Opinion
Case No. 4:00 CV 172
October 2, 2001
OPINION
This is a dispute over insurance coverage. Defendant, American Empire Surplus Lines Insurance Company ("American Empire"), issued several liability insurance policies to Plaintiff, John Boerman ("Boerman"). Those policies included coverage for pollution damage caused by Boerman in the operation of his excavating business. A third party obtained a default judgment against Boerman in a separate suit, and Boerman filed this action in Kalamazoo Circuit Court on September 13, 2000, seeking a declaration that American Empire had a duty to defend him in the lawsuit and claiming indemnification for the $337,290 judgment. American Empire properly removed the action to this Court and now moves for summary judgment.
Facts
The facts of the case are undisputed. (Pl.'s Br. Opp'n at 2.) American Empire issued four consecutive insurance policies to Boerman between 1994 and 1998. The terms of each policy were virtually the same from year to year, covering liability for pollution conditions caused by Boerman in the operation of his excavating business. (Def.'s Br. Supp. Ex. 2.) Each policy was a "claims-made" policy, covering only those claims first made against the insured during the one-year policy period. Only claims or lawsuits actually filed during the effective policy period were covered under the policy. Each policy was further limited, though, to apply only if the pollution condition arose while Boerman was actually performing the work at the site and he reported the claim or suit during the policy period. The policy stated:
[American Empire] will pay "loss" that the "insured" becomes legally obligated to pay as a result of "claims" first made against the "insured" and reported to the company, in writing, during the "policy period" . . . for "pollution conditions" at any site while you, your employees or your subcontractors are performing operations by or on your behalf . . . provided always that "loss" is caused by "pollution conditions" that begin on or after the RETROACTIVE DATE stated in the Declarations . . . .
It is a condition precedent to coverage under this policy that coverage is only afforded for "loss" resulting from operations performed by "you" or on your behalf within the "coverage territory" and with respect to projects and/or jobs: (i) in progress the effective date of the policy if specifically scheduled by endorsement to the policy; or (ii) commenced on or after the effective date of the policy.
Each policy covered a period of one year: Policy No. 4 CL 84467, effective March 11, 1994 through March 11, 1995 ("1994 policy"); Policy No. 5 CL 84509, effective March 11, 1995 through March 11, 1996 ("1995 policy"); Policy No. 6 CL 84560, effective March 11, 1996 through March 11, 1997 ("1996 policy"); and Policy No. 7 CL 84616, effective March 11, 1997 through March 11, 1998 ("1997 policy"). (Def.'s Br. Supp. Ex. 1.)
Boerman sought coverage from American Empire for a lawsuit and judgment arising out of pollution he allegedly caused while operating his business. The Kalamazoo Oil Company filed suit against Boerman in the Kalamazoo County Circuit Court on November 8, 1996. It claimed that on November 14, 1994, Boerman negligently excavated underground storage tanks from its property by failing to remove or cap a fuel oil pipe attached to an active petroleum loading dock. Kalamazoo Oil first discovered the pollution in July 1996, when oil was pumped through the pipe and seeped into the soil and ground water. Boerman was personally served with a summons and complaint on November 21, 1996. (Def's Br. Supp. Ex. 3; Boerman Dep. at 27, 74-75, Def's Br. Supp. Ex. 4.) A default was entered against him on December 13, 1996, for failure to appear. (Def's Br. Supp. Ex. 5.) The Circuit Court entered a default as to liability against Boerman on February 2, 1998, because of Boerman's refusal to comply with discovery and failure to attend a deposition. (Def.'s Br. Supp. Ex. 11.) In a hearing on money damages, a jury awarded Kalamazoo Oil $337,290 from Boerman. (Def.'s Br. Supp. Ex. 12.) Judgment against Boerman was entered on June 2, 1998. The Michigan Court of Appeals affirmed that judgment on July 28, 2000. (Def.'s Br. Supp. Ex. 13.)
Boerman, through an attorney named John Watts, moved to set aside this default on March 10, 1997. (Def's Br. Supp. Ex. 6.) Boerman's explanation for his failure to appear was that he decided to proceed without an attorney and filed papers on his own behalf, which he alleges were lost in the clerk's files. (Boerman Dep. at 27 28.)
Boerman never notified American Empire of the lawsuit filed against him. (Boerman Dep. at 75-76.) American Empire first became aware of the suit against Boerman through a letter from Susan Fall, Kalamazoo Oil's attorney, dated April 4, 1997. (Def.'s Br. Supp. Ex. 8; Boerman Dep. at 33.) Ms. Fall indicated her client's intention to seek satisfaction of any money judgment from Boerman's insurance providers. American Empire denied coverage based on Boerman's failure to provide notice of the suit during the appropriate policy period. Boerman brought this suit seeking indemnification from American Empire for the $337,290 judgment. American Empire denies liability under the policy and now moves this Court for summary judgment of Boerman's claim.
Summary Judgment Standard
Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56. Material facts are facts which are defined by substantive law and are necessary to apply the law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986). A dispute is genuine if a reasonable jury could return judgment for the non-moving party. Id. The court must draw all inferences in a light most favorable to the non-moving party, but may grant summary judgment when "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Agristor Financial Corp. v. Van Sickle, 967 F.2d 233, 236 (6th Cir. 1992) (quoting Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356 (1986)).
Discussion
American Empire makes several arguments to support its motion for summary judgment. First, it argues that the only policy potentially applicable to Boerman's claim for coverage is the 1996 policy because Kalamazoo Oil filed its lawsuit in November 1996. The "claims made" policy explicitly stated that coverage only applied to claims made during the policy period. American Empire then argues that the 1996 policy does not provide coverage for several reasons, any one of which is sufficient to avoid liability. One, it claims that Boerman failed to report the Kalamazoo Oil lawsuit before the expiration of the 1996 policy, failing to meet a condition precedent for coverage. Two, it asserts that the pollution giving rise to the Kalamazoo Oil lawsuit did not occur while Boerman was working at the site, another condition eliminating the coverage of the policy. Three, American Empire contends that the work done for Kalamazoo Oil was not performed during the 1996 policy period, again failing to meet an express requirement for coverage.
American Empire's contention that the 1996 policy is the only policy that applies to Boerman's action is crucial to the remainder of its arguments. Once the analysis is limited to the one individual policy, the terms and conditions limiting the coverage of that policy exclude Boerman's claim for coverage of the Kalamazoo Oil judgment. Boerman did not dispute this conclusion in either his brief or at oral argument. Rather, Boerman argues that the renewal of the policies each year, taken together with certain statements by the insurance agent who sold the policies to Boerman, creates one seamless policy. Then, he argues, if the four individual policy periods are treated as a seamless whole, the dates when the work was performed, when the claim was made, and when the claim was reported to American Empire are insignificant. Even though the pollution condition was created during the 1994 policy, the claim made during the 1996 policy, and the claim reported during the 1997 policy, Boerman argues he is covered by virtue of his yearly renewal.
I. Whether coverage is limited to the 1996 policy
American Empire alleges that the four "claims made" policies issued to Boerman were isolated, individual policies. Boerman responds by arguing that the terms "renew" and "renewal" were not defined in the contracts and that rules of interpretation mandate that the renewal of the policies created one continuous policy. He also alleges that the insurance agent who sold him the policies represented to him that renewal extended the policy period.
A. Terms of the Contract
The Court must look to the language of the insurance policy to interpret its terms and read the policy as a whole in giving meaning to its terms. Auto Owners Ins. Co. v. Churchman, 440 Mich. 560, 566, 489 N.W.2d 431, 434 (1992). Ambiguities in the insurance contract are to be strictly construed against American Empire, the drafter of the document. State Farm Mut. Auto. Ins. v. Enter. Leasing Co., 452 Mich. 25, 38, 549 N.W.2d 345, 357 (1996).
The parties primarily cite Michigan cases in their briefs and appear to agree that Michigan law applies. Thus the Court will apply Michigan substantive law.
Boerman argues that since the contract fails to define "renew" or "renewal," the plain meaning of those terms should be used. "Renew" is defined as "to make effective for an additional period" or "to begin again; recommence." Random House Dictionary of the English Language p. 1631 (2d ed 1987). Boerman asserts that by renewing his policy from year to year he made it effective for an additional period. Continuing the renewals created a seamless policy period extending from March 11, 1994, to March 11, 1998.
American Empire responds that the renewal of a claims-made policy does not create one continuous policy period. Each individual policy is separate, and a renewal does not extend the reporting period of claims made during the previous policy's effective period of coverage. Checkrite Ltd. v. Illinois National Insurance Co., 95 F. Supp.2d 180 (S.D.N.Y. 2000), addressed Boerman's argument. The insured had purchased claims-made insurance covering a period of one year and subsequently renewed that policy for another year. Id. at 184-85. A claim was made against the insured during the first year's policy but not reported to the insurer until the second year. Id. at 187. The court held that the insured was not entitled to coverage and could not recover under the insurance policy because it failed to report the claim to the insurer during the policy period in which the claim was made. Id. at 194. The court noted that, "[n]owhere in the contract does it say that renewal creates a continuous period of coverage during which the insured may report claims without regard to the policy period in which they were first made." Id. at 193. Furthermore, permitting an extension of the reporting period by a renewal of the policy would interfere with the nature and purpose of claims-made policies: "a cut-off date is integral to a claims-made policy" because, "[t]he insurer is afforded greater certainty in computing premiums, since it does not need to be concerned with the risk of claims filed long after the policy has ended, and as a result the insured may benefit from lower premiums." Id. at 191-92. The court concluded:
To read an "inherent" extended reporting period into a renewal policy would "creat (sic) a long [and unbargained-for] `tail' of liability exposure, the avoidance of which forms the conceptual framework for claims made coverage in the first instance." This conceptual framework applies where a policy is renewed, as well as when it is not, since each policy year represents an agreement as to a specific period during which claims made and reported will be covered.
Id. at 194 (citations omitted). See also Nat'l Union Fire Ins. Co. v. Talcott, 931 F.2d 166, 168-69 (1st Cir. 1991) (rejecting insured's argument that continued coverage by the insurer relieved notice requirement of claims-made policy because the insurer has a right to set its premiums with full knowledge of the claims it is obligated to meet);Am. Cas. Co. of Reading, Pa. v. Continisio, 17 F.3d 62, 68 (3rd Cir. 1994) (explaining that "[c]laims-made policies are less expensive because underwriters can calculate risks more precisely since exposure ends at a fixed point. Extension of time periods would significantly increase both the risks to insurers and the costs to insureds."); Ehrgood v. Coregis Ins. Co., 59 F. Supp.2d 438, 446-47 (M.D.Pa. 1998) (stating that, "`an extension of the notice period in a "claims-made" policy constitutes an unbargained for expansion of coverage, gratis, resulting in the insurance company's exposure to a risk substantially broader than that expressly insured against in the policy.'" (quoting Zuckerman v. Nat'l Union Fire Ins. Co., 100 N.J. 304, 495 A.2d 395, 406 (1985)).
The Court is persuaded by the reasoning in these cases. Boerman was not contracting for an extended reporting period when he renewed his insurance policy with American Empire. The premiums and rates set by American Empire were based on a policy period of one year. Extending the reporting period from the 1994 policy through the 1997 policy would be giving Boerman something for which he did not bargain. Moreover, the policy defines the "policy period" as the "period set forth in the Declarations or any shorter period arising as a result of cancellation." (Def.'s Br. Supp. Ex. 1.) The Declaration of the policy clearly states that the period covered by the 1996 policy was March 11, 1996, to March 11, 1997. (Id.) In order to be covered, a claim must be made and reported during that period. Nowhere does the contract indicate that renewal creates a seamless policy period or that a policy period would include previous periods. A commonsense understanding of "renewal" does not alter this conclusion based on the nature and purpose of claims-made insurance policies and the language of the pollution policy issued by American Empire.
B. Statements made by the insurance agent
Boerman asserts that statements made by Phil Siegler, the insurance agent who sold the policies to him, oblige American Empire to provide coverage. Specifically, Siegler testified that he told Boerman that, "if something happened in 1994, as long as he kept renewing the policy, and then later on a claim was filed, he would have been covered." (Siegler Dep. at 56, Def.'s Reply Br. Ex. 3.) Furthermore, Boerman alleges that Siegler told him that purchasing the available extended coverage periods was not necessary as long as he kept renewing the original policy.
American Empire disputes the interpretation given to Siegler's statement. It proposes that Siegler was saying that a renewal would provide coverage for any liability that occurred during the previous policies if a claim was made during the current policy. This does not mean that Siegler told Boerman that he could wait until a subsequent period to report a claim or that renewing the policy would create one continuous policy.
American Empire's interpretation of Siegler's statements makes more sense than Boerman's. But, the Court need not choose between the two differing interpretations. Those representations do not bind American Empire. Siegler testified that he is an independent insurance agent and not specifically an agent of American Empire. (Siegler Dep. at 7-8.) He had an arrangement with another company through which he could issue insurance for a broad group of insurance companies. (Siegler Dep. at 9-10.) Boerman even testified that Siegler was his insurance agent. (Boerman Dep. at 41-42.) Under Michigan law, an independent insurance agent, one that can sell insurance contracts for various insurance companies, is ordinarily an agent of the insured, not the insurer. Mate v. Wolverine Mutual Ins. Co., 233 Mich. App. 14, 20, 592 N.W.2d 379, 382 (1998). See also Am. Cas. Co. of Reading, Pa. v. Rahn, 854 F. Supp. 492, 498 (W.D.Mich. 1994).
Boerman cites Stein, Hinkle, Dawe Associates, Inc. v. Continental Casualty Co., 110 Mich. App. 410, 313 N.W.2d 299 (1981), to support his argument. In that case, an insurance agent failed to inform the plaintiffs about a prior acts rider that would have covered a two-year lapse in their insurance coverage. Id. at 417-18, 313 N.W.2d at 302. The court of appeals affirmed the trial court's finding that a "special relationship" existed between the plaintiffs and the defendant insurance company due to the insurance agent's handling of all the plaintiff's insurance needs for ten years. Id. at 418, 313 N.W.2d at 302-03. The insurance company was liable for a breach of the duty to inform. Dawe Associates is not applicable here. The court concluded without comment or analysis that the insurance agency that dealt with the plaintiff was an agent of the insurance company. Id. The issue was whether, as an agent of the insurer, the insurance agent owed a duty to the insured plaintiffs to inform them of the consequences of a lapse in their coverage. The issue here is whether Siegler is an agent of American Empire at all, not whether he had a duty to inform Boerman about the details of his insurance policy.
Accordingly, since Siegler is not the agent of American Empire, it is not bound by any statement or representation Siegler may have made to Boerman regarding the insurance contract. Boerman is bound by the express terms of the contract, which limit the policy period to one year. Under the terms of the claims-made contract, since the claim by Kalamazoo Oil was made against Boerman in November 1996, the 1996 policy applies. The reporting period is limited to that policy as well because each individual policy is an individual contract and the renewals do not create a seamless, continuous policy period. The terms of the 1996 policy alone apply to Boerman's claim for coverage.
II. Whether Boerman can recover under the 1996 policy
American Empire makes three arguments supporting its contention that certain conditions in the 1996 policy were not met, thus precluding Boerman from coverage. First, it states that Boerman is not covered under the 1996 policy because he failed to report the Kalamazoo Oil lawsuit while that policy was in effect. Second, it alleges that Boerman is precluded from coverage because the oil spill he caused at the Kalamazoo Oil site arose after he had completed his work at the site. Finally, it asserts that Boerman is not covered by the 1996 policy because the work that he performed giving rise to the Kalamazoo Oil lawsuit was not commenced on or after the effective date of the policy. All three of these conditions must be met for coverage to attach under the policy.
Boerman has not disputed American Empire's arguments. The Court will address them anyway.
A. Boerman's failure to timely report the claim
Section I(1)(a) of the policy provides that American Empire will pay the loss that Boerman becomes legally obligated to pay as a result of any claim "first made against [Boerman] and reported to the company, in writing, during the `policy period.'" (Def.'s Br. Supp. Ex. 2). Courts have strictly adhered to the reporting requirements of claims-made insurance contracts such as this. In Gulf Insurance Co. v. Dolan, Fertig, and Curtis, 433 So.2d 512 (Fla. 1983), the Florida Supreme Court explained the importance of reporting requirements:
Coverage depends on the claim being made and reported to the insurer during the policy period. . . . If the claim is reported to the insurer during the policy period, then the carrier is legally obligated to pay; if the claim is not reported during the policy period, no liability attaches. If a court were to allow an extension of time after the end of the policy period, such is tantamount to an extension of coverage to the insured gratis, something for which the insurer has not bargained. This extension of coverage, by the court, so very different from a mere condition of the policy, in effect rewrites the contract between the parties.Id. at 515-16. (emphasis in original). In City of Harrisburg v. International Surplus Lines Insurance Co., 596 F. Supp. 954 (M.D.Pa. 1984), the court addressed the issue of notification in claims-made insurance policies. It concluded that, "[t]he notice provision of a claims-made policy is just as important to coverage as the requirement that the claim be asserted during the policy period. If the insured does not give notice within the contractually required time period, in the instant case `during the policy period,' there is simply no coverage under the policy." Id. at 961.
There is no dispute here that Boerman failed to notify American Empire of the claim made against him by Kalamazoo Oil. Boerman never gave American Empire notice of the claim after he had received service of process of the complaint on November 21, 1996. (Boerman Dep. at 74-76.) In addition, he submitted a signed application for the 1997 policy falsely stating that there was no claim or suit being made against him. American Empire did not receive notice of the Kalamazoo Oil lawsuit until the 1997 policy was in effect, when Susan Fall, Kalamazoo Oil's attorney, sent a letter advising American Empire of the suit and her intention to seek recovery of any judgment from Boerman's insurers.
Boerman explains this misrepresentation by claiming that he simply reused his answers to previous applications when filling out the form. (Boerman Dep. at 70-72.)
The only excuse available to Boerman for his failure to provide notice of the claim to American Empire is M.C.L. § 500.3008, which provides:
In liability insurance policies . . . a provision that failure to give any notice required to be given by such policy within the time specified therein shall not invalidate any claim made by the insured if it shall be shown not to have been reasonably possible to give such notice within the prescribed time and that notice was given as soon as was reasonably possible.See Stine v. Continental Cas. Co., 419 Mich. 89, 105, 349 N.W.2d 127, 134 (1984) (holding that § 3008 applies to claims-made policies). Boerman has failed to produce any evidence that his failure to timely report the claim during the policy period should be excused under this statute. He received service of the lawsuit three months prior to the expiration of the 1996 policy. Boerman consciously chose not to report the claim to American Empire even though it was reasonably possible for him to do so. (Boerman Dep. at 36-38.) Therefore, under the express language of the 1996 policy, Boerman is precluded from asserting coverage for the Kalamazoo Oil lawsuit judgment because he failed to notify American Empire within the policy period.
B. Pollution conditions arose after Boerman completed work
In addition to the limitation in the pollution policy for reporting claims within the policy period, the insurance contract between the parties further limits coverage to those injuries that occur while Boerman's operations are being performed. The policy does not apply to any injuries or damages that occur after Boerman completed his work at the site. Specifically, Section I(1)(a) states, "[American Empire] will pay `loss' that [Boerman] becomes legally obligated to pay . . . for `pollution conditions' at any site while [Boerman, his employees, or subcontactors] are performing operations . . ." (Def's Br. Supp. Ex. 2.) These types of "operations policies" have been upheld in Michigan courts. Duval v. Aetna Casualty Surety Co., 304 Mich. 397, 400-401, 8 N.W.2d 112, 113 (1943).
There is no dispute that Boerman performed the work for Kalamazoo Oil in November 1994, and that Kalamazoo Oil first discovered the pollution one-and-a-half years later in July 1996. Boerman allegedly failed to remove or cap a fuel oil pipe that was connected to an active petroleum fueling station. When oil was pumped through the pipe, it seeped into the soil and ground water.
Boerman contends in his Response that he never completed the contract work for Kalamazoo Oil and therefore the work was still being performed at the time the pollution was discovered. The nature of Kalamazoo Oil's claim, according to Boerman, demonstrates that he never finished his work at the site by failing to remove or cap the fuel pipe. Thus, he argues, the pollution policy should apply because the pollution condition arose while Boerman was still conducting operations.
Boerman's argument fails. First of all, as Boerman's counsel admitted during oral argument, Boerman himself considered the work to have been completed. He had no ongoing operations at the site. Rather, he had simply failed to properly perform his work in 1994 by forgetting an important detail — removing or capping a fuel oil pipe. The nature of the Kalamazoo Oil lawsuit was that Boerman negligently performed his operations by failing to cap or remove the fuel pipe.
Second, even if the work is construed as ongoing, the pollution condition still does not fall into the coverage of the 1996 policy. The pollution policy contains a condition precedent to coverage for damages: only those operations "(i) in progress the effective date of the policy specifically scheduled by endorsement to the policy or (ii) commenced on or after the effective date of the policy" are covered. (Def.'s Br. Supp. Ex. 2.) Boerman's operations at the Kalamazoo Oil site were commenced in November 1994, during the 1994 policy, and were not scheduled on any endorsement to the 1996 policy. Thus, neither condition (i) nor (ii) is met.
Boerman's operations at the Kalamazoo Oil site and the resulting pollution condition do not fall within the coverage of the 1996 policy because the pollution condition did not arise while Boerman was conducting operations at the site. His claim for coverage under the policy falls outside the express limiting condition of the policy.
III. American Empire's Duty to Defend Boerman
After receiving notice of the Kalamazoo Oil claim from Susan Fall in April 1997, American Empire initially retained counsel to defend Boerman in the action. When it became aware of the fact that Boerman had notice of the lawsuit in November 1996 and had failed to notify anyone at American Empire during the 1996 policy, it denied coverage. Boerman claims in this suit that American Empire breached its duty under the policy by failing to defend him in the Kalamazoo Oil lawsuit.
The Michigan Supreme Court has discussed the relationship in insurance contracts between the duty to defend and the ultimate duty to indemnify:
The duty to defend is related to the duty to indemnify in that it arises only with respect to insurance afforded by the policy. If the policy does not apply, there is no duty to defend. However, the scope of the two duties is not identical; the duty to defend is broader than the duty to defend. If the allegations of a third party against the policyholder even arguably come within the policy coverage, the insurer must provide a defense.
Am. Bumper and Mfg. Co. v. Hartford Fire Ins. Co., 452 Mich. 440, 450-451, 550 N.W.2d 475, 481 (1996) (citations omitted).
American Empire did not have a duty to defend Boerman in the Kalamazoo Oil lawsuit because it was clear from the outset that he failed to provide notice of the claim during the policy period. The 1996 policy did not provide coverage because Boerman failed to satisfy the condition precedents under the pollution policy. Since it was not arguable that the claim came within the policy coverage, American Empire did not have a duty to provide a defense.
Conclusion
For the foregoing reasons, the Court will grant Defendant's motion for summary judgment.
An Order consistent with this Opinion will be entered.
ORDER
In accordance with the Opinion filed this date,
IT IS HEREBY ORDERED that Defendant's Motion for Summary Judgment (docket no. 17) is GRANTED and
Plaintiff's complaint is DISMISSED.
This case is closed.