Hunt Construction Gr v. Allianz Global Risks ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-4335
HUNT CONSTRUCTION GROUP, INC.,
Plaintiff-Appellant,
v.
ALLIANZ GLOBAL RISKS U.S. INSURANCE COMPANY,
Defendant-Appellee.
____________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:04-CV-01720-DT-TAB—John Daniel Tinder, Judge.
____________
ARGUED JUNE 8, 2007—DECIDED OCTOBER 1, 2007
____________
Before POSNER, FLAUM, and MANION, Circuit Judges.
POSNER, Circuit Judge. Hunt, a construction company,
brought this diversity suit governed by Michigan law
against the Allianz insurance company, and appeals from
the grant of summary judgment in favor of Allianz. The
district judge’s ground was that Michigan law reads into
the insurance policy on which Hunt’s suit is based a one-
year statute of limitations. Hunt contends that the suit is
governed by the six-year statute of limitations applicable
to contract actions for which no other limitations period
is specified. If the longer statute of limitations applies,
2 No. 06-4335
the suit is timely and the decision of the district court
must be reversed.
Hunt had contracted with Northwest Airlines to build a
major terminal facility at the Detroit airport. Heavy rains
interfered with the project, causing millions of dollars of
loss, including liquidated damages that Hunt had to pay
Northwest for delay in the completion of the project caused
by the rains. Hunt claimed that this expense was insured
under the “builders risk” policy that Allianz had issued to
it, but Allianz persuaded the district court that though
called “builders risk” (no apostrophe, though the term
could use one), the policy is actually a “fire insurance
policy” under Michigan law, which provides that a suit
under such a policy “must be commenced within 1 year
after the loss or within the time period specified in the
policy, whichever is longer.” Mich. Comp. Laws Ann.
§ 500.2833(1)(q). The policy itself specified no time period
within which the insured had to sue.
Although the policy that Allianz issued to Hunt covers
fire damage (with that coverage defined “as in the stand-
ard insurance forms in use in the state where the insured
project is located”), it covers almost every other kind of
damage that a construction company might encounter as
well, and none of the losses for which Hunts asks to be
indemnified by Allianz were caused by fire; all were
caused by water. To call the builders risk policy a fire
insurance policy, and subject it to the 19 separate require-
ments that the statute imposes on “each fire insurance
policy issued or delivered in this state,” id., § 500.2833(1),
when the damage for which the insured seeks indemnifica-
tion was not caused by fire, strains the ordinary meaning
of the term “fire insurance policy.” But the language of
insurance contracts is not standard English, so we must
press on.
No. 06-4335 3
The risks for which insurance is sought cover a wide
range, and as a result different types of insurance con-
tract have evolved. Two of the earliest risks for which
insurance was offered were fire damage and the loss of
cargo at sea. Out of fire insurance evolved “all risks”
property coverage. 10A Lee R. Russ & Thomas F. Segalla,
Couch on Insurance 3d § 149:2, p. 149-9 (3d ed. 1998). Out of
marine insurance evolved “inland marine insurance.” At
first, inland marine insurance covered mainly losses to
cargo moving on inland waterways. But later it expanded
to cover cargo moving by other modes of transportation,
because marine underwriters were the only ones that had
experience with transportation risks and (the same point,
really) because early fire policies excluded coverage when
the goods damaged were in transit. Marquis James,
Biography of a Business, 1792-1942: Insurance Company
of North America 285-86 (1976). Later still, inland marine
insurance expanded further, to cover property in other
transitional states. As a result, builders risk policies (“a
form of bundled liability and property insurance that is
designed to provide protection to the builder if some-
thing goes wrong during the course of construction,”
Jeffrey W. Stempel, Stempel on Insurance Contracts
§ 25:02[D][2], p. 25-11 (3d ed. 2006)), are considered a
form of inland marine insurance even when, as in this
case, the construction project has no maritime aspect. E.g.,
Village of Kiryas Joel Local Development Corp. v. Insurance Co.
of North America, 996 F.2d 1390, 1392 (2d Cir. 1993); Char-
tered Property Casualty Underwriters and Insurance
Institute of America, The CPCU Handbook of Insurance
Policies 215 (2d ed. 1996). A construction site, before the
building under construction is completed, is a “terminus
for cargo”—that is, for the building materials brought to
the site and assembled there. John A. Appleman & Jean
4 No. 06-4335
Appleman, Insurance Law and Practice § 2014, p. 8 (Supp.
2007). So transportation is in the background, and this
helps to explain why builders risk insurance is deemed a
form of inland marine insurance.
Fire is one of the risks of a construction project against
which the Allianz policy insures, but it is only one, and
it seems odd, given the evolution of builders risk insur-
ance from inland marine insurance policies, to describe a
builders risk policy as a fire insurance policy just because
fire is among the risks insured by it. Not that an insurer
should necessarily be allowed to escape the statutory
requirements for fire insurance by providing fire cover-
age in a policy that covers other risks as well, especially
when we recall that all-risks coverage evolved from the
original, narrowly focused fire policies. For example,
insurance against fire damage is the major component of
homeowners’ insurance, Stempel, supra, § 15.01[D], at p. 15-
11; J. François Outreville, Theory and Practice of Insurance
201 (1998) (which is a good example, by the way, of “all
risks” insurance), and therefore the protective aim of
Michigan’s statute could not be achieved if the statute
were limited to fire coverage found in policies called “fire
insurance.” Cf. Wagnon v. State Farm Fire & Casualty Co.,
951 P.2d 641, 646 (Okla. 1997).
Until 1990, the Michigan legislature, rather than trying
to define “fire insurance policy,” provided that the “stan-
dard fire policy” (with its 19 mandatory minimum provi-
sions) “shall not be required for” a variety of types of
insurance, including motor vehicle insurance, aircraft
insurance, ocean marine insurance, reinsurance—and
“inland marine insurance.” Mich. Comp. Laws Ann.
§ 500.2807(3) (repealed). Any type of insurance that was
not exempt was subject to the statutory requirements. So,
No. 06-4335 5
for example, since homeowners’ insurance was not
exempt, insurers could not evade the statutory require-
ments for fire insurance policies by including, as they
usually do, fire coverage in a homeowners’ policy rather
than in a separate policy called fire insurance. See, e.g.,
Borman v. State Farm Fire & Casualty Co., 521 N.W.2d 266(Mich. 1994); Williams v. Auto Club Group Ins. Co., 569
N.W.2d 403 (Mich. App. 1997).
The structure of the Michigan statute implied that any
form of insurance that was not exempt was a “standard
fire policy,” including (were it not exempt) a builders
risk policy, and so the 19 mandatory provisions would
have to be included even when indemnity was sought
for a loss not caused by fire. Cf. Hitt Contracting, Inc. v.
Industrial Risk Insurers, 516 S.E.2d 216, 217 (Va. 1999).
Obviously motor vehicle insurance covers more than fire
damage, but had it not been exempted it would have
been a standard fire policy and the 19 requirements
would have clicked in regardless of which of the risks
covered by the policy materialized.
There are intimations that this was indeed the law in
Michigan before the statutory revision that gave rise to
this suit. Elsey v. Hastings Mutual Ins. Co., 411 N.W.2d 460,
461-62 (Mich. App. 1987) (per curiam); Bourke v. North River
Ins. Co., 324 N.W.2d 52, 53 (Mich. App. 1982) (per curiam).
But inland marine insurance was exempt, and so builders
risk insurance was exempt because it is a form of inland
marine insurance, and therefore had the statute not been
changed in 1990 (well before Allianz issued the insurance
policy in suit to Hunt), Hunt would be home free. But in
1990 the Michigan legislature repealed the exemption.
There is no legislative history explaining the reason for the
repeal—and certainly no indication that the legislature
meant to subject all the previously excluded forms of
6 No. 06-4335
insurance to the requirements prescribed for the
standard fire policy. Yet it is not so much the absence of
legislative history that makes one doubt whether that
was the purpose or effect of the repeal as the absence of
even an atom of evidence of intent to make a revolutionary
change in Michigan’s system of insurance. No evidence,
for example, that inland marine, ocean marine, aircraft,
reinsurance, etc., policies issued in Michigan since 1990
have contained the 19 mandatory requirements for fire
insurance. The policy that Allianz issued to Hunt does not
contain any of them—which means that Allianz is argu-
ing that the policy it issued to Hunt violated Michigan law!
It is time we took a closer look at the 19 requirements,
painful though such a scrutiny is. Here they are:
(a) That the policy shall provide, at a minimum,
coverage for the actual cash value of the property at
the time of the loss, subject to all other provisions
contained herein.
(b) That the policy shall provide, at a minimum,
coverage for direct loss by fire and lightning and pro
rata coverage for 5 days for insured property removed
to another location if it is moved to preserve it from
damage by a covered peril.
(c) That the policy may be void on the basis of
misrepresentation, fraud, or concealment.
(d) That property which is not covered under the
policy.
(e) Those perils that are not covered under the policy.
(f) Those conditions which result in the suspension or
restriction of insurance.
No. 06-4335 7
(g) A provision for waiving or changing a provision
under the policy.
(h) That the policy may be canceled at any time at the
request of the insured. The minimum earned premium
shall not be less than the pro rata premium for the
expired time or $25.00, whichever is greater.
(i) That the policy may be canceled at any time by
the insurer by mailing to each insured named in the
policy at the insured’s address last known to the
insurer or an authorized agent of the insurer, not less
than 10 days before the cancellation, with postage
fully prepaid, a written notice of cancellation with or
without tender of the excess minimum earned pre-
mium. The minimum earned premium shall not be
less than the pro rata premium for the expired time or
$25.00, whichever is greater. The excess, if not ten-
dered, shall be refunded on demand and the notice
of cancellation shall state that the excess premium,
if not tendered, will be refunded on demand.
(j) That if a loss is payable under the policy, in
whole or in part, to a designated mortgagee not named
in the policy as the insured, the interest in the policy
may be canceled by the insurer by giving to the mort-
gagee not less than 10 days’ written notice of cancella-
tion. If the insured fails to render proof of loss, the
mortgagee, upon notice, shall render proof of loss
within 60 days after the notice. If the insurer claims
that no liability existed as to the mortgagor or owner,
it shall, to the extent of payment of loss to the mort-
gagee, be subrogated to all the mortgagee’s rights of
recovery, but without impairing the mortgagee’s
right to sue; or the insurer may pay off the mortgage
debt and require an assignment of the debt and of the
8 No. 06-4335
mortgage. Subrogation pursuant to this subdivision
shall include contractual as well as tort rights of action,
but only to the extent of the loss. An action may be
maintained by either the insured or insurer or by
both of them jointly, to recover their respective por-
tions of the loss.
(k) That the insurer’s liability shall not be greater
than the pro rata share with other insurance for the
peril involved.
(l) The notification requirements when a loss occurs.
(m) That if the insured and insurer fail to agree on
the actual cash value or amount of the loss, either
party may make a written demand that the amount
of the loss or the actual cash value be set by appraisal.
If either makes a written demand for appraisal, each
party shall select a competent, independent appraiser
and notify the other of the appraiser’s identity within
20 days after receipt of the written demand. The
2 appraisers shall then select a competent, impartial
umpire. If the 2 appraisers are unable to agree upon
an umpire within 15 days, the insured or insurer may
ask a judge of the circuit court for the county in
which the loss occurred or in which the property is
located to select an umpire. The appraisers shall then
set the amount of the loss and actual cash value as to
each item. If the appraisers submit a written report of
an agreement to the insurer, the amount agreed upon
shall be the amount of the loss. If the appraisers fail to
agree within a reasonable time, they shall submit
their differences to the umpire. Written agreement
signed by any 2 of these 3 shall set the amount of the
loss. Each appraiser shall be paid by the party select-
ing that appraiser. Other expenses of the appraisal
No. 06-4335 9
and the compensation of the umpire shall be paid
equally by the insured and the insurer.
(n) That the insurer may repair, replace, rebuild, or
take the property.
(o) That there can be no abandonment to the insurer
of any property.
(p) Except as otherwise provided in section 2845, that
the loss is payable within 30 days after receipt of proof
of amount of loss.
(q) That an action under the policy may be com-
menced only after compliance with the policy require-
ments. An action must be commenced within 1 year
after the loss or within the time period specified in the
policy, whichever is longer. The time for commenc-
ing an action is tolled from the time the insured notifies
the insurer of the loss until the insurer formally denies
liability.
(r) That the insurer is subrogated to the insured’s
right of recovery from other parties.
(s) Each fire insurance policy subject to this section
shall be effective at 12:01 a.m., standard time, at the
location of the property involved.
Mich. Comp. Laws Ann. § 500.2833(1). Some of the provi-
sions seem designed for the protection of unsophisticated
persons, such as the typical homeowner ((d) through (j),
and (p)), rather than a business firm; others for the protec-
tion of insurers of residential property, such as (n), which
entitles the insurer to replace or rebuild the property—a
provision singularly inapt to damage to a construction
site—and the requirement of suit within one year unless
the policy otherwise provides. Why would Michigan
10 No. 06-4335
want to hamstring commercial relations—relations not
between an individual and an insurance company but
between two companies (one a builder, the other an
insurer)—by imposing a long list of requirements tailored
to a different type of insurance?
The solution to the interpretive puzzle lies in another
change that the Michigan legislature made in 1990. It
amended the preceding section of the insurance statute,
Mich. Comp. Laws Ann. § 500.2806, to delete the require-
ment that insurance companies issue the standard fire
policy that incorporated the 19 statutory requirements
for fire insurance. With that requirement eliminated, there
was no longer any need to exempt forms of insurance that
are not exclusively, or, as in the case of homeowners’
insurance, primarily, fire insurance though they may cover
fire along with the other covered risks. Since 1990, an
insurance company has been able to tailor its Michigan
policies to the nature of the insurance sought by the
insured without having to rely on a statutory exemption.
Of course an insurer cannot be allowed to escape the 19
requirements for fire insurance by calling what before 1990
would have been considered fire insurance “inland
marine” insurance. But there is no suggestion of that here.
The policy that Allianz issued to Hunt is a builders risk
policy that before 1990 would have fallen squarely
within the statutory exemption for inland marine insur-
ance. Thus, Allianz puts too much weight on the deletion
of the exemptions. Even with the deletion (indeed more
so), a court must decide whether a policy is a fire insur-
ance policy, because the 19 requirements apply only to
such policies. Section 500.2833(1) is explicit about that.
The district court relied for its contrary conclusion on
Villa Clement, Inc. v. National Union Fire Ins. Co., 353 N.W.2d
No. 06-4335 11
369 (Wis. App. 1984), which held that in Wisconsin “fire
insurance” is a “generic” term that encompasses insurance
for any damage to property. The same issue had arisen and
been decided the opposite way by Oklahoma’s highest
court in Wagnon v. State Farm Fire & Casualty Co., supra, 951
P.2d at 646. The suit in that case was under a homeowners’
policy for loss caused by a theft. The policy included
fire coverage but much else besides, and the court held
that the policy’s fire coverage did not convert it into a
fire insurance policy. Theft is a “casualty” in insurance
lingo, and the Oklahoma legislature had specified a
different statute of limitations for casualty insurance.
But these cases are inapposite. The question in this case
is not whether a builders risk policy was a “standard fire
policy” under Michigan law before 1990; probably it
was, for otherwise the exemptions in the pre-1990 statute,
such as the exemption for inland marine policies, which
include builders risk policies, would have been unneces-
sary. The question is whether by repealing the exemptions
the Michigan legislature intended to subject every provi-
sion in a builders risk policy to the 19 requirements
applicable to fire insurance, many of which, as we have
seen, are unsuited to the other risks that builders encoun-
ter. The best understanding of the 1990 amendment is that
by repealing both the requirement that all insurance be in
the form of a standard fire policy having 19 mandatory
provisions and the exemptions for forms of insurance for
which that policy was ill-suited, Michigan freed insurers
to tailor their policies to the particular needs of the insured.
Left open by this discussion is whether, had Hunt’s
property been damaged by fire, the 19 statutory require-
ments for fire insurance policies would have applied.
Before the 1990 amendment, presumably not, as we can
12 No. 06-4335
infer from cases in which claims for fire damage were
resolved under inland marine policies without reference
to the statutory requirements for fire policies. Waldan
General Contractors, Inc. v. Michigan Mutual Ins. Co., 577
N.W.2d 139 (Mich. App. 1998); Armand v. Territorial
Construction, Inc., 322 N.W.2d 924, 925-26 (Mich. 1982). As
we noted earlier, the terms of inland marine insurance
policies did not have to conform to the terms of the stan-
dard fire policy. Yet it can be argued from the Borman and
Williams cases, cited earlier, and like cases in other juris-
dictions, such as Woods Patchogue Corp. v. Franklin National
Ins. Co., 158 N.E.2d 710 (N.Y. 1959), and Liberty Ins. Under-
writers, Inc. v. Weitz Co., 158 P.3d 209, 219-20 (Ariz. App.
2007), that the Allianz policy should be deemed to contain
a fire insurance policy to which the 19 requirements
would therefore apply. The counterargument would be
that those requirements are intended for the protection of
individual property owners (and to some extent for the
protection of insurers of their property, notably in the
short statute of limitations invoked by Allianz) rather
than of builders. Cf. Morgan v. Cincinnati Ins. Co., 307
N.W.2d 53, 54 and n. 2 (Mich. 1981); Stephanie A. Giggetts,
Michigan Civil Jurisprudence: Insurance § 133, p. 2 (2007). We
need not try to resolve this uncertainty in Michigan law,
since none of the damage that Hunt is asking Allianz to
cover is fire damage.
The judgment is reversed and the case remanded for
further proceedings consistent with this opinion.
No. 06-4335 13
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-1-07