ACCIDENTS OR OCCURRENCES
The issue of what constitutes an "accident" or "occurrence" is one that continues to divide the Michigan Supreme Court. In recent years, the court has issued a number of seemingly conflicting decisions with respect to whether a purely objective or subjective standard should be used and/or when intent may be inferred as a matter of law. As recently as Auto Club Group Ins. Co. v. Marzonie, 527 N.W.2d 760 (Mich. 1994) the question of whether injuries resulting from the insured's intentional firing of a gun at a car produced three conflicting opinions from the court.
An “accident” is an undesigned contingency, a happening by chance, something out of the usual course of things. Guerdon Industries, Inc. v. Fidelity and Casualty Company, 123 N.W.2d 143 (Mich. App. 1963).
Michigan courts has ruled that intent will be inferred in cases of sexual assault by adults. Indeed, in Weekley v. Pioneer State Mutual Ins. Co., 224 Mich. App. 34 (1997), the Michigan Court of Appeals ruled that intent should be inferred even if the insured suffered from diminished mental capacity as the result of a serious head injury that he had suffered in the past. The court ruled that the insured's capacity to know the wrongfulness of his acts was immaterial, nor does it matter that the actual injury resulting from the insured's conduct was a different character or magnitude from what was originally intended.
Intent will not necessarily be inferred if the assault was committed by a minor, however. In Fire Insurance Exchange v. Diehl, 450 Mich. 678, 545 N.W.2d 602 (Mich. 1996), the Supreme Court ruled, 4-3, that juries must resolve each claim based on whether a child of similar age, ability, intelligence and experience would reasonably have foreseen injury.
In considering the meaning of “accident” under a liability policy, a court must consider both “the injury-causing act or event and its relation to the resulting property damage or personal injury.” Auto Club Group Insurance Company v. Marzonie, 527 N.W.2d 760 (Mich. 1994) and Frankenbuth Mutual insurance Company v. Masters, 460 Mich. 105, 595 N.W.2d 832 (1999).
The fact that damage is worse or different from what the insured planned is not a basis for claiming coverage. The Michigan Supreme Court has ruled in Frankenmuth Mutual Insurance Company v. Masters, 460 Mich. 105, 595 N.W.2d 832 (1999) that damage to neighboring business properties caused by the insured’s arson was not an “accident” under the terms of its liability policy. Even though the insured had contended that this “collateral” damage was accidental as he had only intended to burn down his own building, the court held that the unintended consequences of an intentional act are outside the policy definition of an “occurrence” where the insured intended to cause some property damage, even if the resulting injury was worse than what was originally intended.
The issue of whether injuries were "expected or intended" will be determined based upon a subjective standard utilizing the standpoint of the insured. Arco Industries Corp. v. AMICO, 448 Mich. 395, 531 N.W.2d 168 (1995) and Metropolitan Property & Liability Ins. Co. v. DiCicco, 432 Mich. 656, 443 N.W.2d 734 (1989). However, an "objective" standard was applied in a homeowner's case involving an exclusion for injuries that might "reasonably be expected to result from intentional or criminal acts of the insured..." Allstate v. Freeman, 432 Mich. 656, 443 N.W.2d 734 (1989).
In Frankenmuth Mut. Ins. Co. v. Piccard, 440 Mich. 539, 489 N.W.2d 422 (1992), the court found that the unforeseen consequences of an intentional criminal act were not an "occurrence." Next, in Auto Owners Ins. Co. v. Churchman, 440 Mich. 560, 489 N.W.2d 431 (1992), the court ruled that a general intent to cause injury barred any finding of "occurrence" even if the insured did not intend the specific injury that resulted. See also State Farm Fire & Cas. Co. v. Heron, 180 Mich. App. 333, 446 N.W.2d 654 (1989). Finally, in Group Ins. Co. of Michigan v. Czopek, 440 Mich. 590, 489 N.W.2d 444 (1992), the court held that voluntary intoxication did not create coverage for an intentional assault, pointing out that "to allow such a defense would be to create the ability to act unwisely without the requisite financial responsibility." Accord, Transamerica Ins. Co. v. Boughton, 172 Mich. App. 253, 440 N.W.2d 922 (1989)(diminished capacity will not preclude a finding that the insured "intended" to cause injury).
Subsequently, the Supreme Court reaffirmed the rule in Churchman, declaring in Frankenmuth Mutual Insurance Company v. Masters, 460 Mich. 105, 595 N.W.2d 832 (1999) that damage to neighboring business properties caused by the insured’s arson was not an “accident” under the terms of its liability policy. Even though the insured had contended that this “collateral” damage was accidental as he had only intended to burn down his own building, the court held that the unintended consequences of an intentional act are outside the policy definition of an “occurrence” where the insured intended to cause any damage, even if the resulting injury was worse than what was originally intended.
Trying once again to quell confusion concerning the availability of coverage for cases in which intentional acts produce unintended injuries, the Supreme Court of Michigan ruled in March 20000 in Nabozny v. Burkhardt, No. 113876 (Mich. March 7, 2000) that a teenager was not entitled to coverage for a drunken incident in which the insured intentionally tripped the plaintiff, breaking his ankle. Even though the insured denied any intention to “break bones,” the court found that the insured should reasonably have expected that some bodily injury would result.
Judge Edmunds ruled in Aetna Cas. & Sur. Co. v. Dow Chemical, 24 F.Supp.2d 421 (E.D. Mich. 1998) that insureds have the burden of proving an “occurrence.” However, the court refused to find that a corporation could be bound by the acts of its employees and therefore ruled that only the knowledge and intent of senior officers and directors (or the knowledge of the industry at the time) was relevant. Further, adressing Dow Chemical’s contention that an intent to damage surface soil might not preclude coverage for sub-soil injury, the court instead adopted the New Jersey Supreme Court’s analysis in Morton as in intermediate resolution of this question of “specific intent.” An insured who engages in inherently dangerous conduct with intent to cause some harm would not be entitled to insurance coverage because the extent of the injuries would be probable and thus subjectively intended under the Morton test.” In short, if the insured shows that the extent of damage that occurred was improbable, the finder of fact must examine whether the insured subjectively intended or expected to cause the extensive damage that occurred.
A subjective analysis was also adopted for pollution claims in Arco Industries, Inc. v. AMICO, supra. The Michigan Supreme Court ruled that the Court of Appeals had erred in ruling in 1993 that pollution resulting from the insured's routine and intentional discharge of waste liquids was not an "occurrence" since the insured "knew or should have known that there was a substantial probability that certain detrimental consequences would result from its actions." Unlike Arco, the Court of Appeals refused to find coverage for a waste lagoon operator in City of Bronson v. American States Ins. Co., 215 Mich. App. 612, 546 N.W.2d 702 (1996) where the insured continued to operate the lagoons despite knowledge that their continued use would cause further environmental contamination.
Michigan Supreme Court ruled in Gelman Sciences, Inc. v. Fidelity & Casualty Co., 572 N.W.2d 617 (Mich. 1998) that "accident" wordings that were in use before October 1996 should be interpreted consistently with the "occurrence" wordings used after that date and that both should be determined in accordance with its "injury in fact" approach.
The Michigan Court of Appeals has ruled that an intentional shooting incident was "expected or intended" by the insured even if he acted in self-defense. Auto Owners Ins. Co. v. Harrington, 212 Mich. App. 682, 538 N.W.2d 106 (1995).
Whether the insured's conduct is an "accident" or not must be considered from the standpoint of the insured. Auto Club Group Ins. Co. v. Marzonie, 527 N.W.2d 760 (Mich. 1994). The Michigan Court of Appeals has rejected the "innocent co-insured" doctrine in a liability case, ruling that a suit against a property owner for failing to protect the plaintiff from an assault by her ex-husband failed to allege an "occurrence." In Michigan Basic Property Insurance Association v. Wasarovich, 546 N.W.2d 265 (Mich. App. 1995), the court ruled that the trial court had erred in interpreting "occurrence" from the standpoint of whether the plaintiff's injuries were expected or intended from the standpoint of the defendant/insured, ruling that the issue was the intent of the insured who caused the injury. A dissenting judge asserted that the exclusion must be read from the standpoint of the insured who was sued.
The Michigan Court of Appeals has ruled that an employee's claim that his supervisor sexually harassed him and coerced him into non-consensual sex was not an "occurrence." In Transamerica Ins. Co. v. Citizens Ins. Co., No. 168554 (Mich. App. February 16, 1995), the court ruled that injuries might be deemed expected or intended if they were the natural, expected and anticipated result of intentional acts or if the acts themselves were of such a character that an intent to injure could be inferred as a matter of law.
In Michigan Basic Property Ins. Assoc. v. Orlando, No. 164173 (Mich. App. January 24, 1995), the Court of Appeals ruled that criminal conduct may not be the basis for coverage, even if the insured's intentional act was not intended to cause injury: "the unforeseen consequences of an insured's criminal act will preclude coverage where the conduct is addressed directly at the innocent person."
The Michigan Court of Appeals has ruled that the intentional tort exception to the worker's compensation statute is not coextensive with a liability policy's prohibition against harm that is intentionally caused by an insured. In Cavalier Mfg. Co. v. Employers Ins. of Wausau, 211 Mich. App. 330, 535 N.W.2d 583 (1995), the court ruled that under Michigan law a worker could sue an employer where the insured did not specifically intend to cause injury but consciously disregarded knowledge of facts that injury was likely to result. The court ruled that this sort of "constructive" intentional tort was not excluded for coverage. More recently, the Sixth Circuit has relied on Cavalier in holding in Ziebart Int. Corp. v. CNA Ins. Companies, 78 F.3d 1245, 248 (6th Cir. 1996) that the statutory exception for claims where "the employer had knowledge that an injury was certain to occur and willfully disregarded that knowledge" is not the same as having actually intended the injury to occur.
"Willful and wanton" conduct or other forms of gross negligence are still an "occurrence." Morrill v. Gallagher, 370 Mich. 578, 122 N.W.2d 687 (1963)(thrown firecracker).
Claims against a contractor for negligently connecting a sewer line to a storm drain instead of a sanitary sewer have been held not to constitute an "occurrence." In an unpublished ruling, the Court of Appeals declared in K.H. Mahnick & Associates v. CNA Ins. Co., No. 167225 (Mich. App. September 22, 1995) that the insured's faulty workmanship was not the result of an "accident" and therefore could not be an "occurrence." On the other hand, the Court of Appeals has found that allegations that an insured contractor caused damage to the plaintiffs’ property were held to allege an “occurrence” to the extent that the damage was not limited to the insured’s own work product. Radenbaugh v. Farm Bureau General Insurance Company of Michigan, No. 212080 (Mich. App. March 3, 2000).
An exclusion for sexual misconduct has been held to preclude coverage for claims against a day care center for allegedly negligently hiring and supervising an employee who sexually abused mentally retarded patients of a nursing home in Western World Ins. Co. v. DeLauter, No. 174216 (Mich. App. May 10, 1996).
Public policy will only defeat coverage allowed unless existence of insurance is likely to "stimulate" insured to act in an anti-social manner. School District for the City of Royal Oak, 912 F.2d 844 (6th Cir. 1990).
Supreme Court has ruled in Nehra v. Provident Life and Accident Ins. Co.,
1997 Mich. LEXIS 450 (Mich. March 6, 1997) that a dentist's carpal tunnel
syndrome was not an "accidental bodily injury" under his disability policy.
While conceding that the term was not defined in the policy, the court
held that injuries could not be accidental where they developed gradually
as a result of a series of events or, as in this case, prolonged repetition
of hand movements, over an extended period of time and lacked a "temporal/spacial
ALLOCATION AND SCOPE ISSUES
Two panels of the Michigan Court of Appeals have reached contradictory conclusions with respect to whether long-tail losses may be pro-rated or not. In Arco Industries Corp. v. American Motorists Ins. Co., 232 Mich. App. 146, 594 N.W.2d 61 (1998), the court adopted a “time on the risk” analysis in a pollution case and rejected the policyholder’s contention that each insurer was jointly liable for “all sums,” declaring instead that Supreme Court’s “injury in fact” trigger ruling in Gelman made clear that insurers are only liable for that portion of damage occurring during their policy period.
The Arco analysis was rejected a year later in Dow Corning v. Continental Cas. Co., No. 200143 (Mich. App. October 12, 1999), however. In an unpublished opinion, the Court of Appeals ruled that the “all sums” language in the defendants’ policies imposed an independent obligation to pay in full without regard to “time on the risk” or any other sort of pro-ration (although the court declined to adopt the specific terminology of “joint and several” since that is a tort concept).
As yet, the Supreme Court has not taken a position. Allocation issues were commented upon but not decided by the court in Gelman Sciences, Inc. v. Fidelity & Casualty Co., 456 Mich. 305, 572 N.W.2d 617 (Mich. 1998). The court ruled that the insured has the burden of proving both the fact and amount of damage in each year for which coverage is claimed. It declared, however, that if it was impossible to pinpoint the amount of damage in each year, "courts should establish some means of allocating the risk among the insurers. While we do not decide the best method of allocation today because we did not grant leave on that issue and it has not been adequately briefed and argued, we note that other courts have utilized various proration methods and joint and several liability to allocate liability. The court noted with approval a pro-insured allocation analysis that had been published in the California Law Review intending that injury in fact should not be strictly applied as to limit coverage as "for these insurers to benefit from the insured's inability to prove the exact time of a causal fact would enrich them unjustly and would upset the reasonable expectations of the insured." In a footnote, the court amplified this allocation analysis by noting that it had similarly adopted less rigorous standards of proof in cases where proof was impossible, including the adoption of theories of alternative liability for plaintiffs in DES cases.
Although an insurer may limit its payment obligation to covered damages, the Michigan Court of Appeals has ruled that it may not pro-rate its obligation to pay defense costs merely because some of the claims are not covered. Detroit Edison Co. v. Michigan Mutual Ins. Co., 301 N.W.2d 832, 835 (Mich. App. 1980).
Judge Enslen ruled in Tiscornia v. The Travelers Corp., 1996 U.S. Dist. LEXIS 17691 (W.D. Mich. October 28, 1996) that defense costs for a pollution case should be allocated pro rata based on the INA v. 48 Insulations time on the risk approach. Similarly, in Western Alliance Ins. Co. v. Mt. Vernon Ins. Co., No. 97-CV-70177 (E.D. Mich. October 20, 1997), Judge Duggan ruled that a liability insurer's policy obligation to share in the cost of a lead poisoning settlement is limited to its pro rata share of the amount of injury that occurred during its policy period. The District Court rejected Western Alliance's contention that Mt. Vernon must pay one-half of the cost of settlement based on the policies' respective "other insurance" clauses.
The Court of Appeals adopted a theory of “horizontal exhaustion” for claims against excess insurers in Dow Corning v. Continental Cas. Co., No. 200143 (Mich. App. October 12, 1999)(unpublished).
In an unpublished disposition, the Sixth Circuit has ruled that an insured must prove its claimed damages and, furthermore, may only recover damages that are directly related to a covered cause of action. Progressive Architects v. Security Ins. Co., No. 95-1535 (6th Cir. December 16, 1996)(insured only entitled to recover costs of removing inert wastes from berm, given absolute pollution exclusion in policy; insured had argued that costs that were in any way related to covered claims should also be covered).
Where an insurer
pays the total amount of a loss and seeks contribution from a co-insurer
whose policy also applied, the claim is one of subrogation. Detroit
Automobile Inter-Insurance Exchange v. Detroit Mutual Automobile Insurance
Company, 59 N.W. 2d 80 (Mich. 1953) and Central Michigan Board of Trustees
v. Employers Reinsurance Corporation, 2000 WL 1526775 (E.D. Mich. October
3, 2000). In so ruling, the District Court further declared
that the liability insurer that had paid for counsel of the insured’s own
choosing was similarly precluded from recovering against the other carrier,
as it must stand in the shoes of the insured.
both an intermediate appellate court and a state Supreme Court.
Unfair or deceptive consumer practices are proscribed by Mich. Comp. Laws Ann. § 445.901 (West 1989).
Michigan courts do not recognize a tort for bad faith breach of an insurance contract. Burnside v. State Farm Fire & Cas. Co., 528 N.W.2d (Mich. App. 1995); Kewin v. Mass. Mut. Life Ins. Co., 409 Mich. 401, 296 N.W.2d 50 (1980)(first party). Similarly, Michigan courts have not recognized a right of action for a breach of any implied covenant of good faith and fair dealing. Dahlman v. Oakland University, 172 Mich. App. 502, 432 N.W.2d 304 (1988).
However, an insurer may be held liable for all consequential damages that flow from its breach of its policy obligations. Stockdale v. Jamison, 416 Mich. 217, 224, 330 N.W.2d 389 (1982).
Further, an insurer may be held liable for a judgment against an insured, even in the absence of coverage, that results from its negligent undertaking of the defense of a case. Warren v. Aetna Casualty & Surety Co., No. 182838 (Mich. App. November 28, 1995)(insurer was negligent in not retaining independent counsel in view of clear conflict resulting from reservation of rights).
fees are not recoverable in a DJ. Iacobelli Constr. v. Western Cas.
& Sur. Co., 130 Mich. App. 255, 343 N.W.2d 517 (1983). However,
Michigan courts have permitted costs to be awarded to prevailing policyholders.
Advance Watch Co., Ltd. v. Kemper National Ins. Co., 878 F.Supp. 1034 (E.D.
Mich. 1995), reversed on other grounds, 99 F.3d 795 (6th Cir. 1996).
Held not to
encompass claims for mental distress in Farm Bureau Mutual Ins. Co. v.
Hoag, 136 Mich. App. 326, 356 N.W.2d 630 (1984)(false arrest); Greenman
v. Michigan Mutual Ins. Co., 173 Mich. App. 88, 433 N.W.2d 346 (1988)(sexual
harassment by co-worker). In Ben Franklin Ins. Co. v. Harris, 161
Mich. App. 86, 409 N.W.2d 733, 735 (1987), the Michigan Court of Appeals
suggested that mental distress claims might be covered if accompanied by
physical symptomatology, however. See also Fitch v. State Farm Fire &
Cas. Co., 211 Mich. App. 330, 535 N.W.2d 583 (1995)(defamation failed to
allege claim for "bodily injury" since it was not accompanied by physical
manifestations of injury). Nevertheless, the mere likelihood that such
claims might someday result in physical manifestations has been held insufficient
to trigger a defense obligation where no such claims are made in the complaint
against the insured. State Farm Fire & Cas. Co. v. Basham, 520 N.W.2d
713 (Mich. App. 1994).
BREACH OF POLICY CONDITIONS
In general, an insurer seeking to deny coverage on the basis of late notice must prove material prejudice. Wendel v. Swanberg, 384 Mich. 468, 185 N.W.2d 348, 239 N.W.2d 922 (1976); Burgess v. American Fidelity Ins. Co., 310 N.W.2d 23 (Mich. App. 1981). However, this burden may shift where the lapse of time caused by the insured's delay that "removes the opportunity for prompt investigation, also destroys the possibility of showing prejudice arising from delayed inquiry." West Bay Exploration Co. v. International Surplus Lines Ins. Co., 915 F.2d 1030 (6th Cir. 1990).
Timely notice of an "occurrence" did not justify the insured's failure to comply with the separate requirement that immediate notice of a "suit" be provided. Koski v. Allstate Ins. Co., 1998 WL 39157 (Mich. February 3, 1998). The Supreme Court also ruled in Koski that the insured was not excused from failing to give notice of the suit merely because the insurer had denied coverage for the notice of the original accident. Where the case had resulted in a default judgment, the court found that the insurer had plainly been prejudiced owing to its exclusion from discovery, settlement discussions and the trial. The court declined to find that this prejudice could have been avoided had the insurer tried to set aside the default judgment, particularly where the time for seeking such relief had already expired.
A notice requirement may be satisfied by information obtained from a third-party other than the policyholder. Bib v Dairyland Insurance Company, 205 N.W.2d 495 (Mich. App. 1973).
An insured that settles a claim or otherwise makes a "voluntary payment" without the knowledge or consent of the insurer forfeits its rights under the policy. Coil Anodizers, Inc. v. Wolverine Ins. Co., 120 Mich. App. 118, 123, 327 N.W.2d 416, 418 (1982). See also Stolaruk Corporation v. Central National Ins. of Omaha, 206 Mich. App. 444, 522 N.W.2d 670 (1994)(insured's settlement of pollution claims without notice to insured breached subrogation clause in policy as well as prohibition against voluntary payments).
The duty to give notice of an "occurrence" arises when the insured becomes aware that an accident has occurred, not at some later date when it is made aware of its claimed legal liability for that accident. Containers Specialties, Inc. v. Aetna Casualty & Surety Company, No. 95-CV-40154 (E.D. Mich. July 8, 1997).
An insured's assignment of claims against its insurer was not a breach of the cooperation clause in Action Auto Stores, Inc. v. United Capitol Ins. Co., File No. 5:91-CV-32 (W.D. Mich. February 8, 1993).
failure to appear for trial, in breach of the cooperation clause, was held
to be prejudicial where the insured’s testimony was vital to the insurer’s
ability to defend. Anderson v. Kemper Ins. Co., 340 N.W.2d 87 (Mich.
"BROAD FORM COVERAGES"
A claim for advertising injury coverage requires proof that (1) the insured's conduct was a particular covered "offense"; (2) that the insured engaged in advertising and (3) the plaintiff's injury was caused by that advertising. GAF Sales & Service, Inc. v. Hastings Mut. Ins. Co., 1997 WL 341817 (Mich. App. June 20, 1997)(plaintiff's damages were caused by insured's buying and selling of pirated software, not advertising). See also Farmington Casualty Company v. Cyberlogic Technologies, Inc., 996 F. Supp. 695, 703 (E.D. Mich. 1998)(CD version of software that had only a limited life so as to be used to promote the product but which also allegedly infringed the claimant’s copyright was not “advertising” because it was also the product.)
Although the "occurrence" policy limitation bars coverage for intentional acts, ambiguity has been found given the conflict between this limitation on coverage and the grant of insurance for intentional torts under "personal injury" coverage provisions. North Bank v. Cincinnati Ins. Co., 1997 WL 599910 (6th Cir. October 1, 1997) (Michigan law).
Michigan courts have generally refused to find "personal injury" coverage for pollution liabilities. In Harrow Products, Inc. v. Liberty Mut. Ins. Co., 64 F.3d 1015 (6th Cir. 1995), the Sixth Circuit ruled that plaintiff governmental authorities did not "occupy" the polluted property, nor were they the subrogees of the owners. A federal district court has since extended Harrow to trespass claims by private citizens. Aetna Casualty & Surety Co. v. Dow Chemical Co., 933 F.Supp. 675 (E.D. Mich. 1996).
the Michigan Court of Appeals refused to find "personal injury" coverage
for a clean up claim by the MDNR in County of Kent v. Home Ins. Co.,219
Mich. App. 250, 551 N.W.2d 424 (1996), vacated on other grounds, 1997 Mich.
LEXIS 2121 (Mich. August 29, 1997).
BURDEN OF PROOF
Michigan follows the general rule that insureds must prove the scope of coverage, whereas insurers must demonstrate the applicability of provisions that defeat coverage, such as policy exclusions (including "expected or intended"). Firemans Fund Ins. Companies v. Ex-Cell-O Corp., 702 F.Supp. 1317 (E.D. Mich. 1988) and Grand Rapids Auctions, Inc. v. Hartford, 178 N.W.2d 812 (Mich. App. 1970).
Under Michigan law, where a plaintiff seeks recovery under the terms of a lost insurance policy, the insured carries the burden of proof to establish both the existence and terms of the policy. Strong v. Hercules Life Ins. Co., 284 Mich. 573, 578 (1938); Star Steel Supply Co. v. USF&G, 186 Mich. App. 475, 479 (1990); and Container Specialties, Inc. v. Aetna Casualty & Surety Co., No. 95-CV-40154 (E.D. Mich. January 21, 1997). In an action on a policy of insurance, it is sufficient to allege (a) the execution, date and amount of the policy; (b) the premium owed; (c) the property or risk insured; (d) the interest of the insured; and (e) the loss. MCR 2.112 (D). See also South Macomb Disposal Authority v. Westchester Fire Insurance Company, 239 Mich. App. 344, 608 N.W.2d 814 (2000).
Consistent with this rule, the Sixth Circuit declared in Harrow Products, Inc. v. Liberty Mutual Ins. Co., 64 F.3d 1015, 1021 (6th Cir. 1995) that while an insured might be able to prove the terms of a policy without a copy of the policy, it faced a "formidable burden" in trying to do so. The Sixth Circuit rejected the insured's effort to rely on an exemplar standard copy of the policy that it believed that the insurer might have issued absent some clear link that only one such form might have been used during the period in question or that only cosmetic differences existed between the different forms. Accord, Production Plated Plastics, Inc. v. Michigan Mut. Ins. Co., No. 193681 (Mich. App. April 25, 1997)(unpublished). See also Thomas Solvent Co. v. Auto Owners Ins. Co., Calhoun County Circuit Court Case No. 90-2779 CK (Mich. September 16, 1994) (insured much prove the issuance of a policy, the premium paid, the risk insured, the interest of the insured and the fact of loss).
In Container Specialties, Inc. v. Aetna Casualty & Surety Co., No. 95-CV-40154 (E.D. Mich. January 21, 1997), a federal district court ruled that the insured had failed to sustain its burden of proving that earlier policies had been renewed, holding that the premium statements and other claimed secondary evidence failed to produce "sufficient, reliable evidence of a prior general liability policy's issuance, its scope of coverage or its terms...."
In Harrow, Thomas Solvent and Star Steel, the courts ruled that specimen forms were not persuasive evidence of the contents of a missing policy. But see, LeVere v. Aetna, 208 Mich. App. 62 (1995).
have disagreed as to whether such proof must be by a standard of "clear
and convincing" evidence or the lesser "preponderance" test. See,
Container Specialties, Inc. v. Aetna Casualty & Surety Co., No.
95-CV-40154 (E.D. Mich. January 21, 1997)(adopting "preponderance" standard).
Sciences, Inc. v. Fidelity & Casualty Ins. Co. of New York, Washtenaw
Case No. 91-42288 (Mich. Cir. Ct. January 14, 2000), the court ruled that
the insured had proved the existence and material terms of certain missing
policies issued by Fidelity between 1962 and 1970. The court took
notice of specific evidence that witnesses had presented on behalf of Gelman
Sciences concerning their understanding of the policies that were issued,
finding that the evidence presented satisfied the insured’s burden under
MCR 2.112(D)(1). Analyzing the federal cases interpreting Rule
1004 of the Federal Rules of Evidence, the court declared that the question
of missing policies should be interpreted in accordance with a “preponderance
of the evidence” since the “clear and convincing” standard standard
was only required in cases where there was a particular danger of fraud.
CHOICE OF LAWS
Under Michigan law, "[t]he validity and construction of a contract are controlled and to be determined by the laws of the situs, or place where the contract was entered into. Fireman's Fund Ins. Co. v. Ex-Cell-O Corp., 702 F.Supp. 1317, 1328 (E.D. Mich. 1988). In Michigan, a contract is deemed to have been made in the state where the last act necessary to make it a binding agreement took place." Millgard Corp. v. Fireman's Fund Ins. Co., 755 F.Supp. 181 (E.D. Mich. 1991). See also Wells v. 10-X Manufacturing Co., 609 F.2d 248 (1979); McLouth Steel Corp. v. Jewell Coal and Coke Co., 570 F.2d 594 (1978).
Notwithstanding the foregoing, there is still uncertainty with respect to what the "last act" is that is required to consumate an insurance contract. See, Morbark Industries, Inc. v. Western Employers Ins. Co., 170 Mich. App. 603, 616, 429 N.W.2d 213 (1988)(focusing on place of countersignature). But see, CPC International v. Aerojet-General, 825 F.Supp. 795 (W.D. Mich. 1993)(holding that location of pollution is more important under "most significant relationship" test than place of contracting). See also Chrysler Corp. v. Skyline Industrial Service, Inc., 199 Mich. App. 366, 502 N.W.2d 715 (1993), leave to appeal granted, 521 N.W.2d 13 (Mich. 1994)(adopting "most significant relationship" test for contract case); Meijer v. General Star Ind. Co., 826 F.Supp. 241 (W.D. Mich. 1993).
The general rule in Michigan is that a Michigan court will apply Michigan law unless a rational reason to do otherwise exists. Sutherland v. Kennington Truck, 454 Mich. 274, 286, 562 N.W.2d 466 (1997). For the most part, Michigan courts will apply Michigan law to contracts entered into in Michigan. Roskam Baking Co. v. Northern Ins. Co. of New York, 1999 U.S. Dist. LEXIS 3224 (W.D. Mich. January 6, 1999).
was applied to a multi-site pollution case in Aetna Cas. & Sur. Co.
v. Dow Chemical Co., 838 F.Supp. 1101 (E.D. Mich. 1995). Judge Edmunds
ruled that Michigan had the most significant relationship to the parties
and the policies at issue, noting that Dow Chemical's proposed "law of
the site" approach was inconsistent with its prior coverage claims and
would create an administrative nightmare.
in Vanguard Ins. Co. v. Clarke, 475 N.W.2d 48 (Mich. 1991).
CONFLICTS OF INTEREST
The Michigan Supreme Court has refused to find that an attorney/client relationship exists between a liability insurer and the defense counsel retained to represent its insured for the purpose of bringing a malpractice action against defense counsel. Atlanta International Insurance Company v. Bell, 475 N.W.2d 294 (Mich. 1991). The court ruled that exposing defense counsel to liability claims in this setting might detract from its duty of loyalty to the policyholder client. The insurer’s right of action is therefore limited to a claim for equitable subrogation.
In light of Belll, the Michigan Court of Appeals has ruled in Koster v. June’s Trucking, No. 212741 (Mich. App. December 26, 2000) that communications between defense counsel and the insurance company do not enjoy the protection of the attorney/client privilege. Accordingly, the court declared that plaintiffs in a garnishment proceeding arising out of an excess verdict against the policyholder were entitled to obtain the insurer’s entire claim file, including reports from counsel, subject only to the protections of the work product doctrine.
A liability insurer must exercise the utmost good faith in conducting the defense of an insured. Allstate v. Freeman, 432 Mich. 656, 703, 443 N.W.2d 734 (1989). If it is reserving its rights on substantive issues, it must retain independent counsel to represent the insured. American Home Assur. Co. v. Evans, 589 F.Supp. 1276, 1286 (E.D. Mich. 1984), vacated on other grounds, 791 F.2d 61 (6th Cir. 1986). However, it is not obligated to pay for the insured's own attorneys in every case in which a reservation of rights is issued unless the conflict of interest is such that it is impossible for counsel to act independently. Federal Ins. Co. v. X-Rite, Inc., 748 F.Supp. 1223 (W.D. Mich. 1990)(rejected insured's argument that Michigan would follow California's Cumis standard). As Judge Lawson later declared in Central Michigan Board of Trustees v. Employers Reinsurance Corporation, 2000 WL 1526775 (E.D. Mich. October 3, 2000), “an insurer complies with its duty to defend when, after it has reserved its right to contest its obligation to indemnify, it fully informs the insured of the nature of the conflict and selects independent counsel to represent the insured in the underlying litigation. The insured has no absolute right to select the attorney himself, as long as the insurer exercises good faith in its selection and the attorney selected is truly independent.”
that reserves its rights but fails to retain independent counsel for its
policyholder does so at its peril. See Warren v. Aetna Casualty &
Surety Co., No. 182838 (Mich. App. November 28, 1995)(declaring that insurer
may be responsible for verdict against insured, even in the absence of
coverage, where it mishandled underlying defense by failing to retain separate
Issue not yet addressed by Michigan Supreme Court. The Michigan Court of Appeals has consistently ruled that remedial expenses incurred pursuant to state and federal environmental statutes are covered "damages." See Polkow (1989); Upjohn (1989), reversed on other grounds, 438 Mich. 197 (1991); and U.S. Aviex Co. (1983). More recently, the Sixth Circuit has predicted that the Michigan Supreme Court will adopt a broad construction of "damages" to find coverage for clean up costs. Anderson Development Co. v. Travelers Ind. Co., 49 F.3d 1128 (6th Cir. 1995).
Costs relative to compliance with mandatory injunctions and other forms of purely equitable relief are not "damages." In Timothy Jones v. Farm Bureau Mutual Ins. Co., 172 Mich. App. 24, 431 N.W.2d 242 (1988), the Court of Appeals ruled that costs incurred by the operator of a hog feed lot in complying with an injunction to stop operating a public nuisance did not seek "damages." The Jones court found that "damages" was unambiguous and did not cover the cost of complying with an injunction for a public nuisance. The court distinguishes its holding five years earlier in U.S. Aviex, finding that the underlying claimant had not alleged an injury to his property that could have required the payment of money damages.
Michigan Supreme Court ruled in American Bumper and Manufacturing Company
v. Hartford Fire Ins. Co., 452 Mich. 440, 550 N.W.2d 475 (1996) that normally
incurred business costs should not be recoverable as defense costs even
if they incidentally assist in defeating or limiting liability or in reducing
remediation costs. As an example, the court noted that costs that
the insured incurred in hooking up to the city sewer system or in dredging
sludge from its lagoon were ordinary costs of doing business or improvements
to its property that would have been necessary eventually without regard
to whether it was sued or subject to claims of liability. Similarly,
the court ruled that costs associated with the insured's efforts to obtain
a groundwater discharge permit were a cost of doing business and not a
recoverable defense cost.
DECLARATORY JUDGMENT ACTIONS
Attorney's fees are not recoverable in a declaratory judgment action. Burnside v. State Farm Fire & Cas. Co., 528 N.W.2d 749 (Mich. App. 1995); Isagholian v. Transamerica Ins. Corp., 527 N.W.2d 13 (Mich. App. 1994). In these cases, the Court of Appeals expressly disdained Murphy v. Cincinatti Ins. Co., 772 F.2d 273 (6th Cir. 1985), wherein the 7th Circuit had opined the Michigan would support such awards.
fees may be awarded to an insured seeking recovery for uninsured motorists
benefits if the insurer unreasonably refused to make payment or unreasonably
delayed in making proper payment. MCL 500.3148(1).
In light of Michigan precedent declaring that a lawyer hired by an insurance company to represent its policyholder has no client relationship with the insurer, the Michigan Court of Appeals has ruled in Koster v. June’s Trucking, No. 212741 (Mich. App. December 26, 2000) that communications between defense counsel and the insurance company do not enjoy the protection of the attorney/client privilege. Accordingly, the court declared that plaintiffs in a garnishment proceeding arising out of an excess verdict against the policyholder were entitled to obtain the insurer’s entire claim file, including reports from counsel, subject only to the protections of the work product doctrine.
Insured allowed to depose insurer employees concerning their understanding of the meaning and scope of the pollution exclusion in Dow Chemical Company v. Fireman’s Fund Insurance Company, No. 96-10298 (E.D. Mich. November 1, 1999).
--Other Policyholder Claims
Insured allowed to obtain discovery from insurer concerning its application of pollution exclusion to other insureds facing similar claims so long as appropriate opportunity to object was provided to other insureds. Dow Chemical Company v. Fireman’s Fund Insurance Company, No. 96-10298 (E.D. Mich. November 1, 1999).
DUTY TO DEFEND
The duty to defend is broader than the duty to indemnify. Auto-Owners Insurance Company v. City of Clare, 521 N.W.2d 480 (Mich. 1994) and Pattison v. Employers Reinsurance Corp., 900 F.2d 986, 989 (6th Cir. 1990).
The duty of an insurance company to defend its insured extends to any suit that alleges facts that arguably come within the policy coverage. Detroit Edison Co. v. Michigan Mutual Ins. Co., 102 Mich. App. 136, 142, 301 N.W.2d 832 (1980) and Frankenmuth Mutual Ins. Co. v. Beyer, 153 Mich. App. 118, 122, 395 N.W.2d 36 (1986). See also Allstate Ins. Co. v. Freeman, 443 N.W.2d 734 (Mich. 1989).
A U.S. District Court has ruled that even if only some of the claims against the insured party are covered, the insurer must defend the whole claim until it becomes apparent that no recovery is possible under the covered theory. Advance Watch Co. v. Kemper National Ins. Co., 878 F.Supp. 1034, 1037 (E.D. Mich. 1995), reversed on other grounds, 99 F.3d 795 (6th Cir. 1996).
A federal district court ruled in Aetna Cas. & Sur. Co. v. Dow Chemical Co., 1997 U.S. Dist. LEXIS 23344 (E.D. Mich. December 4, 1997) that the insured's breach of notice conditions in its policy was not a basis for eliminating the duty to defend. However, Judge Edmunds did rule that the insured could not recover pre-tender costs.
Where coverage questions exist, the preferred course in Michigan is for an insurer to provide a defense under a reservation of rights and bring a declaratory judgment action. Detroit Edison Co. v. Michigan Mutual Ins. Co., 102 Mich. App. 136, 145, 301 N.W.2d 832 (1982). Any reservation of rights must be timely and comprehensive. Fire Ins. Exchange v. Fox, 167 Mich. App. 710, 423 N.W.2d 325 (1988).
The general rule in Michigan is that an insurer that denies coverage on a specified basis waives its right to rely on other defenses. Jones v. Jackson National Life Ins. Co., 819 F.Supp. 1372, 1377 (W.D. Mich. 1993); Lee v. Evergreen Regency Cooperative, 151 Mich. App. 281, 285 (1986). However, this rule may not be relied on to create coverage where none originally existed. Nor does a mere reservation of rights on certain issues preclude the assertion of additional coverage concerns at a later date. Id. First Mercury Syndicate, Inc. v. Telephone Alarm Systems, Inc., No. 1-92-CV-687 (W.D. Mich. April 1, 1994).
An insurer’s defense obligation does not arise until a claim is tendered to it. American Mutual Liability Insurance Company v. Michigan Mutual Liability Insurance Company, 235 N.W.2d 759, 774 (Mich. App. 1975)( “Absent a request, an insurer has no duty to defend an insured.”) See also City of Detroit v. Essex Ins. Co., Inc., No. 155477 (Mich. App. December 29, 1994) (unpublished).
The duty to defend has been held to extend to an obligation to appeal where reasonable grounds for an appeal exist. Ziebart International Corp. v. CNA Ins. Cos., 78 F.3d 245, 248 (6th Cir. 1996) (Michigan law)
a long-standing split in the Michigan courts, the Supreme Court of Michigan
ruled by a 4-3 margin that the term "suit" was ambiguous and should be
construed in the unique context of CERCLA to extend to PRP letters.
Michigan Millers Mut. Ins. Co. v. Bronson Plating Co., 445 Mich. 558, 519
N.W.2d 864 (1994). In light of Bronson, the Sixth Circuit has recently
recanted a series of earlier rulings in which it had taken a more restrictive
view of what constitutes a "suit." Anderson Development Co. v. Travelers
Ind. Co., 49 F.3d 1128 (6th Cir. 1995). See also South Macomb Disposal
Authority v. American Ins. Co., 1997 Mich. App. LEXIS 344 (Mich. App. October
10, 1997)(MDNR claim letter that carried $25,000 a day penalty deemed to
be functional equivalent of a law suit).
A number of recent Michigan cases have considered what constitutes a "defense cost" in the environmental context. By and large, these rulings have followed the test set forth by the Court of Appeals in Gelman, whereby sums paid to develop defenses to liability are deemed to be defense costs, whereas costs paid after liability is established and which are incurred for the purpose of extinguishing or minimizing that liability are deemed to be indemnity. In American Bumper and Manufacturing Company v. Hartford Fire Ins. Co., 452 Mich. 440, 550 N.W.2d 475 (1996), the Supreme Court ruled that even portions of a RI/FS might be a cost of defense, even though these costs were imposed upon the insured by the government, insofar as such costs were expended to develop defenses to liability.
Relying on American Bumper, the Sixth Circuit ruled in late 1996 that oversight costs paid to the U.S. EPA pursuant to the insured's performance of a RI/FS are a cost of defense. Hi-Mill Mfg. Co. v. Aetna Cas. & Sur. Co., 884 F.Supp. 1109 (E.D. Mich. 1995), aff'd, No. 95-1612 (6th Cir. October 3, 1996). A federal district court has also ruled that attorneys' fees incurred in prosecuting cross claims against other potentially responsible parties at a hazardous waste site are "defense costs." Oscar W. Larson Co. v. United Capitol Ins. Co., No. 1:92-CV-244 (W.D. Mich. December 16, 1993).
In South Macomb Disposal Authority v. American Ins. Co., 1997 Mich. App. LEXIS 344 (Mich. App. October 10, 1997), the Court of Appeals declared that the trial court had not erred in requiring Firemans Fund to pay these costs as part of its defense obligation as the work had been undertaken to assess the most cost effective plan for remediation, the court ruled that they should be treated as defense costs under the test adopted by the Michigan Supreme Court in American Bumper.
Court of Appeals has ruled that liability insurers cannot refuse to reimburse
a policyholder for defense costs incurred prior to the date of notice unless
they were prejudiced thereby. Aetna Cas. & Sur. Co. v. Transamerica
Ins. Co., No. 145294 (Mich. App. August 23, 1994).
ESTOPPEL AND WAIVER
Under Michigan law, estoppel will not create contact rights that were not originally created by the parties nor will it broaden coverage to include risks that were expressly excluded from the contract. South Macomb Disposal Authority v. American Ins. Co., 1997 Mich. App. LEXIS 344 (Mich. App. October 10, 1997); Lee v. Evergreen Regency Coop and Management Systems, Inc., 390 N.W.2d 183 (Mich. App. 1986) and Weekley v. Pioneer State Mutual Ins. Co., No. 174786 (Mich. App. January 7, 1997).
An insurer that failed to raise a policy exclusion in its original denial was not estopped to litigate its application in a subsequent declaratory judgment action. In Smit v. Kaechele, 525 N.W.2d 528 (Mich. App. 1994), the court ruled that it would be unfair to reform the policy to avoid the exclusion unless (1) it should have been raised and decided in the underlying action or (2) the inequity to the insurer was outweighed by the prejudice suffered by the policyholder because of the insurer's delay in raising the coverage defense.
However, a rebuttable presumption of prejudice may arise if the insurer defends without giving the insured notice of its coverage concern. See Highlands Coop. Assoc. v. The St. Paul Fire & Marine Ins. Co., No. 1:92 CV 799 (W.D. Mich. May 5, 1995)(although insurer failed to give written notice, evidence of oral notice overcame presumption of prejudice). In such cases, Michigan courts will presume that the insured has been prejudiced and may well estop the insurer from disputing whether it also has any indemnity obligation. Meirhew v. Last, 376 Mich. 33, 38, 132 N.W.2d 353 (1965) and Multi-States, Inc. v. Michigan Mutual Ins. Co., 154 Mich. App. 549, 553-554, 398 N.W.2d 462 (1986), leave to appeal denied, 428 Mich. 866 (1987).
The rule in
Michigan has long been that "the insurer must notify its insured, but not
the plaintiff, of a reservation of rights". Meirthew v Last, 376
Mich. 33 (1965). Relying on Meirhew, a divided Michigan Supreme Court
ruled in Kirchner v. Process Design Associates, No. 109609
(Mich. May 11, 1999) that a liability insurer defending under a reservation
of rights has no affirmative obligation to tell anyone but its policyholder
that there is a potential lack of coverage for a claim. Reaffirming the
general rule that the doctrines of waiver and estoppel cannot be relied
upon to require insurers to assume responsibility for claims that were
not insured under their policies, the Michigan Supreme Court ruled
that General Accident was not estopped to dispute the plaintiff’s garnishment
action by an interrogatory answer that had been filed on behalf of its
insured in the underlying suit identifying the GA policy as “covering”
the plaintiff’s claim. The majority opinion declared that the policy
did, in fact, cover several counts in the suit and that any misconduct
in preparing the response could not be imputed to the insurer, as it was
not a named party in the suit. information could only be have been
covered and (2) the conduct of defense counsel appointed to represent the
insured could not be imputed to the insurer. Judge Kelly concurred
in the result but suggested that a rule of court be adopted prospectively
requiring insurers to advise third parties (and the court) when a case
is being defended under a reservation of rights due to coverage concerns.
An early decision of the Michigan Court of Appeals had suggested that "drop down" might be required where an excess policy states that it will provide insurance over "collectible" amounts. Geerdes v. St. Paul Ins. Co., 128 Mich.App. 730, 341 N.W.2d 195, 197 (1985). However, the Michigan Supreme Court has more recently ruled that an excess policy that defines coverage as excess of "the limits of the underlying insurance, as set forth in the attached Schedule," "the amounts specified" in the primary policy or the insured's "retained limit," will not be required to drop down. Morbark Industries, Inc. v. Western Employers Ins. Co., 170 Mich. App. 603, 429 N.W.2d 213 (1988).
The Michigan Court of Appeals ruled in Celina Mutual Ins. Co. v. Citizens Ins. Co., 133 Mich. App. 655, 349 N.W.2d 547 (1984) that excess insurers have an obligation to share defense costs with primary carriers in proportion to the amount of indemnity that they pay for any given loss.
The Court of Appeals ruled in MEEMIC v. Transamerica Ins. Co., 204 Mich. App. 440, 516 N.W.2d 93 (1994) that a primary insurer could recover a pro rata share of defense costs from an excess insurer in proportion to the excess carrier's indemnity exposure. Further, insofar as the excess insurer might be adjudged to have a primary duty to defend on a "drop down" theory, the primary insurer could recover all of its defense costs as the insured's subrogee.
An excess insurer may sue a primary insurer on a theory of equitable subrogation. However, the Michigan Supreme Court ruled in Commercial Union Ins. Co. v. Medical Protective Ins. Co., 393 N.W.2d 479 (Mich. 1986) that the primary insurer had no direct duty to the excess carrier and that the excess insurer therefore had no direct right of action against the primary carrier if the insured was in some respect prevented from pursuing a claim.
insurer's undertaking to reimburse defense costs does not create an express
duty to defend. American Casualty Company v. Reading v. Rahn, 854
F.Sup. 492 (W.D. Mich. 1994). Thus, the Sixth Circuit has ruled
that an umbrella policy's promise to reimburse an insured for defense costs
is not the same as a policy that contains an express duty to defend.
Valassis Communications, Inc. v. Aetna Casualty & Surety Co., 1996
WL 577404 (6th Cir. October 9, 1996). Nor, in most cases, would an
excess insurer be estopped to dispute the reasonableness of a settlement
affecting its policy unless it participated in the original settlement
negotiations and approved the settlement amount. Commercial Union
Ins. Co. v. Medical Protective Co., 356 N.W.2d 648, 653 (Mich. App. 1984),
aff'd, 393 N.W.2d 479 (Mich. 1986).
In Central Quality Services Corp. v. Ins. Co. of North America, C.A. No. 87-CV074473-DT (E.D. Mich. September 6, 1989), aff'd, 977 F.2d 580 (6th Cir. 1992)(Table), the court refused to permit coverage where the insured knew there was a "substantial probability" of a loss where the insured knew or should have known before the policy was issued that chemicals had been released on its property resulting in groundwater contamination. See also Inland Waters Pollution Control, Inc. v. National Union Fire Ins. Co., 997 F.2d 172 (6th Cir. 1993). Similarly, in Mitchell Corp. v. Ins. Co. of North America, Kent No. 86-51880-CK (Mich. Cir. Ct. November 29, 1988), a state trial court refused to allow coverage under policy issued after a waste generator had received a PRP notice.
granted summary judgment to a later insurer on this basis in Containers
Specialties, Inc. v. Aetna Casualty & Surety Company, No. 95-CV-40154
(E.D. Mich. July 8, 1997) while ruling that questions of fact precluded
summary judgment to an earlier insurer.
NUMBER OF OCCURRENCES
Michigan courts are in disarray on this issue. In Gibbs v. Armovit, 182 Mich. App. 425, 452 N.W.2d 839 (1990), the Michigan Court of Appeals suggested that courts should use an "effect" analysis, holding that the limits of the insured's malpractice policy were determined by the injury suffered by the claimants, not the separate acts of negligence that caused them. In general, however, it seems that Michigan would use a "cause" test, as was subsequently applied by Judge Churchill in the Sarabond litigation in federal court (Dow Chemical Co. v. Associated Indemnity Corp., 727 F.Supp. 1524 (E.D. Mich. 1989)). In that case, the court found that each installation of the insured's defective mortar product (Sarabond) was a separate occurrence. See also Michigan Chemical Corp. v. Am. Home Assur. Co., 530 F.Supp. 47 (E.D. Mich. 1984), rev'd, 728 F.2d 374 (6th Cir. 1984)(liability for damage to dairy herds measured by number of shipments of contaminated feed). More recently, Judge Churchill has ruled in a separate Dow coverage dispute that multiple claims for property damage arising out of an inherently defective product should be treated as a single "occurrence" to the extent that the harm flowing from the defect was not caused or affected by subsequent factors over which the insured had any control. Associated Indemnity Corp. v. Dow Chemical, 814 F.Supp. 613 (E.D. Mich. 1993).
In the most
recent case to revisit this issue, the Court of Appeals declared in
Dow Corning v. Continental Cas. Co., No. 200143 (Mich. App. October 12,
1999) that each woman who received a defective breast implant product was
a new “occurrence”, rejecting Highlands’ claim that all of the claims were
attributable to one “occurrence,” namely Dow Corning’s decision to market
The Supreme Court of Michigan refused to adopt the Lamb-Weston approach that would pro-rate conflicting "other insurance" terms as mutually repugnant. St. Paul Fire & Marine Ins. Co. v. American Home Assurance Company, 514 N.W.2d 113 (Mich. 1994)("pro rata" and "excess" terms not in conflict). Further, the court ruled that "other insurance" clauses only apply when two policies cover the same loss during overlapping periods of insurance company and do not apply to successive injuries in different periods
two excess clauses or an excess clause and an “escape” clause conflict,
both will be required to pay as the clauses are mutually repugnant. Central
Michigan Board of Trustees v. Employers Reinsurance Corporation, 2000 WL
1526775 (E.D. Mich. October 3, 2000), citing Mary Free Bed Hospital and
Rehabilitation Center v. INA, 345 N.W. 2d 658 (Mich. App. 1983).
The”sudden and accidental” exclusion was upheld in a trilogy of rulings issued by the Michigan Supreme Court in August 1991. Upjohn Co. v. New Hampshire Ins. Co., 438 Mich. 197, 476 N.W.2d 392 (1991); Protective National Ins. Co. v. City of Woodhaven, 438 Mich. 154, 476 N.W.2d 374 (1991) and Polkow v. Citizens Ins. Co., 438 Mich. 174, 476 N.W.2d 382 (1991). While mirroring conflicting interpretations within the court concerning certain aspects of the exclusion, have been found to bar coverage for gradual and intentional contamination but leave unclear which party has the burden of proof and how the exclusion applies in the context of the duty to defend.
In 1994, the Supreme Court ruled that pollution that resulted from the insured's continued operation of a landfill that it had been warned was unsuitable was not "sudden and accidental." Auto Owners Ins. Co. v. City of Clare, 446 Mich. 1, 521 N.W.2d 480 (1994), rehearing denied, 447 Mich. 1202 (1994). However, the court declined to resolve the issue of whether the focus of the exclusion was on the "initial discharge" or the subsequent release from the landfill, finding that under either scenario that discharges of pollutants were outside the exception to the exclusion.
Most recently, the Supreme Court ruled in American Bumper and Manufacturing Company v. Hartford Fire Ins. Co., 452 Mich. 440, 550 N.W.2d 475 (1996) that liability insurers must provide a defense to PRP claims until such time as they establish that the insured has no liability or that the factual basis for any liability is outside the scope of their coverages.
Relying on American Bumper, Judge Enslen declared in Tiscornia v. The Travelers Corp., 1996 U.S. Dist. LEXIS 17691 (W.D. Mich. October 28, 1996) that summary judgment on the basis of the pollution exclusion was inappropriate since the underlying allegation that pollution had occurred "through a variety of means" created at least a question of fact" as to whether the discharges were "sudden and accidental" or not. Similarly, in R.W. Meyer, Inc. v. ITT Hartford, No. 1:95 CV 614 (W.D. Mich. December 6, 1996), Judge Enslen declined to grant summary judgment for insurers on the basis of the exclusion, despite evidence that the insured had discharged electroplating wastes into the sewer system, where there was evidence than a 1982 rupture of a water pipe had been a significant source of the pollution of the site.
Recent Michigan rulings have suggested that is the "secondary discharge" of leachate from a landfill that should be looked to in considering the application of the exclusion. The Supreme Court has recently vacated a ruling of the Court of Appeals adopting a "secondary discharge" analysis. Graham v. Neff, 1999 Mich. LEXIS 2540 (Mich. November 2, 1999). See also County of Kent v. Home Ins. Co., 219 Mich. App. 250, 551 N.W.2d 424 (1996), vacated on other grounds, 1997 Mich. LEXIS 2121 (Mich. August 29, 1997). However, Michigan courts have suggested that such an analysis may still be appropriate, as it directed the trial court to determine "whether the discharges that occurred from the landfill into the environment" were "sudden and accidental." In South Macomb Disposal Authority v. Westchester Fire Insurance Company, 608 N.W.2d 814 (Mich. App. 2000), the Michigan Court of Appeals found that any “secondary discharge” analysis was limited to locations where the pollutants were meant to be contained or collected.
Federal courts have also upheld the exclusion in cases such as Harrow Products, Inc. v. Liberty Mut. Ins. Co., 64 F.3d 1015 (6th Cir. 1995); Ray Industries, Inc. v. Liberty Mutual Ins. Co., 974 F.2d 754 (6th Cir. 1992); Christopher v. Hartford Ins. Group., Case No. 89-CV-72492-DT (E.D. Mich. July 1, 1992). However, in Employers Ins. Co. of Wausau v. Petroleum Specialties, Inc., 69 F.3d 98 (6th Cir. 1995), a favorable lower court ruling was reversed due to uncertainty as the sources of pollution (see below).
Intentional discharges of pollutants are excluded under Michigan law, even if the discharges are caused by a third party. In Matakas v. Citizens Mutual Ins. Co., 207 Mich. App. 642, 509 N.W.2d 898 (1993), the Michigan Court of Appeals ruled on December 6 that a landlord could not obtain coverage for the cost of cleaning up pollution caused by the intentional disposal practices of its tenant, even where the insured is "a truly innocent landowner who knows nothing of the polluting activities of a tenant or trespasser."
Michigan law is unsettled on the issue of whether isolated "sudden and accidental" discharges may compel coverage. In South Macomb Disposal Authority v. American Ins. Co., 608 N.W.2d 814 (Mich. App. 2000), the court further found that it was appropriate to consider isolated incidents of pollution where the insured had brought forward evidence of specific discharges that were out of the ordinary and which had resulted in contamination that could be distinguished from pollution that had resulted from the ongoing leakage from the porous bottoms of the landfills. In Upjohn, Judge McKeague undertook a "microanalytic" view of the various sites at which a waste generator had been named as a PRP. However, the same judge reached a different result in an "owned site" case. In Harrow Products, Inc. v. Liberty Mut. Ins. Co., 833 F.Supp. 1239 (W.D. Mich. 1993), aff'd,64 F.3d 1015 (6th Cir. 1995),the Sixth Circuit affirmed a lower court's decision to grant summary judgment on the duty to defend, despite evidence of a few isolated accidental spills, holding that these discharges occurred in the regular course of the insured's business and could not therefore be viewed as abrupt or "sudden." Accord, Containers Specialties, Inc. v. Aetna Casualty & Surety Company, No. 95-CV-40154 (E.D. Mich. July 8, 1997)("where the totality of the circumstances indicates a regular pattern of release of hazardous waste, discrete incidents of sudden or accidental release will not satisfy the requirements of the single "sudden or accidental exception").
In Traverse City Light and Power Board v. The Home Ins. Co., 209 Mich. App. 112, 530 N.W.2d 150 (1995), the Michigan Court of Appeals ruled that the pollution exclusion clearly applied where the insured had discharged waste twice a week for a period of twelve years. A dissenting judge contended that the trial court had properly found a duty to defend under Polkow until such time as it was clear whether these discharges were the source of the pollution. Consistent with this view, the Michigan Court of Appeals found a duty to defend where questions of fact existed as to whether the causes of pollution are "sudden and accidental."
In Federated Mut. Ins. Co. v. Auto-Owners Ins. Co., 1995 WL 855426 (Mich. App. September 8, 1995), leave to appeal denied, 550 N.W.2d 790 (Mich. 1996), the Court of Appeals issued an unpublished order finding that minute releases that occurred every time a customer pumped gas at the insured's service station were "sudden and accidental." the court ruled that a release that commenced abruptly did not cease to be "sudden" merely because a period of time elapsed before it was discovered. The court also refused to find that the releases were not "sudden" because they were "periodic."
The Sixth Circuit ruled in Employers Ins. Co. of Wausau v. Petroleum Specialties, Inc., 69 F.3d 98 (6th Cir. 1995) that a federal trial acted prematurely in dismissing a property owner's indemnity and defense demands arising out of a MDNR claim where the insured had presented concrete evidence of possible accidental spills during the insurers' 1950s policies. The court distinguished its ruling in Harrow as involving a claim where the insured had relied solely on speculative evidence.
There is limited Michigan authority on the issue of whether drafting history information is relevant to interpreting the meaning of the exclusion. In Dow Chemical Company v. Fireman’s Fund Insurance Company, No. 96-10298 (E.D. Mich. November 1, 1999), Judge Richards ruled that Dow Chemical could depose insurer employees concerning their understanding of the exclusion as it relates to products liability claims even without a preliminary finding that the exclusion was ambiguous.
As yet, the Michigan Supreme Courts has not addressed the issue of whether the "sudden and accidental" discharge must occur during the policy period in order to trigger coverage. However, in Employers Ins. of Wausau v. Petroleum Specialties, Inc., Case No. 91-CV-74210 (E.D. Mich. January 31, 1997), Judge DeMascio suggested that earlier sudden and accidental releases might form a basis for coverage under later policies. Similarly, Judge Edmunds ruled in Aetna Casualty & Surety Co. v. Dow Chemical Co., 24 F.Supp.2d 440 (E.D. Mich. 1998) that there was no such requirement under ISO forms and that the language in the London NMA 1685 pollution exclusion clause requiring that a “sudden” happening take place during the policy was ambiguous in that the “happening” could be interpreted to mean many things, including the initial release of the contaminant, the release into a landfill, subsequent releases from a landfill into the environment or the ultimate damage from the release.
Damage to an aquifer was held not to involve a discharge “into or upon any water course or body of water” in Aetna Casualty & Surety Co. v. Dow Chemical Co., 24 F.Supp.2d 440 (E.D. Mich. 1998). The District Court ruled that a “body of water” meant an aggregate of water having defined boundaries, whereas “water course” was a running stream of water flowing in a particular direction.
Absolute exclusions were upheld in McGuirk Sand and Gravel, Inc. v. Meridian Mutual Ins. Co., 220 Mich. App. 347, 559 N.W.2d 93 (1996)(exclusion is just as described--"absolute"); Aetna Casualty & Surety Co. v. Dow Chemical Co., 933 F.Supp. 675 (E.D. Mich. 1996); Davis Oil v. Braganini, Kalamazoo No. D 90 3159 CE (Mich. Cir. Ct. September 29, 1992)(private claim for leaking tanks); Indusco Supply Co. v. The Hartford Fire Ins. Co., Kalamazoo No. D-90-2980-CZ (Mich. Cir. Ct. February 15, 1991)(personal injury claim for on the job accident); Doyen d/b/a Care Free Cove Resorts v. Travelers Ins. Co., No. 90-4091 (Mich. Cir. Ct. 1991)(LUST claims); Horner Equipment Co. v. INA, Case No. 90 CIV 10002 BC (E.D. Mich. December 18, 1990)(LUST claims). See also Royal Ins. Co. v. Bithell, 868 F.Supp. 878 (E.D. Mich. 1993)(raw sewage held to be a "pollutant or contaminant" under first party policy).
In Dow, the
U.S. District Court rejected the insured's argument that there was at least
a duty to defend insofar as it had sent commercially valuable products
or non-hazardous materials to third party sites, ruling that the exclusion
did not support such fine distinctions.
However, the exclusion has been held not to defeat coverage for claims brought by a service station operator against the contractor that installed gasoline containment systems. In Oscar W. Larson Co. v. United Capitol Ins. Co., 64 F.3d 1010 (6th Cir. 1995), the Sixth Circuit ruled that the second part of the exclusion, which refers to any "governmental direction or request," only applied to governmental claims and could not be parsed into (1) a "governmental direction" and (2) a request by any party. Further, the court ruled that "operations" portion of the first part of the exclusion, holding that this was only intended to apply to existing pollution that was worsened by the insured's conduct. In a companion action, Judge Gibson had earlier ruled in Action Auto Stores, Inc. v. United Capitol Ins. Co., File No. 5:910CV-32 (W.D. Mich. February 8, 1993) ruled that the insured's installation of gas tanks at the plaintiff's service station was not an "operation" involving the transportation of "pollutants" since any gasoline that the insured transported to the site was in a container. Nor were these operations designed to remedy pollution. On September 7, Judge Gibson again ruled that gasoline was not a "pollutant" until it was discharged into the environment and that the insured's "operations," while pollution-related, were not directed towards testing for or remediating contamination so as to be excluded.
The U.S. Court of Appeals for the Sixth Circuit has ruled in Meridian Mutual Insurance Company v. Kellman, 197 F.3d 1178 (6th Cir. 1999) that, under Michigan law, total pollution exclusions do not preclude coverage for injuries that occur in the immediate vicinity of the area where a commercial product is being applied. The court affirmed a Michigan District Court’s declaration that Meridian Mutual was obligated to defend a suit by a school teacher had inhaled fumes from chemicals that a painting contractor was applying to drywall in the area immediately adjacent to her classroom. Noting the “disarray” in the case law on this issue, the court declared that it could not be said that the exclusion unambiguously precluded coverage for such claim.
In contrast to Kellman, a federal district court ruled in Gulf Insurance Company v. City of Holland, 2000 U.S. Dist. LEXIS 19602 (W.D. Mich. April 3, 2000) that respiratory injuries suffered by neighboring residents who inhaled chlorine gas that was emitted due to an accidental combination of alum and other substances emitted from a municipal wastewater treatment plant plainly arose out of a “discharge” of pollutants.
Court of Appeals has also ruled that private claims against an electric
utility were not excluded since a utility pole was not "premises" owned
or occupied by the insured. Lansing Board of Water and Light v. USF&G,
No. 160059 (Mich. App. September 1, 1995).
Claims for lost profits or lost business opportunities did not allege physical injury to tangible property, nor did they arise out of any injury to property, so as to constitute "property damage." Fitch v. State Farm Fire & Cas. Co., 211 Mich. App. 330, 535 N.W.2d 583 (1995). See also Highlands Coop. Assoc. v. The St. Paul Fire & Marine Ins. Co., No. 1:92 CV 799 (W.D. Mich. May 5, 1995)(claims for breach of contract based on failure of a fuel saving device to perform as efficiently as promised did not allege injury to the plaintiff's furnace or any other physical injury to tangible property that might constitute "property damage").
The negligent failure to inspect and detect preexisting property damage and make disclosure concerning a home's condition was held not to be covered under a liability policy in Michigan Educational Employees Mutual Ins. Co. v. Karr, No. 200274 (Mich. App. February 13, 1998).
Reproduction, Inc. v. Hartford Insurance Company, 800 F.2d 617 (6th Cir.
1986), the U.S. Court of Appeals for the Sixth Circuit used an economic
test for determining whether “property damage” had resulted from the insured’s
improper placement of sewage lines. As yet, the sewage lines had
not caused damage to the property around them, nor had they resulted in
a loss of use. Nevertheless, the Sixth Circuit ruled that there was
“property damage” because the property had suffered a loss in value whether
or not it had caused tangible injury to the land. Note that
the policy in question did not require that there be any “physical” injury
to tangible property in order for there to be “property damage.”
punitive damages. Peisner v. Detroit Free Press, 304 N.W.2d 814 (Mich.
App. 1981). To the extent that such awards may arise (e.g. from courts
in other states), Michigan courts have ruled that public policy only prohibits
coverage if the insured not only acted deliberately but was motivated by
the assurance or belief that he would be indemnified by insurance for the
consequences of his deliberate acts. School District for the City
of Royal Oak, 912 F.2d 844 (6th Cir. 1990). See also Meijer v. General
Star Indemnity Co., 826 F.Supp. 241 (W.D. Mich. 1993).
STANDARDS FOR POLICY INTERPRETATION
Michigan courts assume insurance contracts are contracts of adhesion. Powers v. Detroit Automobile Inter-Insurance Exchange, 427 Mich. 602, 398 N.W.2d 411 (1986). Courts give them construction most favorable to the insured, particularly exceptions to coverage which are strictly construed against the insured. Powers, supra; Pietrantonio v. Travelers Ins. Co., 282 Mich. 111, 116, 275 N.W. 786 (1937). "Reasonable expectations" doctrine followed in Fresard v. Michigan Millers Mutual Ins. Co., 97 Mich. App. 584, 296 N.W.2d 112 (1980), aff'd, 414 Mich. 686, 327 N.W.2d 286 (1982) and Crowell v. Federated Life & Cas. Co., 397 Mich. 614, 347 N.W.2d 503 (1976).
Under Michigan law, if an insurance contract is unambiguous, it should be interpreted according to its plain meaning. Clevenger v. Allstate Ins. Co., 505 N.W.2d 553, 557 (Mich. 1993).
As a general rule, extrinsic evidence of contracting intent is admissible to explain but not to contradict a written contract term. Union Oil Co. v. Newton, 245 N.W.2d 11 (Mich. 1976) Thus, in Ford Motor Co. v. Northbrook Ins. Co, 1988 U.S. App. LEXIS 730 (6th Cir. January 20, 1988), evidence of specific discussions between the parties was admitted on the issue of whether Ford's SIR was "underlying insurance." Several courts have ruled, however, that extrinsic evidence may be admitted, even without a prior determination that policy terms were ambiguous, in order to develop a latent ambiguity. Sawyer v. Arum, 690 F.2d 590, 593 (6th Cir. 1982); Dow Chemical Company v. Fireman’s Fund Insurance Company, No. 96-10298 (E.D. Mich. November 1, 1999) and NAG Enterprises, Inc. v. Allstate Industries, 285 S.W. 2d 770 (Mich. 1979).
must give specific notice of the inclusion of a new policy exclusion in
a renewal policy. Koski v. Allstate Ins. Co., 213 Mich. App. 166, 539 N.W.2d
561 (1995), aff'd on other grounds, 1998 WL 39157 (Mich. February 3, 1998).
A failure to do so will result in the insurer being estopped to rely on
the provision. See also Amway Distributors Benefits Ass'n v. Federal
Ins. Co., 1997 WL 8196367 (W.D. Mich. November 26, 1997)(insurer must do
more than give insured general admonition to read policy carefully).
THEORIES OF ALTERNATIVE LIABILITY
In Abel v.
Eli Lilly & Co., 343 N.W.2d 164 (Mich. 1984), the Michigan Supreme
Court adopted a modified theory of alternative liability for DES claimants,
holding that if a plaintiff brought all possible defendants into court
and showed (1) that all the defendants had acted negligently; (2) that
plaintiffs had been harmed by the conduct of one of the defendants, and
(3) that plaintiffs, through no fault of their own as measured by the traditional
due diligence standard could not identify the manufacturer of the product
which caused them harm would shift to each defendant to prove by a preponderance
of the evidence that it neither produced nor marketed the product ingested
by the plaintiff's mothers. Defendants who were unable to exculpate
themselves would be held jointly and severally liable. In the asbestos
context, a federal district court ruled in Marshall v. Celotex Corp., 652
F.Supp. 1581 (E.D. Mich. 1987) that recovery might be allowed on a concerted
action theory if defendants conspired to suppress information about asbestos
TRIGGER OF COVERAGE
Coverage is triggered on the date that the insured’s negligent acts result in injury–the negligent acts themselves are not a trigger. Moss v. Shelby Mutual Ins. Co., 105 Mich. App. 671, 308 N.W.2d 428 (1981)(negligent construction of deck that collapsed after policy expired did not trigger coverage).
The Michigan Supreme Court has ruled that "manifestation" is not the sole trigger for pollution liability claims, adopting instead a broad "injury in fact" analysis. In Gelman Sciences, Inc. v. Fidelity & Cas. Co., 456 Mich. 305, 572 N.W.2d 617 (1998), the Supreme Court ruled in two consolidated appeals brought by Gelman and Arco Industries that coverage for pollution claims is not restricted to the year in which property damage is discovered but should instead extend to all years in which discharges of pollutants occur or contamination continues. The court set forth the following test: "where a plaintiff can show that property damage occurred sometime within one or several of the relevant policy periods, and the plaintiff presents credible evidence (such as expert testimony) that fairly supports that plaintiff's claims regarding when property damage occurred, courts should accept such evidence as dispositive." Although the policyholder will have the burden of proving the fact and amount of damage occurring in each year, this rule should not be applied so strictly as to confound the insured's reasonable expectations of coverage. Similarly, the court noted in dicta, that reasonable means of allocation should be devised to prorate such losses among insurers, while leaving open the issue of whether this would be done based upon the Sixth Circuit's ruling in INA v. Forty Eight Insulations or the D.C. Circuit's "joint and several" analysis in Keene v. INA. Further, the court stated that "To the extent that the state and private parties also may have alleged other types of property damage, such as soil and surface water contamination, the policies would, of course, be triggered when those injuries to the environment first occurred."
Earlier, the Supreme Court had declared in American Bumper v. Hartford Fire Ins. Co., 452 Mich. 440, 550 N.W.2d 475 (1996) that it did not believe that either a "manifestation" or "continuous trigger" approach for such cases. The court noted that either analysis was inappropriate for a case in which the MDNR ultimately accepted a "no action" alternative.
Prior to these Supreme Court decisions, the Michigan Court of Appeals had adopted a "manifestation" trigger in a number of cases. See Arco Industries Corp. v. American Motorists Ins. Co., 215 Mich. App. 633, 546 N.W.2d 709 (1996); Gelman Sciences, Inc. v. Fidelity & Cas. Co., 543 N.W.2d 38, 214 Mich. App. 560 (1995) and Cello-Foil Products, Inc. v. Michigan Mutual Ins. Co., No. 151615 (Mich. App. August 15, 1995), appeal dismissed No. 104107 (Mich. 1997) and Transamerica v. Safeco, 189 Mich. App., 472 N.W.2d 5 (1991)(UFFI).
Conversely, federal courts had generally followed an "injury in fact" approach. Ray Industries, Inc. v. Liberty Mut. Ins. Co., 974 F.2d 754 (6th Cir. 1992); Inland Waters Pollution Control, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 943 F.2d 52 (6th Cir. 1991); Tiscornia v. The Travelers Corp., 1996 U.S. Dist. LEXIS 17691 (W.D. Mich. October 28, 1996) and Dow Chemical Co. v. Associated Indemnity Corp., 724 F.Supp. 474 (E.D. Mich. 1989). But see, Employers Ins. of Wausau v. Petroleum Specialties, No. 91-CV-74210 (E.D. Mich. January 31, 1997)(adopting "manifestation" trigger).
While paying lip service to the “loss in progress” doctrine, Michigan courts have tended to treat it the same as the “known loss” doctrine. See Inland Waters Pollution Control, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 997 F.2d 172 (6th Cir. 1993)("loss in progress" doctrine only precludes coverage if insured has foreknowledge that loss is occurring). In South Macomb Disposal Authority v. American Ins. Co., 22 Mich. App. 635, 572 N.W.2d 686 (1997), the Court of Appeals affirmed that the "loss in progress" doctrine applies to liability policies but declared that a trial court had not erred in refusing to give it effect here, there were questions of fact existed concerning the extent of the insured's knowledge. In Aetna Casualty & Surety Co. v. Dow Chemical Co., No. 93-73601 (E.D. Mich. September 17, 1998), Judge Edmunds declared that the application of the loss in progress doctrine depended on whether Dow was subjectively aware, when it purchased the policies in question, that there existed “an imminent threat of the contamination” for which it was seeking coverage. Similarly, the Court of Appeals declared in an unpublished ruling that the Aloss in progress@ and Aknown risk@ doctrines both are limited to cases in which the insured knew or reasonably should have known that there was a substantial probability of a loss before the policy period began. Heritage Mutual Ins. Co. v. East Bank Associates, Ltd, No. 1933112 (Mich. App. February 19, 1999).