Broadway Coney Island, Inc. v. Commercial Union Ins. Co.

• Decision Date: 07 June 1996
• Docket Number: Docket No. 173719
• Citation: 550 N.W.2d 838,217 Mich.App. 109
• Parties: BROADWAY CONEY ISLAND, INC. and Sherry Jackson, Plaintiffs-Appellees, v. COMMERCIAL UNION INSURANCE COMPANY and Northern Assurance Company of America, Defendants-Appellees, and Security First Associated Agency, Inc. and George Burgess, Defendants-Appellants, and George Panos and Carmen Panos, Defendants.
• Court: Court of Appeal of Michigan — District of US

Page 838

550 N.W.2d 838

217 Mich.App. 109

BROADWAY CONEY ISLAND, INC. and Sherry Jackson, Plaintiffs-Appellees, v. COMMERCIAL UNION INSURANCE COMPANY and Northern Assurance Company of America, Defendants-Appellees and Security First Associated Agency, Inc. and George Burgess Defendants-Appellants and George Panos and Carmen Panos, Defendants.

Docket No. 173719.

Court of Appeals of Michigan.

Submitted Feb. 13, 1996, at Lansing.

Decided June 7, 1996, at 9:10 a.m.

Released for Publication July 29, 1996.

Philip L. Dulmage, Flint, for plaintiffs.

Holahan, Malloy, Maybaugh & Monnich by David L. Delie, Jr., Troy, for Security First Associated Agency, Inc., and George Burgess.

Morrison, Mahoney & Miller by Gary R. Chopp and Jeffrey R. Learned, Southfield, for Commercial Union Insurance Companies and Northern Assurance Company of America.

Before WHITE, P.J., and FITZGERALD and THOMAS, ^* JJ.

PER CURIAM.

Defendants Security First Associated Agency, Inc., and George Burgess (the agents) appeal as of right from the orders effectively denying them costs and attorney fees as sanctions against plaintiffs and defendants Commercial Union Insurance Companies and Northern Assurance Company of America (the insurance companies). ¹ Plaintiffs sued defendants when the insurance companies denied coverage for a fire that destroyed property owned by plaintiff Broadway Coney Island, Inc. In September 1993, plaintiffs and the insurance companies settled the lawsuit for $90,000 and sought to have all claims dismissed with prejudice. The insurance agents sought to block the dismissal on the basis that they should be paid costs and attorney fees as sanctions for having to defend against plaintiffs' claims. Following hearings, the trial court issued a written opinion and order that granted the insurance companies' "motion for entry of order of dismissal under MCR 2.504(A)." The insurance agents' motion for reconsideration, seeking to recover costs and attorney fees against plaintiffs and the insurance companies, was denied.

FACTS

In February 1988, plaintiff Sherry Jackson and her business partner, Darlene Meehling, purchased the Broadway Coney Island restaurant from George and Carmen Panos. Jackson and Meehling paid $25,000 cash for the business and signed a $25,000 promissory note. They also leased the building from the Panoses for five years. Plaintiff Broadway Coney Island, Inc., was formed by Jackson and Meehling in 1987 and was apparently incorporated to run and own the restaurant business. In March 1988, Jackson contacted insurance agents Security First and Burgess to purchase insurance for the restaurant. The policy was issued by the insurance companies to Broadway and provided $100,000 worth of contents coverage at replacement cost, plus $50,000 worth of coverage for business interruption. Jackson bought out Meehling's share of the business and corporation in December 1988.

In May 1989, a fire destroyed the contents of the restaurant, and plaintiffs claimed losses of $123,792.50, which included $98,235 in lost property damage. The insurance companies, rejected plaintiffs' claims on several grounds, including arson and lack of insurable interest. The defense of lack of insurable interest was based upon the insurance companies' belief that Jackson, who was not an insured party, owned the business assets. Plaintiffs sued the insurance companies, seeking coverage for the fire loss. In the same complaint, plaintiffs sued the agents alleging that the agents' breach of the duty to inform the insurance companies of Broadway's ownership of the business assets resulted in the insurance companies raising the defense of lack of insurable interest. From the outset, the agents took the position that the only reason they were named in the lawsuit was because the insurance companies had raised the frivolous defense of lack of insurable interest.

The case was mediated in September 1991, resulting in the following evaluation: (1) no cause of action in favor of defendants George and Carmen Panos, with an award of $21,000 in their favor against plaintiffs; (2) no cause of action in favor of insurance agents Security First and Burgess; and (3) $85,000 in favor of plaintiffs against insurance companies Commercial Union and Northern Assurance.

The agents accepted the mediation evaluation. Plaintiffs accepted the $21,000 award in favor of the Panoses, but rejected the remaining evaluations. The insurance companies and the Panoses rejected the mediation evaluation.

In May 1993, plaintiffs and the insurance companies stipulated the withdrawal of the lack of insurable interest defense and dismissal of plaintiffs' claims against the insurance agents. The agents objected to the stipulation and order for dismissal on the ground that it violated MCR 2.504(A), apparently because it was not agreed to by all the parties. Plaintiffs and the insurance companies reached a settlement in this case, which was placed on the record. Counsel for the agents was not present at the hearing, but his opposition to any order of dismissal was noted. Under the settlement, the insurance companies would pay plaintiffs $90,000, plaintiffs would pay the Panoses $27,500, and all claims would be dismissed.

At the hearing on the insurance companies' motion to dismiss, the agents complained that dismissal would be unfair to them because they had been forced to defend against plaintiffs' claims for three years because of a frivolous affirmative defense raised by the insurance companies. The agents requested denial of the motion so they would have the opportunity to recoup some of the costs of litigation and sought consideration of their motion for summary disposition. The agents' motion for summary disposition was scheduled to be heard two days later, on October 27, 1993. The trial court granted the motion for entry of dismissal with prejudice and without costs to any party.

I

Agents Security First Associated Agency and George Burgess argue that they are entitled to costs and attorney fees as mediation sanctions under MCR 2.403(O) because plaintiffs, who rejected mediation, did not improve their position in the ultimate settlement.

Mediation sanctions are governed by MCR 2.403(O), which provides in relevant part:

(1) If a party has rejected an evaluation and the action proceeds to trial, that party must pay the opposing party's actual costs unless the verdict is more favorable to the rejecting party than the mediation evaluation. However, if the opposing party has also rejected the evaluation, a party is entitled to costs only if the verdict is more favorable to that party than the mediation evaluation.

(2) For the purpose of this rule, "verdict" includes

* * * * * *

(c) a judgment entered as a result of a ruling on a motion filed after mediation. [Emphasis added.]

Under MCR 2.403(O)(6)(b), actual costs include reasonable attorney fees for services necessitated by the rejection of the mediation evaluation.

The order of dismissal with prejudice falls within the definition of "verdict" under MCR 2.403(O)(2)(c). The order had the same effect as a judgment of no cause of action in favor of the insurance agents and, therefore, is to be treated as one. To find otherwise would be contrary to the purpose behind MCR 2.403, which is to encourage settlement and deter protractedlitigation by placing the burden of litigation costs upon the party that required that the case proceed toward trial by rejecting the mediator's evaluation. Michigan Basic Property Ins. Ass'n v. Hackert Furniture Distributing Co., Inc., 194 Mich.App. 230, 234, 486 N.W.2d 68 (1992). Plaintiffs cannot be allowed to reject mediation, then avoid potential mediation sanctions owed to third parties by means of a settlement arrangement that does not involve those parties.

MCR 2.403(L)(3) provides in relevant part:

In mediations involving multiple parties the following rules apply:

(a) Each party has the option of accepting all of the awards covering the claims by or against that party or of accepting some and rejecting others. However, as to any particular opposing party, the party must either accept or reject the evaluation in its entirety.

MCR 2.403(O) provides in relevant part:

(3) For the purpose of subrule (O)(1), a verdict must be adjusted by adding to it assessable costs and interest on the amount of the verdict from the filing of the complaint to the date of the mediation evaluation. After this adjustment, the verdict is considered more favorable to a defendant if it is more than 10 percent below the evaluation, and is considered more favorable to the plaintiff if it is more than 10 percent above the evaluation. If the evaluation was zero, a verdict finding that a defendant is not liable to the plaintiff shall be deemed more favorable to the defendant.

(4) In cases involving multiple parties, the following rules apply:

(a) Except as provided in subrule (O)(4)(b), in determining whether the verdict is more favorable to a party than the mediation evaluation, the court shall consider only the amount of the evaluation and verdict as to the particular pair of parties, rather than the aggregate evaluation or verdict as to all parties. However, costs may not be imposed on a plaintiff who obtains an aggregate verdict more favorable to the...