#### J & J FARMER LEASING, INC v CITIZENS INSURANCE COMPANY OF AMERICA

Docket No. 125818.

Decided May 24, 2005.

On application by the defendant for leave to appeal, the Supreme Court, after hearing argument on whether the application should be granted and in lieu of granting leave, vacated the judgment of the Court of Appeals in part and remanded the case to the circuit court for further proceedings.

J & J Farmer Leasing, Inc.; Farmer Brothers Trucking Company, Inc.; Calvin Orange Rickard, Jr.; and James W Riley, personal representative of the estate of Sharyn Ann Riley, deceased, brought an action in the Washtenaw Circuit Court against Citizens Insurance Company of America, alleging bad-faith failure to settle with regard to an underlying wrongful death action by the estate against the Farmer parties. The underlying action resulted in a jury award in excess of $3 million, of which Citizens, the insurer of the Farmer parties, paid its policy limit of $750,000 plus costs, fees, and interest, leaving the Farmer parties hable for the balance of the judgment. The Farmer parties and the estate then entered an agreement to initiate a joint lawsuit against Citizens on the basis of an alleged’ bad-faith failure to settle. The agreement provided that the remainder of the judgment from the underlying lawsuit would be paid from any proceeds from the action alleging bad-faith failure to settle. The agreement also provided that in return for the Farmer parties’ cooperation in bringing the action, the estate would forbear action to collect the excess of the underlying judgment from the Farmer parties. Citizens moved for summary disposition on the basis that the agreement functioned as a release by the estate against the Farmer parties, and therefore the estate cannot recover from Citizens because the Farmer parties will not actually suffer a loss for which Citizens can be held liable. The court, David S. Swartz, J., denied the motion. Citizens appealed by leave granted. The Court of Appeals, Sawyer, EJ., and Hoekstra and Murray, JJ., affirmed, holding that the agreement was a release because it operated to release Farmer from the underlying excess judgment. 260 Mich App 607 (2004). The Supreme Court, in lieu of granting leave to appeal, heard oral argument on whether to grant the application or take other peremptory action. 471 Mich 940 (2004).

*354In a unanimous opinion per curiam, the Supreme Court *held:*

There is a material difference between a covenant not to sue and a release. A release immediately discharges an existing claim or right, while a covenant not to sue is merely an agreement not to sue on an existing claim that does not extinguish the claim or cause of action. The agreement in this case was a covenant not to sue, conditioned on the covenantee performing certain duties before the covenant becomes absolute. The Court of Appeals incorrectly concluded that the covenant not to sue was a release and it needlessly relied on *Frankenmuth Mut Ins Co v Keeley (On Rehearing),*436 Mich 372 (1990), in reaching its determination. The parts of the Court of Appeals opinion that dealt with the release and covenant not to sue issue and its analysis regarding *Keeley*must be vacated. The circuit court correctly denied the motion for summary disposition on the basis that the agreement was a covenant not to sue. The matter must be remanded to the circuit court for further proceedings.

Court of Appeals judgment vacated in part and case remanded to the circuit court.

Contracts — Releases — Covenants Not to Sue.

A material difference exists between a covenant not to sue and a release; a release immediately discharges an existing claim or right, while a covenant not to sue is merely an agreement not to sue on an existing claim and it does not extinguish the claim or cause of action.

*Logeman, Iafrate & Pollard, PC.*(by *Robert E. Loge-man*and *James A. Iafrate),*for the plaintiffs.

*Plunkett & Cooney, PC.*(by *Jeffrey C. Gerish, Charles W. Browning,*and *Stephen P. Brown),*for the defendant.

Amici Curiae:

*Willingham & Cote, PC.*(by *John A. Yeager*and *Kara Henigan),*for Insurance Institute of Michigan.

*Maurice A. Borden*for Michigan Defense Trial Counsel.

*Dykema Gossett, PLLC*(by *Lori McAllister*and *Kurt**355*D. Gallinger),*for the American Insurance Association, the National Association of Mutual Insurance Companies, and the Michigan Insurance Coalition.

Per Curiam.

At issue is whether a covenant not to sue a party is indistinguishable from a release and, thus, results in a bar to suits against a covenantee’s tortfeasor by a covenantee’s assignee. The Court of Appeals concluded that the instruments are indistinguishable and, accordingly, that a covenantee’s assignee (the covenantor) would be barred in a suit against the tortfeasor. We disagree and vacate that part of the judgment. The Court of Appeals correctly concluded for other reasons that the covenantor was not released. Yet the Court unnecessarily relied on a misapplication of *Frankenmuth Mut Ins Co v Keeley (On Rehearing),*436 Mich 372; 461 NW2d 666 (1990), so we vacate that portion of the Court’s analysis. This case is remanded to the Washtenaw Circuit Court for further proceedings consistent with this opinion.

i

Sharyn Riley was killed when her vehicle was struck by a truck owned by J & J Farmer Leasing, Inc. (or Farmer Brothers Trucking Company, Inc.),1 operated by their employee Calvin Rickard, Jr., and insured by Citizens Insurance Company. Rickard was at fault. James Riley, as the personal representative of Sharyn Riley’s estate,2 sued Farmer under a wrongful death theory and Citizens assumed Farmer’s defense. Riley obtained a jury verdict of $3.2 million against Farmer, which exceeded the $750,000 limits of the Citizens *356policy. Thus, Farmer, after Citizens tendered its policy limits, remained liable for the $2.45 million balance of the judgment.

Farmer, believing that the case could have settled for the policy limits but for Citizens’ bad faith in pursuing settlement negotiations, assigned to Riley its cause of action against Citizens for bad-faith failure to settle.3 As part of the agreement between Riley and Farmer, Riley agreed not to sue to collect the excess judgment of $2.45 million from Farmer as long as Farmer cooperated in the suit against Citizens.4

After Riley and Farmer filed suit; Citizens moved for summary disposition, MCR 2.116(0(10), arguing that under the agreement Riley had released its underlying claim against Farmer for the excess judgment and, thus, Farmer’s surety, Citizens, was also released. That is, because the principal was released, so was the surety. The circuit court denied the motion, reasoning that the joint agreement was in the nature of a covenant not to sue and not a release because, under certain conditions, Riley could proceed against Farmer to collect the underlying judgment.

The Court of Appeals granted Citizens’ application for leave to appeal and subsequently affirmed on a *357different basis than the trial court. While the Court held that the trial court reached the right result because of its understanding of the intent and purpose of our decision in *Frankenmuth Mut Ins Co v Keeley (On Rehearing),*436 Mich 372; 461 NW2d 666 (1990), the panel held that the agreement itself was a release because it “operates to release” Farmer from the underlying excess judgment.5

Citizens applied for leave to appeal in this Court. It argued that the covenant not to sue in the agreement effectively operated as a release. Therefore, under *Keeley, supra,*plaintiffs’ claim must fail because Farmer had not suffered any pecuniary loss as a result of Citizens’ alleged bad faith in failing to settle the underlying lawsuit. We entertained oral argument on this matter in lieu of granting leave to appeal under MCR 7.302(G)(1)6 and now resolve Citizens’ application for leave to appeal.

ii

We review a summary disposition ruling de novo to determine whether the moving party is entitled to judgment as a matter of law. *Maiden v Rozwood,*461 Mich 109, 118; 597 NW2d 817 (1999). We view the evidence in the light most favorable to the party opposing the motion. *Id.*at 120.

hi

There is a material difference between a covenant not to sue and a release. A release immediately discharges an existing claim or right. In contrast, a cov*358enant not to sue is merely an agreement not to sue on an existing claim. It does not extinguish a claim or cause of action. The difference primarily affects third parties, rather than the parties to the agreement. *Theophelis v Lansing Gen Hosp,*430 Mich 473, 492 n 14; 424 NW2d 478 (1988) (GRIFFIN, J.); *Industrial Steel Stamping, Inc v Erie State Bank,*167 Mich App 687, 693; 423 NW2d 317 (1988).

As the circuit court concluded, the agreement in this case is a covenant not to sue. Additionally, the covenant not to sue is not absolute but, rather, is conditioned on the covenantee, Farmer, performing certain duties in the litigation against Citizens. Only if Farmer performs these duties does Riley’s covenant not to sue on the underlying excess judgment become absolute and release Farmer of all liability to Riley.

This analysis resolves this matter. No resort to *Keeley*to reach the same conclusion was necessary.

rv

In conclusion, the Court of Appeals incorrectly held that the covenant not to sue was a release and it needlessly relied on *Keeley.*Accordingly, the Court of Appeals opinion, insofar as it dealt with the release and covenant not to sue issue, is vacated. Its analysis regarding *Keeley*is also vacated. The circuit court correctly found that the joint agreement was a covenant not to sue and, therefore, summary disposition was appropriately denied. This matter is remanded to the circuit court for further proceedings.

Taylor, C.J., and Cavanagh, Weaver, Kelly, Corrigan, YOUNG, and Markman, JJ., concurred.

1

 For ease of reference, we will refer to these parties jointly as “Farmer.”

2

 For ease of reference, we will refer to Sharyn Riley’s estate as “Riley.”

3

 Michigan recognizes an insured’s claim against its insurer for bad faith in refusing to settle. See *Commercial Union Ins Co v Liberty Mut Ins Co,*426 Mich 127; 393 NW2d 161 (1986); *Wakefield v Globe Indemnity Co,*246 Mich 645; 225 NW 643 (1929).

4

 In particular, as relevant here, the agreement sets out Farmer’s desire to pursue a bad-faith claim and Riley’s desire to recover the full judgment. It continues by stating that the parties will pursue a joint lawsuit against Citizens, Riley will control the lawsuit, Farmer will cooperate fully or the agreement may be rendered null and void, any recovery will go to Riley (with an exception for $20,000 for attorney fees incurred by Farmer), and Riley will in return “forever forbear” from collecting any judgment from Farmer.

5

*J & J Farmer Leasing, Inc v Citizens Ins Co of America,*260 Mich App 607, 621; 680 NW2d 423 (2004).

6

471 Mich 940 (2004).