Donegal Mutual Insurance Company accuses policyholder of forged invoices

A legal battle has emerged between Michael’s Fabrics, LLC and Donegal Mutual Insurance Company over an insurance claim related to water damage. The case, Michael’s Fabrics, LLC v. Donegal Mutual Insurance Company (Civil 1:24-cv-01585-JRR), revolves around allegations of insurance fraud, policy breaches, and the denial of coverage.

The lawsuit raises critical questions about the enforceability of fraud clauses in insurance contracts, the duty of insurers to pay claims, and the responsibilities of policyholders during the claims process. The case is currently 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, purchased a business owners' insurance policy from Donegal Mutual Insurance Company for the period covering 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, Michael’s Fabrics suffered water damage to its inventory. The company submitted a claim, asserting that an employee from a heating and cooling company accidentally left a water faucet turned on, leading to the loss of 210 bolts of fabric, totaling 6,697 yards.

Donegal Mutual denied the claim on January 19, 2024, citing policy violations and allegations of fraud. Specifically, the insurer argued that Michael’s Fabrics had failed to provide unredacted documents requested during the claim investigation and had submitted potentially altered invoices as part of the claim.

One of the central elements of the dispute is 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:

1. This policy;
2. The Covered Property;
3. Your Interest in the Covered Property; or
4. A claim under this policy."*

Donegal Mutual contends that Michael’s Fabrics violated this clause by submitting invoices that were altered after the water damage occurred. The insurer also claimed that the business failed to cooperate fully with the investigation by refusing to provide unredacted documents.

Michael’s Fabrics, on the other hand, asserts 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 constitutes a breach of contract and bad faith insurance practices.

During its investigation, Donegal Mutual hired Kenneth Rizer, of Nardone & Company, to assess the loss. Rizer's report noted inconsistencies in the invoices submitted by Michael’s Fabrics. The insurer pointed to two key invoices from Tip Top Fabrics, which allegedly showed discrepancies in dates and amounts.

• The invoices were initially dated after the water damage but were later revised to appear as though they were issued before the loss.
• Rizer’s report concluded that the purchase amounts in these invoices were inconsistent with Michael’s Fabrics' historical buying patterns over the previous two years.

Michael’s Fabrics challenged the admissibility of Rizer’s report under Daubert v. Merrell Dow Pharmaceuticals (1993), arguing that it should be excluded as improper expert testimony. However, the court ruled that Rizer was not acting as an expert but as part of the insurer’s internal investigation, and therefore, the challenge was denied as premature.

The case 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 remain, making summary judgment inappropriate.

Key legal points considered:

1. Maryland contract law governs the policy’s interpretation. Insurance contracts are construed like any other contract, with disputes being decided based on the plain meaning of the policy terms.
2. 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.
3. The insurer’s defense relies on proving fraud. Donegal Mutual argues that if fraud occurred, the policy is void, and no payment is required.
4. 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, where a jury will determine:

• 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 emphasized that fraud claims require a full evidentiary review and cannot be decided at the summary judgment stage. The court will allow both sides to present their evidence and witnesses at trial.

This case highlights the importance of transparency in insurance claims and the high stakes 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.