State Farm Fire & Casualty Co. v. Liberty Insurance Underwriters, Inc.

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 10a0629n.06
No. 09-1639
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
) Sep 28, 2010
) LEONARD GREEN, Clerk
STATE FARM FIRE AND CASUALTY )
COMPANY, )
) ON APPEAL FROM THE UNITED
Plaintiff-Appellee, ) STATES DISTRICT COURT FOR THE
v. ) WESTERN DISTRICT OF MICHIGAN
)
L I B E R T Y I N S U R A N C E )
UNDERWRITERS, INC., )
)
Defendant-Appellant. )
Before: GIBBONS, SUTTON, and WHITE, Circuit Judges.
JULIA SMITH GIBBONS, Circuit Judge. Defendant-appellant Liberty Insurance
Underwriters, Inc., (“Liberty”) appeals the district court’s grant of summary judgment to plaintiff-
appellee State Farm Fire & Casualty Co. (“State Farm”). For the following reasons, we affirm the
district court’s decision.
I.
The underlying facts of this insurance case are undisputed. In September 2005, Henry
Bouma was driving a vehicle jointly leased to him and his company, Lumberman’s, Inc., and
accidentally struck and injured a pedestrian. The pedestrian settled her claims for $9 million.
Bouma had coverage under three insurance policies. His automobile liability insurer, Old Republic,
paid its $1 million policy limit as the first-line insurer without any reservation of rights and is not
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.
a party in this case. Of the remaining $8 million, State Farm paid its policy limit of $3 million under
a personal liability umbrella insurance policy issued to Bouma. Liberty paid the remaining $5
million from its $10 million commercial liability umbrella insurance policy issued to Lumberman’s.
State Farm and Liberty reserved their rights to seek a determination that a different allocation of
liability might be required by reconciling the policy provisions.
State Farm brought an action for declaratory judgment in state court, alleging that Liberty’s
policy applied to the underlying settlement and that the two insurers must pay pro rata in proportion
to their respective policy limits. Because the sum total coverage of both policies was $13 million
and State Farm’s coverage limit was $3 million, State Farm argued that it was liable for 3/13 of the
$8 million balance remaining after Old Republic paid out its policy. Under this apportionment, State
Farm sought $1,153,846 from Liberty. Liberty removed the case to federal court on the basis of
diversity of citizenship and argued, in relevant part for this appeal, that it was not responsible for any
payments until State Farm paid its $3 million policy limit. After unsuccessful mediation, the parties
filed cross-motions for summary judgment. As described in further detail below, the district court
granted in part and denied in part State Farm’s motion for summary judgment and denied Liberty’s
motion in full. The court found Liberty liable to State Farm for $1,153,846. The district court
reserved judgment on whether State Farm was entitled to seek pre-complaint interest. Adopting a
proposal by the parties that reflected the partial settlement of their respective claims, the district court
entered final judgment under Federal Rule of Civil Procedure 54(b), and Liberty timely appealed.
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II.
“Questions of contract interpretation, including those that form the basis for the grant of
summary judgment, are subject to de novo review.” Royal Ins. Co. of Am. v. Orient Overseas
Container Line Ltd., 525 F.3d 409, 421 (6th Cir. 2008) (citation omitted). Summary judgment is
proper when “the pleadings, the discovery and disclosure materials on file, and any affidavits show
that there is no genuine issue as to any material fact and that the movant is entitled to judgment as
a matter of law.” Fed. R. Civ. P. 56(c). The parties agree that there are no disputed issues of fact
and that this appeal raises only a question of law.
“In diversity cases, this court applies state law in accordance with the controlling decisions
of the Michigan Supreme Court.” Prestige Cas. Co. v. Mich. Mut. Ins. Co., 99 F.3d 1340, 1348 (6th
Cir. 1996) (citations omitted). “If the state supreme court has not yet addressed the issue presented,
we must predict how that court would rule, by looking to ‘all available data.’” Id. (quoting Kingsley
Assocs., Inc. v. Moll PlastiCrafters, Inc., 65 F.3d 498, 507 (6th Cir. 1995)). “Relevant data include
decisions of the state appellate courts, and those decisions should not be disregarded unless we are
presented with persuasive data that the Michigan Supreme Court would decide otherwise.” Kingsley
Assocs., 65 F.3d at 507.
Under Michigan law, “the policy language must be given effect, if at all possible. Thus, the
policy language is most important in our analysis.” Bosco v. Bauermeister, 571 N.W.2d 509, 513
(Mich. 1997) (internal quotation marks and citation omitted). “The parties have the right to employ
whatever terms they wish, and the courts will not rewrite them as long as the terms do not conflict
with pertinent statutes or public policy.” St. Paul Fire & Marine Ins. Co. v. Am. Home Assurance
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Co. (“St. Paul”), 514 N.W.2d 113, 115 (Mich. 1994). Insurance policies are subject to the same
rules of interpretation that apply to the interpretation of contracts. Rory v. Cont’l Ins. Co., 703
N.W.2d 26, 26 (Mich. 2005). “A contract must be interpreted according to its plain and ordinary
meaning.” Holmes v. Holmes, 760 N.W.2d 300, 311 (Mich. Ct. App. 2008) (citation omitted). An
undefined contractual provision “must be construed in a manner most likely to correspond to the
intention of the parties to the contract.” Bertrand v. Pac. Employers Ins. Co., No. 219724, 2001 WL
1464524, at *2 (Mich. Ct. App. Nov. 16, 2001) (citation omitted).
St. Paul is the seminal case in this area of Michigan insurance law. In that case, three
insurance policies covered a loss and one of the insurance companies brought suit, seeking proration
of the liability. St. Paul, 514 N.W.2d at 114. Each of the policies contained an “other insurance”
clause. Id. These clauses are “provisions inserted in insurance policies to vary or limit the insurer’s
liability when additional insurance coverage can be established to cover the same loss.” Id. at 115.
Under Michigan law, “other insurance” clauses fall into three general categories that reduce an
insurer’s loss in the event of concurrent coverage: (1) pro-rata clauses that purport to “limit the
insurer’s liability to a proportionate percentage of all insurance covering the event”; (2) escape or
no-liability clauses, under which “there shall be no liability if the risk is covered by other insurance”;
and (3) excess clauses, which “limit[] the insurer’s liability to the amount of loss in excess of the
coverage provided by the other insurance.” Id. (citing Fed. Kemper Ins. Co. v. Health Ins. Admin.
Co., 383 N.W.2d 590, 592 (Mich. 1986), overruled on other grounds by Auto Club Ins. Ass’n v.
Frederick & Herrud, Inc., 505 N.W.2d 820 (Mich. 1993)).
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In St. Paul, two of the “other insurance” clauses provided that the insurer would not be liable
for a “greater proportion” of the loss than the “total limit of liability of all valid and collectible
insurance.” Id. at 116. The court deemed these to be pro-rata clauses that “are generally intended
to become effective only when other valid and collectible primary insurance is available.” Id.
(citation omitted). The third policy’s “other insurance” clause provided that, in the time period
which saw the loss, the policy “shall apply only as excess insurance over any other valid and
collectible insurance” and then “only in the amount by which the applicable limits of [the third
policy] exceeds the sum of the applicable limits of liability of all such other insurance.” Id.
(emphasis omitted). The court deemed this to be an excess “other insurance” clause that intended
the policy “only afford secondary coverage when the same loss is covered by ‘other insurance.’” Id.
(citation omitted).
The St. Paul court considered whether the two pro-rata “other insurance” clauses and the
excess “other insurance” clause could be given effect together. Id. at 118. It reconciled the two
types of clauses by “interpreting the policy containing the excess clause as secondary coverage where
there is another insurance policy covering the same risk.” Id. at 119. Thus, “the excess insurer is
generally liable for the loss only to the extent that the insured’s claim exceeds the policy limits of
the insurance policy containing the pro-rata ‘other insurance’ clause.” Id. The alternative option
was to prorate the loss among all three insurers, and the court found “the cost of nullifying the
negotiated intent of the parties alarming,” and “refrain[ed] from rewriting the . . . contracts and
instead g[a]ve effect to the meaning and intent of the policy language.” Id. at 120–21. The Michigan
Supreme Court acknowledged that, in some cases, “other insurance” clauses are irreconcilable. Id.
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at 121. Specifically, “competing excess clauses would leave the insured without any coverage where
it first appeared he had multiple coverage.” Id. “In these cases, there is no rational reason to give
the language of one policy preference over identical language in the other policy,” and the loss
should be prorated among all of the insurers. Id. at 121 & n.31.
The Michigan Supreme Court further expanded upon St. Paul in Bosco, in which five
automobile insurance policies covered the same event and contained varying excess “other
insurance” clauses. 571 N.W.2d at 511. Two of the primary coverage policies contained clauses that
provided that the policy would be excess insurance with respect to an event involving a temporary
substitute car or non-owned car. Id. at 512. The “other insurance” clauses in the remaining umbrella
policies did not limit excess coverage to a specific incident or occurrence, but instead remained
excess over all other insurance. Id. at 515–16. The Michigan Supreme Court held that only the latter
were “true” excess insurance clauses and that the former were “coincidental” excess clauses. Id.
The “true” excess insurance policies were held not to prorate with the “coincidental” excess policies.
Id.
Therefore, as explained in St. Paul and Bosco, there are three tiers of excess insurance
coverage under Michigan law: primary coverage; excess “other insurance” coverage, such as a
“coincidental” excess policy; and “true” excess insurance. See Bosco, 571 N.W.2d at 519. Within
a specific tier or layer of coverage, liability should be prorated based on the total limits of available
coverage within that tier. Once coverage within that tier is exhausted, the next tier of coverage is
triggered. Id. at 510, 519.
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Turning to the case at hand, Liberty argued before the district court that, whereas its umbrella
policy is an “excess” policy that obligates it to pay only the amount of loss that exceeds the coverage
provided by another insurer, State Farm issued Bouma a “pro rata” policy that obligates it to pay
before Liberty incurs any liability. The relevant clause in Liberty’s policy reads:
J. Other Insurance
If other insurance applies to a loss that is also covered by this policy, this policy will
apply excess of the other insurance. Nothing herein will be construed to make this
policy subject to the terms, conditions and limitations of such other insurance.
However, this provision will not apply if the other insurance is specifically written
to be excess of this policy.
The parallel “other insurance” clause in State Farm’s policy originally read: “5. Other Insurance.
This policy is excess over all other valid and collectible insurance.” State Farm subsequently
executed an amendatory endorsement, adding a second sentence to this clause of its policy. Thus,
at the time of Bouma’s accident, State Farm’s other insurance clause read: “5. Other Insurance.
This policy is excess over all other valid and collectible insurance. When like coverage is written
in another company, we will share in payments on a pro rata basis.”
Liberty contended that, under St. Paul, State Farm’s pro rata “other insurance” clause was
primary and that Liberty was liable only in excess of State Farm’s policy limit of $3 million. In
support of its argument, Liberty pointed out that State Farm amended its “other insurance” clause
to include language about pro rata apportionment of liability. According to Liberty, had State Farm
left the original language in place, both parties would have shared the liability, but the amended
language meant that State Farm became the primary second-line insurer. In its cross-motion for
summary judgment, State Farm argued that both parties’ “other insurance” clauses should be
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interpreted to mean that the policies were, separately, in excess of Old Republic’s first-line insurance
policy. It contended that both its policy and Liberty’s were in the same, secondary tier of coverage
and that St. Paul required the district court to apportion liability between both parties on a pro rata
basis. Because the policies had a cumulative coverage limit of $13 million, State Farm argued that
it was only liable for 3/13 of the $8 million not paid by the first-line insurer, Old Republic.
The district court reasoned that the term “like coverage” in the second sentence of State
Farm’s amended “other insurance” clause referred to a policy issued by another company that was
“in excess over all other valid and collectible insurance.” In other words, the district court found that
both policies were in the same tier or layer of coverage and the term “like coverage” referred to
Liberty’s excess policy. Thus, the district court held that the second sentence of State Farm’s
amended “other insurance” clause was superfluous because it merely reiterated the pro rata sharing
rule dictated by St. Paul for cases involving competing excess insurance clauses. The court
determined that the language added to State Farm’s policy was not surplusage, but instead merely
reiterated what the law required when a “policy confronts a like policy, i.e., a policy of equal
priority.”
On appeal, Liberty argues that the district court’s interpretation of the two “other insurance”
clauses was erroneous in two ways: (1) the amendatory endorsement converted State Farm’s policy
from an excess policy into a pro rata umbrella policy; and (2) because of this modification, Liberty’s
policy should have been construed to be in a different tier or layer of coverage than State Farm’s and,
thus, excess to it.
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Both arguments depend upon the construction of the phrase “like coverage” in State Farm’s
amendatory endorsement, and the plain meaning of that endorsement refutes both of Liberty’s
arguments. State Farm’s “other insurance” clause originally provided: “This policy is excess over
all valid and collectible insurance.” Liberty concedes that the “original, standardized language
means and does exactly what State Farm says the amended provision means and does,” namely
establishes that State Farm and Liberty would share in the payments pro rata once Old Republic’s
$1 million primary insurance coverage was exhausted. Appellant Br. at 21. Thus, Liberty’s appeal
turns on whether the addition of the second sentence to State Farm’s “other insurance” clause
somehow modified the substantive import of the first sentence. Although Michigan courts have not
yet interpreted the exact phrase “like coverage” in the context of competing “other insurance”
clauses, the district court’s construction gave proper effect to the plain and ordinary meaning of that
phrase. The only antecedent to which “like coverage” could refer is the preceding sentence, which
contains the language that Liberty concedes would result in pro rata allocation of the $8 million
liability. Because Liberty offered the same excess coverage as State Farm, it offered “like coverage”
with which State Farm would share in payments pro rata.
Liberty relies upon two canons of contract construction to argue that the amendatory
endorsement modified the pro rata allocation scheme that would have been required by St. Paul.
First, it contends that the district court ignored the rule that every word in a contract must be
assumed to have a purpose and that no word should be rejected as mere surplusage if a court can
discover any reasonable purpose for it that may be gleaned from the entire contract. Associated
Truck Lines, Inc. v. Baer, 77 N.W.2d 384, 386 (Mich. 1956). However, State Farm’s intent to
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incorporate the background rule stated in St. Paul regarding the irreconcilability of competing excess
“other insurance” clauses is a reasonable purpose. The district court deemed the amendatory
endorsement “superfluous” only in the sense that the endorsement redundantly stated existing
Michigan law. Thus, the court did not treat the amendatory endorsement as mere surplusage and did
not disregard it.
Liberty also argues that the district court ignored the rule of contract interpretation that
“specific terms and exact terms are given greater weight than general language and that separately
negotiated or added terms are given greater weight than standardized terms.” Royal Ins. Co. of Am.,
525 F.3d at 420 (citation and internal quotation marks omitted). Liberty appears to rely on State
Farm’s addition of the phrase “we will share payments on a pro rata basis.” However, as the district
court noted, the key term in the amendatory endorsement is “like coverage.” That term refers to an
antecedent that defines the type of coverage provided by another insurer for which State Farm would
share in payments pro rata. Because the only antecedent for “like coverage” is the excess policy
found in the first sentence of State Farm’s “other insurance” clause, and Liberty concedes that the
first sentence, standing alone, would defeat its appeal, Liberty’s argument lacks merit and the district
court did not ignore the specificity of the amended language.
Furthermore, Liberty is unable to show that the endorsement somehow moved its policy into
a secondary tier or layer of umbrella coverage that obligated payment only after State Farm
exhausted its $3 million policy limit. Although Bosco requires courts to determine allocation issues
by looking to the total coverage in each tier or layer of insurance, Liberty’s reliance on that case is
misplaced. Bosco compared the effect of one excess “other insurance” clause that was limited to a
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certain event with an “other insurance” clause in an umbrella policy that was materially identical to
State Farm’s amended “other insurance” clause. 571 N.W.2d at 512. The umbrella policy’s clause
stated: “[T]he insurance afforded by this policy shall be excess of such other insurance . . . . With
respect to the Other Insurance Condition, this insurance will prorate with other similar insurance
written excess of the same limits of underlying insurance.” Id. (emphases omitted). The Bosco court
found that this broad language was not similar enough to the limited excess “other insurance” clause
because it was not limited to a specific event. Id. at 513. Thus, the court held that the “coincidental”
excess policy should not prorate with the “true” excess policy. Id. at 517 (“[T]he effect of the
[coincidental] excess clause is to merely allocate liability among the primary insurers, not to
magically remove the primary nature of the policy when a nonowned or substitute vehicle is
involved.”).
In this case, and as Liberty concedes, State Farm’s original language contained a “true”
excess policy per Bosco. The original clause was not limited to any event or occurrence. The
amendatory endorsement did not alter the substantive import of State Farm’s “other insurance”
clause and, thus, this case is distinguishable from Bosco because State Farm’s and Liberty’s
coverages are not only “similar” but identical. Indeed, the language of the “true” excess clauses in
Bosco is almost identical to that contained in State Farm’s amendatory endorsement. Whereas State
Farm referred to “like coverage,” the Bosco policies stated that “this insurance will prorate with other
similar insurance.” Id. at 512 (emphasis added). Given the similarity between the “true” excess
“other insurance” clauses in Bosco that would have prorated and State Farm’s language, Bosco does
not support Liberty’s position.
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Liberty concedes that the original, unamended language in State Farm’s policy would require
proration and, thus, judgment in State Farm’s favor. The only antecedent for the term “like
coverage” in State Farm’s amendatory endorsement is the original, unamended, “true” excess
provision. Because Liberty is unable to show that the amendatory endorsement altered the
substantive import of the first sentence of State Farm’s “other insurance” clause, we conclude that
St. Paul requires that it share payment with State Farm on a pro rata basis.
III.
For the foregoing reasons, we affirm the district court’s decision.
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