Case Name: FRANKENMUTH MUTUAL INSURANCE COMPANY, INC v. CONTINENTAL INSURANCE COMPANY; MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE COMPANY v. TRANSAMERICA INSURANCE CORPORATION OF AMERICA
Court: Michigan Supreme Court
Jurisdiction: Michigan
Decision Date: 1995-08-22
Citations: 450 Mich. 429
Docket Number: Docket Nos. 98342, 99439
Parties: FRANKENMUTH MUTUAL INSURANCE COMPANY, INC v CONTINENTAL INSURANCE COMPANY MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE COMPANY v TRANSAMERICA INSURANCE CORPORATION OF AMERICA
Judges: Brickley, C.J., and Boyle and Riley, JJ., concurred with Weaver, J.
Reporter: Michigan Reports
Volume: 450
Pages: 429–456

Head Matter:
FRANKENMUTH MUTUAL INSURANCE COMPANY, INC v CONTINENTAL INSURANCE COMPANY MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE COMPANY v TRANSAMERICA INSURANCE CORPORATION OF AMERICA
Docket Nos. 98342, 99439.
Argued April 6, 1995
(Calendar Nos. 10-11).
Decided August 22, 1995.
Frankenmuth Mutual Insurance Company, Inc., brought a declaratory judgment action in the Genesee Circuit Court against Continental Insurance Company and other insurers, seeking contribution for costs incurred in defending an underlying lawsuit in which a bicyclist was killed in a collision with a pick-up truck insured by Continental, whose driver was insured by another company. Each policy declared primary coverage for accidents involving vehicles owned by a named insured, and excess coverage respecting nonowned vehicles. Neither company limited its duty to defend when the coverage was excess. The court, Judith A. Fullerton, J., ruled that Continental was the primary insurer for all defendants and ordered it to reimburse Frankenmuth up to its policy limits. The Court of Appeals, Doctokoff, C.J., and Michael J. Kelly and Gkibbs, JJ., affirmed in an unpublished opinion per curiam (Docket No. 138157). Continental appeals.
Michigan Educational Employees Mutual Insurance Company, brought a declaratory judgment action in the Jackson Circuit Court against Transamerica Insurance Corporation of America and others, seeking to be excused from an underlying lawsuit upon payment of policy limits to a passenger who was seriously injured in an accident involving its insured’s automobile. The vehicle was driven by the insured’s son or another person insured by Transamerica, each of whom claimed the other was the driver. It was agreed that meemic provided primary coverage, and Transamerica only excess. The court, Alexander C. Perlos, J., ruled that meemic had an obligation to provide defenses until it reached a settlement of the claims against its insureds, and thereafter, Transamerica would owe a duty to defend its insured. It also denied meemic’s motion for reimbursement of its defense costs. The Court of Appeals, Connor and A. A. Monton, JJ. (Michael J. Kelly, P.J., concurring), reversed, ruling that Transamerica had a duty to defend Transamerica’s insured, commencing when meemic filed the declaratory judgment action, and that Transamerica was liable for a pro-rata share of defense costs when both insurers had a duty to defend, namely, after the filing of the declaratory judgment action, as well as all defense costs after meemic’s duty ended upon payment of its policy limits (Docket No. 144945). Transamerica appeals.
In an opinion by Justice Weaver, joined by Chief Justice Brickley, and Justices Boyle and Riley, the Supreme Court held:
In true excess insurance cases, the true excess insurer is liable for defense costs only after the primary insurer is excused under the terms of its policy.
1. In these cases, the additional insurers are not true excess insurers; rather, their duty to defend, and thus their responsibility for defense costs is triggered by their insureds’ coincidental involvement in the underlying accidents. The issue to be resolved is the allocation of defense costs between these additional insurers where there is a clearly designated primary insurer.
2. One difficulty with the pro-rata approach is determining how the insurers’ interests align so that defense costs can be fairly apportioned. Requiring an excess insurer to participate pro rata on notice that the claim might exceed the primary insurer’s limits effectively forces the excess insurer to be a coinsurer despite the language of its policy. Such a result is contrary to the excess insurer’s reasonable expectations, and ignores the language of insurance policies that typically anticipate the involvement of other insurance.
3. Once it is clear that the additional insurers are not true excess insurers, the inquiry must proceed to the terms and conditions of the policies involved. Where the status of the primary insurer is clear, the primary insurer is liable for the defense and its costs until its limit is paid. Additional insurers who by the terms of their policies also cover some loss are coincidental excess insurers. The duty of these coincidental excess insurers may vary depending on the terms of their policies. Where there are competing other insurance clauses, the Supreme Court will endeavor to reconcile them. Similarly, where there are disputes regarding the potentially conflicting duties to defend and to bear defense costs between multiple insurers for multiple insureds, the policy terms at issue should be honored to the greatest extent possible.
4. In Frankenmuth, Frankenmuth Mutual is an excess in surer under the facts of the case. Given the policy language, Frankenmuth’s duty to defend is analogous to a true excess insurer, and, therefore, Frankenmuth should not be liable for defense costs until Continental is excused under the terms of its policy. In meemic, the Transamerica policy makes clear that when the other-automobile provision was triggered, it would be the excess insurer. Therefore, it is appropriate to apply the rule for true excess insurers to require that meemic should have defended and paid the defense costs up to its limit. Thus, Transamerica is liable for the defense and costs incurred only after meemic is excused under the terms of its policy.
Frankenmuth affirmed.
Meemic reversed.
Justice Cavanagh, concurring in part and dissenting in part, stated that while defense costs should be borne by the primary and excess insurers pro rata on the basis of their shares of the underlying liability, and thus meemic v Chalfant should be reversed, because Continental wrongly refused to provide a defense to its insured, it should bear the costs of the underlying action.
Because the insurers have no contract between themselves, equitable subrogation may be employed to compensate an insurer for costs it incurs in defending an insured when another insurer is also contractually required to provide the defense. Nevertheless, where a primary insurer wrongly fails to provide a defense, equitable subrogation may not be used to force the excess insurer, who provided the entire defense in the first place, to pay a pro-rata share of the defense costs.
Justice Levin, joined by Justice Mallett, dissenting, stated that defense costs should be borne by the primary and excess insurers pro rata on the basis of their shares of the aggregate underlying liability as determined by settlement or adjudication.
Where there is more than one insurer, the doctrine of equitable subrogation allows an insurer who has provided a defense to stand in the shoes of the insured and recover from the insurer who wrongly failed to defend. The duty to defend is broader than and independent of the duty to pay for covered liabilities. It commences whenever the facts set forth in the pleadings would require coverage, or unpleaded facts or a set of facts, known by the insurer to be true, bring the claim within the coverage of the policy. However, the insurer providing the defense is not entitled to stand in the shoes of the insured until it has fully discharged its own duty to provide a defense for the insured. It, therefore, may not require a nondefending excess insurer to actually join in conducting the defense. Once an insurer has completed its defense, it is equitably subrogated to the rights of the insured and ought to be able to recover costs from the insurer who has avoided its duty to defend. Even where the primary insurer has paid its policy limits in partial settlement of a claim, contribution between primary and excess insurers should turn on their respective shares of the final liability.
In each of the instant cases, the excess insurer accepts responsibility for all defense costs after the primary insurer has paid its limits in partial settlement of the underlying claim. The excess insurers seek to avoid bearing part of the defense costs for the period during which the primary insurer was also responsible for defense. But in these cases both insurers owed a duty to defend the insured. Allocating defense costs on the basis of the shares of the final underlying liability encourages primary insurers to continue providing a defense even when it becomes clear that their policy limits will, or are likely to, be exceeded. A temporal rule would encourage a primary insurer to pay and leave prematurely, which might disrupt the defense of the insured, possibly engendering additional litigation between the insurers and, in some cases, the insured.
Proration according to toted liability only includes defense costs where the insurers’ respective interests closely align so that they would pursue compatible strategies on behalf of the insured. It does not extend to true excess policies, where the duty to defend is limited.
204 Mich App 440; 516 NW2d 93 (1994) reversed.
Douglas I. Buck, II, for plaintiff Frankenmuth Mutual Insurance Company.
Nelson & Kreuger, P.C. (by Jon J. Schrotenboer), for plaintiff Michigan Educational Employees Mutual Insurance Company.
Plunkett & Cooney, P.C. (by Mary Massaron Ross), for defendant Continental Insurance Company.
Highland & Zanetti, P.C. (by J. R. Zanetti, Jr., and Duncan H. Brown), for defendant U.S.A.A. Casualty Insurance Company.
Dilley, Dewey, Damon & Condon, P.C. (by Jonathan S. Damon), for defendant Transamerica Insurance Corporation of America.

Opinion:
Weaver, J.
The issue presented in these consolidated cases is the allocation of defense costs among multiple no-fault insurers, each of whom to some degree may be liable for a loss arising out of a single automobile accident. Although the dissent's pro-rata rule is alluring for its simplicity, as applied, it fails to adequately give meaning to the intent of the policy language and will serve only to further agitate a sufficiently litigious area of the law. We take this opportunity to clarify who should bear defense costs where seemingly overlapping duties to defend multiple insureds arise.
The duty to defend is defined by policy language, and, logically, the burden of the cost of defense should follow the duty to defend. The approach outlined herein in no way seeks to erode an insurer's duty to defend its insured and should not be applied to leave the insured without the coverage due. Rather, this approach attempts to give meaning to frequently obtuse policy language, while establishing a consistent analytical framework. For the following reasons, we affirm the decision of the Court of Appeals in Frankenmuth and reverse the Court of Appeals decision in MEEMIC.
i
A. FRANKENMUTH MUTUAL v CONTINENTAL
Eric Bosco was killed when he was hit by a truck driven by Chris Bauermeister, an employee of Flint Tent and Awning. The truck was owned by Kenneth Cook, president of Flint Tent and Awning, and Bauermeister was a permissive user. Continental Insurance provided $500,000 coverage for the truck, Cook as its owner, and Bauermeister as a permissive user. Flint Tent and Awning carried a $250,000 policy with Frankenmuth. In addition to his no-fault coverage with Continental, Cook carried a $1 million umbrella policy with Auto-Owners Insurance Company. Bauermeister carried his own no-fault and umbrella insurance with USAA Casualty Insurance Company for $100,000 and $1 million respectively. However, the question before us affects only the liabilities of Continental and Frankenmuth.
The Bosco family filed suit, and Frankenmuth immediately provided a defense for Flint Tent and Awning. Continental refused to participate in the defense, but subsequently acknowledged that it was the primary insurer. Frankenmuth brought this action against Continental seeking a declaratory. judgment that Continental, as primary insurer, was obligated to provide a defense up to its policy limits and that Continental should reimburse Frankenmuth for defense costs incurred before settlement. The trial court agreed with Frankenmuth and ordered Continental to reimburse Frankenmuth. The Court of Appeals affirmed, and Continental appealed.
B. MEEMIC v CHALFANT
Trevor Chalfant was seriously injured in a one-car accident. Either Jack Perry or Michael Hinkle was driving the car, but neither will admit doing so. The car was owned by Hinkle's father who carried a $100,000 insurance policy with Michigan Educational Employees Mutual Insurance Com pany (meemic). Perry's father carried a $250,000 policy with Transamerica that covered his son's permissive use of vehicles not owned by the Perry family.
Meemic, as the insurer of the vehicle, assumed the defense on behalf of the Hinkles and Perry. Meemic then filed an action seeking to pay the limits of its policy and be excused from the defense. Meemic named Transamerica as a defendant and sought reimbursement for the cost of defending Perry before meemic's offer of settlement. The circuit court held that it was meemic's responsibility to defend the Hinkles and Perry until meemic had paid its policy limit and that Transamerica would be obligated only after that time. Meemic appealed, and the Court of Appeals reversed, holding that Transamerica was obligated to share in Perry's defense costs incurred before meemic paid its policy limit. Transamerica appealed.
n
To determine how defense costs should be allocated, it is first necessary to determine the nature of each insurer's duty to defend its insured in the circumstances at issue. It is not disputed that Continental and meemic, as insurers of the vehicles involved in single vehicle accidents, are the primary insurers in these cases. Nor do these cases involve "true" excess insurers. "True" excess insurance is analogous to umbrella insurance in that a single insured by specific design layers coverage. The logical rule that we adopt in "true" excess insurance cases is that the "true" excess insurer is liable for defense costs only after the primary insurer is excused under the terms of its policy.
In both cases before us, the additional insurers are not "true" excess insurers; rather, their duty to defend and thus their responsibility for defense costs is triggered by their insureds' coincidental involvement in the underlying accidents. The issue we must resolve is the allocation of defense costs between these additional insurers where there is a clearly designated primary insurer.
In Frankenmuth, Continental argues that Frankenmuth is a primary coinsurer and thus should be liable pro rata for the costs of the defense before Continental paid its policy limit. Likewise in meemic, meemic argues that Transamerica should be liable on a pro-rata basis for the costs of the defense. Continental and meemic cite Celina Mut Ins Co v Citizens Ins Co of America, 133 Mich App 655; 349 NW2d 547 (1984), for the proposition that when it is clear that a settlement will exceed the limits of the primary insurer's policy, the "excess" insurer should be forced to participate in the costs of the defense from the beginning. We disagree.
One difficulty with the pro-rata approach is determining how the insurers' interests align so that defense costs can be fairly apportioned. In cases where it is clear that a primary insurer's policy limits will be exceeded, the primary's goal will likely be to avoid liability altogether, while the excess insurer's goal will be to reduce the plaintiff's damages. The resolution of this issue will no doubt generate additional litigation, contrary to the goal of Michigan's no-fault insurance system. Further, requiring an excess insurer to participate pro rata on notice that the claim might exceed the primary insurer's limits effectively forces the excess insurer to be a coinsurer despite the language of its policy. Such a result is contrary to the excess insurer's reasonable expectations. Finally, a pro-rata approach ignores the language of insurance policies that typically anticipate the involvement of other insurance.
in
Once it is clear that the additional insurers are not "true" excess insurers, our inquiry must proceed to the terms and conditions of the policies involved. Where the status of the primary insurer is clear, as in these single car accident cases, the primary insurer is liable for the defense and its costs until its limit is paid. Additional insurers who by the terms of their policies also cover some loss arising from the single car accident are coincidental excess insurers. The duty of these coinci dental excess insurers may vary depending on the terms of their policies.
In circumstances not presented today, it may be difficult to clearly designate a primary insurer. In such circumstances, the next inquiry should be whether the terms of the policies at issue cover the same loss, the same risk, and the same subject matter. If there is exactly concurring coverage, it might be appropriate to prorate the costs of defense. However, where there is a policy more specifically tailored to the circumstances of the claim, it would be appropriate to designate that policy as the primary insurer and for that insurer to defend to the limits of its policy and be responsible for the accompanying defense costs.
This Court has held that where there are competing other insurance clauses, we will endeavor to reconcile them. Similarly, where there are disputes regarding the potentially conflicting duties to defend and to bear defense costs between multiple insurers for multiple insureds, we hold that the policies at issue should be honored to the greatest extent possible.
In Frankenmuth, Cook's truck appears to be a "temporary substitute automobile" as defined in the Frankenmuth policy. Therefore, under the "other insurance" clause of the Frankenmuth policy, Frankenmuth is an excess insurer under the facts of this case. Given this policy language, we hold that Frankenmuth's duty to defend is analogous to a "true" excess insurer and, therefore, Frankenmuth should not be liable for defense costs until Continental is excused under the terms of its policy.
In meemic, Perry bought the insurance policy from Transamerica with terms to cover the situation in which a family member is involved in an accident while driving a nonowned automobile. The Transamerica policy makes clear that when the "Other Automobile" provision of its policy was triggered, Transamerica would be the excess insurer. Therefore, it is again appropriate to apply the rule for "true" excess insurers. The proper outcome in meemic is for meemic to have defended and paid the defense costs until it paid its limit. Thus, Transamerica is liable for the defense and costs incurred only after meemic is excused under the terms of its policy.
iv
A single rule applied pro forma cannot address the multiple variations of policies that we may face. On the facts of these cases, we affirm Frankenmuth, but reverse meemic and reinstate the circuit court decision.
Brickley, C.J., and Boyle and Riley, JJ., concurred with Weaver, J.
We have acknowledged that it is a priority to give meaning to policy language. See, e.g., St Paul Fire & Marine Ins Co v American Home Assurance Co, 444 Mich 560; 514 NW2d 113 (1994).
Stockdale v Jamison, 416 Mich 217, 224; 330 NW2d 389 (1982).
Turner v Auto Club Ins Ass'n, 448 Mich 22, 34; 528 NW2d 681 (1995).
"True" excess coverage occurs where a single insured has two policies covering the same loss, but one policy is written with the expectation that "the primary will conduct all of the investigation, negotiation and defense of claims until its limits are exhausted . . . ." 7C Appleman, Insurance Law & Practice, § 4682, p 28. See also Hartford Accident & Indemnity Co v Continental Nat'l American Ins Co, 861 F2d 1184, 1187 (CA 9, 1989). Further, the rates of a "true" excess insurer are ascertained only after the excess insurer has given due consideration to the terms of the underlying primary policies. 46 CJS, Insurance, § 1138, p 542.
Texas Employers Ins Ass'n v Underwriting Members of Lloyds, 836 F Supp 398, 407 (SD Tex, 1993). See also German & Gallagher, Allocation of the duties of defense between carriers providing coverage to the same insured, 47 Ins Counsel J 224-261 (1980).
Although there is no contractual relationship between a primary and a "true" excess insurer, it is commonly understood that the primary insurer owes the "true" excess insurer the same standard of care it owes to the insured. This duty has been grounded in both the doctrine of equitable subrogation and tort law. See Jerry, Understanding Insurance Law, pp 622-623.
See, e.g., Shavers v Attorney General, 402 Mich 554, 578-579; 267 NW2d 72 (1978).
See 46 CJS, Insurance, § 1152, pp 569-570. See also Signal Cos v Harbor Ins Co, 27 Cal 3d 359, 370-371; 165 Cal Rptr 799; 612 P2d 889 (1980).
St Paul Ins Co v American Home Assurance Co, n 1 supra at 562.
The Frankenmuth policy carried by Flint Tent and Awning states:
"[T]emporary substitute automobile" means any automobile, truck or trailer, not owned by the named Insured [Flint Tent and Awning], while temporarily used with the permission of the owner [Cook] as a substitute for the owned automobile .
If the Insured [Flint Tent and Awning] has other insurance against a loss . . . the Company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of liability, stated in the Declarations bears to the total applicable limit of liability of all valid and collectible insurance against such loss; provided, however, the insurance with respect to temporary substitute automobile or non-owned automobile shall be excess insurance over any other valid and collectible insurance. [Emphasis added.]
The Transamerica policy at v(a) defines other automobiles as those used by "residents of the same household [Perry's son] as the Named Insured [Perry]" with permission of the owner. The policy then states:
[T]he insurance with respect to . . . other automobiles under (a) of Insuring Agreement v or under part (a) of Insuring Agreement vi shall be excess insurance over any other valid and collectible insurance.