Burnside v. State Farm Fire and Cas. Co.

• Decision Date: 17 January 1995
• Docket Number: Docket No. 147884
• Citation: 208 Mich.App. 422,528 N.W.2d 749
• Parties: Harlan BURNSIDE and Margaret Burnside, Plaintiffs-Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 749

528 N.W.2d 749

208 Mich.App. 422

Harlan BURNSIDE and Margaret Burnside, Plaintiffs-Appellants, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant-Appellee.

Docket No. 147884.

Court of Appeals of Michigan.

Submitted Sept. 7, 1994, at Grand Rapids.

Decided Jan. 17, 1995, at 10:30 a.m.

Released for Publication March 21, 1995.

Miller, Johnson, Snell & Cummiskey, P.L.C. by James S. Brady and Matthew L. Vicari, Grand Rapids, for plaintiffs.

Smith, Haughey, Rice & Roegge by John D. Vander Ploeg and Phillip K. Mowers, and Tolley, Verwys, VandenBosch & Walton, P.C. by David L. Harrison, Grand Rapids, for defendant.

Before MacKENZIE, P.J., and GRIFFIN and TALBOT, ^* JJ.

RICHARD ALLEN GRIFFIN, Judge.

Plaintiffs appeal as of right from an order of the circuit court denying their motion for an award of costs and attorney fees against defendant in this breach of contract action. Plaintiffs' motion was based upon the jury's determination that defendant breached its implied contractual duty as an insurer to act fairly and reasonably in investigating and refusing to pay plaintiffs' claim. We affirm. In doing so, we hold that the application of the American rule precludes the recovery of attorney fees incurred as the result of an insurer's bad-faith refusal to pay a claim.

I

On January 8, 1989, plaintiffs' home was destroyed by fire. Plaintiffs' residence and its contents were insured by defendant against loss caused by fire. On April 17, 1989, plaintiffs submitted a proof of loss to defendant totaling $229,627.04, plus additional living expenses. Following a lengthy investigation, defendant denied plaintiffs' claim on September 13, 1989, citing the following reasons: (1) the fire was intentionally caused by plaintiffs, and (2) plaintiffs misrepresented and concealed material facts and falsely swore to the cause of the fire.

On October 5, 1989, plaintiffs brought the instant action against defendant. In their complaint, plaintiffs alleged the following claims: (1) breach of the insurance contract, including violations of M.C.L. § 500.2836; M.S.A. § 24.12836 and the Uniform Trade Practices Act (UTPA), M.C.L. § 500.2001 et seq.; M.S.A. § 24.12001 et seq., (2) commission of the tort of bad-faith handling of an insurance claim, and (3) intentional infliction of emotional distress. Following defendant's motion for summary disposition, the trial court dismissed plaintiffs' bad-faith tort claim, but denied the motion with respect to plaintiffs' claims of breach of contract and intentional infliction of emotional distress.

On June 17, 1991, a lengthy jury trial was commenced. At the close of proofs, the trial court gave the following jury instruction regarding the award of attorney fees:

Michigan law recognizes a contractual obligation on the part of an insurance company to act fairly and reasonably in the investigation of a claim and in denying payment of its insureds' claim. You must make a determination whether State Farm Fire and Casualty Company acted fairly and reasonably in its investigation of the claim and in denying payment of its insureds' claim.

Michigan law further permits an award of attorney fees to be determined by a judge as a proper measure of damages arising out of the breach of an insurer's implied contractual duty to act fairly and reasonably in investigating and refusing to pay an insured's claim.

The jury returned a verdict in favor of defendant with respect to plaintiffs' claim of intentional infliction of emotional distress. With respect to the contract claim, the jury found that defendant had breached the insurance contract and assessed the maximum allowable damages. The jury also awarded plaintiffs penalty interest at the rate of twelve percent per annum under § 2006 of the UTPA, M.C.L. § 500.2006; M.S.A. § 24.12006. Pursuant to a special verdict form, the jury also found that defendant acted in "bad faith" when it refused to pay plaintiffs' claim. ¹ A verdict in plaintiffs' favor with respect to defendant's counterclaim was also rendered.

On September 12, 1991, plaintiffs moved for attorney fees and actual costs on the basis of the jury's determination that defendant acted in bad faith and for mediation sanctions pursuant to MCR 2.403(O). The trial court awarded plaintiffs $109,933.67 in mediation sanctions but ruled, contrary to its jury instruction at trial, that attorney fees and actual costs were not recoverable as the result of the bad-faith breach of an insurance contract. The trial court determined that under these circumstances the recovery of attorney fees and actual costs were not authorized by court rule, statute, or controlling case law.

II

On appeal, plaintiffs contend that the trial court erred in denying their motion for attorney fees and actual costs in light of the jury's finding that defendant refused in bad faith to pay their claim. Plaintiffs assert that under the common law of Michigan, an insurer found to have violated its duty to act "fairly and reasonably" must reimburse the insured party its full contract damages in enforcing the insurance contract. In response, defendant maintains that Michigan law does not allow a party to recover attorney fees and actual costs because of the bad-faith breach of an insurance contract. Further, defendant argues that an award of penalty interest under the UTPA is the exclusive remedy when an insurance company acts in bad faith. After thorough review, we agree with defendant's argument.

III

In Michigan, it is well-settled that the recovery of attorney fees is governed by the "American rule." Matras v. Amoco Oil Co., 424 Mich. 675, 385 N.W.2d 586 (1986). Under the American rule, attorney fees are generally not allowed, as either costs or damages, unless recovery is expressly authorized by statute, court rule, or a recognized exception. Clute v. General Accident Assurance Co. of Canada, 177 Mich.App. 411, 417, 442 N.W.2d 689 (1989). See also Brooks v. Rose, 191 Mich.App. 565, 575, 478 N.W.2d 731 (1991); State Farm Mutual Automobile Ins. Co. v. Allen, 50 Mich.App. 71, 74, 212 N.W.2d 821 (1973). Exceptions to the general rule are construed narrowly. Rose, supra; Scott v. Hurd-Corrigan Moving & Storage Co., Inc., 103 Mich.App. 322, 347, 302 N.W.2d 867 (1981).

Plaintiffs, relying on the decisions of the Sixth Circuit Court of Appeals in Murphy v. Cincinnati Ins. Co., 772 F.2d 273 (CA 6, 1985), argue that they are entitled to attorney fees as damages arising from defendant's bad-faith refusal to provide coverage. In Murphy, the insureds were awarded the proceeds of their fire insurance policy and $16,637.59 in attorney fees incurred as a result of the insurance company's bad-faith refusal to pay their claim. In upholding the lower court's award of attorney fees, the Sixth Circuit Court of Appeals interpreted Michigan case law to permit the recovery of attorney fees as an item of damages arising out of an insurer's breach of its implied contractual duty to act fairly and reasonably in investigating and refusing to pay an insured's claim. In reaching this decision, the Sixth Circuit noted that Michigan follows the rule in Hadley v. Baxendale, 9 Exch. 341, 156 Eng.Rep. 145 (1854), ² that a party who fails to perform its contractual obligations becomes liable for all foreseeable damages flowing from the breach.

Underlying the Sixth Circuit's decision in Murphy was our Supreme Court's holding in Kewin v. Massachusetts Mutual Life Ins. Co., 409 Mich. 401, 295 N.W.2d 50 (1980). In Kewin, the Supreme Court addressed the issues whether, and under what circumstances, mental distress and exemplary damages are recoverable as a result of a bad-faith breach of a commercial contract. The instant issue was noted but not addressed by the Kewin Court. Id. at 421, n. 2, 295 N.W.2d 50. In holding that mental anguish damages are not recoverable unless contemplated by the parties at the time of the contract, the Supreme Court reaffirmed the application of the Hadley v. Baxendale rule in the context of commercial contracts. Moreover, the Supreme Court noted that application of the rule "in the commercial contract situation generally results in a limitation of damages to the monetary value of the contract had the breaching party fully performed under it." Id. at 414-415, 295 N.W.2d 50.

Implicit in the holding in Kewin, and reaffirmed in Valentine v. General American Credit, Inc, 420 Mich. 256, 362 N.W.2d 628 (1984), however, was the willingness of our Supreme Court to apply less than scrupulously the foreseeability test stated in Hadley v. Baxendale in the face of another controlling point of law. In Valentine, the Supreme Court held that although mental distress damages are foreseeable within the rule of Hadley v. Baxendale for virtually all breach of contract actions, the general rule in most jurisdictions is to deny recovery. As a rationale for its decision to deny recovery, the Court explained that the rule barring the recovery of mental distress damages is "a gloss on the generality of the rule stated in Hadley v. Baxendale [and] is fully applicable to an action for breach of an employment contract." 420 Mich. at 260-261, 362 N.W.2d 628.

Similarly, other jurisdictions have recognized the American rule's limitation upon the recovery of attorney fees incurred as a foreseeable result of an insurer's breach of a contract to provide coverage:

These contentions lay bare the underlying conflict between the principle that breach of contract damages will be awarded to protect the promisee's expectation interest and the principle, known as the American rule, that costs awarded to a prevailing party ordinarily do not include the counsel fees of the prevailing party.

Where a liability insurer has promised to defend the insured against a covered claim and fails to do so, where a health insurer has promised to pay certain benefits for the insured to a third-party provider and fails to do so, and, indeed, where any promisor breaches the contract...