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Think Before You Sue: Did Your Client Satisfy Duties After Loss?

By Robyn Hagan Cain | Last updated on

How much documentation must Indiana policyholders provide to their insurers to collect on a claim? According to the Seventh Circuit Court of Appeals, it’s everything the insurer asks for in the “Your Duties After Loss” section of the policy, as long as the company doesn’t badger policyholders with irrelevant demands.

On January 3, 2009 -- while Harry and Linda Foster, their family members, and the family's eight dogs were out -- a fire severely damaged the Fosters' Indiana home. Linda submitted a claim to State Farm under the family's homeowners' policy the next day. By mid-March, State Farm's fire investigator had concluded that the fire was intentionally set, and the Fosters' $2.6 million claim was referred to the insurance company's Special Investigative Unit. Attorneys for State Farm and the Fosters spent the rest of the year exchanging document requests and taking statements.

On December 11, 2009, the Fosters expressed concerns about "growing evidence of State Farm's bad faith in assessing the Foster's claim" and the company's "copious and often unreasonable requests." The Fosters sued State Farm for breach of contract and bad faith on December 30, 2009, just shy of the one-year anniversary of the fire. The district court granted State Farm's motion for summary judgment. This week, the Seventh Circuit Court of Appeals affirmed the dismissal.

The Seventh Circuit reviewed two issues on appeal:

  • Whether the Fosters breached their insurance contract with State Farm by failing to comply with a section titled "Your Duties After Loss."
  • Whether State Farm's delay in deciding the Fosters' claim was in bad faith and therefore tortious.

Morris v. Economy Fire & Cas. Co., the controlling Indiana Supreme Court case regarding the policyholders' duties, states that a "Your Duties After Loss" provision is "an entirely separate condition that explicitly requires the policyholder to perform specific duties." The insured must produce documents and sit for examinations under oath (EUOs), and cannot impose prerequisites on the performance of those duties. Compliance is not optional or subject to a trial court determination of reasonableness.

As a matter of law, the Fosters' failure to produce requested documents or even explain why they could not, and their related failure to complete Linda's EUO, materially breached the contract. The Fosters also breached the contract by suing State Farm before complying with all of the provisions of the agreement. While the Fosters claim that their contract set a one-year period to sue to collect under the policy, Indiana has a two-year statute of limitations for such suits.

With regard to the bad faith claim, the Seventh Circuit found that nothing in the record demonstrated an element of "dishonest purpose, moral obliquity, furtive design, or ill will" to support bad faith.

Instead, the record reveals nothing more than State Farm's attempt to investigate a substantial claim made after an intentionally set fire.

Before you sue an insurance company for breach of contract or bad faith, make sure your client upheld her end of the policy agreement.

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