Insurer and Fabric Retailer Clash in Court Over Water Damage Claim
A legal dispute has emerged between Michael’s Fabrics, LLC, and Donegal Mutual Insurance Company regarding an insurance claim for water damage. The case, titled Michael’s Fabrics, LLC v. Donegal Mutual Insurance Company (Civil 1:24-cv-01585-JRR), centers on allegations of insurance fraud, breaches of the insurance policy, and the insurer’s denial of coverage. This ongoing lawsuit raises key questions about the enforcement of fraud clauses in insurance contracts, the insurer’s duty to pay claims, and the policyholder’s responsibilities during the claims process. The case is currently being heard before Judge Julie R. Rubin in the United States District Court for the District of Maryland.
Michael’s Fabrics, LLC, a Baltimore-based retailer specializing in high-end fabrics, secured a business owners’ insurance policy from Donegal Mutual Insurance Company. The coverage period extended from December 16, 2022, to December 16, 2023. The policy, for which the company paid an annual premium of $4,765, included $3,364 for property coverage. On January 21, 2023, the company’s inventory suffered water damage.
The company subsequently filed a claim, stating that an employee from a heating and cooling service accidentally left a water faucet running, resulting in damage to 210 bolts of fabric, amounting to 6,697 yards. Donegal Mutual Insurance denied the claim on January 19, 2024, citing violations of the policy and claiming fraud.
Specifically, the insurer stated that Michael’s Fabrics failed to provide unredacted documents requested during the investigation and submitted potentially altered invoices as part of the claim. The central point of contention lies with the policy’s fraud and misrepresentation clause, which states:
“This policy is void in any case of fraud by you as it relates to this policy at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning: This policy; The Covered Property; Your Interest in the Covered Property; or A claim under this policy.”
Donegal Mutual asserts that Michael’s Fabrics violated this clause by submitting invoices that had been altered after the water damage occurred. The insurer also alleges the business did not fully cooperate with the investigation, due to its refusal to provide the unredacted documents. Michael’s Fabrics counters that it fully complied with all document requests and that the redactions were necessary to protect sensitive information. The company argues that Donegal Mutual’s denial of the claim is a breach of contract and constitutes bad faith insurance practices.
During its investigation, Donegal Mutual brought in Kenneth Rizer, of Nardone & Company, to assess the loss. Rizer’s report brought up inconsistencies in the invoices submitted by Michael’s Fabrics. The insurer highlighted two key invoices from Tip Top Fabrics, claiming discrepancies in dates and amounts. The invoices were originally dated after the water damage but were later modified to appear as if they had been issued before the loss. Rizer’s report concluded that the purchase amounts on these invoices were inconsistent with Michael’s Fabrics’ historical buying patterns over the preceding two years.
Michael’s Fabrics challenged the admissibility of Rizer’s report under Daubert v. Merrell Dow Pharmaceuticals (1993), arguing it should be excluded as improper expert testimony. However, the court ruled that Rizer was not acting as an expert but part of the insurer’s internal investigation; therefore, the challenge was denied as premature.
The case then proceeded with cross-motions for summary judgment. Michael’s Fabrics sought partial summary judgment on its breach of contract claim, arguing that Donegal Mutual wrongfully denied coverage despite the company’s full compliance with the policy. Donegal Mutual sought summary judgment on the bad faith claim, asserting that its denial was justified based on evidence of fraud and non-cooperation by the insured. Judge Rubin denied both motions on the grounds that material factual disputes remained.
Key Legal Points:
- Maryland contract law governs the policy’s interpretation. Insurance contracts are interpreted like any other contract, with disputes determined by the plain meaning of the policy terms. A claim for breach of contract requires proof of a contractual obligation, a breach, and resulting damages. Michael’s Fabrics contends that Donegal breached the policy by wrongfully refusing payment. The insurer’s defense relies on proving fraud. Donegal Mutual argues that if fraud occurred, the policy is void, and no payment is required.
- Fraud is a factual question for the jury. Because Donegal’s fraud allegations are disputed, they must be resolved at trial, not through summary judgment.
- Since both summary judgment motions were denied, the case will proceed to trial. A jury will decide:
- Whether Michael’s Fabrics misrepresented material facts in its insurance claim.
- Whether Donegal Mutual wrongfully denied coverage under the policy.
- Whether Donegal Mutual acted in bad faith when it refused to pay the claim.
Judge Rubin noted that fraud claims demand a comprehensive review of the evidence and can’t be resolved during the summary judgment phase. Therefore, both sides will be able to introduce evidence and call witnesses at trial.
This case emphasizes the importance of transparency in insurance claims and the significant consequences of fraud allegations. If Donegal Mutual proves fraud, Michael’s Fabrics could lose all coverage under the policy. Conversely, if the jury finds that Donegal wrongfully denied the claim, the insurer could be liable for damages and potential penalties under Maryland’s bad faith insurance laws.
