BACKWATER , INCORPORATED , doing business as FINKE’S , WILLIAM FINKE , and RUTH FINKE v. Penn- American Insurance Company

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-2805
B ACKWATER , I NCORPORATED , doing
business as F INKE’S , W ILLIAM F INKE ,
and R UTH F INKE ,
Plaintiffs-Appellants,
v.
P ENN- A MERICAN I NSURANCE C OMPANY ,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Indiana, Hammond Division.
No. 04 C 52—Paul R. Cherry, Magistrate Judge.
____________
A RGUED A PRIL 5, 2006—D ECIDED M AY 24, 2006
____________
Before E VANS , W ILLIAMS , and S YKES , Circuit Judges.
E VANS , Circuit Judge. In late December 2001, a High-
land, Indiana, nightclub called “Finke’s” was vandalized.
The damage was extensive, and the club’s owners, William
and Ruth Finke (more precisely, their company, “Back-
water, Inc.”), soon filed a claim with the property’s insurer,
Penn-American Insurance Company. But Penn-American
rejected the claim, concluding after a lengthy investigation
that the vandalism was an inside job. The Finkes sued,
alleging breach of contract and bad faith. See Erie Ins. Co.
v. Hickman, 622 N.E.2d 515, 519 (Ind. 1993) (recognizing

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2 No. 05-2805
cause of action for insurer’s breach of implied obligation of
good faith and fair dealing). After removing the case to
federal court based on diversity of citizenship, Penn-
American sought and obtained summary judgment on the
bad-faith claim and later prevailed in a jury trial on the
breach-of-contract claim. The Finkes appeal both outcomes.
Under Indiana law, an insurer breaches its obligation to
deal fairly with an insured when it denies a claim knowing
that there is no rational, principled basis for doing so. See
Hickman, 622 N.E.2d at 520. Penn-American identifies a
number of facts that, it argues, provided a rational basis for
denying the Finkes’ claim. For starters, fewer than 60 days
before the vandalism, the Finkes increased the coverage on
the building and its contents from $800,000 to $1,400,000.
Then, after increasing the coverage, Mr. Finke made several
inquires to his alarm company concerning its monitoring of
the building’s openings and closings. The vandalism itself
was unusually thorough—the perpetrators carefully
disabled the building’s security system (which Mr. Finke
himself had installed), preventing any of the 48 interior
cameras from recording any activity and allowing the
vandals to spend several hours trashing the place— even
taking time to prepare a midnight snack in the club’s
kitchen. Finally, there was reason to think the Finkes
might have been looking for a way out of the business—not
only did the club’s tax returns indicate that it was losing
money, but its prospects were further dampened by a series
of run-ins with the community concerning noise
and parking.
According to the Finkes, none of this proves anything. So
what if they increased their insurance coverage? They
only did it, they say, after an insurance agent told them the
property was underinsured. The other evidence on which
Penn-American relied is likewise circumstantial, the Finkes
assert, and equally open to innocent interpretation. Because
such an interpretation is possible, they argue, summary
judgment on their bad-faith claim was inappropriate.

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No. 05-2805 3
The Finkes are right that the court, in deciding a mo-
tion for summary judgment, is obliged to construe the facts
as favorably as possible to the nonmoving party. But Penn-
American, in deciding whether to grant or deny coverage,
was under no such obligation. Rather, it was free, within
the constraints of reason and good faith, to evaluate the
evidence and draw its own conclusion about the source of
the vandalism. The Finkes acknowledge that “conflicting
inferences may be drawn” from the facts. 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.” Monroe Guar.
Ins. Co. v. Magworks Corp., 829 N.E.2d 968, 976 (Ind.
2005). Summary judgment was appropriate on the bad-faith
claim.
In deciding the Finkes’ breach-of-contract claim, the
jury was similarly free to evaluate the evidence, and ap-
parently (as far as we can tell from the general verdict
form) it agreed with Penn-American. Challenging that
verdict, the Finkes identify two ways in which they believe
the trial was flawed. First, they say the court improperly
excluded evidence bearing on their reason for increasing
their insurance coverage in November 2001. Mr. Finke was
going to testify about the conversation in which the insur-
ance agent told him the property was underinsured, but the
court barred the testimony as hearsay since it
was apparently offered as evidence of the truth of the
matter asserted—that the property was underinsured. (The
agent himself also testified but had trouble recalling the
substance of the conversation.) According to the Finkes, the
point of the testimony wasn’t to show that the property
actually needed more insurance, but rather to show the
effect of the agent’s assessment on the Finkes’ own decision-
making; therefore, they argue, it was not hearsay. See
United States v. Inglese, 282 F.3d 528, 538 (7th Cir. 2002)

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4 No. 05-2805
(out-of-court statement not hearsay when offered to show
the effect it had on the listener).
It’s not a bad argument, but unfortunately for the Finkes
it’s also not an argument they made during the trial:
instead of responding to Penn-American’s objection with
an offer of proof or by asking that the testimony be ad-
mitted subject to a limiting instruction, they simply moved
on, forfeiting any charge of error. They now try to get
around that forfeiture by calling the exclusion “plain
error”—that is, an error so obvious, crucial, and egregious
that we may and should correct it even though no objection
was made below. See Fed. R. Evid. 103(d); Stringel v.
Methodist Hosp. of Indiana, Inc., 89 F.3d 415, 421 (7th Cir.
1996). But that’s an extraordinary measure, see Higbee v.
Sentry Ins. Co., 440 F.3d 408, 409 (7th Cir. 2006) (noting
“extremely limited” application of plain-error review in civil
litigation), and we don’t see anything extraordinary here.
The Finkes also say it was plain error for the court to
include in the jury instructions the (undisputed) fact that
“[o]n or about November 1, 2001, Backwater, Inc. in-
creased the property insurance coverage on both the
building and the contents.” See Fed. R. Civ. P. 51(d)(2)
(allowing plain-error review of jury instructions); Higbee,
440 F.3d at 409. Specifically, they are concerned about
the fact’s placement: right at the beginning of the back-
ground narrative. Putting the statement there, they argue,
gave it an “unwarranted emphasis,” focusing the jury’s
attention on a fact supporting Penn-American’s theory
that the Finkes trashed the club for the insurance money.
Calling this error at all seems a stretch—in any arrange-
ment of jury instructions, after all, “[s]omething has to come
first, something last.” Texas & Pac. R.R. Co. v. Jones,
298 F.2d 188, 191 (5th Cir. 1962). Calling it plain error,
without citing a single case in which the order of instruc-
tions was held to be relevant, stretches that term beyond
the breaking point.

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No. 05-2805 5
The undisputed facts show that Penn-American had
reason to suspect insurance fraud, so there was no bad
faith. The jury agreed that coverage was properly denied,
and the Finkes identify no plain error in the way the trial
was conducted. The judgment is A FFIRMED .
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-24-06

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