Insureds: Incomplete documentation can hurt your coverage
As this fire insurance lawsuit proves, when it comes to comprehensive coverage, it’s all about the paperwork.
The Houston Fire Department had concluded that an electrical fire damaged Resie’s Chicken & Waffles just weeks after the restaurant opened.
Resie’s submitted a claim for damages to its commercial property insurance carrier, Acceptance Indemnity Company (AIC). AIC hired a third-party arson investigator to conduct an independent analysis of the incident.
Approximately nine months after the fire, AIC’s attorney sent a letter to Resie’s acknowledging the receipt of certain documents as well as financial and insurance claim records release authorizations from Resie’s. These documents and authorizations apparently were sent in response to requests from AIC. The parties disputed, however, whether the documents AIC received were in fact the financial records it had requested.
Two months later, AIC denied Resie’s claim, concluding that:
- The fire was the result of arson, not an accidental loss;
- Resie’s failed to maintain a working smoke alarm; and
- Resie’s failed to provide the financial information requested on numerous occasions.
Resie’s sued AIC for breach of its insurance contract, among other things.
AIC asserted three affirmative defenses: arson attributable to Resie’s, a non-functioning smoke alarm on the premises, and Resie’s failure to cooperate with AIC’s requests for financial records.
The AIC insurance policy imposed a number of conditions in the event of loss or damage, including that Resie’s “must … [a]s often as may be reasonably required, permit [AIC] to inspect the property proving the loss or damage and examine [Resie’s’] books and records and must [c]ooperate with [AIC] in the investigation or settlement of the claim.”
Conflicting testimony
At trial, Charese Foreman, the owner of Resie’s, gave extensive and at times conflicting testimony regarding the financial records.
She stated that she “gave [AIC] everything that [it] asked for; receipts, invoices. [It] asked me for bank statements. [It] asked for me for tax returns. We gave [it] everything.”
She also testified that she provided her attorney with Resie’s’ accounting documents, which she claimed to have retrieved from a computer at the restaurant that was undamaged by the fire.
AIC introduced Ms. Foreman’s testimony from her deposition in which she claimed to have never used the restaurant’s computer to access any documents after the fire. Ms. Foreman also stated in her deposition that she didn’t have access to the accounting documents because the computer remained at Resie’s, from which she had been locked out by her landlord.
Headed for an appeal
The jury rejected AIC’s arson and smoke detector defenses but found that Resie’s “failed to provide financial information relating to the business as requested” and that “such failure to provide documents to [AIC] was prejudicial to [AIC].”
AIC moved for entry of judgment and Resie’s moved for judgment as a matter of law on the grounds of insufficient evidence supporting the jury’s response to the financial records interrogatories, or, in the alternative, for a new trial only with respect to the financial records issue. The U.S. District Court for the Southern District of Texas entered judgment as a matter of law for Resie’s, and AIC appealed.
The Fifth Circuit’s decision
The circuit court ruled that the district court had erred in granting judgment as a matter of law for Resie’s.
In its decision, the Fifth Circuit explained that the district court had concluded that “the record show[ed], undisputedly, that the means for obtaining [Resie’s’ business] records [were] in [AIC’s] hands,” regardless of whether Resie’s actually had provided the records to AIC. The Fifth Circuit noted, however, that the only reference in the record to authorizations to obtain records appeared in the letter from AIC’s counsel to Resie’s counsel, which acknowledged receipt of authorizations for “(1) Insurance/Claim records; (2) General Release of Information; and (3) Financial Records.”
The circuit court then pointed out that AIC maintained that the financial records that it sought were Resie’s profit-and-loss statements and its balance sheets, and that these were not available from third parties and could not reliably be recreated from information obtained from third parties, such as bank records.
The Fifth Circuit found that the jury was entitled to conclude that Resie’s had not produced information reflecting its profits and losses or its balance sheets. According to the circuit court, there was “no evidence that it was available from other sources.”
The Fifth Circuit added that there was other evidence that the jury could have credited in reaching its conclusions, including the fact that Resie’s failed to present at trial the financial records that it said had been provided in response to requests by AIC. According to the circuit court, the facts and inferences did not point “so strongly and overwhelmingly in favor” of Resie’s to warrant judgment as a matter of law.
The circuit court also ruled that the jury’s finding that AIC had been prejudiced also was supported by the evidence, as a reasonable juror could have inferred that the failure to provide financial information prevented AIC from presenting a clear motive for the alleged arson.
Accordingly, the Fifth Circuit found sufficient evidence to reinstate the jury’s verdict that Resie’s had breached its policy by failing to provide requested financial information, and that this breach had prejudiced AIC. It ordered the district court to reinstate the jury’s verdict.
The case is Foreman v. Acceptance Indemnity Co., No. 16-20680 (5th Cir. April 6, 2018).
Steven A. Meyerowitz, Esq., (smeyerowitz@meyerowitzcommunications.com) is director of FC&S Legal, editor-in-chief of Insurance Coverage Law Report, and founder and president of Meyerowitz Communications Inc.
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