-1- 

### STATE OF MICHIGAN

COURT OF APPEALS

HOME-OWNERS INSURANCE COMPANY,

Plaintiff-Appellee, UNPUBLISHED February 21, 2017

v No. 327751 Wayne Circuit Court STEVEN FOURMENT, KIMBERLY FOURMENT, and HANOVER INSURANCE COMPANY, LC No. 14-009444-CK

Defendants,

and

NICOLE BALL,

Defendant-Appellant.

HOME-OWNERS INSURANCE COMPANY,

Plaintiff-Appellee,

v No. 330269 Wayne Circuit Court STEVEN FOURMENT, KIMBERLY FOURMENT, and NICOLE BALL, LC No. 14-009444-CK

Defendants,

and

HANOVER INSURANCE COMPANY,

Defendant-Appellant.

Before: J ANSEN , P.J., and B ECKERING and G ADOLA , JJ.

P ER C URIAM

.-2- These consolidated appeals arise from the same lower court fil e. In Docket No. 327751, defendant Nicole Ball (Ball) app eals as of right an order grant ing summary disposition to plaintiff, Home-Owners Insurance Company (Home-Owners). In Doc ket No. 330269, defendant Hanover Insurance Company (Hanov er) appeals by delayed leave gr anted 1 the same lower court order. We reverse and remand for entry of an order granting su mmary disposition to defendants and a judgment declaring that Home-Owners was required to defen d and indemnify defendants Steven Fourment (Steven) and Kimberly Fourment (Kimberly) (coll ectively, the Fourments) in connection with an underlying dog bite action filed by Ball aga inst the Fourments.

On appeal, Ball and Hanover, the insurance company for another defendant in the underlying action, argue that the trial court erred by granting Home-Owners’s motion for summary disposition. Ball and Hanover contend that Home-Owners is estopped from asserting coverage defenses with respect to a homeowners insurance policy issued to the Fourments. We

agree.

A trial court’s decision regard ing a motion for summary dispos ition is reviewed de novo. Cannon Twp v Rockford Pub Sch , 311 Mich App 403, 410; 875 NW2d 24 2 (2015). A motion for summary disposition under MCR 2.116(C)(10) tests the factual su fficiency of the complaint and is proper when there is no genui ne issue regarding any material fact. Id . at 411. “When deciding a motion under MCR 2.116(C)(10), a trial court may consider aff idavits, pleadings, depositions, admissions, and other evidence submitted by the parties, in the light most favorable to the nonmoving party.” Id . “A genuine issue of material fa ct exists when, viewed in the light most favorable to the nonmoving part y, reasonable minds could differ on an issue.” Id . When the
evidence fails to establish a genuine issue of fact, the moving party is entitled to judgment as a

matter of law. Id

.

“[W]hen an insurance company undertakes the defense of its ins ured, it has a duty to give reasonable notice to the insured that it is proceeding under a reservation of rights, or the insurance company will be estopped from denying its liability.” Kirschner v Process Design
Assoc, Inc , 459 Mich 587, 593; 592 NW2d 707 (1999) (emphasis omitted), ci ting Meirthew v

Last , 376 Mich 33, 39; 135 NW2d 353 (1965). The doctrine of estopp el typically “will not be applied to broaden the coverage o f a policy to protect the insu red against risks that were not included in the policy or that were expressly excluded from the policy.” Kirschner , 459 Mich at 594. Nonetheless, the application of estoppel may sometimes “b ring within coverage risks not covered by the policy.” Id

.

For example, in situations in wh ich the insurance company has m isrepresented the terms of the policy to the insured or defended the insured with out reserving the right to deny coverage, courts have extended coverage beyond th e terms of the policy when the inequity to the insurer as a result of the broa dened coverage is outweighed by the inequity s uffered by the insured. [ Id . at 594-595.]

1 See Home Owners Ins Co v Fourment , unpublished order of the Court of Appeals, entered January 8, 2016 (Docket No. 330269).-3- But the failure of t he insurer, who is not a party to the underlying lawsuit, to notify an underlying tort claimant, who is not the insured, of a reservation of rights does not permit the us e of estoppel to broaden coverage beyond the terms of the policy. Id . at 589, 595. Rather, an underlying tort claimant who is a judgment creditor of the insured may recover against the insurer only to the
extent that the insured could r ecover against the insurer. See id . at 596.

In Meirthew , 376 Mich at 36-37, the insurer p rovided a defense to its insu red but did not provide notice of its reservation of rights to its insured unti l more than two years after the underlying lawsuit was filed against the insured, and approxima tely seven months before the underlying judgment was entered. This deprived the insured of a fair and timely opportunity to seek a declaration of rights against the insurer or to attempt an independent negotiation of a settlement with the underlying plaintiff. Id . at 37. This Court held that the insurer’s notice was insufficient because it was vague and “that it came too late to avoid presumptive prejudice of [the insured’s] rights and [the underlying] plaintiff’s consequ ential rights.” Id . at 38.

Whether an insurer’s notice of its reservation of rights is ti mely presents

a two-step question. The Court looks first to the earliest mom ent that the insurer should have become aware of the substantial possibility of conf lict between its own interests and those of the insured, and then measures the t ime elapsing between that time and the time of notification. [ Cozzens v Bazzani Bldg Co , 456 F Supp 192, 200 (ED Mich, 1978). 2 ]

In Fire Ins Exch v Fox , 167 Mich App 710, 714; 423 NW2d 325 (1988), this Court noted that

only four months passed between the initiation of the underlyin g action and the date [that the insurer] sent its reservation of rights letter. We feel that four months is, as a matter of law, not an unreasonable length of time. We hold that issuance of the reservation of rights le tter only four months after init iation of the litigation reasonably put [the insured] on notice that his claim might not be covered under his homeowner’s insurance policy.

If an insurer defends an insured while knowing of facts that w ould permit avoidance of coverage but fails to provide rea sonable notice to the insured, “actual prejudice is not required for the application of estoppel. Instead, a presumption of pre judice arises that, if unrebutted, will establish prejudice as a matter of law.” Smit v State Farm Mut Auto Ins Co , 207 Mich App 674, 684; 525 NW2d 528 (1994), citing Multi-States Transp, Inc v Mich Mut Ins Co , 154 Mich App 549, 556; 398 NW2d 462 (1986). In Multi-States Transp, Inc , 154 Mich App at 557, the insurer defended its insured for approximately 21⁄2 years without reveali ng a possible coverage defense despite knowing of that possible coverage defense since earlier in the case. In that circumstance, the insured’s rights were presum ptively prejudiced, the presump tion had not been rebutted by the insurer, and the insurer was t hus estopped from asserting the p olicy exclusion. Id

.

2 “Decisions from lower federal courts are not binding but may b e considered persuasive.” Truel v City of Dearborn , 291 Mich App 125, 136 n 3; 804 NW2d 744 (2010).-4- In the present case, Home-Owners was aware almost immediately after the dog bite
incident of the facts on which Home-Owners now relies to assert its coverage defenses. Yet Home-Owners waited almost an entire year before providing any n otice of its coverage defenses to its insureds, the Fourments. Home-Owners’s claim notes refl ect that it was notified of the dog bite incident on July 25, 2013, which was the day after the dog bite occurred. On July 25, 2013, a Home-Owners claims representative spoke to Kimberly on the ph one and learned that the Fourments’ dog bit a customer at a pet store. The claims repre sentative was informed that the Fourments’ dog was being used to demonstrate a product to the c ustomer. On August 5, 2013, Home-Owners’s claims representative met with Kimberly at the st ore and took her statement. Kimberly revealed that the dog was the Fourments’ personal dog and that the Fourments took their dog to work at the pet store because they work long hours . These are the key facts on which Home-Owners now asserts the applicability of its coverage defenses, including the premises and business-pursuits exclusions. Yet Home-Owners did not assert its coverage
defenses to the Fourments until nearly a year later, in its “co verage position letter” to the Fourments dated July 16, 2014, shortly after a case evaluation in the underlying action that
resulted in an award a gainst the Fourments.

In the nearly one year between the dog bite incident and the p rovision of notice in the July 16, 2014 letter, Home-Owners proceeded as if coverage was available without providing any notice that Home-Owners was reserving its rights. On Augus t 1, 2013, Home-Owners sent a letter to Ball informing her that the Fourments had medical pay ments coverage available to Ball in the amount of $1,000. The letter did not assert any coverag e defenses. Ball filed the underlying lawsuit against the Fourments and their employer, We stland Dog Food Co., Inc., on September 26, 2013. Home-Owners then provided a lawyer to repr esent the Fourments in the underlying case from September 2013 to July 2014 without issuin g a reservation of rights letter. Indeed, as late as June 30, 2014, just before the underlying ca se evaluation, Home-Owners sent a letter to the Fourments informing them that the policy limits w ere $300,000 and that the Fourments may be personally liable for any judgment in excess of that amount. This letter did not assert any coverage defenses or the applicability of any ex clusions in the insurance policy. It
was not until after the issuance of the case evaluation award t hat Home-Owners suddenly informed the Fourments in a July 16, 2014 “coverage position le tter” that no coverage was afforded under the policy and that Home-Owners would continue t o provide a defense to the Fourments as a courtesy, but would not pay any judgment on thei r behalf. The letter informed the Fourments that if they chose to accept the case evaluation award, they were required to do so by July 28, 2014. On July 22, 2014, Home-Owner s commenced this declaratory judgment action against the Fourments, Ball, and Hanover, asserting that no cov erage was available under the policy. On August 7, 2014, Home-Owners sent the Fourments a “r evised coverage position letter” adhering to its denial of coverage and quoting specific language from the insurance policy.

We conclude that Home-Owners failed to provide timely notice o f its reservation of rights. Home-Owners’s conduct in this case strikes us as unusu ally egregious. Home-Owners had all of the information it needed to assert its coverage def enses by either July 25, 2013, which was the day after the dog bite i ncident occurred, or certainly no later than August 5, 2013, when the Home-Owners claims representative met with Kimberly at the pet store and took her statement. Home-Owners knew that Ball was a customer of the pe t store, that it was the-5- Fourments’ personal dog that bit Ball, and that the dog was bei ng used to demonstrate a product at the store. Home-Owners thus could have asserted the applica bility of the business-pursuits or premises exclusions at any time in the almost one year that lap sed before Home-Owners finally issued its coverage position le tter on July 16, 2014. In the m eantime, Home-Owners had tendered a defense to the Fourments without ever suggesting tha t coverage was unavailable. On the contrary, Home-Owners strong ly suggested that coverage was available by indicating that medical payments coverage would be afforded to Ball and by info rming the Fourments before case evaluation that they would be liable for any judgment amou nt in excess of the policy limits.

Given Home-Owners’s failure to provide reasonable notice of it s reservation of rights to its insureds, the Fourments, in a timely manner, a presumption of prejudice arises that, if unrebutted, establishes prejud ice as a matter of law. See Smit , 207 Mich App at 684; MultiStates Transp, Inc , 154 Mich App at 556. See also Meirthew , 376 Mich at 38 (stating that the
insurer’s notice “came too late to avoid presumptive prejudice of [the insured’s] rights”) (emphasis added). Home-Owners has failed to provide any eviden ce to rebut the presumption of prejudice.

Even if prejudice is not presumed, we would conclude that ther e was unrebutted evidence that the Fourments were prejudiced. Home-Owners waited nearly a year to provide notice of its coverage position, which was after case evaluation was held and an award was rendered against the Fourments. The Fourments were thus placed in a position of having to either accept the case evaluation award that was rendered when insurance coverage was assumed to exist―an award that the Fourments may well have been unable to afford to pay w ithout insurance coverage―or else face the risk of sanctions for rejecting the award followi ng the ultimate judgment against

them. 3 If Home-Owners had provided notice of its coverage position before case evaluation, this likely would have resulted in a lesser case evaluation award ag ainst the Fourments, which the Fourments may well have been more willing and able to accept. 4 It is also reasonable to conclude that earlier notice of Home-Owners’s coverage position would have influenced underlying settlement discussions, because the Fourments would have had a greater incentive to settle before the possible rendering of a large case evaluation award that exposed them to the risk
of sanctions.

It is a well-known fact that th e availability of an insurance f und to pay whatever judgment is ultimately entered is an important element in the m anagement of a case, both with respect to the nature and extent of the discove ry that is undertaken

3 In fact, the latter event is pr ecisely what happened. After a jury verdict was rendered against the Fourments, case evaluation sanctions were imposed on them f or rejecting the case evaluation

award.

4 A case evaluation panel may consider factors similar to those considered in settlement negotiations, including insurance policy limits. See Vermilya v Carter Crompton Site Dev
Contractors, Inc , 201 Mich App 467, 473; 506 NW2d 580 (1993); MCR 2.403(J)(3) (“Information on settlement negotiations not protected under MC R 2.412 and applicable insurance policy limits shall be disclosed at the request of th e case evaluation panel.”).-6- and with respect to the course of settlement discussions. [ Multi-States Transp,

Inc , 154 Mich App at 556, quoting Cozzens , 456 F Supp at 202 (quotation marks omitted).]

See also Meirthew , 376 Mich at 37 (noting that the insurer’s untimely notice dep rived the insured of an opportunity to seek an independent settlement negotiation with the underlying plaintiff). Therefore, even if prejudice is not presumed, we would conclude that it is clear in this case that the Fourments were prejudiced b y Home-Owners’s untimely notice of its coverage position, such that Home-Owners is now estopped from asserting its coverage de fenses.

The trial court’s reasoning di d not accurately reflect the est oppel theory being asserted in this case. The trial court correctly noted that the doctrine o f estoppel may not be used to expand coverage beyond the terms of the policy when an insurer fails t o notify an injured person who is not an insured that the insurer is reserving its rights. See Kirschner , 459 Mich at 589, 595 (an insurer’s failure to notify an underlying tort claimant, who is not the insured, of a reservation of rights does not permit the use of estoppel to broaden coverage beyond the terms of the policy). But defendants in this case did not assert that estoppel applie d because of Home-Owners’s failure to notify the underlying tort claimant, Ball, of the re servation of rights. On the contrary, estoppel here was asserted on th e basis of Home-Owners’s failur e to notify its own insureds, the Fourments, of the reservation of rights. This trial court’s re asoning thus reflects an apparent misunderstanding of the nature of the estoppel theory being ass erted in this case.

Because Ball is a judgment creditor of the Fourments, she has the right to recover against
Home-Owners to the same extent t hat the Fourments could recover . See Kirschner , 459 Mich at 596; Meirthew , 376 Mich at 40; Smit , 207 Mich App at 683. Contrary to Home-Owners’s argument on appeal, Ball is thus permitted to assert estoppel a gainst Home-Owners to the same
extent that the Fourments could assert that doctrine. Accordin gly, we conclude that the doctrine of estoppel applies to bar Home-Owners from asserting its cover age defenses. It is therefore unnecessary to address the additional issues raised on appeal c oncerning the merits of whether the asserted polic y exclusions apply.

Finally, we note that the fact that Home-Owners provided the a ttorney for the Fourments in the underlying action and later asserted that no coverage wa s afforded under the policy raises ethical concerns regarding the attorney’s duties to the Fourmen ts. “ ‘[N]o attorney-client relationship exists between an in surance company and the attorn ey representing the insurance company’s insured. The attorney ’s sole loyalty and duty is owe d to the client, notto the insurer.’

” Kirschner , 459 Mich at 598 (citation omitted). Although the attorney di d not have an attorney-client relationship w ith the insurance company, we can not overlook the fact that HomeOwners provided the attorney for the Fourments and that the ins urance company’s position may affect the attorney’s loyalty to the insured. In the typical s ituation, an attorney provided by an insurance company would face no e thical conflict because the in terests of the insurance company
and the interests of the insured would be aligned. However, in this case, the attorney provided by Home-Owners initially represen ted the Fourments with the und erstanding that the incident was covered under the insurance policy. This understanding rem ained until after the case evaluation award was issued. Then, the same attorney continued to represent the Fourments even after Home-Owners took the position that it would not prov ide coverage. The interests of the insured and the interests of the insurer were no longer ali gned when Home-Owners-7- determined that the incident was not covered by the insurance p olicy. It is difficult to determine whether the attorney was acting to further the interests of the Fourments throughout the underlying action in light of the fact that the insurance compa ny, the entity that provided the attorney, took the position during the case that coverage was n ot afforded under the policy. Therefore, we conclude that Home-Owners’s position that it perm itted the attorney to represent the Fourments as a “courtesy” is specious and raises ethical co ncerns regarding the loyalty of the
attorney.

Reversed and remanded for entry of an order granting summary d isposition to defendants pursuant to MCR 2.116(I)(2) and a judgment declaring that Home- Owners was required to defend and indemnify the Fourments in connection with the under lying dog bite action filed by Ball against the Fourments. W e do not retain jurisdiction.

/s/ Kathleen Jansen
/s/ Michael F. Gadola