Heniser v. Frankenmuth Mutual Insurance

Boyle, J.

The question presented is whether the homeowner’s insurance policy in this case provides coverage for the destruction of the insured’s building. We hold that the policy is unambiguous, that the destruction of the building does not fall within the scope of the policy, and thus affirm the decision of the Court of Appeals.

i

The facts are not in dispute. Plaintiff Heniser and his wife purchased a vacation home in Honor, Michigan. The couple lived in the house intermittently throughout the years until their divorce.

Heniser retained possession of the property after the divorce, but in November, 1988, sold the property on a land contract. At the time of the sale, the property was insured by defendant-appellee Frankenmuth Mutual Insurance Company under a homeowner’s policy that expired September, 1989. Heniser did not inform Frankenmuth of the sale.

In January, 1989, the property was destroyed, by fire. Heniser filed an insurance claim with Frankenmuth under his homeowner’s policy seeking $20,000 for the building, $24,500 for personal property and $7,200 for related cleanup expenses. Frankenmuth denied coverage, terminated the policy, and returned the unearned premium to Heniser. Frankenmuth contended that Heniser’s claim was barred because of fraud and false swearing with regard to the cash value of the personal property damaged by fire, and that the damage to the building was not covered by the policy because Heniser did not and could not reside at the property, as required by the contract,¹ at the time of the fire.

b. that part of any other building; where you reside and which is shown as the "residence premises” in the Declarations.

Heniser then filed suit against Frankenmuth, alleging that it had breached its insurance contract. In response, Frankenmuth asserted the aforementioned defenses.

The parties filed cross-motions for summary disposition.² Both motions were denied, and the Court of Appeals denied interlocutory relief.

Following mediation, the case was tried without a jury before Judge Robert A. Benson. At the close of testimony, Judge Benson held that because Heniser did not reside at the property at the time of the fire, the policy did not provide coverage for the loss of the building. Judge Benson also found that Frankenmuth had not carried its burden of proving fraud by clear and convincing evidence. On appeal, the parties stipulated to the facts and agreed that the only issue is whether the definition of "residence premise” provides coverage for destruction of the building.³

The Court of Appeals affirmed the holding⁴ that the policy did not cover the destruction of the building. 201 Mich App 70; 506 NW2d 247 (1993). We granted leave to appeal on July 22, 1994. 445 Mich 943.

ii

A

Plaintiff contends that the insurance policy is ambiguous regarding whether the policy covered his loss, even though he did not, and could not,⁵ reside at the insured premises at the time of the fire. Plaintiff advances three arguments in support of claimed ambiguity: (1) the definitions section of the policy and the conditions section of the policy are internally inconsistent; (2) it is unclear whether he had to reside at the insured premises only at the time the policy was entered into or whether he had to reside at the insured location throughout the term of the policy; (3) an exclusion from coverage was deceptively placed in the definitional section.

Ambiguous provisions in an insurance contract are construed against the insurer and in favor of coverage. Group Ins Co of Michigan v Czopek, 440 Mich 590; 489 NW2d 444 (1992); Powers v DAIIE, 427 Mich 602, 624; 398 NW2d 411 (1986). Where the policy is clear, however, "courts are bound by the specific language set forth in the agreement.” Cottrill v Michigan Hosp Service, 359 Mich 472, 476; 102 NW2d 179 (1960); Raska v Farm Bureau Mut Ins Co, 412 Mich 355; 314 NW2d 440 (1982). Terms in an insurance policy must be given their plain meaning and the court cannot "create an ambiguity where none exists.” UpJohn Co v New Hampshire Ins Co, 438 Mich 197, 206; 476 NW2d 392 (1991). An insurer is free to define or limit the scope of coverage as long as the policy language fairly leads to only one reasonable interpretation and is not in contravention of public policy. Raska, supra at 361-362. If these prerequisites are fulfilled, the policy will be enforced as written.

Heniser has not, and cannot, demonstrate that the policy covers the destruction of the building.⁶ The policy in this case, read as a whole, is unambiguous and does not cover the loss because the property was not a "residence premises” at the time of the loss.⁷

Our conclusion that the policy is unambiguous is further strengthened by the language Heniser included in the land contract when he sold the property. The land contract states:

Said Purchaser shall promptly pay, when due, all taxes and assessments of every nature, which shall become a lien on said premises after the date hereof, and shall, during the continuance of this contract, keep insured the buildings now on said premises or which shall hereafter be placed thereon in the name of said Seller against loss by fire and windstorm, in such company or companies and for such amount as the Seller shall approve, and forthwith deposit all policies of insurance with the Seller, with loss, if any, payable to the Seller, as his interest may appear under this contract.

Heniser included this language to protect himself in case the property was destroyed before the purchasers completed payment. This language indicates Heniser understood that his existing insurance policy would not cover the property after he sold it, and strengthens our conclusion that the policy in question does not cover the destruction of the building.

B

The policy is not internally inconsistent. Although the conditions section of the policy requires the insured to notify the insurer of any "changes in title or occupancy of the property during the term of the policy” before recovering for any loss, this provision does not conflict with the definitions section mandate that the insured reside at the property. The requirement in the conditions section simply allows the insurance company to guarantee that the insured had an insurable interest in the property at the time of the loss or to coordinate coverage with other potential insurers.

c

While the definition of "reside” may be ambiguous in other contexts, there is no ambiguity in this case. The Court of Appeals, in interpreting the term "resides” in the Michigan Freedom of Information Act⁸ and in the Child Custody Act⁹ has found the term to have two different meanings: a legal or technical meaning and a general or popular meaning. Curry v Jackson Circuit Court, 151 Mich App 754; 391 NW2d 476 (1986); Kubiak v Steen, 51 Mich App 408; 215 NW2d 195 (1974). In some contexts, the legal term means something more than actual physical presence; it includes the intent to live at that location at sometime in the future, a meaning similar to the legal concept of domicile. Id. at 413. In other contexts, the term requires actual physical presence. Id.

The policy of interpreting ambiguities in a contract against insurers is rooted in the fact that insurers have superior understanding of the terms they employ, which should not bind relatively unsophisticated insureds. This goal is not furthered by allowing insureds to employ a sophisticated version of a term to create a claim of ambiguity.

Finally, any ambiguity created by the fact that the law ascribes multiple meanings to the term "reside” is irrelevant because Mr. Heniser fails under either standard.¹⁰ Mr. Heniser admits that he did not actually live at the insured premises at the time of the fire and that he did not intend to live there in the future. Accordingly, Mr. Heniser did not "reside” at the insured premises under either definition.

D

The policy is also clear that if Mr. Heniser did not "reside” at the insured property at the time of the loss, the property is not a "residence premises,” as defined by the policy, and the policy does not cover the loss.

Mr. Heniser alternately contends that several courts have found similar language to require only that the insured fulfill the policy requirement at the time the policy was entered. In these cases, the language was viewed as an affirmative warranty and not a continuing warranty.¹¹ See Reid v Hardware Mut Ins Co of Carolinas, Inc, 252 SC 339; 166 SE2d 317 (1969); Ins Co of North America v Howard, 679 F2d 147 (CA 9, 1982). Mr. Heniser and the author of the dissenting opinion in the Court of Appeals rely heavily on the South Carolina Supreme Court opinion in Reid.

In Reid, the insureds purchased a homeowner’s insurance policy that described the insured premises as a "one story frame constructed, approved roof, owner occupied, one family dwelling.” Id. at 342 (emphasis added). While the policy was in effect, the Reids sold the home and the buyer assumed the mortgage. The policy was not transferred, however, and the Reids remained the named insureds. Five months after the sale, while the insurance policy was still in effect, the house was destroyed by fire. When the Reids filed a claim of loss with the insurer, the company refused to pay contending, among other things, that the policy did not cover the home because it was no longer "owner occupied.” Id. at 343. The trial court found in favor of the Reids, and on appeal, the Supreme Court of South Carolina affirmed. In concluding that "owner occupied” was only an affirmative warranty that the Reids occupied the home at the time the policy was issued, the court stated:

Thus, a description of a house in a policy of insurance, as "occupied by” the insured, is a description merely and is not an agreement that the insured should continue in the occupation of it. Joyce v Main Ins Co, 45 Me 168 [(1858)]. O’Niel v Buffalo Fire Ins Co, 3 NY 122 [(1849)]. A statement in an insurance policy that the property is occupied by the insured as a dwelling for himself and family, is not a warranty that it shall continue to be so occupied but is only a warranty of the situation at the time the insurance is effected. German Ins Co [of Freeport, Ill] v Russell, 65 Kan 373; 69 P 345; 58 LRA 234 [(1902)]. [Id. at 346-347.]

The United States Court of Appeals for the Ninth Circuit addressed a situation similar to Reid in Ins Co of North America v Howard, supra. The insureds had purchased a homeowner’s policy covering the "described residence owned and occupied by the insured exclusively for residential purposes.” Id. at 148 (emphasis added). After the death of Mr. Howard, Mrs. Howard moved most of her possessions to another residence and began to rent the home. Two weeks after Mrs. Howard rented her home, it burned. Mrs. Howard filed a claim under the policy, and the company denied coverage, contending that because Mrs. Howard had rented the home, it was no longer "owned and occupied by the insured.” The district.court agreed with the insurer but, on appeal, the court of appeals reversed. Relying on Reid, supra, the Ninth Circuit stated that the policy

contains a representation that the insured is the homeowner and occupant and that the insurance is not being purchased by a third party. It does not impose a condition requiring the policyholder to continue to live at the residence. [Id.]

The court went on to conclude that if an insurer wishes to terminate coverage upon rental of the home, the policy must give the insured unequivocal notice of this condition.¹² Id. at 149.

Because Reid and Howard are distinguishable from this case, a different result is warranted. Unlike the language in Reid and Howard, the phrase "where you reside” in the policy before us is not a warranty but a statement of coverage.

E

The policy language, and the context in which the language is found in the policy before us, differs from that in either Reid or Howard.¹³ The language at issue is found in the definitions section. "[W]here you reside” is not used to describe the dwelling but is an independent part of the definition of "residence premises.” To be' a "residence premises” the insured must reside at the insured premises and the property must be shown as the residence premises in the declarations portion of the policy.

Were we to accept the argument that this definition is merely an affirmative warranty, we would freeze coverage at the time the policy is entered into and render subsequent events irrelevant. Applying this method of contract interpretation to other definitions in the policy before us illustrates the unreasonable result of such an approach. For example, the policy between Heniser and Frankenmuth states:

"Insured” means yoú and residents of your household who are:

a. your relatives; or

b. other persons under the age of 21 and in the care of any person named above.

If the definition of "insured” does not govern the scope of the policy on a continuing basis, an insured’s relatives, who live with the named insured on the date the policy is entered into would continue to be covered by the policy even if they moved out of the insured premises the day after the policy is issued. The analysis becomes even more strained as applied to the definition of "insured location.” The policy defines an "insured location” as, among other things, "individual or family cemetery plots or burial vaults of an insured . . . .” Thus, relatives who lived at the insured premises on the day the policy was entered into would have their burial vault covered until the policy expires, even if they are no longer residents at the insured premises. We conclude that the definitions are properly viewed as establishing whether the property at issue is covered by the policy at the time of the loss and not as warranties.

We agree with those courts that have found the exact language of this policy to unambiguously require the insured to reside at the insured premises at the time of the loss. The Georgia Court of Appeals recently interpreted identical policy language and found that the policy set forth two requirements: that the insured reside at the property at the time of the loss, and that the property be described as the residence premises in the declarations portion of the policy. Georgia Farm Bureau Mut Ins v Kephart, 211 Ga App 423; 439 SE2d 682 (1993).

In Kephart, the plaintiff and her husband purchased a homeowner’s insurance policy that contained the same definition of "residence premises” as the policy before us. The couple’s marriage deteriorated, and the plaintiff moved out of the house. In October, 1990, the couple was divorced, and in November, 1990, fire destroyed the home in which the ex-husband was living. The plaintiff filed to recover for the loss, but the insurance company denied coverage, arguing that Kephart did not "reside” at the premises at the time of the loss. The Georgia Court of Appeals agreed with the insurance company and held:

Because the evidence established that Kephart did not live at the house ... at the time of the fire, and the policy unambiguously required her, as named insured, to live at the "residence premises” in order for coverage to be effective, no coverage existed for Kephart’s claim.[¹⁴] [Id. at 425.]

A different panel of the Georgia Court of Appeals subsequently decided that similar language was merely a description of the property. Hill v Nationwide Mut Fire Ins Co, 214 Ga App 715; 448 SE2d 747 (1994). However, the difference between the policy language in Hill and the language of the policies in Kephart and the instant case, combined with the rationale employed by both panels, fortifies our decision that the contract before us does not employ the term "residence” as merely a description of the property. The policy in Hill defined "residence premise's” to mean

the one- or two-family dwelling, other structures and grounds; or that part of any other building where you live, shown as the residence premises on the Declarations. [Id. at 715. Emphasis added.]

The policy language in Hill is similar to that found in Howard. The language following immediately after the word "building” is not preceded by a comma or a semicolon, and the connector "and” does not precede the requirement that the property must also be shown as the "residence premises” in the declarations. In reaching its decision, the court in Hill specifically relied on the difference in punctuation and the lack of the word "and” to distinguish the language in Hill from the policy language at issue in Epps v Nicholson, 187 Ga App 246; 370 SE2d 13 (1988).

The policy in Epps defined "residence premises” as "the one or two family dwelling, other structures, and grounds or that part of any other building where you reside and which is shown as the 'residence premises’ in the Declarations.” Id. at 246. The Epps court found the policy unambiguous and held that the policy "contained two requirements for coverage: first, the dwelling must be the place where the insured resides; and second, the dwelling must be shown as the 'residence premises’ in the Declarations.” Id. at 247. The second requirement was fulfilled, but because the property was rented and the insured did not reside at the insured premises, the policy did not provide coverage. Id.

Finally, in contrasting the policy language used in Hill with the language used in Kephart (the exact language found in this policy), the Hill court stated that the policy language and sentence structure found in Kephart "clearly require that whether the covered premises is 'a. the one family dwelling . . .’ or 'b. that part of any other building,’ the insured must reside there.”¹⁵ Hill, supra at 718.

The policy language in this case is different from that in Hill and akin to the language analyzed in Epps and Kephart. The policy language following the word "building” is preceded by a semicolon and the word "and” connects the requirement that the insured reside at the premises and the requirement that the property be shown as the "residence premises” in the declarations. Thus, we find that the policy does not cover the destruction of the building unless the insured resides at the insured premises when the loss occurs.

F

Heniser’s final contention, that the definition of "residence premises” deceptively places a coverage exclusion in the definitions section of the policy, is without merit. Heniser’s reliance on Powers v DAIIE, supra, and Transamerica Ins Corp of America v Buckley, 169 Mich App 540; 426 NW2d 696 (1988),¹⁶ is misplaced. Both of these cases dealt with a situation in which the insurer purported to extend coverage in one portion of the policy and excluded such coverage in another section, or where the insurer defined certain terms in variance with their common meaning. That is not the case in the policy between Heniser and Frankenmuth.

The definition of "residence premises” does not vary from its common meaning. This term is clearly defined on page two of the policy and there is no contrary definition elsewhere in the policy. The terms used in the definition of "residence premises” are clear. As noted by the Court of Appeals in Curry, supra, the general or popular definition of "reside” requires actual occupancy, unlike the legal meaning that allows an intent to occupy the property in the future to suffice. The term "reside” is clear to most laypersons and, in a homeowner’s policy, ambiguity is not created by reference to legal theories outside the frame of reference of the ordinary insured.

To determine whether an insured is entitled to insurance benefits, we employ a two-part analysis. "First, we determine if the policy provides coverage to the insured. If it does, we then ascertain whether that coverage is negated by an exclusion.” Buczkowski v Allstate Ins Co, 447 Mich 669, 682; 526 NW2d 589 (1994). It is the insured’s burden to establish that his claim falls within the terms of the policy. Arco Industries Corp v American Motorists Ins Co, 448 Mich 395; 531 NW2d 168 (1995). Harvey Oil Co v Federated Mut Ins Co, 837 F Supp 242, 244 (WD Mich, 1993). As explained above, once Heniser ceased to "reside” at the insured premises, the policy no longer covered the property, and we need not examine whether the policy excludes coverage. Policy .exclusions are based on the presumption that the insured already has established that the policy covers the property in question. The question then becomes whether this particular loss is excluded from coverage for some reason. In this case, the policy did not apply, and destruction of the building, regardless of the cause, would not have been covered.

hi

Coverage in this case is predicated on two separate requirements: the insured must reside at the insured premises, and the premises must be listed in the declarations section. We find that this policy admits of but one interpretation and is not ambiguous or fatally unclear. See Allstate Ins Co v Goldwater, 163 Mich App 646, 648; 415 NW2d 2 (1987). Heniser did not "reside” at the premises at the time of the fire. Thus, the property was no. longer a "residence premises,” and the policy does not provide coverage for the destruction of the building.

We affirm the decision of the Court of Appeals.

Brickley, C.J., and Cavanagh, Riley, and Weaver, JJ., concurred with Boyle, J.

1 The homeowner’s insurance policy issued by defendant in this case is a thirty-five-page form policy. The language pertinent to this case is found in the definitions section on page one of the policy:

In this policy, "you” and "your” refer to the "named insured” shown in the Declarations and the spouse if a resident of the same household. "We,” "us” and "our” refer to the Company providing this insurance. In addition, certain words and phrases are defined as follows:

3. "Insured” means you and residents of your household who are:

a. your relatives; or

b. other persons under the age of 21 and in the care of any person named above.

4. "insured location” means:

a. the residence premises;

b. the part of other premises, other structures and grounds used by you as a residence and:

(1) which is shown in the Declarations; or

(2) which is acquired by you during the policy period for your use as a residence;

c. any premises used by you in connection with a premises in 4.a or 4.b above;

d. any part of a premises:

(1) not owned by an insured; and

(2) where an insured is temporarily residing;

e. vacant land, other than farm land, owned by or rented to an insured;

f. land owned by or rented to an insured on which a one or two family dwelling is being built as a residence for an insured;

g. individual or family cemetery plots or burial vaults of an insured;

h. any part of a premises occasionally rented to an insured for other than business use.

8. “residence premises” means:

a. the one family dwelling, other structures and grounds; or

2 Frankenmuth’s motion relied on MCR 2.116(C)(8) (failure to state a claim on which relief can be granted) and MCR 2.116(0(10) (no genuine issue of material fact). Heniser’s motion was based solely on MCR 2.116(0(10).

3 At trial, Frankenmuth contested recovery for the personal property as well because it alleged that the entire policy was void on the basis of Heniser’s fraudulent claim regarding the value of the personal property. Judge Benson found no fraud on the part of Heniser, however, and presumably Heniser has recovered for the value of his personal property. The policy language defining the scope of coverage for personal property does not employ the term "residence premises,” but rather covers "personal property owned or used by an insured while it is anywhere in the world.” Accordingly, the only loss in dispute is that of the building and not the contents.

4 Griffin, J., dissenting.

5 In this case, when'Heniser signed the land contract, he affirmatively manifested his intent to no longer reside at the residence premises in the future, and relinquished his right to do so. We might be faced with a different situation if the insured has not affirmatively engaged in behavior that indicates an intent to no longer reside at the insured premises, such as if the insured were to die, or if the insured continues to retain the right to reside at the residence premises, such as the period between when an insured places his home for sale but has not yet completed the transaction. These are not the facts of this case, however, and we express no opinion on how we would resolve those scenarios.

6 It is without dispute that the "insured bears the burden of proving coverage, while the insurer must prove that an exclusion to coverage is applicable.” Arco Industries Corp v American Motorists Ins Co, 448 Mich 395, 424-425; 531 NW2d 168 (1995) (Boyle, J., concurring).

7 It is important to note at the outset that while other courts have concluded that similar language is merely descriptive of the property covered by the policy, no court in the country has found this or similar language to be ambiguous. See Hill v Nationwide Mut Fire Ins Co, 214 Ga App 715; 448 SE2d 747 (1994); Georgia Farm Bureau Mut Ins Co v Kephart, 211 Ga App 423; 439 SE2d 682 (1993); Ins Co of North America v Howard, 679 F2d 147, 148 (CA 9, 1982) ("We also find the provision unambiguous”); Shepard v Keystone Ins Co, 743 F Supp 429, 430 (D Md, 1990) ("There is no ambiguity as to the meaning of the terms 'residence’ or 'reside’ in the insurance contract between Shepard and Keystone”); Nancarrow v Aetna Casualty & Surety, 932 F2d 742, 744 (CA 8, 1991); Epps v Nicholson, 187 Ga App 246, 247; 370 SE2d 13 (1988) ("we do not find the provisions here to be conflicting, or the policy language ambiguous”).

8 MCL 15.240(1); MSA 4.1801(10X1).

9 MCL 722.26; MSA 25.312(6).

10 Whether Heniser actually had to live at the insured premises on a full-time basis, or whether intermittent occupancy was sufficient, is not in dispute. In light of the fact that this policy was issued with the knowledge that Heniser used the property as a vacation home on an irregular and sporadic basis, it is likely that Frankenmuth Mutual contemplated noncontinuous occupancy.

11 An express warranty is a

written statement or stipulation inserted on the face of the policy itself, or clearly embodied therein as a part thereof by proper words of reference, whereby the insured expressly agrees that certain facts are, or shall be, true ... of which the validity of the contract of insurance depends .... [7 Couch, Insurance, 2d (rev vol), § 36:2, p 423.]

An affirmative warranty is

one which asserts an existing fact or condition, and appears on the face of the policy, or is attached thereto and made a part thereof. [Id, § 36:4, p 426.]

Promissory or continuing warranties

are those where the insured undertakes to perform some executory stipulation, as that certain acts shall or will be done, or that certain facts shall or will continue to exist. [Id, § 36:5, p 427.]

12 Heniser erroneously contends that the Oregon Court of Appeals recently found similar language to be ambiguous in Farmers Ins Co of Oregon v Trutanich, 123 Or App 6; 858 P2d 1332 (1993). The policy language in Trutanich defined "residence premises” as "the one or two family dwelling and separate structures or that part of any other building where you reside, and shown in the Declarations.” Id. at 13. As explained below, this language is significantly different from the policy language in this case. The Trutanich court did not find the language ambiguous, but concluded that either "where you reside” only modified "part of any other building” and not "family dwelling,” or that even if it did modify "family dwelling” it was still "insufficient to take the house out of coverage.” Id. The Trutanich court relied heavily on Howard, supra, and cited the proposition found in Howard that if the insurer intended for coverage to terminate on the rental of the property, the exclusion should be clearly delineated.

13 Both Reid and Howard found the language in the respective policies to he merely descriptive of the structure covered by the policy. It is crucial, however, to closely examine the exact policy language and context in which the language is used. In Reid at 342, the policy described the building insured as a "one story frame constructed, approved roof, owner occupied, one family dwelling.” The "owner occupied” language was in a list of statements describing the building covered by the policy. Read in context, it is clear that "owner occupied” was simply a description of the dwelling in the same way that stating the building had an "approved roof ” merely commented on the structure at the time the policy was created.

Likewise, in Howard, the policy stated that it covered the "described residence owned and occupied by the insured exclusively for residential purposes.” Again, the "owned and occupied by the insured” language is reasonably understood as merely a description of the dwelling insured. The language immediately follows the term residence and is not set off by any punctuation.

Howard is further distinguishable in that the court was concerned that the policy did not clearly indicate that rental of the insured property could terminate coverage. Id. at 149. While it might not occur to an insured that rental of his property could affect his homeowner’s policy, it is a vastly different case when the insured sells the property.

14 In Kephart, two judges concurred specially, stating that the special conditions found in the policy, requiring the "residence premises [to be] the only premises where the named insured or spouse maintains a residence” further strengthened the decision that the insured had to reside at the insured premises at the time of the loss. Id. at 424. The concurrence rejected the insured’s argument that because the special conditions were written , in the present tense, the requirements only had to be fulfilled at the time the policy was entered. In rejecting this argument, the concurring judges noted that neither the common law or the legislature required there to be an express warning that coverage depended on the continued compliance with the policy requirements. Id. at 427.

The absence of the exclusive residency condition in the present policy does not alter our decision that the definition of "residence premises” unambiguously requires the insured to reside at the insured premises when the loss occurs.

15 We express no opinion on how we would interpret the policy language found in Hill.

16 Heniser erroneously relies on Yahr v Garcia, 177 Mich App 705; 442 NW2d 749 (1989), for support of this proposition as well. Reliance on Yahr is improper because we reversed the Court of Appeals decision in Yahr and agreed with the dissenting opinion that there was no deceptive placement problem. 436 Mich 872 (1990).