Universal Underwriters Ins. Co. v. Kneeland

Decision Date03 July 2001
Docket NumberDocket No. 114900, Calendar No. 3.
Citation628 N.W.2d 491,464 Mich. 491
PartiesUNIVERSAL UNDERWRITERS INSURANCE COMPANY, as Subrogee of Betten Toyota and Betten Toyota, Plaintiffs-Appellees, v. Nancy KNEELAND, Defendant-Appellant.
CourtMichigan Supreme Court

Garan, Lucow, Miller, P.C. by David N. Campos and Daniel S. Saylor, Detroit, MI, for the plaintiffs-appellees.

Bensinger, Cotant, Menkes & Aardema, P.C. by Dale L. Arndt, Grand Rapids, MI, for the defendant-appellant.

Opinion

CORRIGAN, C.J.

We granted leave to determine whether a contractual provision that assigned "all responsibility for damages" to defendant while she rented a vehicle contravenes our no-fault act, M.C.L. § 500.3101 et seq., and thereby voids the parties' contract. We hold that the no-fault act does not prevent contracting parties from voluntarily allocating liability for collision damage to a rented vehicle. We thus affirm the judgment of the Court of Appeals.

I. Underlying facts and procedural history

While repairing defendant's vehicle, plaintiff Betten Toyota loaned her a vehicle. Defendant and a Betten employee signed a "courtesy car agreement" that stated:

2. Renter agrees to replace gasoline used.
3. Renter agrees to pay cash for rental charge.
4. Renter agrees to assume all responsibility for damages while vehicle is in his possession.

5. Renter agrees not to sublet or loan the car to anyone. [Emphasis added.]

While driving the rented vehicle, defendant was involved in an accident. Total collision damages amounted to $3,738.49. Betten Toyota absorbed $1,000 as a deductible; plaintiff Universal Underwriters Insurance Company, Betten's insurer, paid the remainder.

Betten and Universal sought recovery from defendant, but she refused to pay. Plaintiffs then commenced this action alleging breach of the courtesy car agreement. Universal seeks recovery as Betten's subrogee of the $2,738.49 it paid to repair the rented vehicle; Betten demands payment of the $1,000 deductible.

Plaintiffs moved for summary disposition under MCR 2.116(C)(10), arguing that no genuine issue of material fact existed regarding defendant's contractual liability. The district court instead granted summary disposition for defendant under MCR 2.116(I)(2).1 It relied on an unpublished Court of Appeals opinion to conclude that the no-fault act does not allow contractual allocation of liability for collision damages. Universal Underwriters Ins. Co. v. Stout, unpublished opinion per curiam, issued February 2, 1996 (Docket No. 171069). The circuit court affirmed.

The Court of Appeals reversed and remanded for entry of a judgment in plaintiffs' favor unless the district court "determines that defendant has defenses that have not yet been addressed, in which case the court shall conduct proceedings consistent with" the Court of Appeals opinion. 235 Mich.App. 646, 662, 599 N.W.2d 519 (1999). It noted that while the no-fault act abrogated tort liability arising from the ownership, maintenance, or use of a motor vehicle (except in certain circumstances),2 it did not abolish contractual liability. See Kinnunen v. Bohlinger, 128 Mich.App. 635, 638, 341 N.W.2d 167 (1983); Nat'l Ben Franklin Ins. Co. v. Bakhaus Contractors, Inc., 124 Mich.App. 510, 513, 335 N.W.2d 70 (1983).

The Court of Appeals distinguished this Court's peremptory order in Universal Underwriters Ins. Co. v. Vallejo, 436 Mich. 873, 461 N.W.2d 364 (1990). Vallejo held that the defendant-renter was entitled to summary disposition on the insurer's claim for collision damages to a rented vehicle:

Although the trial court gave the plaintiff insurer numerous opportunities to explain, with specific factual allegations, how its conclusory allegation of an express or implied contract of bailment differentiated this case from any other situation in which a permissive user of a car is involved in a collision and therefore cannot return the car to its owner in an undamaged condition, the plaintiff repeatedly failed to do so. Under these circumstances, the trial court correctly granted the defendant's motion for summary disposition. By operation of the pertinent insurance statutes, e.g., M.C.L. § 257.520(b)(2); MSA 9.2220(b)(2) and M.C.L. § 500.3009; MSA 24.13009, the defendant appears to have been insured by the plaintiff against the very loss at issue in this case, since a standard automobile policy typically insures such a permissive driver "against loss from the liability imposed by law for damages arising out of the ownership, maintenance or use of" a motor vehicle. [Id.]

The Court of Appeals noted that, while the plaintiff in Vallejo relied on a commonlaw bailment theory, plaintiff here seeks recovery under the express terms of a written agreement. The Court did not read Vallejo "as a blanket rejection of all contract claims seeking to hold a permissive user responsible for damage to a borrowed vehicle. Rather, we understand the order as rejecting the insurer's effort to convert a simple, permissive-user, tort liability case into a contract case by alleging an express or implied contract of bailment, without providing specific factual allegations that would support such a distinction." Kneeland, supra at 659, 599 N.W.2d 519. The Court reasoned that Vallejo suggested the possibility of a different result where there is proof of an express contract.

II. Standard of Review

We review de novo a grant of summary disposition under MCR 2.116(C)(10). Smith v. Globe Life Ins. Co., 460 Mich. 446, 454, 597 N.W.2d 28 (1999). The issue under review is a question of law, i.e., whether the no-fault act prevents contractual assignment of liability for collision damages. We review questions of law de novo. Cardinal Mooney High School v. Michigan High School Athletic Ass'n, 437 Mich. 75, 80, 467 N.W.2d 21 (1991).

III. Contractual Interpretation

Before deciding whether the courtesy car agreement contravenes public policy, we must determine what the contract states. Absent an ambiguity or internal inconsistency, contractual interpretation begins and ends with the actual words of a written agreement. Henderson v. State Farm Fire & Casualty Co., 460 Mich. 348, 354, 596 N.W.2d 190 (1999). A contract is ambiguous if its provisions may reasonably be understood in different ways. Farm Bureau Ins. Co. v. Nikkel, 460 Mich. 558, 566, 596 N.W.2d 915 (1999).

The fourth provision of the courtesy car agreement states: "Renter agrees to assume all responsibility for damages while vehicle is in his possession." This language clearly imposes liability on defendant. The contract is unclear, however, regarding the extent of the shift of liability. The provision refers to "damages," but does not explicate precisely the categories of damages that defendant has agreed to pay.

The general term "damages" could refer to any harm caused to a third party's person or property, i.e., it could reach damages for which no-fault insurance coverage is mandatory. See, e.g., M.C.L. § 500.3107, 500.3121. A shift of liability to that extent might contravene the no-fault act. Cf. State Farm v. Enterprise Leasing, 452 Mich. 25, 36, 549 N.W.2d 345 (1996).3

Another reasonable interpretation of the contract is available, however. Black's Law Dictionary (6th ed.) defines "damages" as "[a] pecuniary compensation or indemnity, which may be recovered in the courts by any person who has suffered a loss, detriment, or injury, whether to his person, property, or rights...." The parties may reasonably have intended to limit the meaning of the word "damages" to losses for which a legal right of recovery is available. An ambiguity arises also because the contract shifts liability for damages "while [the] vehicle is in [defendant's] possession." Damages to the vehicle itself are likely to occur while the renter possesses the vehicle. But other types of damages, including wage loss and medical expenses, often arise after the rental period has ended. The contract does not clearly shift liability for the latter kinds of damages.

We thus conclude that the words of the contract may reasonably be understood in different ways. This ambiguity requires us to assume that the parties knew the law and wished to comply with it. See 3 Corbin, Contracts, § 546, pp. 170-171:

[I]t is very commonly stated that when the terms of agreement have two possible interpretations, by one of which the agreement would create a valid contract and by the other it would be void or illegal, the former will be preferred. This is an advisory rule of interpretation, since it is believed that the parties intend their agreement to be valid rather than invalid, lawful rather than unlawful, and honest and effective rather than fraudulent and voidable.

See also Walsh v. Schlecht, 429 U.S. 401, 408, 97 S.Ct. 679, 50 L.Ed.2d 641 (1977) ("Since a general rule of construction presumes the legality and enforceability of contracts, ... ambiguously worded contracts should not be interpreted to render them illegal and unenforceable where the wording lends itself to a logically acceptable construction that renders them legal and enforceable"); Stillman v. Goldfarb, 172 Mich.App. 231, 239, 431 N.W.2d 247 (1988).

We follow these authorities and presume that the parties intended to enter a valid, enforceable agreement and that the contract thus does not shift liability for damages that may not legally be reallocated.

IV. The dissent's approach

The dissent first construes the contract against its drafter and the drafter's subrogee by extending the shift of liability beyond collision damages. The dissent would then invalidate the contract on the basis of its allegedly illegal reach. We reject that analysis.

The dissent misapplies the rule requiring that contractual ambiguities be construed against the drafter by using the rule not to interpret the contract, but to invalidate it. As discussed above, courts will presume that a contract is legal if a reasonable interpretation...

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