Smit v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 05 December 1994
• Docket Number: Docket No. 159838
• Citation: 525 N.W.2d 528,207 Mich.App. 674
• Parties: Ronald SMIT and Victoria Smit, Plaintiffs-Appellees, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Garnishee-Defendant-Appellant.
• Court: Court of Appeal of Michigan — District of US

Page 528

525 N.W.2d 528

207 Mich.App. 674

Ronald SMIT and Victoria Smit, Plaintiffs-Appellees, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY Garnishee-Defendant-Appellant.

Docket No. 159838.

Court of Appeals of Michigan.

Submitted Sept. 20, 1994, at Grand Rapids.

Decided Dec. 5, 1994, at 9:15 a.m.

Released for Publication Jan. 24, 1995.

Linsey, Strain & Worsfold, P.C. by William D. Howard, Grand Rapids, for plaintiffs.

Cholette, Perkins & Buchanan by Robert E. Attmore, Grand Rapids, for garnishee defendant.

Before REILLY, P.J., and TAYLOR and KOBZA, ^* JJ.

REILLY, Presiding Judge.

Garnishee-defendant State Farm Mutual Automobile Insurance Company appeals as of right a circuit order granting summary disposition in favor of plaintiffs. We reverse and remand.

Plaintiff Ronald Smit was injured on August 17, 1990, when a minivan driven by defendant Dawn Senneker struck the motorcycle he was driving. Senneker was making a delivery for her employer, Country Town Floral, owned by defendant Judy Kaechele or her husband, Tom Kaechele. After plaintiffs initiated the present action, Senneker's no-fault carrier, State Farm Mutual Automobile Insurance Company, denied liability in a letter to plaintiffs' counsel dated June 14, 1991, on the basis of two policy provisions.

On July 24, 1991, plaintiffs, the principal defendants, and Farm Bureau Mutual Insurance Company, Kaechele's insurer, stipulated the entry of a number of orders reflecting their settlement agreement. Farm Bureau agreed to pay $200,000 in exchange for the dismissal of the complaint against Judy Kaechele, doing business as Country Town Floral, with prejudice. Senneker stipulated the entry of a judgment against her "in such sum as the court determines fully and fairly compensates the plaintiffs for their injuries and damages." In addition, Senneker assigned to plaintiffs her rights, claims, and causes of action against State Farm. Plaintiffs agreed to enforce the judgment against only State Farm. The court assessed plaintiffs' damages at $500,000 and, subtracting the amount paid by Farm Bureau, entered judgment against Senneker in the amount of $300,000. The judgment specified that it could be enforced by plaintiffs against State Farm only. ¹

On September 20, 1991, plaintiffs secured issuance of a writ of garnishment directed to State Farm. The garnishment disclosure filed on October 30, 1991, by State Farm stated that the policy did not provide coverage. ²

On July 17, 1992, State Farm moved for summary disposition pursuant to MCR 2.116(C)(10), again contending that the policy provided no coverage for the accident. The exclusion in the policy upon which State Farm relied in its motion was different from those previously asserted in the letter to plaintiffs' counsel and the garnishment disclosure. In its motion, State Farm asserted that an endorsement to the policy, 6025U, also referred to as 6025H, contained the following provision that excluded coverage for this loss:

4. For the operation, maintenance or use of any vehicle

a. Owned by or registered or leased in the name of:

* * * * * *

(4) An employer of you, your spouse or any relative.

In response to State Farm's motion, plaintiffs argued in part that State Farm was precluded from asserting exclusions other than those identified in the June 14, 1991, letter in which coverage was denied.

At the hearing on the motion, State Farm's counsel indicated to the court that coverage was denied initially on the basis of the wrong policy and that the applicable policy contained the provision upon which State Farm now sought to rely. The court denied State Farm's motion without prejudice, indicating that it was "somewhat persuaded" by plaintiffs' argument that State Farm's defenses were limited to those raised in the letter denying coverage, but wanted to provide State Farm's counsel an opportunity to respond to the argument.

Plaintiffs subsequently moved for summary disposition pursuant to MCR 2.116(C)(9) and (10). Plaintiffs reiterated their argument that State Farm was precluded from raising exclusions other than those in the denial letter. Plaintiffs further argued that both of the defenses originally asserted by State Farm were not applicable because they were based on provisions of a policy that State Farm had conceded was not in effect at the time of the accident.

The trial court granted plaintiffs' motion for summary disposition. The court referred to the general rule indicated in cases cited by plaintiffs that "insurance companies would be held to waive all defenses not raised in their initial denial of coverage." Accordingly, the court held that State Farm was "estopped" from raising defenses not raised in the initial denial of coverage. The court also rejected State Farm's position, as asserted in the original denial of coverage, that the vehicle was not a private passenger vehicle. The court ordered judgment in favor of plaintiffs in the amount of $100,000, which was State Farm's policy limit, "plus costs, statutory attorneys fees, and interest."

State Farm contends that the trial court erred in determining that State Farm was limited to the defenses raised in the letter denying liability. We agree.

In Lee v. Evergreen Regency Cooperative, 151 Mich.App. 281, 390 N.W.2d 183 (1986), this Court explained the principles of law applicable in this case. The general rule is that once an insurance company has denied coverage to an insured and stated its defenses, the company has waived or is estopped from raising new defenses. Id. at 285, 390 N.W.2d 183. However, as noted in Lee, the Supreme Court limited the application of waiver and estoppel in Ruddock v. Detroit Life Ins. Co, 209 Mich. 638, 177 N.W. 242 (1920). In that case, the Court explained that the cases applying the "doctrine of waiver and estoppel" ³ had primarily been ones that involved the insurer's assertion that the contract had been forfeited because of noncompliance with conditions of the contract. The Court distinguished those cases and held that waiver and estoppel are not available where their application would result in broadening the coverage of a policy, such that it would "cover a loss it never covered by its terms ... [and] create a liability contrary to the express provisions of the contract the parties did make." ID. AT 654, 177 N.W. 242.⁴

The limitation on the application of waiver and estoppel discussed in Ruddock has not been applied without exception. ⁵ In Lee 151 Mich.App. at 287, 390 N.W.2d 183, this Court identified two classes of cases decided since Ruddock in which estoppel or waiver was applied to bring within coverage risks not covered by policy terms or expressly excluded from the policy:

... The first class involves companies which have rejected claims of coverage and declined to defend their insureds in the underlying litigation. In these instances, the Court has held that the insurance company cannot later raise issues that were or should have been raised in the underlying litigation. Morrill v. Gallagher, 370 Mich 578; 122 NW2d 687 (1963); Dickenson [Dickinson] v. Homerich, 248 Mich 634; 227 NW 696 (1929). These cases are closely akin to the principle behind collateral estoppel....

The second class of cases allowing the limits of a policy to be expanded by estoppel or waiver despite the holding of Ruddock involves instances where the inequity of forcing the insurer to pay on a risk for which it never collected premiums is outweighed by the inequity suffered by the insured because of the insurance company's actions.

In this case, application of the doctrines of waiver and estoppel has the possible effect of broadening coverage of the policy. In granting plaintiffs' motion for summary disposition, the trial court referred to the general rule discussed above and held that State Farm was estopped from raising defenses not raised in its initial denial of coverage. The court's ruling precluded State Farm from its attempt to establish that a particular exclusion regarding vehicles owned by an employer applied to this loss. Therefore, if State Farm was correct that the exclusion applied, waiver or estoppel was used to effectively reform the policy to "cover a loss it never covered by its terms ... [and] create a liability contrary to the express provisions of the contract the parties did make" in violation of the Ruddock limitation.

This case does not belong in the first class of cases identified in Lee, because State Farm is not attempting to now raise an issue that was or should have been litigated in the underlying action. As in Lee, State Farm is attempting to establish here that coverage of the loss is excluded from the terms of the policy because of the circumstances of the accident. Although evidence pertaining to the ownership of the vehicle and the employment relationship might have been introduced in a trial of the underlying action, the evidence would have been presented by plaintiffs in their claim against Judy Kaechele, doing business as Country Town Floral, or by Kaechele in her defense. The evidence would not have been relevant to Senneker's liability as the driver or the validity of any judgment rendered against her. See, for example, Morrill, supra. Any attorney for State Farm representing Senneker in the underlying action might have faced a charge of conflict of interest if an attempt had been made to introduce evidence of the employment relationship between Senneker and the owner of the minivan. The employment relationship, if proven, would not be a valid defense to the claim against Senneker, but it might exclude coverage for her, which would be against her interests. Therefore, we believe the trial court erred in ruling that this case belongs in the first class of cases identified in Lee.

Furthermore, unlike the present case, those included in Lee's first class do not involve a consent judgment. According to Lee at 287, "[t]hese cases are closely akin to the principle behind...