Michigan Coverage Decisions, Issue 14

Warren v Aetna Casualty & Surety Company

Unpublished. Decided March 28, 2000. Michigan Court of Appeals Docket Number 215045.

This is an action for bad faith. The plaintiff was sued for employment discrimination and defamation. All parties agreed that the employment discrimination claim was not covered under the policy. The defamation claim was dismissed and apparently a judgment was taken against plaintiff insured on the discrimination claim.

Plaintiff claimed that it was bad faith for defendant to fail to offer a significant amount in settlement of the defamation claim. Plaintiff also claimed that it was bad faith for defendant not to pay for counsel of his choosing. Plaintiff also claimed that it was bad faith for the defendant to direct defense counsel to file a motion for partial summary disposition to dispose of the defamation count which would leave the insured without any covered claims resulting in the defendant not paying his defense costs.

With respect to the offers of settlement, the Court of Appeals held that the defendant was justified in not offering large amounts in settlement of the defamation count as they had a good faith belief that it was without merit. With respect to retaining counsel of the insured’s choosing, the Court stated that there was no requirement under Michigan law or prior authority for this proposition. With respect to directing counsel to file a partial motion for summary disposition, the Court held that this was not material because the motion was denied and defense costs were paid through trial by defendant.

[su_box title=”Kallas & Henk Note”] While on its face this decision rejects the bad faith claims of the insured, the discussion of the Court with regard to the argument that it would have been bad faith to move to dismiss the covered count while leaving the insured to defend the uncovered counts, is somewhat troubling. The Court stated: “While it is arguable that this action could be considered bad faith because it shows disregard for the insured’s interest of having his defense costs paid by defendant . . .” In making this statement, the Court did not explain why this could be bad faith. There is nothing in Michigan case law to suggest that an insurer (or defense counsel) must refrain from prevailing on portions of the lawsuit merely because they are covered under the insurance contract and other portions of the lawsuit are not. Any such requirement would, in essence, expand the insurance contract to require the insurer to defend claims not covered. [/su_box]


Sharp v Logwood and Farm Bureau Insurance Company

Unpublished. Decided April 21, 2000. Michigan Court of Appeals Docket Number 214322.

Plaintiff sought coverage against defendant homeowner’s carrier for damages caused by a resident of the insured’s home from a sexual assault. The homeowners were conducting a child care business in their home. Defendant insurer had denied coverage based on its business pursuits exclusion. Plaintiffs contended that even though the business pursuits exclusion was applicable, defendant insurer was liable as a result of silent fraud in not informing the homeowners of the fact that the policy excluded coverage for business pursuits or that the insured needed coverage for the day care business.

The Trial Court granted summary disposition in favor of defendant insurer. The Court of Appeals affirmed finding that neither the agent nor the insurer had any duty to inform the insured of the adequacy of coverage except in specific circumstances. The court also found that there was no evidence that the insurer had knowledge of the operation of the day care business in the home.

[su_box title=”Kallas & Henk Note”] This decision relies heavily on the recent Supreme Court decision in Harts vs. Farmers Insurance Exchange, 461 Mich 1; 597 NW2d 47 (1999). In Harts, the Court held that an agent may not be liable for failure to advise of the adequacy of coverage except where (1) the agent misrepresents the nature or extent of coverage offered or provided, or (2) an ambiguous request is made that requires clarification, or (3) inquiry is made that requires advice and the agent gives inaccurate advice, or (4) the agent assumes additional duties by either express agreement or promise to the insured. It appears that the court applied this standard to the insurer (as opposed to the agent) because the agent was a direct employee of the carrier (as opposed to an independent agent). Michigan case law provides that where an independent agent deals with the insured, the carrier has no duty to provide adequate or complete coverage.  [/su_box]


Swikoski v Citizens Insurance Company, Hartford Fire Insurance Co., and Republic Insurance Co.

Unpublished. Decided May 2, 2000. Michigan Court of Appeals Docket Number 210343.

Plaintiffs, the personal representatives of the estates of three individuals who drowned, brought a claim against a fishing boat captain alleging that his negligence caused the tragedy. Defendant issued a commercial general liability policy to the Indian tribe which issued the fishing license to the boat captain. The carrier denied coverage on the basis that the fishing boat captain was not an insured as defined in the policy. Plaintiffs contended that the fishing boat captain was an “officer” of the tribe (the definition of insured included officers).

The Trial Court granted summary disposition to the insurer finding that the fishing boat captain was not an “officer” of the tribe. The Court of Appeals affirmed finding that the definition of insured was not ambiguous. The Court also held that the fact that the tribe (1) issued a restricted license to the captain (2) regulated his manner and method of fishing and (3) was given a percentage of revenues from the fishing activity did not make him an “officer” for purposes of the insurance coverage.

[su_box title=”Kallas & Henk Note”] While there is nothing unusual about the findings of the Court of Appeals in this case, the procedural posture of the case is quite curious. The estates of the decedents had sued the tribe. The tribe obtained a dismissal based on sovereign immunity. This action is apparently a direct action against the insurer by the estates. Under Michigan law, an insured party is not considered a third party beneficiary of a commercial liability insurance contract. It does not appear, however, that this was raised because the Court of Appeals’ decision makes no reference to this basic Michigan insurance law.  [/su_box]


Scottsdale Insurance Company v Roumph

Published. Decided May 4, 2000. United States Court of Appeals for the Sixth Circuit.

Plaintiff issued a commercial general liability policy to a Michigan social welfare agency. The social welfare agency placed a child into a foster home. The child then sexually molested another child. The lawsuit was filed in a Michigan state court. The insurer filed this declaratory action in federal court seeking a ruling on the applicability of a “Sexual Misconduct Limitation Endorsement”.

The Federal District Court dismissed the declaratory action finding that the matter should be determined in state court. The Sixth Circuit Court of Appeals affirmed the District Court finding that the Declaratory Judgment Act gives the Trial Court a broad range of discretion on whether to accept a declaratory action. The District Court had relied on the fact that there was no Michigan law interpreting a similar sexual misconduct endorsement and that such interpretation should be left to the state court. The Court of Appeals found that such a consideration was sufficient to uphold the dismissal, although it pointed out that such a consideration does not compel a dismissal.

[su_box title=”Kallas & Henk Note”] This decision will certainly make it more difficult for insurers to obtain declaratory relief in the federal courts as opposed to state court in Michigan. While the decision does not mandate a dismissal in favor of state court, most trial judges in the federal court will have a reluctance to accept a declaratory action where a state court is already handling the underlying lawsuit. [/su_box]

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