Opinion
CAUSE NO. NA 00-74-C
September 10, 2002
ENTRY ON PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT
A fire on May 18, 1998, destroyed the property and business of plaintiff Thompson Hardwoods, Inc. On March 15, 2002, this court granted defendant Transportation Insurance Company's motion for partial summary judgment on plaintiff's claim for bad faith denial of insurance coverage of the losses from the fire. See Thompson Hardwoods, Inc. v. Transportation Insurance Co., 2002 WL 440222 (S.D.Ind. March 15, 2002). The court's reasoning indicated that plaintiff might be entitled to summary judgment on the underlying claim for breach of the insurance contract providing coverage for the fire at plaintiff's facility. Accordingly, at the court's invitation, plaintiff filed a motion for partial summary judgment on the issue of liability for breach of contract. As explained below, plaintiff's motion for partial summary judgment on liability is granted.
The court will not repeat all the background and analysis from the earlier entry. For purposes of plaintiff's motion for summary judgment as to liability, the court must view all evidence in the light reasonably most favorable to the defendant, giving defendant the benefit of reasonable inferences from that evidence. E.g., Employers Ins. of Wausau v. James McHugh Const. Co., 144 F.3d 1097, 1100 (7th Cir. 1998). Indiana law governs this case, and the interpretation of an insurance contract under Indiana law often presents issues of law well-suited for summary judgment. See, e.g., Myles v. General Agents Ins. Co. of America, Inc., 197 F.3d 866, 868 (7th Cir. 1999), citing Piers v. American United Life Ins. Co., 714 N.E.2d 1289, 1290 (Ind.App. 1999); accord, Johnson v. AAA Chicago Motor Club Ins. Co., 699 N.E.2d 1182, 1184 (Ind.App. 1998), citing Western Reserve Mutual Casualty Co. v. Holland, 666 N.E.2d 966, 968 (Ind.App. 1996).
Defendant Transportation Insurance Company contends that Reed Thompson intentionally started the fire that destroyed plaintiff's property and business. Defendant has come forward with circumstantial evidence that reasonably permits that conclusion, though it certainly does not settle the issue. Mr. Thompson denies the arson, but for purposes of plaintiff's motion for summary judgment, the court assumes that defendant will be able to show by a preponderance of the evidence that Reed Thompson intentionally started the fire.
Mr. Thompson, however, is not the insured. The issue is whether the corporate plaintiff, Thompson Hardwoods, Inc., could be held responsible for such arson by Mr. Thompson, who was at all relevant times an employee, president, director, and shareholder of Thompson Hardwoods. Both sides argue that the plain language of the policy favors their opposing positions. Transportation Insurance also contends that even if the policy itself does not exclude coverage, Indiana common law should do so.
I. The Policy Language
The Transportation Insurance policy for Thompson Hardwoods contained the following exclusion provision:
2. We will not pay for loss or damage caused by or resulting from any of the following:
* * *
h. Dishonest or criminal acts by you, any of your partners, employees (including leased employees), directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose:
1. Acting alone or in collusion with others; or
2. Whether or not occurring during the hours of employment.
This exclusion does not apply to acts of destruction by your employees (including leased employees); but theft by employees (including leased employees) is not covered.
Transportation Insurance argues that coverage for (presumed) arson by Mr. Thompson is excluded under Exclusion 2-h for criminal acts "by you, any of your partners, employees . . ., directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose." Thompson Hardwoods responds that, even if Mr. Thompson set the fire, the plain language of the policy covers this loss because Exclusion 2-h also provides: "This exclusion does not apply to acts of destruction by your employees. . . ."
It is undisputed that Mr. Thompson was both a director and an employee of Thompson Hardwoods, Inc. Reed Thompson was an employee of Thompson Hardwoods, goes plaintiff's argument, hence any act of destruction by him is not excluded from coverage. Because the language of the exception is so clear, the argument continues, and because even if it were deemed ambiguous, ambiguities are construed in favor of the insured, Transportation Insurance is obligated to provide coverage. See, e.g., Federal Ins. Co. v. Stroh Brewing Co., 127 F.3d 563, 569 (7th Cir. 1997) (applying Indiana law, ambiguous policy exclusions are construed in favor of insured); Wood v. Allstate Ins. Co., 21 F.3d 741, 744 (7th Cir. 1994) (Indiana has long accepted canon of construction under which ambiguous insurance policies are interpreted in favor of insured); Meridian Mutual Ins. Co. v. Auto-Owners Ins. Co., 698 N.E.2d 770, 773 (Ind. 1998) (principle applies with special force to provisions limiting or excluding coverage); American States Ins. Co. v. Kiger, 662 N.E.2d 945, 947 (Ind. 1996) (under Indiana law, ambiguities in policy provisions, especially those excluding coverage, are construed strictly against the insurer).
In response, Transportation Insurance argues that the exception should be construed so as not to apply to acts of destruction by a person who is both an employee and a director. A federal case from North Dakota offers the most direct support for this view. The corporate insurance policy in Kabob House, Inc. v. Houston General Ins. Co., 17 F. Supp.2d 1090 (D.N.D. 1997), contained an essentially identical exclusion for criminal acts of employees and directors, with an exception for "acts of destruction by your employees." The arsonist in the case was one of three officers, directors, and shareholders, and she was also an employee of the corporation. (The case was complicated by issues as to whether the arsonist's action was in fact criminal because of mental illness.)
In response to an argument like the one Thompson Hardwoods makes here, based on the exception for employees' acts of destruction, the court held as a matter of law that coverage was not available for acts of destruction by employees who were also officers or directors:
It is true that Zhaleh [the arsonist] was an employee of Kabob House, Inc., but she was also an officer, director, and shareholder. When the exception is read in conjunction with the exclusion which immediately precedes it, it is clear that the exception does not apply to an employee who is also a director. The exclusion applies to "partners, employees, directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose." The exception applies only to "employees." If the exception was meant to apply to any act of destruction committed by any of the individuals listed in the exclusion, it would have so stated. Thus, Zhaleh's actions as a director of the corporation will bar recovery if they were criminal or dishonest.17 F. Supp.2d at 1092.
This court respectfully disagrees with the views of the North Dakota court on this question. The Kabob House decision effectively rewrites the policy exception as if it applied to acts of destruction by "your employees who are not also directors, partners or trustees. . . ." But the insurance company drafted the policy, and if it wanted to narrow the exception by adding such language, it could have done so. The approach in Kabob House effectively reverses the principle that ambiguous exclusions in insurance contracts should be construed in favor of the insured and against the insurance company that drafted them.
The simplest and clearest reading of the exception is that it applies to acts of destruction by "employees" — any employees, without qualification. Even if the exception were deemed ambiguous in its application to acts of destruction by employees who are also directors, under Indiana law the ambiguity would be resolved in favor of the insured so as not to exclude coverage. See, e.g., Federal Ins. Co. v. Stroh Brewing Co., 127 F.3d at 569; Wood v. Allstate Ins. Co., 21 F.3d at 744; Meridian Mutual Ins. Co. v. Auto-Owners Ins. Co., 698 N.E.2d at 773; American States Ins. Co. v. Kiger, 662 N.E.2d at 947.
Transportation Insurance also relies on a case in which the parties' positions regarding an insurance policy's treatment of officer-employees were essentially reversed. In Golden Door Jewelry Creations, Inc. v. Lloyds Underwriters Non-Marine Ass'n, 117 F.3d 1328 (11th Cir. 1997), the Eleventh Circuit distinguished between employees in general and employees who were also corporate officers. The insurance policy in the case had been issued to a jeweler. One Credini and his wife each owned 50 percent of the shares. Credini stole $9 million worth of jewelry from the company and from companies that had consigned gold to the company. Credini was later convicted on criminal charges.
Credini was both an officer and an employee of the corporations. In the civil insurance coverage litigation, the insurer denied coverage in part based on an exclusion for loss resulting from theft or dishonest acts "on the part of the Assured or his or their employees." The insurer argued that the exclusion barred coverage because Credini was an employee as well as an officer. 117 F.3d at 1337. The Eleventh Circuit disagreed, finding that the policy distinguished in other provisions between corporate officers and employees. For example, the two groups were treated separately in a provision excluding coverage for jewelry worn by "the Assured, officer of the corporation, member of the firm, director, agent, employee, servant, or messenger of the Assured." Id. at 1337-38.
Transportation Insurance's reliance on the Golden Door case is not persuasive here. The Eleventh Circuit also relied on the principle that ambiguities should be interpreted in favor of the insured, and ultimately affirmed summary judgment in favor of coverage. Id. In this case, that principle works in favor of treating Mr. Thompson as an employee for purposes of the "employee destruction" exception to the criminal act exclusion.
At the earlier stage of this case in deciding motions about the claim for bad faith denial of coverage, the court did not need to predict how the Supreme Court of Indiana would express and apply Indiana law to the underlying issue of coverage. Plaintiff's present motion now requires the court to make such a prediction. In view of Indiana's strong principle of applying the plain language of insurance policies and of construing ambiguous policy provisions in favor of the insured, the court concludes that Indiana courts would agree with Thompson Hardwoods on the scope of the exception as applied to acts of destruction by an employee who is also a corporate director. Thus, even assuming that Transportation Insurance can prove that Reed Thompson was responsible for the arson, the policy will still provide coverage for this criminal act of destruction by an employee of the insured corporation.
II. Common Law Principles
Transportation Insurance also argues that, even if the policy does not exclude coverage for the loss, the common law of Indiana should bar such coverage. The common law of Indiana imposes some limits on insurance coverage for such moral hazards as allowing an insured to collect for a loss the insured has intentionally caused. See Wood v. Allstate Ins. Co., 21 F.3d 741, 742 (7th Cir. 1994) (Indiana law would imply a criminal acts exclusion for insured's own arson even without an express exclusion provision in the policy), citing American Economy Ins. Co. v. Liggett, 426 N.E.2d 136, 140 (Ind.App. 1981) (holding that "innocent spouse" was entitled to coverage of arson loss caused by her husband, who was killed in the fire). Under the common law, the underlying issue is whether an act of arson by Mr. Thompson would be deemed an act of "the insured," the corporation itself, so as to bar coverage.
The Supreme Court of Indiana has not addressed this issue directly. Transportation Insurance relies on the Indiana Court of Appeals case most closely on point, Hoosier Insurance Co. v. North South Trucking Supplies, Inc., 684 N.E.2d 1164 (Ind.App. 1997). The case involved a small corporation. One person was president and owned all the shares, but was not familiar with the actual business. The day-to-day operations were run by the corporate secretary, who owned no shares. The secretary-manager set a fire that destroyed the business. In the coverage lawsuit, a jury found in favor of the corporation.
The appellate court affirmed. The court reviewed cases from around the country. The court stated that the majority rule was that "an arsonist's status as an officer, stockholder, employee or agent of an insured corporation does not necessarily preclude recovery by a corporate insured on an insurance policy." 684 N.E.2d at 1169. The appellate court cited the general principle that the law should not allow a wrongdoer to profit from his own crime, but it affirmed the verdict in favor of coverage, treating the degree of the arsonist's control over the corporation as the decisive issue, but an issue of fact for the jury to resolve.
The decision in Hoosier Insurance v. North South Trucking shows how difficult the problem of corporate responsibility for arson can be in the absence of express provisions in the insurance policy. The court's opinion discussed a number of cases focusing on the extent to which the arsonist controlled the business of the insured corporation. See 684 N.E.2d at 1169-71. A useful discussion of the uncertainty in this area of the law is also found in Judge Boggs' opinion for the Sixth Circuit in K T Enterprises, Inc. v. Zurich Insurance Co., 97 F.3d 171, 177-80 (6th Cir. 1996), and additional discussion of the difficulty is found in this court's earlier decision on plaintiff's claim for bad faith denial of coverage. See Thompson Hardwoods, Inc. v. Transportation Ins. Co., 2002 WL 440222, at *7-11 (S.D.Ind. March 15, 2002) (finding sufficient uncertainty so as to give defendant a reasonable basis for denying coverage).
The decisive question at this stage is whether a common law rule is even necessary when the insurance policy in question specifically addresses coverage with respect to intentional, criminal wrongdoing by employees and others closely associated with the insured. At bottom, the extent of the insurer's obligation is a matter of contract. Where the contract resolves the question, this court predicts that the Supreme Court of Indiana would choose not to resort to the complex and indeterminate body of law that has developed in these corporate arson cases in the absence of specific policy provisions. The state court would instead simply enforce the policy provision, which in this case leads to the conclusion that Thompson Hardwoods is entitled to coverage for the losses caused by the fire even if the fire was deliberately set by Mr. Thompson. See, e.g., Carroll v. Statesman Ins. Co., 509 N.E.2d 825, 827 (Ind. 1987), adopting in relevant part 493 N.E.2d 1289, 1293 (Ind.App. 1986) ("unless an insurance policy specifically excludes coverage once any party to the policy deliberately causes the loss, an innocent co-insured is entitled to recover"), citing American Economy Ins. Co. v. Liggett, 426 N.E.2d 136; Property Owners Ins. Co. v. Hack, 559 N.E.2d 396, 399 n. 2 (Ind.App. 1990) (innocent spouse rule applied "unless the policy specifically excluded coverage for all insureds in the event any insured deliberately caused a loss").
Public policy arguments and the equitable principle that a wrongdoer should not profit from his crime offer little help here. If Transportation Insurance can in fact prove that Reed Thompson was responsible for the arson, the insurer should have subrogation rights against him personally that would ensure he could not profit personally from the arson. Under Transportation Insurance's theory, however, the question is whether the owners of the remaining 77 percent of Thompson Hardwoods shares should also be penalized for the arson. No equitable principles or public policy arguments about profiting from wrongdoing support penalizing innocent shareholders. This analysis is consistent with the Indiana courts' protection of so-called "innocent spouses" in analogous cases. See, e.g., Fuston v. National Mut. Ins. Co., 440 N.E.2d 751, 752 (Ind.App. 1982); American Economy Ins. Co. v. Liggett, 426 N.E.2d at 140.
III. Other Directors?
In a final effort to avoid summary judgment on liability, Transportation Insurance has suggested the possibility that directors other than Reed Thompson might have given Mr. Thompson their approval for the arson. If the corporation effectively authorized the arson, of course, then the corporation would not be entitled to coverage of the loss. Also, if a director who was not also an employee of the corporation committed a criminal act of destruction, coverage would be denied under Exclusion 2-h.
An insurer raising an arson defense must establish the truth of its claim of willful burning by the insured by a preponderance of the evidence. Dean v. Ins. Co. of North America, 453 N.E.2d 1187, 1194 (Ind.App. 1983). Transportation Insurance has come forward with no evidence, however, that would allow a reasonable jury to find any such corporate approval of arson or involvement of any director other than Reed Thompson. Transportation Insurance has offered only speculation and suspicion to support this theory, and that speculation is not sufficient to avoid summary judgment. Circumstantial evidence can be sufficient to support a finding that the insured committed arson. See Cincinnati Ins. Co. v. Compton, 569 N.E.2d 728, 729 (Ind.App. 1991) (affirming verdict for individual insured and rejecting arson defense); Dean v. Ins. Co. of North America, 453 N.E.2d 1187, 1194 (Ind.App. 1983) (jury may find arson based on circumstantial evidence "if the inferences are not so remote and all circumstances, including the inferences, are of sufficient force to bring minds of ordinary intelligence to a persuasion of incendiarism by a fair preponderance of the evidence"); Hoosier Ins. Co. v. Mangino, 419 N.E.2d 978, 986 (Ind.App. 1981). Suspicion alone is not enough, however. Cincinnati Ins. Co. v. Compton, 569 N.E.2d at 729.
In this case, Transportation Insurance has put together circumstantial evidence that could support an inference that Reed Thompson set the fire or directed someone else to set it. But Transportation Insurance has not come forward with evidence that could, without guesswork and speculation, support an inference that any other directors of the corporation authorized or directed Reed Thompson to take such action. Cf. Dean, 453 N.E.2d at 1196 (collecting cases with types of additional circumstantial evidence that supported inference of arson). Transportation Insurance seems to be arguing that such an inference is warranted from the incendiary origin of the fire and the poor financial condition of the corporation at the time of the fire. If that evidence were enough alone to support an inference that a corporation's board of directors had authorized arson and a fraudulent insurance claim, that ruling would be a significant extension of Indiana law on the subject, and it would invite juries to speculate about responsibility for arson.
IV. Conclusion
Accordingly, the court grants Thompson Hardwoods' motion for partial summary judgment on liability for breach of the insurance contract. The court trial scheduled for October 29-30, 2002 will address the issue of damages.
So ordered.