Smith v. Michigan Basic Property Ins. Ass'n
| Citation | 490 N.W.2d 864,441 Mich. 181 |
| Decision Date | 29 September 1992 |
| Docket Number | No. 8,Nos. 90632,90639,s. 90632,8 |
| Parties | Elmer SMITH and Myrtle Smith, Plaintiffs-Appellants, v. MICHIGAN BASIC PROPERTY INSURANCE ASSOCIATION, Defendant-Appellee. Elmer SMITH and Myrtle Smith, Plaintiffs-Appellees, v. MICHIGAN BASIC PROPERTY INSURANCE ASSOCIATION, Defendant-Appellant. Calendar |
| Court | Supreme Court of Michigan |
Two questions are presented:
(1) Whether an insured can recover under a replacement cost provision of a fire insurance policy without actually repairing, rebuilding, or replacing the property at the same or another site. We conclude that, although the insurer denied coverage on the grounds that the fire was caused by the insureds and they had committed fraud in reporting the loss and the jury found the fire was not caused by the insureds and there was no fraud, the insureds must nevertheless actually repair, rebuild, or replace at the same or another site before the insurer becomes liable to pay the difference between actual cash value and replacement cost.
(2) Whether the circuit judge erred in ruling that the insurer may not introduce evidence of the financial condition of the insureds to show motive or for any other purpose. We conclude that although evidence of the financial condition of an insured may, in particular cases, be admissible to prove motive or for other purposes, the judge did not err in ruling that Michigan Basic could not, in the instant case, introduce evidence of the financial condition of the Smiths.
Elmer and Myrtle Smith insured their home in Trenton, Michigan, with the Michigan Basic Property Insurance Association against fire loss. The policy provided for replacement cost coverage on the home with a policy limit of $56,000. 1
The Smiths' home and its contents were completely destroyed by fire. Michigan Basic claimed that the Smiths had deliberately set the fire, and that they had committed fraud in reporting the loss. When it appeared that the home would not be repaired, the City of Trenton demolished what was left of the structure. The Smiths commenced this action in circuit court.
Before trial, the Smiths moved for a determination whether, in the event of a favorable verdict, they would be allowed to recover the replacement cost of the home not exceeding the $56,000 policy limit instead of the stipulated $7,500 actual cash value. 2 Michigan Basic contended that it was obliged to pay only the actual cash value of the home in the event the Smiths obtained a favorable verdict with regard to the arson and fraud issues, because the Smiths had not completed repair or replacement of the home as both the policy 3 and the statute 4 require.
Observing that the arson and fraud allegations would have made it extremely difficult for the Smiths to obtain financing to rebuild the home, the judge ruled and later entered an order that, in the event the Smiths obtained a favorable verdict, they were, pursuant to Pollock v. Fire Ins. Exchange, 167 Mich.App. 415, 423 N.W.2d 234 (1988), "entitled to recover the full replacement cost value of their home not to exceed policy limits without first having to repair or replace same."
The judge also entered an order in limine directing that "pursuant to the holding of People v. Henderson, 408 Mich. 56, 289 N.W.2d 376 (1980)," Michigan Basic "shall not introduce any evidence of plaintiff Elmer and Myrtle Smith's alleged poverty, dependence on public welfare, unemployment, under employment, low paying or marginal employment to show motive or for any other purpose...."
The jury found, in a special verdict form, that the fire was not deliberately set, that the Smiths had not deliberately set or caused the setting of the fire, and that the Smiths did not know of and consent to the setting of the fire for the fraudulent purpose of attempting to recover under the policy issued by Michigan Basic. The jury also found that the Smiths had not misrepresented or concealed any material fact or circumstance concerning the cause or origin of the fire, the value of the insured property, or the extent of loss and damage sustained. The jury further found that Michigan Basic had not "wilfully denied the Plaintiffs' claim with a callous disregard for the Plaintiffs' rights under the policy."
The Court of Appeals 5 vacated and remanded for a new trial, stating that the judge should have allowed inquiry concerning the Smiths' financial condition, but affirmed the judge's ruling that the Smiths could recover the replacement cost of the home without actually having repaired or replaced it. 6 As earlier stated, we disagree with the Court of Appeals on both questions.
We remand this case to the circuit court with the direction that the judgment for $90,607.92 entered in favor of the Smiths be modified to require the payment, without regard to whether they actually repair, rebuild or replace the home, of $42,107.92 7 plus interest, and to require an additional payment of an amount not exceeding $48,500 8 plus interest when and if the Smiths actually repair, rebuild or replace the home.
Michigan Basic introduced expert testimony tending to show that the fire resulted from the ignition of flammable liquids and had been deliberately set, and additional expert testimony that there was no evidence indicating that the fire was accidental. Still another expert witness, for the Smiths, testified that he believed that the fire was caused accidentally by a short circuit in the wiring leading to a refrigerator. The state police were unable to find evidence of a flammable substance on testing samples taken from the home.
The Smiths purchased the two-story, single-family residence for approximately $6,500 in 1973, over thirteen years before the fire. After they purchased the home, the City of Trenton rezoned the property for commercial use. Only two houses remained on the Smiths' block at the time of the fire. Approximately fifteen to twenty other structures in the neighborhood had been removed between the purchase of the home and the time of the fire.
Michigan Basic introduced evidence tending to show that the home was in a state of disrepair. A Trenton housing inspector testified that inspections beginning in 1975 revealed code violations, including electrical and plumbing problems. The Smiths were informed of the need to obtain an electrical permit before the violations were corrected. The Smiths did not, however, obtain the required permits and the code violations had not been corrected before the fire. Additional code violations were observed in an April, 1986, inspection.
In March, 1987, a Trenton inspector notified the Smiths that he intended to enter the property and conduct a more extensive inspection. The inspection was delayed for a short time at the request of the Smiths to allow them time to make repairs. Elmer Smith fixed a broken water pipe, and was in the process of installing a new linoleum floor.
The fire occurred on the day before the rescheduled inspection, while the Smiths and their children were visiting relatives in Hesperia, Michigan, over four hours driving time from Trenton.
We agree with Michigan Basic that it is not liable for the difference between the $7,500 actual cash value of the home and the $56,000 replacement cost policy limit unless the home is actually repaired, rebuilt, or replaced, and that Pollock should not be followed.
The fire insurance policy provides that the insurer will pay no more than the actual cash value of the damage unless "actual repair or replacement is complete." 9 The statute 10 provides that there shall be no liability on the part of the insurer under a replacement cost provision "unless the property damaged is actually repaired, rebuilt or replaced at the same or another site."
The Smiths rely on Pollock, McCahill v. Commercial Union Ins. Co., 179 Mich.App. 761, 446 N.W.2d 579 (1989), and Zaitchick v. American Motorists Ins. Co., 554 F.Supp. 209 (S.D.N.Y.1982), aff'd without published opinion, 742 F.2d 1441 (C.A.2 1983). Michigan Basic contends that Pollock, McCahill, and Zaitchick were incorrectly decided, and in all events are distinguishable because the jury found that Michigan Basic had not wilfully denied the Smiths' claim with a callous disregard for their rights, while in Pollock the Court found "lack of good faith processing" 11 of the insured's claim and in McCahill the Court followed Pollock "under the facts of this case" which included a finding of "extreme and outrageous conduct" by the insurer. 12
We agree with Michigan Basic that where the insurer asserts in good faith a defense of arson or fraud, the insured is not automatically entitled to payment of replacement cost following a jury's rejection of those defenses. Although, as stated in Zaitchick, supra at p. 217, "a bank would be chary to lend money on the basis of an unlitigated law suit in which the defendant and its vast resources intend to present several defenses to payment," and, thus, we agree with the Smiths that they could not be expected to repair, rebuild, or replace while this litigation was pending, once it has been determined that they are entitled to payment of actual cash value without regard to whether they repair, rebuild, or replace, and to replacement cost if they do so, the insurer's interposition of arson and fraud defenses no longer stands in the way of lender-assisted financing of repair, rebuilding, or replacement.
The insurance policy provides that the insured may disregard the replacement cost...
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