Cunningham v. Continental Cas. Co.

• Decision Date: 20 November 1984
• Docket Number: 71456,Docket Nos. 71455
• Citation: 139 Mich.App. 238,361 N.W.2d 780
• Parties: Cleveland CUNNINGHAM, Plaintiff-Appellee, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant. (On Remand). Keith KEMPAINEN, Plaintiff-Appellee, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant. (On Remand). 139 Mich.App. 238, 361 N.W.2d 780
• Court: Court of Appeal of Michigan — District of US

Page 780

361 N.W.2d 780

Cleveland CUNNINGHAM, Plaintiff-Appellee, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant. (On

Remand).

Keith KEMPAINEN, Plaintiff-Appellee, v. CONTINENTAL CASUALTY COMPANY, Defendant-Appellant. (On

Remand).

Docket Nos. 71455, 71456.

139 Mich.App. 238, 361 N.W.2d 780

Court of Appeals of Michigan.

Submitted May 19, 1983 Decided Nov. 20, 1984 Appellant's Rehearing Denied March 13, 1985 Appellee's Rehearing Granted March 13, 1985 Released for Publication Feb. 1, 1985.

[139 MICHAPP 239] The Jaques Admiralty Law Firm, P.C. by Leonard C. Jaques, Detroit, for plaintiffs-appellees.

Vandeveer, Garzia, Tonkin, Kerr & Heaphy, P.C. by Richard J. Tonkin, Detroit, for defendant-appellant.

Before T.M. BURNS, P.J., and BRONSON and MAHER, JJ.

PER CURIAM (On Remand).

On February 10, 1970, plaintiffs, employees of Greenfield Construction Company, were injured when the dirt walls of a tunnel shaft in which they were working collapsed. At the time of the accident, defendant provided workers' compensation insurance to Greenfield Construction. Plaintiffs sued defendant, arguing that their injuries were caused by defendant's failure to adequately perform the safety inspection duties at the construction site it had undertaken as Greenfield Construction's workers' compensation carrier. The jury awarded plaintiffs $725,000 each, and defendant appealed to this Court. After various proceedings, this Court granted plaintiffs' motions to affirm on August 21, 1980. Defendant sought leave to appeal to the Supreme Court. The Supreme Court, in lieu of granting leave to appeal, remanded[139 MICHAPP 240] the case to the Court of Appeals "for reconsideration in light of Smith v Allendale Mutual Ins Co, 410 Mich 685 (1981)". 417 Mich. 984 (1983).

On remand, defendant argues that the earlier judgments must be reversed because plaintiffs failed to establish at trial that defendant was liable to them under the negligent inspection theory set forth in Smith v. Allendale, supra, or because the jury was not properly instructed under the Smith v. Allendale theory. In Smith v. Allendale, the plaintiffs sought to hold the defendants (fire insurers for plaintiffs' employers) liable for injuries sustained by the plaintiffs as a result of fire hazards not detected and brought to the insureds' attention after the insurers' inspections of the insureds' premises. The plaintiffs argued that the insurers had become liable to them under the theory expressed in Restatement Torts, 2d, Sec. 324A, which provides that, in certain circumstances, one who undertakes to render services to another which he should recognize as necessary for the protection of a third person is subject to liability if his "failure to exercise reasonable care to [perform] ¹ his undertaking" results in physical harm to the third person. The Supreme Court held that in order to establish such a threshold undertaking, the plaintiffs were required to prove that the insurers "had agreed or intended to provide services for the benefit of [their] insured[s]". The Supreme Court further held that "[e]vidence demonstrating merely that a benefit was conferred upon another is not sufficient to establish an undertaking which betokens duty. * * * Accordingly, [139 MICHAPP 241] where a plaintiff seeks to prove an undertaking by conduct which benefits another and that conduct is consistent with a primary purpose on the part of the actor to benefit himself, the plaintiff must offer additional evidence to create a jury question whether there was an undertaking to render services and hence a duty to one who might foreseeably be injured by the actor's failure to perform the undertaking with reasonable care." 410 Mich. 717-718, 303 N.W.2d 702.

In response, plaintiffs first argue that the holding in Smith v. Allendale is confined to situations involving fire insurance inspections. ² They contend that the issue addressed in Smith concerned the evidentiary requirements necessary to establish that fire insurance inspections constituted "services to another" that would trigger the duty to exercise reasonable care in the services provided and that, for various policy reasons, these evidentiary requirements are not equally applicable to a negligent worker's compensation insurance inspection case.

We do not agree that the holding of Smith v. Allendale is applicable only to fire insurers. Although the Supreme Court's opinion repeatedly refers to fire insurers, fire inspections, and fire prevention, the holding of the case, as stated earlier, is expressed in general terms, referring to insurers and, even more generally, to "plaintiffs" and "actors" rather than to "fire insurers". The underlying issue in the case is not what quantum of evidence is needed to establish a fire insurer's duty to the employees of its insured, but rather how to properly interpret the term "undertaking" [139 MICHAPP 242] in Sec. 324A, Restatement Torts, 2d. On this issue, the Supreme Court stated:

"Section 324A provides that an actor who 'undertakes, gratuitously or for consideration, to render services to another ' (emphasis supplied) may in certain circumstances be liable to foreseeable third persons for negligence. Plaintiffs maintain that by inspecting the Farm Bureau feed mill and the Great Lakes Steel plant for fire hazards, the insurers in these cases embarked upon gratuitous undertakings within the ambit of Sec. 324A.

"In our view, plaintiffs misconceive the sweep of the section's principles. The illustrations given in the official comments to Sec. 324A and the cases cited by way of example in the Reporter's Notes involve either a contractual undertaking by a defendant to render particular services, an undertaking by an agent or employee to render services to his employer as part of the agency or employment, or an undertaking whose unambiguous object is to benefit another and which would not have been performed primarily for the actor's purposes.

"One can agree with the general proposition that any person, including an insurer, who assumes to act must act with reasonable care without concluding that the insurers in these cases are subject to liability under the rule of Sec. 324A. It is not enough that the insurer acted. It must have undertaken to render services to another. Its acts do not constitute such an undertaking unless it agreed or intended to benefit the insured or its employees by the inspections.

* * *

"The law does not impose a duty upon an insurer who inspects in the absence of conduct evidencing an agreement or intent to benefit others by the inspection; only in such a case has the insurer acknowledged the propriety of judging the competence of its inspection by a standard which measures its potential effect on others. This concept of acknowledged obligation to another is comprehended by Sec. 324A's threshold description of '[o]ne who undertakes * * * to render services to another'; the rule stated in Sec. 324A by its terms does not [139 MICHAPP 243] apply to an actor following a self-serving course of conduct." (Footnotes omitted.) 410 Mich. 715-717, 303 N.W.2d 702.

The Supreme Court also stated:

"For the reasons stated [elsewhere in the opinion], we conclude that the insurers in these cases are not liable to plaintiffs under the common-law rule restated in Sec. 324A because on these records the relationships did not give rise to an undertaking creating a duty to inspect with due care. This result is consistent with the Restatement when Sec. 324A is read in light of the cases that gave rise to it. It also reflects our judgment, guided by the legislative response to a prior case, of the wiser public policy." 410 Mich. 713, 303 N.W.2d 702.

We note that this Court, in Scott v. Detroit (On Rehearing), 113 Mich.App. 241, 318 N.W.2d 32 (1982), lv. den. 417 Mich. 864 (1983), and the United States District Court, in Rick v. RLC Corp., 535 F.Supp. 39 (E.D.Mich.1981), have applied this holding in Smith v. Allendale to nonfire insurer situations.

We also reject the contention that the Supreme Court expressly differentiated between fire insurers and workers' compensation insurers for purposes of Sec. 324A in Smith v. Allendale. The references to earlier Court of Appeals cases involving Sec. 324A in the workers' compensation insurance context ³ do not approve the interpretation of Sec. 324A contained within those cases, but simply note that Sec. 324A of the Restatement Torts, 2d, had been applied prior to Smith v. Allendale in Michigan case law. See 410 Mich. 712, 303 N.W.2d 702. Other references to the workers' compensation insurance context occur only in the discussion of the common-law [139 MICHAPP 244] development of the concept of insurer liability for negligent inspection. This discussion does not endorse the holdings of the earlier cases. See 410 Mich. 733-734, 303 N.W.2d 702.

Plaintiffs also argue that the policy reasons listed in Smith v. Allendale for declining to "enlarge" the tort liability of fire insurers, 410 Mich. 736-738, 303 N.W.2d 702, do not apply to workers' compensation insurers and that, therefore, the holding in Smith should not apply. However, whether or not these policy reasons apply, we are persuaded that the Supreme Court intended them to apply:

"The common-law principles relied on by the plaintiffs do not subject an insurer to liability for negligent inspection unless it undertakes to inspect for the insured's benefit. In assessing the proper development of these principles, we find compelling that, after the Court of Appeals permitted maintenance of actions against workers' compensation insurers for employee injuries proximately resulting from negligent safety inspections, the Legislature amended the workers' compensation act to preclude third-party actions against the carrier based upon its furnishing of, or failure to furnish, safety inspections. This amendment expresses a policy judgment that the societal benefits obtained from not burdening the...