Opinion ID: 848627
Heading Depth: 2
Heading Rank: 1

Heading: Extrinsic Evidence and the Pollution Exclusion Clause

Text: The Court of Appeals observed that although an insurance policy is enforced according to its terms, the contracting parties' intent controls. Further, the Court of Appeals reasoned that because the city had presented evidence that the pool repeatedly paid basement backup claims, a question of fact existed with respect to the parties' intent regarding the applicability of the pollution exclusion clause. Relying on Michigan Millers, supra, [6] the Court of Appeals concluded that the insurance policy was not so unambiguous that no extrinsic evidence of the parties' intent can be considered. Op. at ___ n. 9. We disagree with the Court of Appeals rationale. An insurance policy is much the same as any other contract. Auto-Owners Ins. Co. v. Churchman, 440 Mich. 560, 566, 489 N.W.2d 431 (1992). The cardinal rule in the interpretation of contracts is to ascertain the intention of the parties. To this rule all others are subordinate. McIntosh v. Groomes, 227 Mich. 215, 218, 198 N.W. 954 (1924). In light of this cardinal rule, and to effectuate the principle of freedom of contract, this Court has generally observed that [i]f the language of the contract is clear and unambiguous, it is to be construed according to its plain sense and meaning; but if it is ambiguous, testimony may be taken to explain the ambiguity. New Amsterdam Cas. Co. v. Sokolowski, 374 Mich. 340, 342, 132 N.W.2d 66 (1965); see also Frankenmuth Mut. Ins. Co. v. Masters, 460 Mich. 105, 111, 595 N.W.2d 832 (1999). However, we will not create ambiguity where the terms of the contract are clear. Id. In light of these principles, we note that consideration of extrinsic evidence generally depends on some finding of contractual ambiguity. Ambiguity in written contracts can fairly be said to consist of two types: patent and latent. A patent ambiguity is one that clearly appears on the face of a document, arising from the language itself. Black's Law Dictionary (7th ed). See also Hall v. Equitable Life Assurance Society, 295 Mich. 404, 409, 295 N.W. 204 (1940). Accordingly, resort to extrinsic evidence is unnecessary to detect a patent ambiguity. A latent ambiguity, however, is one that does not readily appear in the language of a document, but instead arises from a collateral matter when the document's terms are applied or executed. Black's Law Dictionary (7th ed.). Because the detection of a latent ambiguity requires a consideration of factors outside the instrument itself, extrinsic evidence is obviously admissible to prove the existence of the ambiguity, as well as to resolve any ambiguity proven to exist. McCarty v. Mercury Metalcraft Co., 372 Mich. 567, 575, 127 N.W.2d 340 (1964). In other words, where a latent ambiguity exists in a contract, extrinsic evidence is admissible to indicate the actual intent of the parties as an aid to the construction of the contract. Id. Thus, the question becomes whether an ambiguity exists in this insurance policy's pollution exclusion clause. This insurance policy provides that coverage is excluded when bodily injury or property damage results from the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants. The policy further defines pollutants as any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. The insurance policy, however, does not specifically define waste. Where a term is not defined in the policy, it is accorded its commonly understood meaning. Allstate Ins. Co. v. McCarn, 466 Mich. 277, 280, 645 N.W.2d 20 (2002) ( McCarn I ). Waste is commonly understood to include sewage. [7] In other words, waste is commonly understood to include urine and feces, bathwater and dishwater, toilet paper, feminine napkins and tampons, condoms, and the countless other substances typically introduced into a sewer system. We believe that the term waste in this policy is not patently ambiguous and the text of the policy fairly admits of but one interpretation. [8] We must observe, however, that we do not make this determination lightly. Again, the cardinal rule in the interpretation of contracts is to ascertain and give effect to the parties' intentions. McIntosh, supra at 218, 198 N.W. 954. We are also mindful of Professor Corbin's warning that when judges attempt to enforce a contract according to their own understanding of what is plain and clear, these judges run the risk of substituting their own judgment for the intent of the parties and, thus, making a contract for the parties that was never intended. See Stark v. Budwarker, Inc., 25 Mich.App. 305, 314, 181 N.W.2d 298 (1970). [9] Indeed, such a result would actually undermine the freedom of contract principle. Nonetheless, we conclude that this pollution exclusion clause is not patently ambiguous because an ambiguity does not readily appear in the text of the policy. Again, courts are not permitted to create ambiguity where the terms of the contract are clear. Masters, supra at 111, 595 N.W.2d 832. Therefore, we will apply this pollution exclusion clause as written unless we determine that a latent ambiguity arises from a matter outside of the text of the policy. We initially observe that it is well-established that [i]n construing [contractual provisions] due regard must be had to the purpose sought to be accomplished by the parties as indicated by the language used, read in the light of the attendant facts and circumstances. Such intent when ascertained must, if possible, be given effect and must prevail as against the literal meaning of expressions used in the agreement. W. O. Barnes Co., Inc. v. Folsinski, 337 Mich. 370, 376-377, 60 N.W.2d 302 (1953). Further, attendant facts and circumstances explain the context in which the words were used and may reveal the meaning the parties intended. Sobczak v. Kotwicki, 347 Mich. 242, 249, 79 N.W.2d 471 (1956). [10] In this respect, the detection of a latent ambiguity unquestionably requires consideration of factors outside the policy itself. McCarty, supra at 575, 127 N.W.2d 340. Therefore, extrinsic evidence is admissible to prove the existence of the ambiguity, and, if a latent ambiguity is proven to exist, extrinsic evidence may then be used as an aid in the construction of the contract. Id.; see also Goodwin, Inc. v. Orson E. Coe Pontiac, Inc., 392 Mich. 195, 209-210, 220 N.W.2d 664 (1974). In light of the attendant facts and circumstances of this case, we conclude that a latent ambiguity does not exist. We are unpersuaded by Grosse Pointe Park's arguments that the pool's practice of covering basement backup claims somehow shows that this pollution exclusion clause is ambiguous. The pool's practice of paying backup claims does not render the clause susceptible to two reasonable, yet mutually exclusive, interpretations. Indeed, the pool's practice does not change our conclusions that the parties intended for coverage to be excluded when property damage results from the actual discharge of pollutants, that pollutants include waste, and that the term waste include urine and feces, bathwater and dishwater, toilet paper, feminine napkins and tampons, condoms, and the countless other substances typically introduced into a sewer system. Indeed, a latent ambiguity does not exist under this policy because when we consider how the clause applies or has been applied, it cannot be said that the clause was intended to have a different meaning than that reflected in the text of the policy. Accordingly, after considering factors outside the four corners of this policy, we cannot detect any latent ambiguities. [11] In other words, the extrinsic evidence introduced by Grosse Pointe Park does not prove the existence of a latent ambiguity. Thus, it is unnecessary to examine outside factors as an aid in construing this policy. In sum, we conclude that this pollution exclusion clause is not patently ambiguous. Further, review of extrinsic evidence neither leads to the detection nor proves the existence of a latent ambiguity. Thus, because an ambiguity does not exist, extrinsic evidence is inadmissible as an aid in the construction of this policy. Accordingly, we hold that the Court of Appeals erred when it concluded that the insurance policy was not so unambiguous and, thus, extrinsic evidence was generally admissible. Because we believe that this policy's pollution exclusion clause is unambiguous, we will enforce it according to its terms and consistent with the parties' intent. When we accord waste the meaning intended by the parties, as well as its commonly understood meaning, we have little difficulty concluding that the city discharged pollutants into Fox Creek. Thus, we hold that the city's discharges fell under the purview of this insurance policy's pollution exclusion clause.