NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 13a0504n.06

No. 12-2511

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

AMI ENTERTAINMENT NETWORK,

INC.,

Plaintiff-Appellant,

v.

ZURICH AMERICAN INSURANCE CO.,

Defendant-Appellee.

)

)

)

)

)

)

)

)

)

)

ON APPEAL FROM THE UNITED

STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF MICHIGAN

Before: MARTIN and SUTTON, Circuit Judges; ADAMS, District Judge.*

SUTTON, Circuit Judge. In this insurance case, a diversity suit governed by Michigan law,

AMIEntertainment Network challenges the district court’s grant of summaryjudgment to its insurer,

Zurich American Insurance. We affirm.

I. 

In July 2010, AMI was sued by a company called RDIin Oakland Circuit Court. The lawsuit

alleged that AMI falsely claimed that RDI did not own a valid license to distribute the Michigan

Superstar video poker game. Between July 2010 and November 2011, AMI defended itself from the

lawsuit, filing several motions and eventually removing the lawsuit to federal court. In the process,

AMI ran up more than $1.3 million in legal fees. For reasons of its own, AMI did not notify its

insurer, Zurich, about the lawsuit until November 2011. 

The Honorable John R. Adams, United States District Judge for the Northern District of *

Ohio, sitting by designation.
No. 12-2511

AMI Entm’t Network, Inc. v. Zurich Am. Ins. Co.

When Zurich received word of the lawsuit, it informed AMI that, going forward, it would

provide a defense under the terms of AMI’s policy. At the same time, it refused to pay the legal bills

AMI had already incurred in view of the prompt-notice and expense-permission requirements of the

insurance policy. 

AMI filed this lawsuit in response, alleging that Zurich had breached its duty of defense by

refusing to pay for the legal bills AMI incurred before November 2011. The district court granted 

summary judgment to Zurich. 

II. 

This appeal presents one question: Must Zurich pay the defense costs AMI incurred before

it told Zurich about the underlying litigation? The answer is no, as the district court correctly

recognized. 

Start with the language of the insurance contract. The policy obligated AMIto notifyZurich

“promptly of any . . . suit,” and gave Zurich “the right to appoint defense counsel.” R. 14-2 at 15,

§ I.D.3; see also id. at 55 (requiring AMI to notify Zurich “as soon as practicable” in the event of a

lawsuit against AMI). The policy added that “[n]o insured will, except at that insured’s own costs,

voluntarily make any payment, assume any obligation, or incur any expense . . . without our

consent.” R. 14-3 at 11, § IV.2.d. The policy confirmed that “[c]ompliance with the reporting

requirements . . . is a condition precedent to coverage.” R. 14-2 at 15, § I.D.4. And the policy

established that, if AMI failed to comply, Zurich would “not be required to establish prejudice

resulting from the noncompliance, but [would] be automatically relieved of liability with respect to

- 2 -
No. 12-2511

AMI Entm’t Network, Inc. v. Zurich Am. Ins. Co.

the claim.” Id. When all is said and done, the language of the policy squarely supports Zurich’s

decision not to pay for defense expenses incurred before AMI told Zurich about the underlying

lawsuit and incurred without Zurich’s permission.

In addition to being supported by the language of the policy, Zurich’s position also is

supported by background principles of Michigan insurance law. The policy gave Zurich the duty to

defend AMI against any lawsuit that potentially fell within the ambit of the policy. That duty began

as soon as a lawsuit was filed against AMI. Am. Bumper & Mfg. Co. v. Hartford Fire Ins. Co., 550

N.W.2d 475, 481 (Mich. 1996). An insurer cannot, however, breach that duty before it knows about

a lawsuit. Aetna Cas. & Sur. Co. v. Dow Chemical Co., 44 F. Supp. 2d 847, 859 (E.D. Mich. 1997);

Century Indem. Co. v. Aero-Motive Co., 318 F. Supp. 2d 530, 544 (W.D. Mich. 2003), aff’d, 155 F.

App’x 833 (6th Cir. 2005) (citing Dow Chem. Co. for the same). Before an insurer knows about a

lawsuit, it has no chance to mount (or to refuse to mount) a defense for its insured, and insurers are

not sentries who must march “back and forth to the court house to keep a check on if or when [their

insured] may be served with process.” Koski v. Allstate Ins. Co., 572 N.W.2d 636, 640 (Mich. 1998)

(quoting Weaver v. Hartford Acc. & Indem. Co., 570 S.W.2d 367, 369 (Tex. 1978)). AMI does not

dispute that Zurich did not know about the RDI lawsuit until November 2011. Before then, Zurich

could not have breached any duty to defend, and in the absence of a breach Zurich cannot be liable

for AMI’s defense costs. 

AMI offers several responses, all unconvincing. It first claims that Zurich must establish

prejudice from the absence of notice and permission, notwithstanding the term of the parties’

- 3 -
No. 12-2511

AMI Entm’t Network, Inc. v. Zurich Am. Ins. Co.

agreement that disclaimed any need to show prejudice. Call us skeptical. Some Michigan cases to

be sure suggest that Michigan public policy prohibits a party from refusing to indemnify based on

a failure to notify the insurance company in a timely manner in the absence of prejudice to the

insurance company. See, e.g., Koski, 572 N.W.2d at 639; Wendel v. Swanberg, 185 N.W.2d 348,

353 (Mich. 1971). But AMI has not pointed us to an expense-only case in which this public policy

prohibits the insurance company from enforcing a contractual provision that reasonably requires

notice and permission before the insured may charge defense costs to the insurance company.

Be that as it may, we need not resolve this point of Michigan law today. The reality is that

Zurich can show prejudice in any event. Forsixteen months, all concede, Zurich did not know about

the lawsuit. And for sixteen months, AMI assumed control of the defense of the RDIlawsuit without

Zurich’s knowledge, depriving Zurich of the opportunity to manage the litigation efficiently or for

that matter settle it. See Koski, 572 N.W.2d at 639 (holding that an insurer suffered prejudice when,

among other things, it was “deprived of any opportunity to engage in discovery”); Wehner v. Foster,

49 N.W.2d 87, 91 (Mich. 1951) (finding prejudice when a seven-month delay in reporting a claim

gave the insurer no opportunity to inspect damaged property or interview witnesses); see also

Guaranty Bank v. Chubb Corp., 538 F.3d 587, 591 (7th Cir. 2008) (finding that “increasing the cost

of defending the suit” prejudiced an insurer); Integon Nat’l Ins. Co. v. Berry, No. 289320, 2010 WL

1138023, at *4 (Mich. Ct. App. Mar. 25, 2010) (explaining that an insurer suffered prejudice when

it was “deprived of notice and the opportunity to defend”). On top of these general indicators of

prejudice, there is another purpose of an expense-permission clause: approving the rates of outside

- 4 -
No. 12-2511

AMI Entm’t Network, Inc. v. Zurich Am. Ins. Co.

counsel. In this instance, AMI paid the partners of its outside law firm $250 per hour, while Zurich

permitted partners at outside law firms a maximum of $150 per hour. See Morrow Aff., R. 16-7

¶ 12. Similar disparities existed between the rates paid by AMI for the work of associates and the

rates allowed by Zurich. Id. Allowing AMI to recover pre-notice and pre-permission costs would

transform the insurer’s duty to defend into “a duty to reimburse, without affording the insurer the

opportunity to control the defense and settlement of the underlying obligation.” Century Indem. Co.,

318 F. Supp. 2d at 544. 

Nor did a potential conflict of interest between AMI and Zurich—arising from the

intentional-tort exemption in the policy—give AMI the right to control the defense without notice

to Zurich and without permission from Zurich for the expenses AMI incurred. Many liability

insurance policies, including this one, exempt intentional torts from their coverage. And in this

instance, RDI brought a series of claims against AMI, one of which might or might not be treated

as an intentional tort. In that kind of a setting, if the insurer “has asserted coverage defenses that

raise the same issues raised by the plaintiff in the underlying action against the insured,” the insured

need not cede the lawsuit’s defense to its insurer, and the insurer remains liable for the costs. Dow

Chemical Co., 44 F. Supp. 2d at 860. 

But to invoke this kind of a conflict to retain control of the defense, AMI had to do something

it did not: give notice to the insurer. An insurer cannot argue that a lawsuit falls outside the policy’s

scope if the insurer does not know of the lawsuit at all. That is why Dow Chemical refused to grant

summary judgment when there was a factual question about “when, if at all,” the insurer was “made

- 5 -
No. 12-2511

AMI Entm’t Network, Inc. v. Zurich Am. Ins. Co.

aware of an underlying claim and [the insured’s] need for a defense.” Id. at 861. No such dispute

clouds the resolution of this case. AMI does not contend that Zurich knew about the lawsuit before

AMI provided notice in November 2011. Perhaps, as AMI claims, a conflict began after Zurich

raised several potential defenses in December 2011. That question is the subject of a separate

lawsuit over post-notice defense costs still pending in the district court. See Complaint ¶¶ 17–20,

AMI Entm’t Network, Inc. v. Zurich Am. Ins. Co., No. 4:12-cv-15212-GAD-LJM, ECF #1 (E.D.

Mich. Nov. 27, 2012). But even if such a conflict existed, it had no bearing on Zurich’s liability for

money AMI spent before it notified Zurich. As the district court correctly concluded, AMI alone

bears responsibility for those costs.

III.

For these reasons, we affirm.

- 6 -