Michigan Coverage Decisions, Issue 163

Tooling, Manufacturing, and Technologies Assn. v. Hartford Fire Ins. Co.

Published. Decided September 11, 2012 US 6th Circuit Court of Appeals Docket No. 10-2480.

The plaintiff obtained a fidelity policy from the insurer, which covers losses incurred directly due to employee theft. A short time after the policy was issued, one of the plaintiff’s employees was found to be embezzling funds from a separate limited liability company, which the plaintiff controlled and from which the plaintiff derived most of its income, but which was not an insured. The insurer denied coverage because the LLC suffered the theft loss, not the plaintiff, and the LLC was not an insured. The plaintiff filed suit for breach of contract arguing that the LLC should be considered an insured in the policy and, even if it was not, that the plaintiff suffered a direct loss due to the employee theft because the plaintiff receives its income through the LLC.

The district court granted summary judgment for the insurer and the Court of Appeals affirmed. The plain terms of the policy only applied to losses that an insured directly suffered, and not as a result of indirect loss, such as an inability to realize income. The Court reasoned that the plaintiff’s loss merely derived from the theft perpetrated directly against the LLC, and the theft was only a proximate cause of the plaintiff’s loss, because the LLC could not pass through revenue to the plaintiff. The policy did not apply because the LLC was not an insured, and the plaintiff did not directly incur loss as a result of the theft.

[su_box title=”Kallas & Henk Note”] While the plaintiff argued that the LLC should be considered an insured because it was controlled by the plaintiff and all revenue of the LLC was directed to the plaintiff, the Court looked to the language of the policy which did not evidence an intent to cover the LLC, particularly when the policy stated that it was for the benefit of the named insureds, and for no other party. [/su_box]


Kokas v. Citizens Ins. Co. of America

Unpublished. Decided September 13, 2012 Michigan Court of Appeals Docket No. 303592.

The plaintiff made a claim for repair of structural damages to his home, including a portion of the house that had separated from the rest of the building. The plaintiff’s homeowner’s policy covered structural damages resulting from a collapse. The policy does not define the term “collapse”, but did provide that a collapse resulting from settling, cracking, shrinking, bulging or expansion is not covered. The defendant asserted that the damages did not result from a collapse as that term is generally understood, and that for coverage to apply, the building had to completely collapse.

A jury trial was conducted to determine the cause of the damage and to interpret the meaning of the policy. After hearing conflicting testimony, the jury returned a verdict for the plaintiff, and the Court of Appeals upheld that verdict. The policy stated that it applied to all losses, except for those specifically excluded. By not defining what constituted a collapse for coverage purposes, the jury could properly consider whether the partial collapse of the building was within coverage. The Court also affirmed an award of penalty interest to the plaintiff, even though a proof of loss was not submitted. The Court held that the insurer had received notice of the loss, and if it was not satisfied with the information provided, it was necessary for the defendant to specify what additional information it needed. Because it did not notify the plaintiff that the notice was insufficient, the plaintiff was excused from providing a proof of loss.

[su_box title=”Kallas & Henk Note”] This decision highlights the fact that critical terms need to be defined in a policy. In addition, with the relaxed requirements for providing a proof of loss, it is even more important to timely notify an insured when the information an insured supplies is not sufficient to establish whether a claim should be paid. [/su_box]


Merlo Const. Co., Inc. v. Citizens Ins. Co. of America

Unpublished. Decided September 25, 2012 Michigan Court of Appeals Docket No. 304184.

The plaintiff insured several items of equipment through a commercial policy with the defendant. The policies provide that coverage is available only for scheduled equipment. During the effective dates of one of these policies, the plaintiff replaced an item of equipment but did not notify the defendant or have the policy schedules changed to reflect the replacement of the equipment. Subsequently, the replacement equipment was stolen. When the defendant denied coverage because the stolen equipment was not listed as a covered item, the plaintiff sued. The trial court held that, because the plaintiff made an honest mistake, it was equitable to require coverage for the stolen equipment. The Court of Appeals disagreed and reversed.

The policy clearly states that it applies only to scheduled equipment and the stolen item was not listed on any policy schedule. While the policy could be reformed to provide for coverage, reformation requires a mutual mistake of fact, and the defendant’s lack of knowledge about the equipment replacement was not a mistake of fact. The plaintiff also argued that, because it paid premiums on a piece of equipment for which no coverage was available, the policy was illusory. The Court of Appeals held that a policy is illusory when the insurer has reason to know that the policy will never provide coverage in foreseeable circumstances, and no such evidence was presented in this case.

[su_box title=”Kallas & Henk Note”] While it may seem that the result for the plaintiff was inequitable, especially for a simple mistake in identifying a piece of equipment, this decision does affirm the premise that an insured is in the best position to look out for its own interests, and should read and understand its insurance policies. [/su_box]


Fremont Ins. Co. v. Izenbaard

Decided September 26, 2011 Michigan Supreme Court Docket No. 144728.

The defendant caused injuries to the underlying plaintiff while driving an all-terrain vehicle on land adjacent to the underlying defendant’s property. The plaintiff provided a homeowners insurance policy to the defendant covering the defendant’s residence, and any premises used by the defendant in connection with that residence. The plaintiff denied coverage because the accident did not arise on the defendant’s property or on premises used by the defendant in connection with that property.

The trial court held that the policy was ambiguous because it did not specifically define the premises for which coverage would be available. The Court of Appeals reversed (see Michigan Coverage Decisions, Issue 156) finding that the land on which the accident occurred was unimproved, and therefore was not a “premises” to which coverage applied. Instead of granting leave to appeal, the Supreme Court reversed on the basis that the term “premises”does not necessarily mean that a structure must have been constructed on the property, particularly since the policy did not define this term.

[su_box title=”Kallas & Henk Note”] This order does not finally determine the coverage issue because the Supreme Court remanded the case to the Court of Appeals for consideration as to whether the adjacent property was “used in connection with” the insured’s property, which is a necessary element for coverage in the policy at issue. [/su_box]


Preston v. Pioneer State Mut. Ins. Co.

Unpublished. Decided October 9, 2012 Michigan Court of Appeals Docket No. 305295.

The plaintiff suffered a fire loss of her residence and made a claim for coverage with the defendant under her homeowners policy. The policy required the plaintiff to cooperate in the investigation of claims, such as submitting to an examination under oath. The plaintiff did appear for an EUO, which took approximately 3 hours, however, the defendant requested a continuation of that examination. The plaintiff would not attend the continued EUO, claiming that she was caring for a terminally ill relative and could not attend. While nine months later she informed the defendant that she would continue the EUO, the defendant denied coverage instead. The plaintiff then filed this suit for breach of contract.

The trial court held that the plaintiff’s excuse for not attending the continued EUO was insufficient, and the Court of Appeals affirmed. The policy required the plaintiff to submit to an examination as often as the defendant reasonably required. When the EUO was first taken, neither the plaintiff nor her attorney objected to the continuation, and attempts were made to re-schedule, until the plaintiff informed the defendant that she would not subject herself to further examination. The plaintiff never argued that the examination was unreasonable, only that her non-compliance was not willful. The policy did not contain an exception for non-compliance that was not willful, and the Court enforced the policy as written.

[su_box title=”Kallas & Henk Note”] This is an interesting decision, not only because of the panel that decided this case, but because of the circumstances surrounding the claim. The fire had been intentionally set, which probably accounted for the plaintiff’s lengthy EUO, and the defendant also examined the plaintiff’s son for an additional 4 hours – and also requested examinations of other relatives. While the defendant arguably had an excuse for not attending the continuation of her EUO, the Court rejected her argument that she substantially complied with her obligations, because the EUO was a condition precedent to coverage, and she never claimed that this condition was unreasonable or unenforceable.  [/su_box]

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