Court Opinion

ID: 176041
Source: CourtListenerOpinion
Date Created: 2010-09-28 14:13:47+00
Date Added: 2024-06-11T09:13:09.565046
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                            File Name: 10a0629n.06

                                            No. 09-1639

                             UNITED STATES COURT OF APPEALS
                                  FOR THE SIXTH CIRCUIT
                                                                                        FILED
                                                   )                                 Sep 28, 2010
                                                   )                           LEONARD GREEN, Clerk
STATE FARM FIRE AND CASUALTY                       )
COMPANY,                                           )
                                                   )   ON APPEAL FROM THE UNITED
        Plaintiff-Appellee,                        )   STATES DISTRICT COURT FOR THE
v.                                                 )   WESTERN DISTRICT OF MICHIGAN
                                                   )
L I B E R T Y I N S U R A N C E                    )
UNDERWRITERS, INC.,                                )
                                                   )
        Defendant-Appellant.                       )

Before: GIBBONS, SUTTON, and WHITE, Circuit Judges.

        JULIA SMITH GIBBONS, Circuit Judge.                 Defendant-appellant Liberty Insurance

Underwriters, Inc., (“Liberty”) appeals the district court’s grant of summary judgment to plaintiff-

appellee State Farm Fire & Casualty Co. (“State Farm”). For the following reasons, we affirm the

district court’s decision.

                                                  I.

        The underlying facts of this insurance case are undisputed. In September 2005, Henry

Bouma was driving a vehicle jointly leased to him and his company, Lumberman’s, Inc., and

accidentally struck and injured a pedestrian. The pedestrian settled her claims for $9 million.

Bouma had coverage under three insurance policies. His automobile liability insurer, Old Republic,

paid its $1 million policy limit as the first-line insurer without any reservation of rights and is not
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

a party in this case. Of the remaining $8 million, State Farm paid its policy limit of $3 million under

a personal liability umbrella insurance policy issued to Bouma. Liberty paid the remaining $5

million from its $10 million commercial liability umbrella insurance policy issued to Lumberman’s.

State Farm and Liberty reserved their rights to seek a determination that a different allocation of

liability might be required by reconciling the policy provisions.

        State Farm brought an action for declaratory judgment in state court, alleging that Liberty’s

policy applied to the underlying settlement and that the two insurers must pay pro rata in proportion

to their respective policy limits. Because the sum total coverage of both policies was $13 million

and State Farm’s coverage limit was $3 million, State Farm argued that it was liable for 3/13 of the

$8 million balance remaining after Old Republic paid out its policy. Under this apportionment, State

Farm sought $1,153,846 from Liberty. Liberty removed the case to federal court on the basis of

diversity of citizenship and argued, in relevant part for this appeal, that it was not responsible for any

payments until State Farm paid its $3 million policy limit. After unsuccessful mediation, the parties

filed cross-motions for summary judgment. As described in further detail below, the district court

granted in part and denied in part State Farm’s motion for summary judgment and denied Liberty’s

motion in full. The court found Liberty liable to State Farm for $1,153,846. The district court

reserved judgment on whether State Farm was entitled to seek pre-complaint interest. Adopting a

proposal by the parties that reflected the partial settlement of their respective claims, the district court

entered final judgment under Federal Rule of Civil Procedure 54(b), and Liberty timely appealed.

                                                    -2-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

                                                 II.

       “Questions of contract interpretation, including those that form the basis for the grant of

summary judgment, are subject to de novo review.” Royal Ins. Co. of Am. v. Orient Overseas

Container Line Ltd., 525 F.3d 409, 421 (6th Cir. 2008) (citation omitted). Summary judgment is

proper when “the pleadings, the discovery and disclosure materials on file, and any affidavits show

that there is no genuine issue as to any material fact and that the movant is entitled to judgment as

a matter of law.” Fed. R. Civ. P. 56(c). The parties agree that there are no disputed issues of fact

and that this appeal raises only a question of law.

       “In diversity cases, this court applies state law in accordance with the controlling decisions

of the Michigan Supreme Court.” Prestige Cas. Co. v. Mich. Mut. Ins. Co., 99 F.3d 1340, 1348 (6th

Cir. 1996) (citations omitted). “If the state supreme court has not yet addressed the issue presented,

we must predict how that court would rule, by looking to ‘all available data.’” Id. (quoting Kingsley

Assocs., Inc. v. Moll PlastiCrafters, Inc., 65 F.3d 498, 507 (6th Cir. 1995)). “Relevant data include

decisions of the state appellate courts, and those decisions should not be disregarded unless we are

presented with persuasive data that the Michigan Supreme Court would decide otherwise.” Kingsley

Assocs., 65 F.3d at 507.

       Under Michigan law, “the policy language must be given effect, if at all possible. Thus, the

policy language is most important in our analysis.” Bosco v. Bauermeister, 571 N.W.2d 509, 513

(Mich. 1997) (internal quotation marks and citation omitted). “The parties have the right to employ

whatever terms they wish, and the courts will not rewrite them as long as the terms do not conflict

with pertinent statutes or public policy.” St. Paul Fire & Marine Ins. Co. v. Am. Home Assurance

                                                 -3-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

Co. (“St. Paul”), 514 N.W.2d 113, 115 (Mich. 1994). Insurance policies are subject to the same

rules of interpretation that apply to the interpretation of contracts. Rory v. Cont’l Ins. Co., 703

N.W.2d 26, 26 (Mich. 2005). “A contract must be interpreted according to its plain and ordinary

meaning.” Holmes v. Holmes, 760 N.W.2d 300, 311 (Mich. Ct. App. 2008) (citation omitted). An

undefined contractual provision “must be construed in a manner most likely to correspond to the

intention of the parties to the contract.” Bertrand v. Pac. Employers Ins. Co., No. 219724, 2001 WL

1464524, at *2 (Mich. Ct. App. Nov. 16, 2001) (citation omitted).

        St. Paul is the seminal case in this area of Michigan insurance law. In that case, three

insurance policies covered a loss and one of the insurance companies brought suit, seeking proration

of the liability. St. Paul, 514 N.W.2d at 114. Each of the policies contained an “other insurance”

clause. Id. These clauses are “provisions inserted in insurance policies to vary or limit the insurer’s

liability when additional insurance coverage can be established to cover the same loss.” Id. at 115.

Under Michigan law, “other insurance” clauses fall into three general categories that reduce an

insurer’s loss in the event of concurrent coverage: (1) pro-rata clauses that purport to “limit the

insurer’s liability to a proportionate percentage of all insurance covering the event”; (2) escape or

no-liability clauses, under which “there shall be no liability if the risk is covered by other insurance”;

and (3) excess clauses, which “limit[] the insurer’s liability to the amount of loss in excess of the

coverage provided by the other insurance.” Id. (citing Fed. Kemper Ins. Co. v. Health Ins. Admin.

Co., 383 N.W.2d 590, 592 (Mich. 1986), overruled on other grounds by Auto Club Ins. Ass’n v.

Frederick & Herrud, Inc., 505 N.W.2d 820 (Mich. 1993)).

                                                   -4-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

       In St. Paul, two of the “other insurance” clauses provided that the insurer would not be liable

for a “greater proportion” of the loss than the “total limit of liability of all valid and collectible

insurance.” Id. at 116. The court deemed these to be pro-rata clauses that “are generally intended

to become effective only when other valid and collectible primary insurance is available.” Id.

(citation omitted). The third policy’s “other insurance” clause provided that, in the time period

which saw the loss, the policy “shall apply only as excess insurance over any other valid and

collectible insurance” and then “only in the amount by which the applicable limits of [the third

policy] exceeds the sum of the applicable limits of liability of all such other insurance.” Id.

(emphasis omitted). The court deemed this to be an excess “other insurance” clause that intended

the policy “only afford secondary coverage when the same loss is covered by ‘other insurance.’” Id.

(citation omitted).

       The St. Paul court considered whether the two pro-rata “other insurance” clauses and the

excess “other insurance” clause could be given effect together. Id. at 118. It reconciled the two

types of clauses by “interpreting the policy containing the excess clause as secondary coverage where

there is another insurance policy covering the same risk.” Id. at 119. Thus, “the excess insurer is

generally liable for the loss only to the extent that the insured’s claim exceeds the policy limits of

the insurance policy containing the pro-rata ‘other insurance’ clause.” Id. The alternative option

was to prorate the loss among all three insurers, and the court found “the cost of nullifying the

negotiated intent of the parties alarming,” and “refrain[ed] from rewriting the . . . contracts and

instead g[a]ve effect to the meaning and intent of the policy language.” Id. at 120–21. The Michigan

Supreme Court acknowledged that, in some cases, “other insurance” clauses are irreconcilable. Id.

                                                 -5-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

at 121. Specifically, “competing excess clauses would leave the insured without any coverage where

it first appeared he had multiple coverage.” Id. “In these cases, there is no rational reason to give

the language of one policy preference over identical language in the other policy,” and the loss

should be prorated among all of the insurers. Id. at 121 & n.31.

        The Michigan Supreme Court further expanded upon St. Paul in Bosco, in which five

automobile insurance policies covered the same event and contained varying excess “other

insurance” clauses. 571 N.W.2d at 511. Two of the primary coverage policies contained clauses that

provided that the policy would be excess insurance with respect to an event involving a temporary

substitute car or non-owned car. Id. at 512. The “other insurance” clauses in the remaining umbrella

policies did not limit excess coverage to a specific incident or occurrence, but instead remained

excess over all other insurance. Id. at 515–16. The Michigan Supreme Court held that only the latter

were “true” excess insurance clauses and that the former were “coincidental” excess clauses. Id.

The “true” excess insurance policies were held not to prorate with the “coincidental” excess policies.

Id.

        Therefore, as explained in St. Paul and Bosco, there are three tiers of excess insurance

coverage under Michigan law: primary coverage; excess “other insurance” coverage, such as a

“coincidental” excess policy; and “true” excess insurance. See Bosco, 571 N.W.2d at 519. Within

a specific tier or layer of coverage, liability should be prorated based on the total limits of available

coverage within that tier. Once coverage within that tier is exhausted, the next tier of coverage is

triggered. Id. at 510, 519.

                                                  -6-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

       Turning to the case at hand, Liberty argued before the district court that, whereas its umbrella

policy is an “excess” policy that obligates it to pay only the amount of loss that exceeds the coverage

provided by another insurer, State Farm issued Bouma a “pro rata” policy that obligates it to pay

before Liberty incurs any liability. The relevant clause in Liberty’s policy reads:

       J. Other Insurance
       If other insurance applies to a loss that is also covered by this policy, this policy will
       apply excess of the other insurance. Nothing herein will be construed to make this
       policy subject to the terms, conditions and limitations of such other insurance.
       However, this provision will not apply if the other insurance is specifically written
       to be excess of this policy.

The parallel “other insurance” clause in State Farm’s policy originally read: “5. Other Insurance.

This policy is excess over all other valid and collectible insurance.” State Farm subsequently

executed an amendatory endorsement, adding a second sentence to this clause of its policy. Thus,

at the time of Bouma’s accident, State Farm’s other insurance clause read: “5. Other Insurance.

This policy is excess over all other valid and collectible insurance. When like coverage is written

in another company, we will share in payments on a pro rata basis.”

       Liberty contended that, under St. Paul, State Farm’s pro rata “other insurance” clause was

primary and that Liberty was liable only in excess of State Farm’s policy limit of $3 million. In

support of its argument, Liberty pointed out that State Farm amended its “other insurance” clause

to include language about pro rata apportionment of liability. According to Liberty, had State Farm

left the original language in place, both parties would have shared the liability, but the amended

language meant that State Farm became the primary second-line insurer. In its cross-motion for

summary judgment, State Farm argued that both parties’ “other insurance” clauses should be

                                                  -7-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

interpreted to mean that the policies were, separately, in excess of Old Republic’s first-line insurance

policy. It contended that both its policy and Liberty’s were in the same, secondary tier of coverage

and that St. Paul required the district court to apportion liability between both parties on a pro rata

basis. Because the policies had a cumulative coverage limit of $13 million, State Farm argued that

it was only liable for 3/13 of the $8 million not paid by the first-line insurer, Old Republic.

        The district court reasoned that the term “like coverage” in the second sentence of State

Farm’s amended “other insurance” clause referred to a policy issued by another company that was

“in excess over all other valid and collectible insurance.” In other words, the district court found that

both policies were in the same tier or layer of coverage and the term “like coverage” referred to

Liberty’s excess policy. Thus, the district court held that the second sentence of State Farm’s

amended “other insurance” clause was superfluous because it merely reiterated the pro rata sharing

rule dictated by St. Paul for cases involving competing excess insurance clauses. The court

determined that the language added to State Farm’s policy was not surplusage, but instead merely

reiterated what the law required when a “policy confronts a like policy, i.e., a policy of equal

priority.”

        On appeal, Liberty argues that the district court’s interpretation of the two “other insurance”

clauses was erroneous in two ways: (1) the amendatory endorsement converted State Farm’s policy

from an excess policy into a pro rata umbrella policy; and (2) because of this modification, Liberty’s

policy should have been construed to be in a different tier or layer of coverage than State Farm’s and,

thus, excess to it.

                                                  -8-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

       Both arguments depend upon the construction of the phrase “like coverage” in State Farm’s

amendatory endorsement, and the plain meaning of that endorsement refutes both of Liberty’s

arguments. State Farm’s “other insurance” clause originally provided: “This policy is excess over

all valid and collectible insurance.” Liberty concedes that the “original, standardized language

means and does exactly what State Farm says the amended provision means and does,” namely

establishes that State Farm and Liberty would share in the payments pro rata once Old Republic’s

$1 million primary insurance coverage was exhausted. Appellant Br. at 21. Thus, Liberty’s appeal

turns on whether the addition of the second sentence to State Farm’s “other insurance” clause

somehow modified the substantive import of the first sentence. Although Michigan courts have not

yet interpreted the exact phrase “like coverage” in the context of competing “other insurance”

clauses, the district court’s construction gave proper effect to the plain and ordinary meaning of that

phrase. The only antecedent to which “like coverage” could refer is the preceding sentence, which

contains the language that Liberty concedes would result in pro rata allocation of the $8 million

liability. Because Liberty offered the same excess coverage as State Farm, it offered “like coverage”

with which State Farm would share in payments pro rata.

       Liberty relies upon two canons of contract construction to argue that the amendatory

endorsement modified the pro rata allocation scheme that would have been required by St. Paul.

First, it contends that the district court ignored the rule that every word in a contract must be

assumed to have a purpose and that no word should be rejected as mere surplusage if a court can

discover any reasonable purpose for it that may be gleaned from the entire contract. Associated

Truck Lines, Inc. v. Baer, 77 N.W.2d 384, 386 (Mich. 1956). However, State Farm’s intent to

                                                 -9-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

incorporate the background rule stated in St. Paul regarding the irreconcilability of competing excess

“other insurance” clauses is a reasonable purpose. The district court deemed the amendatory

endorsement “superfluous” only in the sense that the endorsement redundantly stated existing

Michigan law. Thus, the court did not treat the amendatory endorsement as mere surplusage and did

not disregard it.

        Liberty also argues that the district court ignored the rule of contract interpretation that

“specific terms and exact terms are given greater weight than general language and that separately

negotiated or added terms are given greater weight than standardized terms.” Royal Ins. Co. of Am.,

525 F.3d at 420 (citation and internal quotation marks omitted). Liberty appears to rely on State

Farm’s addition of the phrase “we will share payments on a pro rata basis.” However, as the district

court noted, the key term in the amendatory endorsement is “like coverage.” That term refers to an

antecedent that defines the type of coverage provided by another insurer for which State Farm would

share in payments pro rata. Because the only antecedent for “like coverage” is the excess policy

found in the first sentence of State Farm’s “other insurance” clause, and Liberty concedes that the

first sentence, standing alone, would defeat its appeal, Liberty’s argument lacks merit and the district

court did not ignore the specificity of the amended language.

        Furthermore, Liberty is unable to show that the endorsement somehow moved its policy into

a secondary tier or layer of umbrella coverage that obligated payment only after State Farm

exhausted its $3 million policy limit. Although Bosco requires courts to determine allocation issues

by looking to the total coverage in each tier or layer of insurance, Liberty’s reliance on that case is

misplaced. Bosco compared the effect of one excess “other insurance” clause that was limited to a

                                                 -10-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

certain event with an “other insurance” clause in an umbrella policy that was materially identical to

State Farm’s amended “other insurance” clause. 571 N.W.2d at 512. The umbrella policy’s clause

stated: “[T]he insurance afforded by this policy shall be excess of such other insurance . . . . With

respect to the Other Insurance Condition, this insurance will prorate with other similar insurance

written excess of the same limits of underlying insurance.” Id. (emphases omitted). The Bosco court

found that this broad language was not similar enough to the limited excess “other insurance” clause

because it was not limited to a specific event. Id. at 513. Thus, the court held that the “coincidental”

excess policy should not prorate with the “true” excess policy. Id. at 517 (“[T]he effect of the

[coincidental] excess clause is to merely allocate liability among the primary insurers, not to

magically remove the primary nature of the policy when a nonowned or substitute vehicle is

involved.”).

       In this case, and as Liberty concedes, State Farm’s original language contained a “true”

excess policy per Bosco. The original clause was not limited to any event or occurrence. The

amendatory endorsement did not alter the substantive import of State Farm’s “other insurance”

clause and, thus, this case is distinguishable from Bosco because State Farm’s and Liberty’s

coverages are not only “similar” but identical. Indeed, the language of the “true” excess clauses in

Bosco is almost identical to that contained in State Farm’s amendatory endorsement. Whereas State

Farm referred to “like coverage,” the Bosco policies stated that “this insurance will prorate with other

similar insurance.” Id. at 512 (emphasis added). Given the similarity between the “true” excess

“other insurance” clauses in Bosco that would have prorated and State Farm’s language, Bosco does

not support Liberty’s position.

                                                 -11-
No. 09-1639
State Farm Fire & Cas. Co. v. Liberty Ins. Underwriters, Inc.

       Liberty concedes that the original, unamended language in State Farm’s policy would require

proration and, thus, judgment in State Farm’s favor. The only antecedent for the term “like

coverage” in State Farm’s amendatory endorsement is the original, unamended, “true” excess

provision. Because Liberty is unable to show that the amendatory endorsement altered the

substantive import of the first sentence of State Farm’s “other insurance” clause, we conclude that

St. Paul requires that it share payment with State Farm on a pro rata basis.

                                               III.

       For the foregoing reasons, we affirm the district court’s decision.

                                               -12-