Chapter 7 - § 7.6 • THE REASONABLENESS OF AN INSURER'S RELIANCE ON EXPERTS

• Jurisdiction: Colorado

§ 7.6 • THE REASONABLENESS OF AN INSURER'S RELIANCE ON EXPERTS

Sipes v. Allstate Indemnity Co., 949 F. Supp. 2d 1079 (D. Colo. 2013), arose from a property damage claim submitted by Larry Sipes to Allstate Indemnity Company regarding Mr. Sipes's rental property. Mr. Sipes's claim arose from a fire that occurred on the rental property on March 30, 2010.

Following the submission of Mr. Sipes's claim, Allstate assigned the claim to a senior claims analyst, who was also the manager of Allstate's special investigations unit. During Allstate's investigation, it obtained a fire origin and cause report prepared by the Clifton Fire Department; it retained Phoenix Investigation, a private fire inspection company, to prepare a fire origin and cause report; and it retained Rita Booker, an attorney specializing in insurance defense litigation.

Clifton began its investigation after it had extinguished the fire on March 30, 2010. The investigation consisted of an examination of "the exterior and interior of the rental property, as well as interviews with Mr. Sipes, firefighters, previous tenants of the [r]ental [p]roperty, and neighbors of the [r]ental [p]roperty." Id. at 1081. Clifton's report concluded that the fire originated in two areas: "(1) the north wall of the kitchen and (2) the utility room west of the kitchen." Id. Additionally, Clifton concluded that the fire was incendiary. In its own footnote, the court noted that "incendiary" in the fire investigation context meant "a fire that [wa]s intentionally, not accidentally, set by one or more person." Id. at 1081 n. 4.

As noted above, Allstate retained Phoenix to prepare a fire origin and cause report. During its investigation, Phoenix examined the interior and exterior of the rental property, interviewed Mr. Sipes and his neighbors, and apparently obtained a copy of Clifton's report. Phoenix's conclusions included:

(1) the fire originated near the floor area surrounding the north wall of the kitchen to the left/west of the cabinets; (2) all accidental causes of the fire were examined and eliminated; (3) the fire damage was not consistent with the fuel load reportedly present in the kitchen prior to the fire; and (4) the fire was most likely caused by an unidentified human act."

Id. at 1081-82. However, Phoenix declined to opine as to whether the unidentified human act was intentional.

Allstate retained Ms. Booker to prepare a coverage analysis of Mr. Sipes's claim. Her coverage analysis incorporated a review of the fire origin and cause reports, Mr. Sipes's deposition, and applicable case law. Ms. Booker concluded: "(1) there was evidence of arson, (2) Mr. Sipes had a motive to commit arson, and (3) the circumstantial evidence supported a finding of arson." Id. at 1082. Thus, Ms. Booker indicated that "there was a reasonable good-faith basis upon which to deny Mr. Sipes' property damage claims as an intentional act excluded from coverage." Id. (internal quotation omitted). Her coverage analysis was issued on August 31, 2010.

After receiving the fire origin and cause reports and the coverage analysis, Allstate prepared an "Outcome Summary," which agreed with Ms. Booker's findings. After issuance of the "Outcome Summary," Allstate submitted it to one of its claims analysts who had experience investigating arson claims, and the claims analyst agreed with the findings and conclusion on or about September 18, 2010. On September 23, 2010, Allstate sent Mr. Sipes a claim denial letter stating:

[A]fter investigation, Allstate had a reasonable belief that (1) the fire was intentionally set and not caused by any natural or accidental means, (2) Mr. Sipes either started the fire, or the fire was set at his direction or with his knowledge and consent, and (3) Mr. Sipes concealed or misrepresented material facts related to the [r]ental [p]roperty, such as the cause of loss, his activities prior to the loss, his testimony that he never saw mold in the [r]ental [p]roperty, and his financial condition before and after the loss, which placed Mr. Sipes' coverage claim within the exclusions of the insurance policy.

Id. at 1083. As a result, Allstate denied Mr. Sipes's claim, noting that it was excluded under the "intentional act" and "misrepresentation, fraud, or concealment" clauses of Mr. Sipes's policy. Unsurprisingly, Mr. Sipes denied Allstate's contentions. Id. at 1083-84.

On September 8, 2011, Mr. Sipes filed suit against Allstate, alleging claims for breach of contract and unreasonable delay or denial of insurance benefits in violation of C.R.S. §§ 10-3-1115 and -1116. Thereafter, Allstate moved for summary judgment on Mr. Sipes's statutory claim. Id. at 1084.

In its motion for summary judgment, Allstate argued that it acted reasonably in denying Mr. Sipes's claim because it relied upon the results of the fire origin and cause reports and Ms. Booker's coverage analysis. Furthermore, Allstate claimed that it had a reasonable belief that Mr. Sipes intentionally set fire to the rental property and misrepresented information during the investigation, as well as substantiating a reasonable belief that Allstate could present a valid defense of arson¹ based upon the reports and analyses it obtained during its investigation. Conversely, Mr. Sipes disputed that he set fire to the rental property, and he argued that there were "genuine disputes of material fact about the inferences Allstate dr[ew] from the evidence gathered during its investigation." Id.

The court began its analysis by noting that "[t]he question is whether a reasonable insurer under similar circumstances would have denied or delayed payment of the claim. The reasonableness of an insurer's conduct must be determined objectively, based on proof of industry standards." Id. at 1085. Then, it turned to address "whether it was reasonable for Allstate to rely on the evidence gathered during its investigation to conclude that Mr. Sipes intentionally caused the fire at the property." Id. As noted above, Allstate contended that it had a reasonable basis for its coverage denial based upon the fire origin and cause reports and Ms. Booker's coverage analysis; however, Mr. Sipes argued that Allstate's reliance on the fire origin and cause reports was unreasonable because Allstate had "not shown that the conclusions of the reports [we]re valid and Allstate did not take into consideration . . . Mr. Sipes fire origin and cause expert." Id. at 1086. After evaluating the methodology underlying the fire origin and cause reports, the court found that it was reasonable for Allstate to rely upon the reports to make its coverage decision, noting that Mr. Sipes "provided no evidence showing that Allstate had any reason to question the validity of the fire origin and cause reports or that Allstate's reliance on these reports was contrary to industry standards." Id. at 1088. In addition, the court disagreed with Mr. Sipes that it was unreasonable for Allstate to refuse to consider the report from Mr. Sipes's expert because the report was not available prior to the issuance of Allstate's claim denial letter. Id. The court noted that Mr. Sipes did not assert a new claim of unreasonable denial of benefits for failure to...