Cleveland-Cliffs Iron Co. v. First State Ins. Co.

• Decision Date: 21 April 1981
• Docket Number: Docket No. 45183,CLEVELAND-CLIFFS
• Citation: 307 N.W.2d 78,105 Mich.App. 487
• Parties: TheIRON COMPANY, Plaintiff-Appellee, v. FIRST STATE INSURANCE COMPANY, Defendant-Third Party Plaintiff-Appellant, and Allis-Chalmers Corporation, Defendant-Third Party Plaintiff Cross Plaintiff-Third Party Defendant-Appellee, and George Reintjes Company, Inc., Defendant-Third Party Defendant CrossDefendant-Appellee, and Project Systems, Inc., Third Party Defendant-Third Party Plaintiff-CrossPlaintiff-Appellee, and ABI Contracting, Inc., Third Party Defendant.
• Court: Court of Appeal of Michigan — District of US

Page 78

307 N.W.2d 78

105 Mich.App. 487

The CLEVELAND-CLIFFS IRON COMPANY, Plaintiff-Appellee, v. FIRST STATE INSURANCE COMPANY, Defendant-Third Party Plaintiff-Appellant and Allis-Chalmers Corporation, Defendant-Third Party Plaintiff Cross Plaintiff-Third Party Defendant-Appellee and George Reintjes Company, Inc., Defendant-Third Party Defendant CrossDefendant-Appellee and Project Systems, Inc., Third Party Defendant-Third Party Plaintiff-CrossPlaintiff-Appellee and ABI Contracting, Inc., Third Party Defendant.

Docket No. 45183.

Court of Appeals of Michigan.

April 21, 1981.

Released for Publication July 2, 1981.

Ronald D. Keefe, Marquette, for defendant-third party plaintiff-appellant.

Michael G. Summers, Marquette, for Allis-Chalmers & Project Sys.

William I. McDonald, Marquette, for Reintjes Co.

Before MacKENZIE, P. J., and BRONSON and ALLEN, JJ.

BRONSON, Judge.

Plaintiff, Cleveland-Cliffs Iron Company (Cleveland-Cliffs), filed suit against defendant First State Insurance Company (First State) on January 25, 1977, in the Marquette County Circuit Court, seeking to collect monies claimed to be due in pursuant to an all risks property insurance policy issued by First State. Cleveland-Cliffs averred that on July 1, 1975, cracking occurred in the flow duct of its Empire III pellet plant, causing a "burn out" resulting in the plant's closing. It further averred that the accident required $33,000 in repairs and resulted in $934,182 in lost business. Both risks were covered by the insurance policy.

First State answered on April 18, 1977, and pled as an affirmative defense that the loss was "directly or indirectly caused by fault, defect, error or omission in design, plan or specification", which the contract excluded from coverage. On May 16, 1977, First State moved to implead third-party defendants Allis-Chalmers Corporation (Allis-Chalmers) and George P. Reintjes Company, Inc. (Reintjes). This motion was granted by leave of the court on June 13, 1977. The third-party complaints averred negligence on the parts of Allis-Chalmers and Reintjes in the design and construction of the errant refractory lining of Cleveland-Cliff's flow duct system. First State contended that, in the event it was held liable to Cleveland-Cliffs in the main action, it had a right of "indemnification" from the third-party defendants. In fact, as the trial court recognized, if First State had any rights against the third-party defendants it was for "subrogation" and not "indemnification".

On July 5, 1978, First State filed a third-party complaint on the same grounds against Project Systems, Inc. (PSI). Thereafter, on August 10, 1978, Cleveland-Cliffs filed direct complaints against Allis-Chalmers, Reintjes, and PSI.

Allis-Chalmers, Reintjes, and PSI all moved for summary judgment in reference to First State's complaints on the basis that First State had no present right of subrogation and therefore no third-party claim. Allis-Chalmers, Reintjes, and PSI also moved for summary or accelerated judgment against Cleveland-Cliffs. Plaintiff did not answer these motions.

On April 18, 1978, a visiting judge assigned to hear this matter conducted a hearing on the motions. The court granted the motions of the third-party defendants against First State on the grounds that it had no right of subrogation until it paid Cleveland-Cliffs and, therefore, impleader was improper. The trial court also granted partial summary judgment in favor of Allis-Chalmers and PSI as to the business loss damages on the grounds that Cleveland-Cliffs did not answer their claim that the construction contract limited liability to direct damages.

First State now appeals as of right the trial court's ruling that impleader was improper because it had not paid Cleveland-Cliffs and, thus, had no right of subrogation.

Resolution of this dispute depends on the proper construction to be given GCR 1963, 204.1(1), which provides:

".1 When Defendant May Bring in Third Party.

"(1) Subject to the provisions of Section 3030 of the Insurance Code of 1956, before the service of his answer a defendant may move ex parte or, after the service of his answer, on notice to the plaintiff, for leave as a third-party plaintiff to serve a summons and complaint upon a person not a party to the action who is or may thereafter be liable to such third-party plaintiff, by right of contribution or otherwise, for all or part of the plaintiff's claim against him." (Emphasis added.)

The arguments advanced by the respective parties are clear and simple. First State's argument is that each of the third-party defendants is a party "who may thereafter be liable " to it by way of subrogation. The counter-argument is that the court rule creates no substantive rights, and the doctrine of subrogation permits no cause of action until the purported subrogee pays its claimant.

It is well established that GCR 1963, 204 is a rule of procedure creating no substantive rights. Husted v. Consumers Power Co., 376 Mich. 41, 47, 135 N.W.2d 370 (1965); Duncan v. Beres, 15 Mich.App. 318, 322, 166 N.W.2d 678 (1968); White v. McLouth Steel Corp., 18 Mich.App. 688, 692, 171 N.W.2d 662 (1969), lv. den. 383 Mich. 791 (1970). It has also been held that an insurer may not become subrogated to the rights of the insured until it has paid its insured. Associated Truck Lines v. Employers' Fire Ins. Co. of Boston, Mass., 275 Mich. 74, 76, 265 N.W. 780 (1936); Poynter v. Aetna Casualty & Surety Co., 13 Mich.App. 125, 128, 163 N.W.2d 716 (1968). However, these cases have nothing to do with principles of third-party practice.

Third-party defendants contend to hold that First State could implead them prior to payment of Cleveland-Cliffs' claim would, in effect, be creating a substantive right, to-wit: the right to subrogation prior to payment of the underlying claim. First State on the other hand argues that such a construction would create no substantive right but, rather, would merely as a matter of procedure accelerate the point in time at which the doctrine of subrogation could be relied on in a limited number of cases. First State seeks to distinguish an independent action for subrogation brought by the insurer (manifestly requiring payment to its claimant prior to institution) and procedural rights that are conferred upon an insurer by virtue of GCR 1963, 204.1(1). What constitutes a rule of procedure as opposed to a rule of substance has challenged and baffled generations of lawyers. Ultimately, however, we conclude that GCR 1963, 204.1(1), does allow third parties to be impleaded based on their potential liability via subrogation.

GCR 1963, 204 was adapted from Federal Rule of Civil Procedure 14(a). The Federal rule contains language substantially similar to that used in GCR 1963, 204. As construed by those Federal courts considering the problem, rule 14(a) has been held broad enough to allow the impleading of a third-party defendant based on a subrogation theory even where the defendant and third-party plaintiff has not yet paid the party through whom it claims subrogation rights. Inter alia: Glens Falls Indemnity Co. v. Atlantic Bldg. Corp., 199 F.2d 60 (C.A. 4, 1952); Concordia College Corp. v. Great American Ins. Co., 14 F.R.D. 403 (D.Minn., 1953); St. Paul Fire & Marine Ins. Co. v. United States Lines Co., 258 F.2d 374 (C.A. 2, 1958), cert. den. 395 U.S. 910, 79 S.Ct. 587, 3 L.Ed.2d 574 (1959); Monarch Industrial Corp. v. American Motorists Ins. Co., 276 F.Supp. 972 (S.D.N.Y.1967) ; International Harvester Co. v. General Ins. Co. of America, 45 F.R.D. 4 (E.D.Wis., 1968). ¹

The facts of this case are indistinguishable from those of St. Paul Fire & Marine Ins. Co., supra, in any persuasive manner. There, the third-party defendant persuaded the district court that, because the insurer had not paid its insured, it had no right of subrogation so that rule 14(a) did not allow impleader. The Second Circuit Court of Appeals reversed, holding:

"USL bases its argument upon the grounds that until the Insurance Company has been held liable the Insurance Company has not been damaged and possesses no right of subrogation. The court below argued that subrogation would not occur until the loss had been paid and that the Insurance Company, therefore, had no right of subrogation at the time it served its third-party complaint. The court also held that because the plaintiff had not sued USL within one year USL was relieved of liability by reason of the statute of limitations.

"These grounds are irrelevant. Rule 14 was designed to permit third-party defendants to be brought into the action so that the rights of the original defendant and the third-party defendant could be established in the same trial. To hold that the plaintiff must proceed against the Insurance Company and that the Insurance Company can take no steps to sue USL until liability has been determined and the judgment paid would make of Rule 14 a nullity." 258 F.2d 374, 376.

Where a statute has been adopted from another jurisdiction, it is presumed that the Legislature had in mind any construction placed upon it by the courts of the jurisdiction from which it was taken. In re Cress Estate, 335 Mich. 551, 564-565, 56 N.W.2d 380 (1953); Goldman v. Loubella Extendables, 91 Mich.App. 212, 219, 283 N.W.2d 695 (1979), lv. den. 407 Mich. 901 (1979). This rule is even more persuasive in the context presented here. It is inherently unlikely that our Supreme Court adopted rule 14(a) without any cognizance of how that rule had been construed in the Federal courts.

Apart from the Federal precedent, there is some suggestion in Husted, supra, that the construction we adopt here is proper. There, the Michigan Supreme Court held that grounds for impleader must be found in substantive rights apart from GCR 1963, 204. This basis "may be found in principles of indemnity, subrogation, contribution, warranty, or other substantive right". Husted, supra, 376 Mich. 47, 135...