Kalamazoo Acquisit v. Westfield Ins Co ( 2005 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0031p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
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Plaintiff-Appellee, -
KALAMAZOO ACQUISITIONS, L.L.C.,
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No. 03-2323
v.
,
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WESTFIELD INSURANCE CO., INC., -
Defendant-Appellant. -
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Appeal from the United States District Court
for the Western District of Michigan at Grand Rapids.
No. 02-00564—Richard A. Enslen, District Judge.
Argued: October 27, 2004
Decided and Filed: January 19, 2005
Before: KEITH, CLAY, and BRIGHT, Circuit Judges.*
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COUNSEL
ARGUED: Deborah A. Hebert, CARDELLI, HEBERT & LANFEAR, Royal Oak, Michigan, for
Appellant. Floyd E. Gates, Jr., KREIS, ENDERLE, CALLANDER & HUDGINS, Battle Creek,
Michigan, for Appellee. ON BRIEF: Deborah A. Hebert, CARDELLI, HEBERT & LANFEAR,
Royal Oak, Michigan, for Appellant. Floyd E. Gates, Jr., Mark E. Kreter, KREIS, ENDERLE,
CALLANDER & HUDGINS, Battle Creek, Michigan, for Appellee.
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OPINION
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CLAY, Circuit Judge. In this action for breach of a contract for commercial property
insurance, Defendant Westfield Insurance Co., Inc., (“Westfield”) appeals the district court’s grant
of summary judgment in favor of Plaintiff Kalamazoo Acquisitions, L.L.C. (“Kalamazoo”) and
seeks entry of judgment in its favor. Westfield asserts that Kalamazoo is barred from bringing this
action because it entered into a general release with the party who damaged the property insured by
Westfield and hence impaired Westfield’s right of subrogation, in breach of the parties’ policy for
property insurance. The district court held that Westfield waived this argument. Because Westfield
did not waive this argument and because the argument disposes of the case, we REVERSE the
*
The Honorable Myron H. Bright, Circuit Judge of the United States Court of Appeals for the Eighth Circuit,
sitting by designation.
1
No. 03-2323 Kalamazoo Acquisitions v. Westfield Ins. Co. Page 2
judgment of the district court and REMAND with instructions that the district court enter judgment
in Westfield’s favor.
I. FACTS
Kalamazoo owns a commercial multi-tenant building in Kalamazoo, Michigan, which it
began to renovate during late 2000. In order to accomplish the renovations, Kalamazoo hired
Continental Construction (“Continental”) to raise the ceiling of the building’s top floor. To facilitate
construction of a new roof, Continental drilled holes in the existing roof, situating a steel beam in
each hole; ultimately, a total of 12 such beams would support the beginnings of the new roof.
Around February 25, 2001, the city suffered a heavy rainstorm, which caused water to enter
the building by way of the space in between the beams and the edges of the holes in the existing
roof. In an effort to divert the streaming water into the building’s drainage system, Continental
covered the holes with visqueen (a dense plastic material). The visqueen did not succeed in its
mission and the interior of the top three floors of the building sustained serious water damage as a
consequence. Kalamazoo alleges that the total cost of repairing the damage, or the replacement cost
value (“RCV”) of the loss, was $357,968.1
In the aftermath of the storm, Kalamazoo settled its claim against Continental for $208,188,
which it claims was the actual cash value (“ACV”) of the loss.2 In exchange for this sum,
Kalamazoo agreed to release Continental and its insurer, Amerisure, from any and all claims arising
from the water damage. The date of the general release between Kalamazoo and Continental was
September 6, 2001. Kalamazoo first notified Westfield of the release by letter dated November 1,
2001, in which letter Kalamazoo also made a claim for the $149,780 now in dispute. According to
Kalamazoo, this amount represents the difference between the RCV and the ACV. On February 28,
2002, Westfield denied the claim on the grounds that Kalamazoo had breached express conditions
in the parties’ insurance policy (the “policy”) by releasing Continental and Amerisure from further
claims and thereby 3waiving Westfield’s right of subrogation against Continental and Amerisure
without its consent. On June 7, 2002, Westfield made what it calls “a professional concession to
the independent insurance agent handling [Kalamazoo’s] business,” Brief of Appellant at 10, in the
form of a payment to Kalamazoo for $19,788.07 after investigating a June 27, 2001 claim
Kalamazoo had submitted to Westfield in the amount of $24,537.63.4
1
According to the general release between Kalamazoo and Continental, the actual cash value of the water
damage was $208,188. In this action, Kalamazoo seeks $149,780, which it claims is the difference between the total
replacement cost and the actual cash value.
2
Kalamazoo provides no accounting of the expenses that make up this figure. In any event, as our discussion
demonstrates, since this is not a case where the property at issue – here, the building – was totally destroyed, the proper
measure of damages is the cost of repairs, not the actual cash value of the loss. See discussion infra Part IV.
3
Westfield also asserted that the water damage was not a loss covered by the policy.
4
Kalamazoo does not refer to this payment in its brief but we note that in its June 7, 2001 claim letter,
Kalamazoo requested $24,537.63 in reimbursement for labor, clean-up, and tile replacement relating to the damages
caused by the storm. See J.A. at 492-93. Kalamazoo suggested that the claim should be subrogated to Continental but
did not refer to any pending settlement negotiations with Continental; nor did the letter indicate the total cost to repair
the damages.
No. 03-2323 Kalamazoo Acquisitions v. Westfield Ins. Co. Page 3
II. PROCEDURAL HISTORY
In response to the denial of its claim for $149,780, Kalamazoo brought suit against Westfield
for breach of contract in Kalamazoo County Circuit Court on July 1, 2002. Invoking diversity
jurisdiction5, Westfield timely removed the case to the district court for the Western District of
Michigan. At the close of discovery, both parties moved for summary judgment. On June 10, 2003,
the court6granted summary judgment in favor of Kalamazoo, and entered a $149,780 judgment in
its favor. The court’s decision was in part based on its conclusion that Westfield had conceded, or
waived, its defense that Kalamazoo’s release of claims against Continental constituted breach of
contract. Westfield timely filed a motion for reconsideration of the judgment, asserting that the
district court improperly deemed its breach of contract defense waived and, moreover, that
Kalamazoo’s destruction of its subrogation rights warranted a reversal and entry of summary
judgment in its favor. The court denied the motion to reconsider on August 1, 2003.
On appeal to this Court, Westfield raises two main arguments. Initially, Westfield asserts
that it did not “concede” its breach of contract defense, as the district judge concluded. Westfield
further maintains that Kalamazoo is not entitled to the amount it seeks because it breached its
insurance contract with Westfield by settling with Continental and thus extinguishing Westfield’s
contractual subrogation rights. Westfield’s second argument is that, in any event, the water damages
to Kalamazoo’s building are not a “covered loss” within the meaning of the policy. Finally, in
connection with the second argument, Westfield asserts that assuming summary judgment for
Kalamazoo was proper, the amount of damages awarded is not supported by evidence. Because we
resolve the subrogation issue in Westfield’s favor, we need not consider Westfield’s alternative
arguments.
III. STANDARD OF REVIEW
When a party seeks review of a summary judgment order by way of a motion to reconsider,
we review the court’s denial of the motion de novo.7 E.g., Perez v. Aetna Life Ins. Co., 150 F.3d
550, 554 (6th Cir. 1998) (en banc). Similarly, we review a district court’s decision to grant
summary judgment de novo. E.g., Cockrel v. Shelby County Sch. Dist., 270 F.3d 1036, 1048 (6th
Cir. 2001), cert. denied, 537 U.S. 813 (2002). Summary judgment shall be granted when “the
pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law.” FED. R. CIV. P. 56(c). The district court, and this
Court in its review of the district court, must view the facts and any inferences reasonably drawn
from them in the light most favorable to the party against whom judgment was entered. Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Accordingly, with respect to
whether summary judgment in favor of Kalamazoo was proper, we view the facts in the light most
favorable to Westfield. However, because Westfield also moved for summary judgment below –
5
Westfield is an Ohio corporation, licensed to issue insurance in Michigan. Kalamazoo is a Michigan limited
liability company, with its principal place of business in Michigan.
6
The district court’s opinion is reported at 266 F. Supp. 2d 675 (W. D. Mich. 2003).
7
Kalamazoo suggests the proper standard of review is the standard applied by this Court when reviewing the
denial of a motion to amend a judgment under FED. R. CIV. P. 60, i.e., abuse of discretion. Its theory is that Westfield’s
motion for reconsideration, which did not cite the rule pursuant to which it was brought, must be viewed as a motion
under Rule 60. We disagree and construe Westfield’s motion as a motion to alter or amend the judgment brought under
Rule 59(e) because it presents a substantive legal challenge to the district court’s reasoning and does not merely point
to the type of clerical error or palpable defect in a judgment that is the province of Rule 60. See, e.g., Crown Plaza
Partners v. City of Rochester Hills, 2000 WL 658029, at *3-4 (6th Cir. May 8, 2000) (unpublished opinion).
No. 03-2323 Kalamazoo Acquisitions v. Westfield Ins. Co. Page 4
and now seeks both a reversal and entry of judgment in its favor – we consider de novo the question
whether Westfield is entitled to summary judgment. Accordingly, as to Wesfield’s argument that
its motion for summary judgment was improperly denied, we review the facts in the light most
favorable to Kalamazoo. See, e.g., Relford v. Lexington-Fayette Urban County Gov’t, 390 F.3d 452,
456-57 (6th Cir. 2004) (discussing the proper standard of review when reviewing parties’ cross
motions for summary judgment). As we make clear in our discussion infra, however, the resolution
of this case does not depend on any factual disputes. We hold in favor of Westfield because, having
impaired Westfield’s right of subrogation without notice or consent, Kalamazoo is precluded from
bringing this action as a matter of law.
IV. DISCUSSION
In a diversity action, a federal court must apply the law of the forum state. Klaxon Co. v.
Sentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). The policy at issue in this case, therefore, must
be analyzed under Michigan law. In Michigan, “[t]erms in an insurance policy must be given their
plain meaning and the court cannot ‘create an ambiguity where none exists.’” Heniser v.
Frankenmuth Mut. Ins. Co., 534 N.W.2d 502, 505 (Mich. 1995) (quoting Upjohn Co. v. New
Hampshire Ins. Co., 476 N.W.2d 392, 397 (Mich. 1991)); see also Raska v. Farm Bureau Mut. Ins.
Co., 314 N.W.2d 440, 441 (Mich. 1982). Additionally, the insured bears the burden of proof as to
whether the policy applies to the loss upon which the claim is based. E.g., Heniser, 534 N.W.2d at
505 n.6; Fire Ins. Exch. v. Diehl, 545 N.W.2d 602, 609 (Mich. 1996) (Riley, J., dissenting).
Westfield asserts that by virtue of its settlement and release agreement with Continental,
Kalamazoo waived any rights it may have had under the policy to collect payment from Westfield.
Westfield maintains that under the policy, Kalamazoo’s right to recover from Westfield is subject
to an express condition with which it failed to comply. We agree. First, Westfield does not dispute
that under the policy, it is obligated to provide Kalamazoo with the cost of repairs to damaged
property in the event of a covered loss, i.e., the total replacement cost value or RCV. However,
under Westfield’s standard commercial property insurance policy, an insured’s right to recover from
Westfield is subject to the condition that the insured in no way impair Westfield’s right of
subrogation against the party who caused the damage to the insured’s property. The Commercial
Property Conditions section of the policy provides, in relevant part:
D. LEGAL ACTION AGAINST US
No one may bring a legal action against us under this Coverage Part unless:
1. There has been full compliance with all of the terms of this Coverage Part . . .
...
I. TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO US
If any person or organization to or for whom we make payment under this Coverage
Part has rights to recover damages from another, those rights are transferred to us to
the extent of our payment. That person or organization must do everything
necessary to secure our rights and must do nothing after loss to impair them. But
you may waive your rights against another party in writing . . .
2. After a loss to your Covered Property . . . only if, at the time of loss, that party is
one of the following:
No. 03-2323 Kalamazoo Acquisitions v. Westfield Ins. Co. Page 5
a. Someone insured by this insurance;
b. A business firm:
(1) owned or controlled by you; or
(2) that owns or controls you; or
c. Your tenant.
J.A. at 62-63 (insurance policy) (emphases added).
Kalamazoo does not challenge the validity of this policy condition or the bar against legal
action for failure to comply with it8; nor does it suggest that the general release it entered into with
Continental falls within one of the exceptions listed in section I(2) of the policy; nor, finally, does
Kalamazoo suggest that it timely notified Westfield of the possibility of a release and of the total
amount of the loss.9 Instead, Kalamazoo asserts that it did “nothing after loss to impair
[Westfield’s] rights” and therefore fully complied with the policy. Brief of Appellee at 18-19. In
support of this conclusion, Kalamazoo presents a flawed reading of Michigan’s law of damages.
Its argument proceeds as follows: First, Kalamazoo maintains that in an action for damages to
commercial property caused by a builder or renovator’s negligence, the proper amount of damages
is the actual value of the property damaged. Brief of Appellee at 19. Second, Continental was
therefore liable to Kalamazoo for no more than the actual value of the property damages.
Accordingly, Kalamazoo submits, Kalamazoo’s settlement with Continental in no way impaired
Westfield’s right of subrogation; by paying Kalamazoo the actual value of the loss, Continental had
paid the maximum amount it owed under the law. Put another way, Kalamazoo’s position is that
if it had collected from Westfield instead of obtaining payment from Continental, Westfield’s right
of subrogation against Continental would be limited to the actual value of the property damages; the
settlement and release, therefore, makes Westfield no worse off than it would have been.
The flaw in Kalamazoo’s argument is its basic premise. In Michigan, the appropriate amount
of damages in an action for negligent damage to property is clear:
It is the settled law of this state that the measure of damages to real property, if
permanently irreparable, is the difference between its market value before and after
the damage. However, if the injury is reparable, and the expense of repairs is less
than the market value, the measure of damage is the cost of the repairs.
Strzelecki v. Blaser’s Lakeside Indus., 348 N.W.2d 311, 312 (Mich. Ct. App. 1984) (per curiam)
(quoting Bayley Prods. Inc. v. American Plastic Prods. Co., 186 N.W.2d 813, 816 (Mich. Ct. App.
8
In Michigan, an insured’s failure to comply with this standard policy condition operates to bar an action against
the insurer for recovery on the policy. See Stolaruk Corp. v. Cent. Nat’l Ins. Co., 522 N.W.2d 670, 672-73 (Mich. Ct.
App. 1994), appeal denied, 538 N.W.2d 679 (Mich. 1995); Poynter v. Aetna Cas. & Sur. Co., 163 N.W.2d 716, 718
(Mich. Ct. App. 1968). Indeed, it is a well-recognized principle of insurance law that “as a general rule where an insured
forecloses an insurer’s right to subrogation by releasing the tortfeasor, the insurer is released from its liability to pay
policy benefits . . . even if the insured has not been fully compensated for a loss.” 16 LEE R. RUSS & THOMAS F.
SEGALLA, COUCH ON INSURANCE § 224:136 (3d Ed. Updated 2004) [hereinafter COUCH ON INSURANCE].
9
Kalamazoo admits that the first time it notified Westfield of the September 6, 2001 release and the claim for
$149,780 was in its letter dated November 1, 2001. Kalamazoo’s June 7, 2001 claim – which Kalamazoo does not
mention in its brief – was for $24,537.63 and made no reference to additional damages to the property. At oral argument,
counsel for Kalamazoo asserted that Kalamazoo additionally notified Westfield of the loss by submitting a property loss
notice form to Westfield on June 14, 2001, via Westfield’s agent, The Campbell Agency. This notice simply states that
wind and water damage occurred at the property; it contains no dollar amounts. In any event, at no point did Kalamazoo
put Westfield on notice that it might settle with Continental for $208,188. Similarly, at no point did Kalamazoo seek
to preserve Westfield’s right of subrogation against Continental and Amerisure.
No. 03-2323 Kalamazoo Acquisitions v. Westfield Ins. Co. Page 6
1971)); see also Kratze v. Indep. Order of Oddfellows, 500 N.W.2d 115, 149 (Mich. 1993) (“If the
injury is reparable . . . the proper measure of damages is the cost of restoration of the property to its
original condition, if less than the value of the property before the injury.”) (citation omitted); Tilson
v. Consumers’ Power Co., 256 N.W. 801 (Mich. 1934); 7 MICH. CIV. JUR. D10AMAGES § 50
(discussing the proper damages in actions for negligent injury to real property). There is no
contention in this case that the damage sustained by Kalamazoo’s building rendered the property
irreparable. To the contrary, not only was the property reparable, it was in fact repaired.11
Accordingly, in an action for negligence against Continental, Kalamazoo would be entitled to the
“cost of the repairs”, i.e., the complete $357,968. Strzelecki, 348 N.W.2d at 312; Kratze, 500
N.W.2d at 149. By settling with Continental for merely $208,188 and releasing it from all further
claims, Kalamazoo extinguished Westfield’s right of subrogation, by which Westfield could have
secured the balance of the damages – the $149,780 now in dispute – from the tortfeasor, Continental,
or its insurer, Amerisure. Consequently, because Kalamazoo deprived Westfield of its subrogation
rights as to this balance, Kalamazoo is legally precluded from demanding that Westfield pay the
balance. E.g., Stolaruk v. Cent. Nat’l Ins. Co. of Omaha, 552 N.W.2d 670, 673-74 (Mich. Ct. App.
1994), appeal denied, 538 N.W.2d 679 (Mich. 1995) (holding that an insured is barred from
recovery under an insurance policy if it extinguishes the insurer’s right of subrogation by releasing
a tortfeasor); Poynter v. Aetna Cas. & Sur. Co., 163 N.W.2d 716, 718 (Mich. Ct. App. 1968) (same);
see also 16 COUCH ON INSURANCE § 224:136 (“As a general rule, an insured who deprives an insurer,
by settlement and release, of its right of subrogation against a wrongdoer, thereby provides the
insurer with a complete defense to an action on the policy . . . .”). Kalamazoo does not contest this
principle of insurance law, instead relying on the argument we have already rejected – namely, that
it did not impair Westfield’s right of subrogation in the first place.
Finally, Kalamazoo’s argument that Westfield “conceded” its breach of contract defense is
wholly without merit. Westfield cited Kalamazoo’s failure to abide by the policy’s subrogation
condition in its claim denial letter of February 28, 2002 (J.A. at 288) and did not waive the
subrogation issue during the pleadings. See J.A. at 16-27. Moreover, Westfield moved for summary
judgment based on the same argument it makes here. See J.A. at 135-36. (Defendant’s Motion for
Summary Judgment). Yet Kalamazoo nonetheless maintains that the argument was “conceded.”
Brief of Appellee at 16-17. Its basis for this assertion is the December 19, 2002 deposition
testimony of a Westfield employee, claims adjuster Curtis Devries.12 Devries stated that it was his
understanding that Westfield’s right of subrogation against a tortfeasor is limited to the extent of
actual cash value. When asked if under these circumstances it would be fair to say that a release
“would not affect Westfield’s subrogation rights,” Devries responded in the affirmative. J.A. at 350
(Devries Depo.). In our view, Devries’ testimony is at most evidence that a Westfield claims
adjuster misunderstood Michigan’s law of negligent damage to property. Westfield raised
Kalamazoo’s failure to comply with the policy condition in its answer and clearly presented the
10
Kalamazoo’s misapprehension as to the correct measure of damages may be due to only superficially reading
the case it cites for the proposition that actual cash value is the proper measure. Kalamazoo relies upon an unpublished
opinion of this Court, which observed that “[i]n negligence actions, Michigan appellate courts have held that damages
for destruction of property may not be based on replacement cost without any deduction for depreciation.” Paul v. Aetna
Casualty & Surety Co., 1987 WL 38865, at *2 (6th Cir. 1987) (unpublished opinion) (emphasis added). If Kalamazoo’s
building had been destroyed, as opposed to reparably damaged, its reliance on this statement would be availing.
11
Kalamazoo does not argue, and we have no reason to believe, that the total cost to repair the building
exceeded its market value. We note that according to Kalamazoo, the total repair cost amounted to $357,968, while the
policy limit was $4 million. See J.A. at 155 (policy).
12
Curiously, Kalamazoo initially offered no basis for its assertion that Westfield waived or conceded its defense
that Kalamazoo breached the policy by impairing Wesfield’s subrogation rights. See J.A. at 38 (Defendant’s Motion
for Summary Judgment). Even more curiously, the district court accepted Kalamazoo’s assertion without investigation.
See J.A. at 447 & n.1 (Dist. Ct. Op.).
No. 03-2323 Kalamazoo Acquisitions v. Westfield Ins. Co. Page 7
argument in its motion for summary judgment. Against this backdrop, Kalamazoo cannot suggest
that a claims adjuster’s deposition testimony – on a question of pure law – has the legal effect of a
waiver.13
In light of these legal conclusions, we hold that the district court should have granted
Westfield’s motion for summary judgment and denied Kalamazoo’s.
V. CONCLUSION
For the foregoing reasons, we REVERSE the judgment of the district court and REMAND
with instructions that the district court enter judgment for Westfield.
13
We also note that it was Devries who issued the claim denial letter to Kalamazoo nearly ten months prior to
his deposition. The denial letter cited Kalamazoo’s failure to adhere to the subrogation condition in the policy as a basis
for the denial.