Misrepresentation on Application for Insurance
Principles in Interpreting Insurance Contract Language
'Occurrence' and 'Accident' in the Meaning of Insurance Policies
No Estoppel in Enforcing Policy Exclusions
Pollution Exclusions and Related Issues
Bad Faith Refusal to SettleThis is an appeal of the trial court’s order granting defendant-insurer’s motion for summary disposition. The plaintiffs in this case were defended by the defendant-insurer in an underlying wrongful death case based on a fatal head-on collision. The underlying case failed to settle and proceeded to trial where the jury awarded in excess of $3 million against the plaintiffs. The defendant tendered its policy limits of $750,000, leaving the plaintiffs liable for the balance of the judgment. The plaintiffs then filed this action against the defendant, alleging bad faith refusal to settle the underlying action. The trial court granted the defendant’s motion for summary disposition, concluding that the defendant could not be liable for bad faith because it offered to settle for the policy limits before trial. The court of appeals reversed the trial court’s ruling and remanded the case for further proceedings.
The evidence showed that the plaintiffs’ attorneys had advised the defendant several times of the adverse liability potential in this case and that the exposure could easily exceed the insurance coverage available to the insureds. Despite requests by the insured’s counsel for the $750,000 policy limits, however, the defendant offered $500,000 to settle, which was flatly refused by the underlying plaintiff but with an indication that tender of policy limits could settle the case. The insured’s counsel again requested the defendant to increase its settlement offer to the policy limits of $750,000, but the defendant refused to change its position. The case mediated for $950,000 and the defendant then offered its policy limits to settle the case. Counsel for the decedent’s estate made a counter-offer of $825,000 but the case did not settle and proceeded to trial despite the fact that the insured’s Claims Vice President attended a settlement conference and offered $25,000 over policy limits. Based upon these facts and the elements of bad faith as set forth in Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 426 Mich. 127; 393 N.W.2d 161 (1986), the court of appeals found that a finder of fact could conclude that the defendant had acted in bad faith by rejecting a reasonable settlement offer within policy limits, unduly delayed in accepting a reasonable offer to settle within the policy limit when verdict potential was high, and repeatedly disregarding the advice of counsel (each of which are Commercial Union factors a fact finder may consider in finding bad faith). On the other hand, the court found that "while an insurer has an obligation to act in good faith in settling its insured’s claim, it has no statutory duty to pay in excess of its policy limit or pre-settlement interest on the amount paid in settlement of a tort claim. ..."
Although unpublished, this case has received wide dissemination by the Michigan State Bar’s e-mail service, and it presents ominous implications for any insurer offering an aggressive defense to its insured while protecting its policy limits. In any instance, as here, where the advice of selected defense counsel, or the advice of an adjuster, is disregarded, an insurer must be prepared to document a cogent rationale for refusal to settle for up to policy limits, especially in a high damages case of strong liability, or become a ready target in "bad faith" litigation.
J & J Farmer Leasing, Inc., et al. v Citizens Insurance Co., No. 209236 (Mich. Ct. App. Oct. 22, 1999)
Misrepresentation on Application for Insurance
This case involves a dispute regarding the defendant-insurer’s avoidance of a life and disability policy because of misrepresentations made on the insurance application. The plaintiff, as personal representative of her father’s estate, made a claim for insurance benefits after her father died of a heart attack. The defendant denied the claim and rescinded the contract when it discovered that the decedent had misrepresented his health condition on the insurance application. The plaintiff sued the defendant-insurer for breach of contract and bad faith, as well as misrepresentation of the benefits, terms and conditions of the policy in violation of the Michigan Consumer Protection Act (MCPA).
The decedent’s application contained slash marks in the boxes labeled "NO" as responses to whether decedent had been diagnosed as having, among other things, a heart condition and diabetes. However, in support of its motion, the defendant offered evidence that the decedent had been diagnosed with coronary artery disease and was an insulin-dependent diabetic and argued that it would not have insured the decedent had it been aware of his medical background. In response, the plaintiff argued that the slash marks were not in her father’s handwriting.
The trial court granted the defendant’s motion for summary disposition, concluding that the decedent’s signature appeared authentic and, whether or not he made the slash marks, the decedent adopted them. The court of appeals reversed, holding that there were factual questions as to whether the decedent had authored the slash marks and whether the defendant had relied upon the application in issuing the policy. The court of appeals also held that the defendant was not entitled to summary disposition on the MCPA claim, concluding that while the MCPA exempted conduct specifically authorized under laws administered by a regulatory board or officer acting under statutory authority, a common sense reading of the statute indicates that the Legislature did not intend to exempt illegal conduct. In other words, the court of appeals found that although the MCPA exempts activity regulated by the State Commissioner of Insurance, those insurance activities alleged to be illegal are not exempt. Furthermore, the court of appeals held that the MCPA makes an exception to this statutory exemption for private causes of action.
The Supreme Court reversed the court of appeals’ ruling on the breach of contract count, reinstating the trial court’s order granting defendant’s motion for summary disposition. Specifically, the Court found that the plaintiff had not challenged the authenticity of her father’s signature on the application and offered no evidence as to how the slash marks were made. The Court stated that by simply denying that the slash marks were made by her father, the plaintiff was essentially arguing that her father signed a blank application and someone else filled it in. The Court, however, rejected this argument as mere speculation and found that as a matter of law, the plaintiff had not raised a genuine issue of fact.
The Court also ruled that it was not necessary for the defendant to show that it relied on the application in issuing the insurance policy. The Court looked to M.C.L.A. 500.2218 which essentially states that falsity in an application for disability insurance may not bar the right to recovery unless the false statement "materially affected either the acceptance of the risk or the hazard assumed by the insurer." Evaluating the concepts of "acceptance of the risk" and "hazard assumed," the Court stated:
[W]hile a misrepresentation in an insurance application clearly cannot affect an insurer’s "acceptance of the risk" unless the insurer relied on the misrepresentation in issuing the policy, we conclude that such a misrepresentation materially affects the "hazard assumed" by an insurer whenever the facts misrepresented are causally connected to the loss. When such a causal relationship exists, an insurer is entitled to rescind the policy under '2218 even without a showing of reliance.
The Court found that because the decedent’s misrepresentation about his heart condition was causally related to his death, this representation materially affected the hazard assumed by the defendant, regardless of whether the defendant actually relied upon the misrepresentation.
With regard to the MCPA, the Court agreed with the court of appeals that the statute creates an exception for private causes of action, but reversed the court of appeals’ holding that the MCPA did not exempt those acts "specifically authorized" but alleged to be illegal. Citing Attorney General v. Diamond Mortgage Co., 414 Mich. 603; 327 N.W.2d 805 (1982), the Court stated that the focus is on whether the transaction at issue, not the alleged misconduct, is specifically authorized. Contrary to the court of appeals, the Supreme Court concluded that the Legislature intended to exempt conduct specifically authorized by law, including conduct of disputable legality.
Accordingly, the Michigan Supreme Court has apparently created a troubling new private right of action against insurers under the Michigan Consumer Protection Act, even where traditional breach of contract or bad faith actions may be foreclosed to insured.
Smith v. Globe Life Ins. Co., 460 Mich. 446; 597 N.W.2d 28 (1999)
Principles Utilized in Interpreting Insurance Contract Language
The Michigan Supreme Court, in a case of first impression, found that summary disposition was inappropriate in a case where a homeowner’s insurance company refused to defend an 18-year-old woman in a negligence suit because there was a question of fact whether the women, who was temporarily staying with the home owner, was "in the care of" the home owner. The Court of Appeals determined that the phrase in the home owner’s insurance policy was ambiguous and that there was no genuine issue of material fact that the young woman came within the definition of an insured. The Supreme Court found that the court of appeals had erred and that neither plaintiff nor defendant was entitled to summary disposition.
The young woman had been staying in the home of her boyfriend and his mother. While plaintiff Danielle Henderson was visiting the household, an altercation occurred with some strangers during which Henderson was stabbed. Henderson subsequently filed a lawsuit alleging that the young woman and her boyfriend had negligently provoked the incident with the strangers resulting in her injury.
The lawsuit was tendered to the defendant-insurer, which assumed a defense for the boyfriend, but declined to defend the young woman because she was not "insured" within the meaning of the insurance policy. Henderson obtained a default judgment for $75,000 against the woman. In consideration of Henderson’s promise not to proceed against her personal assets, the women assigned all rights, benefits and claims she had against State Farm to Henderson.
Henderson subsequently filed a complaint, as the woman’s assignee, against State Farm alleging that it breached its obligations when it did not defend and provide coverage to the woman under the homeowners policy. The trial court denied plaintiff’s motion for summary disposition and granted the motion of defendant-insurer, finding that, at the age of 18, the woman was a legal adult and was not under the control, guidance, supervision, management or custody of the homeowners. As such, the court found that the State Farm policy did not provide coverage because she was not "in the care of" the insured. However, the appeals court found that the phrase "in the care of" was ambiguous and found that the woman came within the definition of "insured."
The Michigan Supreme Court found that the phrase "in the care of" was not ambiguous: "[t]he Court of Appeals failed to recognize that this phrase is a colloquial or idiomatic phase that is peculiar to itself and readily understood by speakers and readers of our language." This is significant because the Court of Appeals did a word-by-word analysis of the phase; but the Supreme Court opined that the "mere fact that various dictionaries define the word ‘care’ differently does not make the word ‘care’ ambiguous. To so hold would make virtually any word ambiguous, thus derailing proper interpretation where word-by-word explication is called for." However, the Court found that while the phrase is not ambiguous, "this is not to say that application of the phrase to a given set of facts will always be easy. This is the case here." The Court articulated a series of eight "non-exclusive, common sense factors" relevant for the fact finder to consider when answering when someone is "in the care of someone else." In this regard, looking at the competing motions in a light most favorable to either party, the Court found genuine issues of material fact requiring a trial on the merits.
Danielle Henderson, Assignee and Dawn Mysierowicz vs. State Farm Fire and Casualty Co., 460 Mich. 348; 596 N.W. 2d 198 (1999)
'Occurrence' and 'Accident' Within the Meaning of an Insurance Policy
The insurer was not responsible for payment of a judgment reach by settlement in the underlying lawsuit between plaintiff-police officer and the insured because there was no "occurrence" under the policy. The insured had resisted arrest which was construed as an intentional act that created a risk of harm that should have been anticipated. Therefore, resulting injuries could not be characterized as an "accident" which the policy language required for there to be an occurrence.
The court observed that recent cases have interpreted "accident" to mean "an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected," and that the definition must be evaluated from the "standpoint of the insured rather than from the standpoint of the injured party." Although "accidents" need not result solely from unintentional conduct, "when an insured’s intentional actions create a direct risk of harm, there can be no liability coverage for any resulting . . . injury, despite the lack of an actual intent to . . . injure." The court found no occurrence and no coverage.
Czarnowski v State Farm Fire and Casualty Co., No. 216599 (Mich. Ct. App., Jan. 18, 2000)
No Estoppel in Enforcing Policy Exclusions
The Michigan Supreme Court held that an insurer was not estopped from enforcing its policy exclusions against the plaintiff, a judgment creditor of the insured. The plaintiff had argued that answers to interrogatories, submitted by the insured and its counsel selected by the insurer under a reservation of rights, were misleading in that the answer indicated that there was coverage. The Court noted the "general rule that ‘[n]o attorney-client relationship exists between an insurance company and the attorney representing the insurance company’s insured. The attorney’s sole loyalty and duty is owed to the client, not the insurer." (citation omitted). The Court accordingly found that the answer given by the insured is not chargeable to the insurer, but only to the insured, and there is "no additional duty that requires an insurer that is not a party to the lawsuit to notify a plaintiff about a potential lack of coverage." The Court found that the insurer cannot be estopped from enforcing the policy exclusions against plaintiffs.
Kirschner v Process Design Associates, Inc. and General Accident Ins. Co. of America, 459 Mich. 587; 592 N.W. 2d 707 (1999)
Pollution Exclusions; Sudden and Accidental Exception to Pollution Exclusion; Lost Insurance Policies; Defense Costs
The Michigan Court of Appeals reversed the trial court’s denial of defendant-insurers’ motion for summary disposition on the application of the pollution exclusion. The consolidated cases arose from environmental contamination caused by leachate from four landfill sites operated by plaintiff from the late 1960s to the mid-1980s. After consideration, de novo, on the merits of the motion, the Court of Appeals found that, contrary to the trial court’s ruling, no genuine issue of material fact existed on whether a 1971 discharge of leachate in groundwater from an underdrain could be considered "the initial discharge of pollution into the environment," and thus not "sudden and accidental." Key to the court’s decision was the finding that "the underdrain was not designed as an containment system." Thus, the court rejected the notion that the discharge of leachate into groundwater from the underdrain could be construed as either sudden or accidental.
The court of appeals also ruled that the trial court erred in granting summary disposition to the insured with regard to the existence and terms of the lost insured policies from Citizens Insurance Co. which the insured alleged did not contain a pollution exclusion clause. The Court of Appeals found genuine issues of material fact precluding summary disposition. Finally, the court held that if plaintiff can establish that the policies did exist and that they did not contain the relevant pollution exclusion clause, then Citizens would have a duty to defend, and would thus be responsible for defense costs, including sums already expended by an excess carrier.
South Macomb Disposal Authority v Westchester Fire Ins. Co., et al., 239 Mich. App. 344; 608 NW2d 814 (2000)