Melson v. Prime Insurance ( 2005 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 05a0455p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
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Plaintiff-Appellant, -
SARAH MELSON,
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-
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No. 03-1914
v.
,
>
PRIME INSURANCE SYNDICATE, INC., -
Defendant-Appellee. -
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Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 03-70546—Bernard A. Friedman, Chief District Judge.
Argued: August 12, 2004
Decided and Filed: November 29, 2005
Before: MOORE and COLE, Circuit Judges; MARBLEY, District Judge.*
_________________
COUNSEL
ARGUED: Patrick A. King, FABIAN, SKLAR & KING, Farmington Hills, Michigan, for
Appellant. Jeffrey R. Learned, GROTEFELD & DENENBERG, Bingham Farms, Michigan, for
Appellee. ON BRIEF: Patrick A. King, FABIAN, SKLAR & KING, Farmington Hills, Michigan,
for Appellant. Jeffrey R. Learned, GROTEFELD & DENENBERG, Bingham Farms, Michigan, for
Appellee.
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OPINION
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R. GUY COLE, JR., Circuit Judge. Plaintiff-Appellant Sarah Melson brought this action
against Defendant-Appellee Prime Insurance Syndicate, Inc. (“Prime”), alleging that Prime’s
decision not to pay her insurance policy’s face value for a loss caused by fire damage to Melson’s
commercial property violated both Michigan state law and the terms of the insurance policy.
Melson appealed the district court’s grant of summary judgment in favor of Prime, contending that
the district court’s judgment was erroneous because: (1) Prime’s Coinsurance Provision – upon
which it relied to deny Melson full coverage – is invalid, as against Michigan public policy; and (2)
the Coinsurance Provision is ambiguous, and thus fraudulently misrepresents the true nature of the
Policy. On appeal, we held that the Coinsurance Provision provided Melson with accurate notice
*
The Honorable Algenon L. Marbley, United States District Judge for the Southern District of Ohio, sitting by
designation.
1
No. 03-1914 Melson v. Prime Insurance Syndicate Page 2
as to the conditions of the Policy’s coverage. We were unable to determine with certainty, however,
whether the Coinsurance Provision violated Michigan public policy,1 and thus sought guidance from
the Michigan Supreme Court in the form of two certified questions. That court declined to answer
our questions. In re Certified Questions from the United States Court of Appeals for the Sixth
Circuit, 696 N.W.2d 687 (Mich. 2005). This opinion follows.
I. BACKGROUND
On September 28, 1995, Melson purchased two adjoining properties for commercial use in
Detroit, Michigan, located at 20338-54 and 20426-40 W. Seven Mile Road, respectively. The total
purchase price for both properties was $250,000, which included the land and all other elements of
the real estate.
On October 12, 1995, Melson insured both properties with Prime. The total insurance
coverage for both buildings was $480,000 – including $185,000 for the property at issue. According
to the insurance policy (“Policy”), Prime was required to pay the full amount of actual loss in the
event of a fire, subject to certain limitations and conditions. One of these conditions was the
imposition of a coinsurance penalty if it were determined that Melson had underinsured the property.
Attached to the policy under a provision titled “Additional Conditions,” the Coinsurance Provision
states:2 “We will not pay the full amount of any loss if the replacement cost value of Covered
Property at the time of the loss times the Coinsurance Percentage shown for it in the Declarations
is greater than the limit for the property.” The Policy’s Commercial Property Coverage Declarations
page (“Declarations page”) listed a coinsurance amount of 80%. This required Melson to insure the
property at 80% of its replacement cost value to avoid triggering the coinsurance penalty.
On January 16, 2001, a fire damaged the building located at 20426-40 W. Seven Mile Road.
Each party agrees that the actual cash value of the loss exceeded the total coverage of $185,000.3
Prime calculated the actual cash value of the loss at $255,778.28. Without a Coinsurance Provision,
Prime would have been required to pay the policy’s full face value – $185,000. Here, however,
Prime contends that because the Policy imposed a coinsurance requirement, it is not responsible for
indemnifying Melson for the policy’s full face value. Prime argues that it is only required to cover
a percentage of that loss, because Melson failed to meet the coinsurance requirement. Specifically,
Prime contends that because Melson insured less than 80% of the building’s total replacement cost
with them, it is only responsible for the proportion of the loss equal to the proportion that was
“adequately insured.”
Prime determined that the full replacement cost of the building was $468,347. Applying the
Coinsurance Provision, Prime determined that the replacement cost value ($468,347) multiplied by
the Coinsurance Percentage (.80) required Melson to have insured the property for $374,677.60,
rather than $185,000. Prime then determined that it would only pay a sum equal to the proportion
1
Did the enactment of Public Act 1990, No. 305 § 2, coupled with the rescission of M.C.L. § 500.2840
(repealed 1990), effect the prohibition of coinsurance clauses in insurance policies in the State of Michigan?
Does the rescission of M.C.L. § 500.2832 (repealed 1990) and its replacement by M.C.L. § 500.2833 (2003)
constitute a prohibition of coinsurance clauses?
2
A Coinsurance Percentage is the proportion of insurance – as measured against replacement cost or actual cost
– that an insured is required to maintain to avoid having a coinsurance penalty imposed. Here, Melson was required
to maintain the policy’s face value at 80% of the replacement cost of the property.
3
Actual cash value is the replacement cost minus normal depreciation. BLACK’S LAW DICTIONARY 1549 (7th
ed. 1999).
No. 03-1914 Melson v. Prime Insurance Syndicate Page 3
of insurance that Melson had versus what she was required to have. That is, Prime agreed to pay
the equivalent proportion of $185,000/$374,678 of whatever loss was incurred.
Prime used the following formula to calculate its payment:
(1) multiply the replacement cost value of the covered property by the Coinsurance Percentage
($468,347 x .8) = $374,677.60;
(2) divide the limit of insurance of the property by the figure determined in step (1)
(185,000/374,677.60) = .4939;
(3) multiply the total amount of loss, before the application of any deductible, by the figure
determined in step (2)
$255,677.28 x .49 = $126,292.53; and
(4) subtract the deductible from the figure determined in step (3)
$126,292.53 - $1,000 = $125,292.53.
Pursuant to these calculations, Prime sent Melson two checks totaling $125,292.53 on
April 4, 2001. Melson filed an action in federal district court, alleging that Prime’s refusal to pay
the full $185,000 was a violation of both the terms of the contract and Michigan state law. The
district court granted Prime’s motion for summary judgment. Melson appealed, alleging that Prime
misrepresented the nature of the policy, that the policy was ambiguous, and that the Coinsurance
Provision was contrary to Michigan public policy. Although we affirmed the district court’s order
on Melson’s first two claims, we were unable to determine whether coinsurance clauses violated
Michigan public policy. We certified two questions to the Michigan Supreme Court, which declined
to provide guidance after determining that it did not have jurisdiction. Our opinion addresses only
whether coinsurance clauses violate Michigan public policy.
II. DISCUSSION
A. Standard of Review
We review the district court’s grant of summary judgment de novo. Stephenson v. Allstate
Ins. Co., 328 F.3d 822, 826 (6th Cir. 2003). Summary judgment is proper if “the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,
show that there is no genuine issue of material fact and that the moving party is entitled to a judgment
as a matter of law.” FED. R. CIV. P. 56(c). When reviewing a motion for summary judgment, the
facts, and any inferences drawn therefrom, must be viewed in the light most favorable to the
nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The party opposing summary judgment, however, must present more than a “mere scintilla” of
evidence; the evidence must be such that a reasonable jury could find in favor of the plaintiff.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).
B. The Public Policy Claim
Melson argues that Prime’s Coinsurance Provision is contrary to Michigan public policy for
two reasons: (1) the Michigan legislature revoked the statutory authorization permitting inclusion
of coinsurance provisions in property policies; and (2) the Michigan legislature requires that
property policies pay, at a minimum, actual cash value benefits upon a loss. “When and how state
No. 03-1914 Melson v. Prime Insurance Syndicate Page 4
law applies to a particular case is a matter on which the state supreme court has the last word.”
Houston v. Dutton, 50 F.3d 381, 385 (6th Cir. 1995). If state law is unsettled, as in this case, we
anticipate how the state’s supreme court would rule on the issue of state law. C & H Entertainment,
Inc. v. Jefferson County Fiscal Court, 169 F.3d 1023, 1025 (6th Cir. 1999). In order to determine
how the state supreme court would rule, we look to the decisions of the state’s intermediate courts
unless we are convinced that the state supreme court would decide the issue differently. United of
Omaha Life Ins. Co. v. Rex Roto Corp., 126 F.3d 785, 789 (6th Cir. 1997).
1. Michigan Public Policy
With few exceptions, courts have held that “[a]n insurer is free to define or limit the scope
of coverage as long as the policy language fairly leads to only one reasonable interpretation and is
not in contravention of public policy.” Farm Bureau Mut. Ins. Co. v. Nikkel, 596 N.W.2d 915, 920
(Mich. 1999) (quoting Heniser v. Frankenmuth Mut. Ins. Co., 534 N.W.2d 502, 505 (Mich. 1995)).
Regarding the determination of whether an insurance contract contravenes public policy, the
Michigan Supreme Court has stated:
Public policy is to be ascertained by reference to the laws and legal precedents and
not from general considerations of supposed public interests. As the term ‘public
policy’ is vague, there must be found definite indications in the law of the sovereign
to justify the invalidation of a contract as contrary to that policy.
Terrien v. Zwit, 648 N.W.2d 602, 609 (Mich. 2002).
First, Melson contends that although coinsurance provisions were permitted in property
policies in Michigan pursuant to M.C.L. § 500.2840, the authority of insurers to include such
provisions was revoked by Public Act 1990, No. 305, § 2, effective December 14, 1990.4 In support
of her contention that the deletion of § 500.2840 from Michigan’s Insurance Code constitutes a
prohibition on coinsurance provisions, Melson cites to several cases for the proposition that “[w]here
a statute is repealed and another statute is enacted that covers the same subject area . . . a change in
wording reflects a legislative intent to change the statute’s meaning.” Williams v. Auto Club Group
Ins. Co., 569 N.W.2d 403, 405 (Mich. Ct. App. 1997). Prime responds that Melson’s
characterization of the revocation of a permitting statute wrongly suggests that coinsurance clauses
are invalid without prior statutory authorization. Second, Prime argues a version of the “dog that
didn’t bark” maxim of statutory interpretation, which counsels that legislative silence on what would
be a fundamental change in the law provides evidence that the legislature did not intend such a
change. Here, Prime points to the legislative history of Public Act 1990, No. 305, contending that
the legislature’s silence on the prohibition of coinsurance provisions – coupled with the overall
purpose of the Act – provides ample evidence for rejecting the conclusion that the state sought to
prohibit coinsurance provisions when it revoked § 500.2840.
Although the Michigan Supreme Court has not yet addressed whether, after the repeal of
§ 500.2840, coinsurance provisions remain consistent with Michigan public policy, it is clear that
Michigan courts have historically accepted coinsurance provisions. “We dismiss plaintiff’s claim
that there is something vicious about co-insurance. Its legality is no longer a debatable question.
It has been authorized by law for over 40 years.” Masonic Temple Ass’n of Grand Rapids v.
4
M.C.L. § 500.2840(1) reads:
Any person may obtain from any insurer authorized to do business within the state of Michigan, a coinsurance
clause to be attached to or included in any policy issued by such insurer insuring the interest of the insured in any real
or tangible or intangible personal property against direct, indirect or consequential loss of damage, and the insurer shall
have the right to issue such coinsurance clause, providing the form of the same has first been approved by the
commissioner.
No. 03-1914 Melson v. Prime Insurance Syndicate Page 5
Michigan, 36 N.W.2d 317, 320 (Mich. 1949) (citing Fine Arts Corp. v. Kuchins Furniture Mfg. Co.,
257 N.W. 822 (Mich. 1934)).
Furthermore, although the Michigan Supreme Court has not addressed this precise issue, a
Michigan Court of Appeals has explicitly held that coinsurance provisions continue to be consistent
with Michigan public policy despite the repeal of § 500.2840. A decision by the Michigan Court
of Appeals is controlling until the Michigan Supreme Court or another panel of the Michigan Court
of Appeals rules otherwise. Wieczorek v. Volkswagenwerk, A.G., 731 F.2d 309, 310 (6th Cir. 1984)
(citing In re Hague, 315 N.W.2d 524, 532 (Mich. 1982)). Citing Masonic Temple, the Michigan
Court of Appeals held that coinsurance provisions generally do not violate Michigan public policy.
Royal Property Group v. Prime Ins. Syndicate, Inc., --N.W.2d--, 2005 WL 2030918 (Mich. Ct. App.
2005). That court considered an insurance policy nearly identical to the policy at bar; the policy
required that the insured maintain insurance sufficient to cover 80% of the replacement cost value
in order to receive benefits based upon actual loss. Like Melson, the insured in Royal Property was
required to act as a coinsurer when it failed to obtain insurance for at least 80% of the replacement
cost.
The Michigan court not only held that coinsurance provisions do not violate Michigan public
policy as a general rule, it permitted a coinsurance clause that is in all relevant respects identical to
the provision at issue. In so holding, that court observed that “nothing has been presented to clearly
establish that the instant coinsurance clause transgresses our state and federal constitutions, our
statutes, the common law, our administrative rules and regulations, or our public rules of
professional conduct.” Royal Property, at *7. So too here, Melson has presented nothing that
clearly establishes that the Coinsurance Provision violates Michigan public policy. Absent a clear
indication that coinsurance violates Michigan public policy, this Court cannot rewrite the insurance
contract. Terrien, 648 N.W.2d at 609.
Melson contends that this Court should not follow Royal Property, because the court in that
case did not discuss the repeal of § 500.2840. Although Melson contends that the state court did not
discuss § 500.2840 because it was unaware of the repeal of the statute, it is at least as plausible that
the court considered but rejected the argument Melson forwards here. Even if that court did not
consider it, this Court is not convinced that the repeal of § 500.2840 provides an indication that
coinsurance violates Michigan public policy so definite that the Michigan Supreme Court would find
it sufficient to justify the invalidation of a contract under Terrien.
Prime argues persuasively that § 500.2840 did not authorize insurers to include coinsurance
provisions, but merely provided structure for a right long recognized by Michigan common law. As
discussed supra, Michigan courts have recognized the legality of coinsurance provisions as well
established. Masonic Temple, 36 N.W.2d at 320. In Cheesebrough v. Home Insurance Co., 28
N.W. 110 (Mich. 1886), decided long before any statutory provision regarding coinsurance
provisions, the Michigan Supreme Court upheld an insurer’s coinsurance provision that required the
insured to maintain insurance at 80% of the value of the insured property. There, the Michigan
Supreme Court held that:
[The plaintiff is] bound either to procure from others, or to carry themselves,
insurance to the extent, with defendant’s policy, of four-fifths of the value of the
insured property. The undertaking is positive and unequivocal that they shall keep
the property insured to that extent, and5 that they shall themselves be treated as
insurers for all that others do not insure.
5
The policy in Cheesebrough provided:
It is a part of the consideration of this policy, and the basis upon which the rate of premium is fixed,
that the assured shall maintain insurance on the property, hereby insured by this policy, to the extent
No. 03-1914 Melson v. Prime Insurance Syndicate Page 6
Id. at 111. Although the Michigan legislature certainly could regulate the legality of coinsurance
clauses via statute, Masonic Temple and Cheesebrough suggest that § 500.2840 did not authorize
their introduction. Given that § 500.2840 appears to have structured, rather than created, the long-
established practice of including coinsurance provisions in property policies, its deletion neither
prohibits such provisions, nor indicates that coinsurance provisions are in conflict with Michigan
public policy.
2. Actual Cash Benefits
Melson also asserts that the coinsurance clause violates Michigan public policy insofar as
coinsurance policies are inconsistent with Michigan statutory law regulating the contents of fire
insurance policies. M.C.L. § 500.2833(1)(a) requires fire insurance policies to pay a minimum of
actual cash value upon a loss. It provides: “Each fire insurance policy issued or delivered in this
state shall contain the following provisions: That the policy shall provide, at a minimum, coverage
for actual cash value of the property at the time of the loss, subject to all other provisions contained
herein.” § 500.2833(1)(a). Melson contrasts § 500.2833 with M.C.L. § 500.2832, the former
Michigan Standard Fire Policy, which was repealed by Public Act 1990, No. 305. Melson argues
that M.C.L. § 500.2832, which set forth the form of a standard policy and provided coverage to the
extent of actual cash value of the property at the time of loss, but not exceeding the amount it would
cost to repair or replace the property, was an implicit endorsement of coinsurance clauses. Melson
argues that in recodifying Michigan fire insurance law in the form of M.C.L. § 500.2833 so as to
require coverage for actual cash value of the property, the Michigan legislature intended to prohibit
coinsurance provisions. Coupled with the already-discussed repeal of what Melson takes to be the
authorizing statute for coinsurance provisions, she argues that coinsurance provisions are against
Michigan public policy.
First, as discussed supra, Melson’s argument is premised on an erroneous assumption that
coinsurance policies were authorized by statute, such that the repeal of a statute could effectuate the
prohibition of coinsurance clauses. Second, in reading § 500.2833(1)(a) as prohibiting coinsurance
provisions, Melson focuses on only a subsection of that statute, and ignores other relevant
provisions. Although § 500.2833(1)(a) requires that a fire policy provide coverage for the actual
cash value at the time of the loss, § 500.2833(1)(f) requires a fire insurance policy to include
“[t]hose conditions which result in the suspension or restriction of insurance.” M.C.L.
§ 500.2833(1)(f). Given that coinsurance policies do not, as a general rule, violate Michigan public
policy, it is consistent with § 500.2833 to include coinsurance provisions in fire insurance policies,
because failure to obtain sufficient insurance is a condition that will result in the restriction of
insurance.
Like the repeal of § 500.2840, the repeal of § 500.2832 and the codification of § 500.2833
fail to provide a definite indication that this Court should strike the insurance contract as invalid
because it is contrary to public policy. There is no indication that the Michigan Supreme Court
would rule differently than did the appellate court in the issue of coinsurance clauses; therefore, this
Court will follow Royal Property.
of four-fifths of the actual cash value thereof, and that, failing so to do, the assured shall be a
co-insurer to the extent of such deficit, and in that event shall bear his, her, or their proportion of any
loss. It is, however, mutually understood and agreed that in case the total insurance shall exceed
four-fifths of the actual cash value of the property insured by this policy the assured shall not recover
from this company more than its pro rata share of the whole actual cash value of such property.
Cheesebrough, at 110.
No. 03-1914 Melson v. Prime Insurance Syndicate Page 7
III. Conclusion
For the foregoing reasons, we AFFIRM the opinion of the district court.