City of Lebanon, 331 F. Supp. 2d 311, 315 (M.D. Pa. 2004); FED. R. CIV. P. 56(e); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). This evidence must be adequate, as a matter of law, to sustain a judgment in favor of the non-moving party on the claims. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-57 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-89 (1986); see also FED. R. CIV. P. 56(c), (e). Only if this threshold is met may the cause of action proceed. Pappas, 331 F. Supp. 2d at 315.

III. Discussion

The sole issue presently before the court is whether the Habeckers' alleged failure to provide an inventory and tax authorization excuses Peerless's coverage obligations. The identity of the arsonist responsible for the fire plays no role in this inquiry. 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., 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.*fn6 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., 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., 522 A.2d 531, 532 (Pa. 1987) (quoting Conroy v. Commercial Cas. Ins. Co., 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.

This court has previously addressed the duty to cooperate under factual circumstances nearly identical to those of instant case. In McCoy v. Travelers Indemnity Company of America, No. 4:CV-00-2246, 2002 U.S. Dist. LEXIS 27431 (M.D. Pa. Feb. 8, 2002), an incendiary fire destroyed the plaintiffs' food service business. Id. at *8. The plaintiffs initially cooperated with the insurer's investigation, signing financial release authorizations and submitting to examinations under oath. Id. at *5-6, 10. They subsequently ceased cooperation by revoking the releases, denying access to their books, and withholding information about the source of the fire. Id. at *5-6, 9-12. The plaintiffs brought suit to enforce the policy, and the insurer defended on non-cooperation grounds. The court held that, despite the plaintiffs' initial assistance, no reasonable jury could have concluded that the plaintiffs had discharged their duty to cooperate. Id. at *12. The plaintiffs' refusal to cooperate prejudiced the insurer by depriving it of information essential to assess the merits of the plaintiffs' claim in a timely manner, id. at *15-17, and the court entered summary judgment in favor of the insurer, id. at *18.

A similar disposition is appropriate if an insured fails to provide an inventory of damaged articles. The inventory forms the marrow of an insurance claim, notifying the insurer of the items for which the insured seeks coverage and calculating the estimated loss. An insurer cannot adjust the value of loss without this information and may deny coverage if an insured refuses to produce it. See, e.g., 14 LEE R. RUSS & THOMAS F. SEGALLA, COUCH ON INSURANCE § 199:39 (3d ed. 1995 & Supp. June 2008) (observing that the failure to provide insurer with information pertaining to loss constitutes breach of the duty of cooperation); 5A JOHN ALAN APPLEMAN & JEAN APPLEMAN, INSURANCELAW AND PRACTICE, § 3542 (1970 & Cumulative Supp. 2008) (noting that the insured's failure to comply with reasonable requests for production of inventories, books, records, and similar accounting materials may preclude recovery); see also McCoy, 2002 U.S. Dist. LEXIS 27431, at *16; accord Durkin v. State Farm Mut. Ins. Co., 3 F. Supp. 2d 724, 728 (E.D. La. 1997) (granting insurer's motion for summary judgment because the insured did not provide inventory of flood-damaged items), aff'd 141 F.3d 1163 (5th Cir. 1998); Tran v. State Farm Fire & Cas. Co., 961 P.2d 358, 365 (Wash. 1998) (holding that the insurer was prejudiced by the plaintiff's failure to produce financial records and tax returns); DiFranciso v. Chubb Ins. Co., 662 A.2d 1027, 1032 (N.J. Super. Ct. App. Div. 1995) (declaring that the failure to produce books and records of the plaintiffs' business constituted a material breach of the insurance policy); Happy Hank Auction Co. v. Am. Eagle Fire Ins. Co., 145 N.Y.S.2d 206, 211 (App. Div. 1955) (proclaiming that a demand for the plaintiff's current inventory account was material in light of "circumstances tending to excite suspicion").

Turning to the case sub judice, it is beyond peradventure that the inventory requested is critical to an evaluation of the Habeckers' claim and that their failure to provide it prejudiced Peerless's adjustment of the loss. Moreover, the tax record authorizations were reasonable requests likely to produce information relevant and material to the Habeckers' claim.

The Habeckers' inventory contains information central to their coverage request. It includes the manufacturer, date of purchase, and vendor of the business's durable goods as well as other data crucial to a precise valuation of the damaged property. It sets forth a nuanced depiction of business assets. For example, it reflects that the Barbecue Company purchased its dining room and office furnishings as a bulk, prepackaged set; and it specifies precise quantities of culinary miscellanea such as sheet pans, cutlery, china, and food service trays. Plaintiffs have not submitted evidence demonstrating that this information was available to Peerless from an alternate source.*fn7

The Habeckers were informed of the importance of the inventory as early as January 27, 2007, when Baker instructed Gerald Habecker to prepare it. They were repeatedly reminded of it through the four letters collectively sent by Baker and Peerless stating that no inventory had been received.*fn8 Without the inventory, Peerless lacked the rudimentary information necessary to assess its insurance exposure and render payment under the policy.*fn9

The Habeckers' failure to provide Peerless with authorization to review their IRS file is similarly prejudicial. Peerless initially obtained business records from the Habeckers' accountant, and it contacted the IRS during this investigation. A IRS official informed Peerless that the Barbecue Company's tax file contained additional pertinent information but refused to provide greater detail without the Habeckers' consent. (Doc. 14-6 at 147.) By refusing to execute an authorization, the Habeckers deprived Peerless of relevant information about the company's financial loss. Peerless could not evaluate all pertinent facets of the Habeckers' insurance claim without this information, thereby prejudicing it assessment of covered claims.*fn10

The delay resulting from the Habeckers' non-responsiveness is a further source of prejudice to Peerless. "An insurer is entitled to receive information relevant to a loss promptly and while the information is still fresh." McCoy, 2002 U.S. Dist. LEXIS 27431, at *16. Excessive delay can result in the further deterioration of damaged property, and intervening repair and salvage efforts can render accurate valuation of a loss difficult. Receipt of timely information is imperative for the insurer to compensate the insured fairly and in an amount consistent with the actual harm sustained. Here, Peerless promptly commenced an investigation of the Habeckers' claim. On the day after the fire, Peerless dispatched Schriver to determine its origin. Nine days later, Habecker met with Caruso and Baker, who instructed him to prepare an inventory. Further investigation continued through the spring. The Habeckers, however, went incommunicado after retaining counsel in May 2005. The next message Peerless received from them came in the form of a complaint, filed approximately twenty months after their attorney last contacted Peerless. During the interim, the Barbecue Company's landlord cleared the premises of items damaged by the fire. Peerless never received notice of this repossession, depriving it of the possibility of salvaging damaged items. This excessive delay prevented Peerless from conducting a fair investigation into the fire, and it has been prejudiced by its inability to value the loss accurately.

The Habeckers' conduct, viewed in toto, does not evince the good faith cooperation long-recognized as essential to the insurance adjustment process. Forester v. Teutonia Fire Insurance Company, 60 Pa. Super. 151 (1915), illustrates the importance of collaboration between insurer and insured and provides an ready analogy for the instant case. In Forester, the plaintiff's premises were destroyed by fire. The plaintiff transmitted timely notice of the damage to the insurer but failed to provide information regarding the origin of the fire, the extent of his interest in the property, the cash value of damaged items, and other material information required by the policy. Id. at 154-55. Plaintiff then departed the state for an eight-month period, during which he maintained no contact with the insurer. Id. at 156. The Pennsylvania Superior Court concluded that the plaintiff's failure to provide material policy information, coupled with his extended period of non-responsiveness, discharged the insurer's coverage obligations:

By no sort of casuistry can the conclusion be reached in the present case that the company had all the information as to material facts which the furnishing of such a statement as the policy required would have given. Not only was the statement not furnished, but the plaintiff, by his conduct, as effectively put it out of the power of the company to obtain the information from him as if he had positively refused to furnish it on demand. Clearly, there was neither strict nor substantial performance of the reasonable condition; nor was there a bona fide effort to perform.

Id. at 157. The Habeckers, like the Forester plaintiff, 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's records, without keeping Peerless apprised of salvage efforts, and after remaining non-communicative for approximately twenty months. No reasonable jury could conclude that the Habeckers assisted Peerless in good faith with the timely investigation of their claim. They simply cannot expect an insurance payment after failing to comply with Peerless's iterant reasonable requests for material information. The motion for summary judgment will be granted.*fn11

An appropriate order will issue.

CHRISTOPHER C. CONNER United States District Judge


AND NOW, this 14th day of November, 2008, upon consideration of defendants' motion for summary judgment (Doc. 13), and, for the reasons set forth in the accompanying memorandum, it is hereby ORDERED that:

1. The motion for summary judgment (Doc. 13) is GRANTED.

2. The Clerk of Court is instructed to enter JUDGMENT in favor of defendants and against plaintiffs on all claims.

3. The Clerk of Court is instructed to CLOSE this case.

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