The Seventh Circuit Court of Appeals ruled that an insurer did not act in bad faith in denying a claim for vandalism in Backwater Incorporated v. Penn-American Ins. Co., No. 05-2805, 2006 WL 1409427 (7th Cir. May 24, 2006).
A nightclub called Finke's, owned by Ruth and William Finke through their company, Backwater, Inc., suffered extensive vandalism damage. They filed a claim with their property insurer, Penn-American. Following an investigation, Penn-American concluded that the vandalism was an inside job and denied coverage for the claim.
The investigation revealed that less than two months before the vandalism damage, the Finkes increased their coverage limits from $800,000 to $1.4 million. Following the increase, Mr. Finke made inquiries to his alarm company regarding monitoring the building's openings and closings. The vandals disabled all forty-eight interior cameras, so nothing was captured on tape. The Finkes were also losing money on the business, so there was reason to believe they wanted out.
The Finkes argued that the increase in their limits followed a discussion with their agent, who told them the building was underinsured. They claimed that the other evidence was circumstantial and could be explained.
The Finkes filed a claim against Penn-American for bad faith and breach of contract. Penn-American obtained summary judgment for the bad faith claim and won at trial for the breach of contract claim. While the Finkes acknowledged that “'conflicting inferences may be drawn' from the facts,” they also argued that, because the claims were “open to innocent interpretation,” the summary judgment was inappropriate.
The court, however, said, regarding their acknowledgement about conflicting inferences, “That's practically the definition of a good-faith dispute. And, such a dispute, in the words of the Supreme Court of Indiana, 'cannot provide the basis for a claim in tort that the insurer breached its duty to deal in good faith with its insured.'” Thus, the court found that the summary judgment was appropriate.