In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 05-2805

BACKWATER, INCORPORATED, doing

business as FINKE’S, WILLIAM FINKE,

and RUTH FINKE,

Plaintiffs-Appellants,

v.

PENN-AMERICAN INSURANCE COMPANY,

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.

____________

ARGUED APRIL 5, 2006—DECIDED MAY 24, 2006

____________

Before EVANS, WILLIAMS, and SYKES, Circuit Judges.

EVANS, Circuit Judge. In late December 2001, a Highland, Indiana, nightclub called “Finke’s” was vandalized.

The damage was extensive, and the club’s owners, William

and Ruth Finke (more precisely, their company, “Backwater, 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
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, PennAmerican 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.
No. 05-2805 3

The Finkes are right that the court, in deciding a motion for summary judgment, is obliged to construe the facts

as favorably as possible to the nonmoving party. But PennAmerican, 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 apparently (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 insurance 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 decisionmaking; therefore, they argue, it was not hearsay. See

United States v. Inglese, 282 F.3d 528, 538 (7th Cir. 2002)
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 admitted 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. increased 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 background 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 arrangement 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 instructions was held to be relevant, stretches that term beyond

the breaking point.
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 AFFIRMED.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—5-24-06