Marlo Beauty Supply, Inc. v. Farmers Ins. Group of Companies

Decision Date13 January 1998
Docket NumberDocket No. 175470
PartiesMARLO BEAUTY SUPPLY, INC., and Allied Barber and Beauty Supply, Inc., Plaintiffs/Appellants/Cross-Appellees, v. FARMERS INSURANCE GROUP of COMPANIES, Truck Insurance Exchange, and William D. Abraham, Defendants/Appellees/Cross-Appellants, and Jacqueline Smith, Denelda Shaw, and Linda Smith, Nominal Defendants/Appellees.
CourtCourt of Appeal of Michigan — District of US

Strobl and Manoogian, P.C. by Kieran F. Cunningham, Keith S. King, and Thomas J Strobl, Bloomfield Hills, for plaintiffs/appellants/cross-appellees.

Garan, Lucow, Miller, Seward, Cooper & Becker, P.C. by James L. Borin and Robert D. Goldstein, Detroit, for Farmers Insurance Group of Companies, Truck Insurance Exchange, and William D. Abraham.

Before WAHLS, P.J., and YOUNG and H.A. BEACH *, JJ.


Plaintiffs appeal as of right the April 20, 1994, order of declaratory judgment in favor of Farmers Insurance Group of Companies, Truck Insurance Exchange, and William D. Abraham (hereafter defendants). Defendants cross appeal, arguing that their motion for summary disposition was erroneously denied. We affirm in part reverse in part, and remand for further proceedings.


In 1989, defendant William D. Abraham, an agent for defendant Farmers Insurance Group, sold plaintiffs a liability insurance policy. In 1991 and 1992, the nominal defendants in this action, Jacqueline Smith, Denalda Shaw, and Linda Smith, brought actions against plaintiffs, alleging that they were injured when acetone that they had purchased from plaintiffs ignited. Defendants refused to defend or indemnify plaintiffs in these suits because of two policy endorsements that restricted products liability coverage, ET-114 1 (products liability exclusion) and ET-343 2 (products and completed operations liability exclusion). In addition, defendants claimed that coverage was precluded by an exclusion listed in § IV(4)(b) of the insurance policy. Plaintiffs brought this action seeking a declaratory judgment that defendants were obligated to defend plaintiffs. In addition, plaintiffs brought a negligence claim against Abraham, alleging that Abraham had negligently failed to provide plaintiffs with adequate insurance coverage.

Plaintiffs moved for summary disposition pursuant to MCR 2.116(C)(10). They claimed that there was no genuine issue of material fact that the signatures of plaintiffs' president, Michael Asher, on the two policy restriction endorsements were forgeries. In addition, they claimed that the exclusion in § IV(4)(b) of the insurance policy was not applicable. Finally, they argued that defendants should be estopped from denying coverage because plaintiffs reasonably believed that they had purchased products liability coverage. Defendants filed a cross-motion for summary disposition.

The trial court held that defendants had failed to create a question of fact concerning the authenticity of the signatures on the two policy restriction endorsements and granted plaintiffs partial summary disposition with regard to that issue. The trial court also found that the exclusion in § IV(4)(b) was not applicable because the acetone that allegedly injured the underlying plaintiffs was not manufactured by plaintiffs. Instead of granting plaintiffs' motion for summary disposition in full or defendants' cross-motion for summary disposition, the trial court ordered a trial to determine whether plaintiffs reasonably expected coverage under the policy. Following a bench trial the trial court found that plaintiffs could not have reasonably expected coverage and denied declaratory relief. In addition, because the trial court found no special relationship between plaintiffs and Abraham, it denied plaintiffs' negligence claim.


Plaintiffs argue on appeal that the trial court clearly erred in finding that Abraham was not negligent. We disagree. Generally, an insurance agent does not have an affirmative duty to advise a client regarding the adequacy of a policy's coverage. Bruner v. League General Ins. Co., 164 Mich.App. 28, 31, 416 N.W.2d 318 (1987). However, a duty to advise may arise when a "special relationship" exists between the insurance company or its agent and the policyholder. Id., p. 32, 416 N.W.2d 318. After reviewing the record, we believe that the trial court's finding that no special relationship existed between Asher and Abraham was not clearly erroneous. Arco Industries Corp. v. American Motorists Ins. Co., 448 Mich. 395, 410, 531 N.W.2d 168 (1995); compare Stein v. Continental Casualty Co., 110 Mich.App. 410, 417-418, 313 N.W.2d 299 (1981). Accordingly, Abraham did not owe a duty to plaintiffs. Bruner, supra, p. 34, 416 N.W.2d 318. The trial court did not err in denying plaintiffs' negligence claim.


Plaintiffs also argue that defendants were required to plead contributory negligence as an affirmative defense to the negligence claim. Because of our holding regarding the previous issue, this issue is moot.


Plaintiffs argue that the trial court clearly erred in finding that plaintiffs did not have a reasonable expectation of coverage. We agree.

The duty to defend is essentially tied to the availability of coverage. Arco Industries Corp. v. American Motorists Ins. Co. (On Remand), 215 Mich.App. 633, 636, 546 N.W.2d 709 (1996). The duty to defend arises in instances in which coverage is even arguable, though the claim may be groundless or frivolous. Id. Consistent with this premise, any analysis of an insurer's duty to defend must begin with an examination of whether coverage is possible. Id. If coverage is not possible, then the insurer is not obliged to offer a defense. Id.

An insurance policy is much the same as any other contract; it is an agreement between the parties. Zurich-American Ins. Co. v. Amerisure Ins. Co., 215 Mich.App. 526, 530, 547 N.W.2d 52 (1996). An insurance policy must be enforced in accordance with its terms. Arco, supra, 448 Mich. at 402, 531 N.W.2d 168. An insurance contract should be read as a whole to effectuate the overall intent of the parties. Pacific Employers Ins. Co. v. Michigan Mut. Ins. Co., 452 Mich. 218, 224, 549 N.W.2d 872 (1996).

Under the rule of reasonable expectations, a court finds coverage under a policy if "the policyholder, upon reading the contract language, is led to a reasonable expectation of coverage." Fire Ins. Exchange v. Diehl, 450 Mich. 678, 687, 545 N.W.2d 602 (1996). In considering the reasonable expectations of the insured, a court must look at the policy language from an objective standpoint and determine whether an insured could have reasonably expected coverage. Allstate Ins. Co. v. Keillor (After Remand), 450 Mich. 412, 417, 537 N.W.2d 589 (1995).

First, we note that the trial court erred in making a finding of fact regarding the reasonable expectations of plaintiffs. The construction of a contract with clear language is a question of law. Auto Club Ins. Ass'n v. Lozanis, 215 Mich.App. 415, 418-419, 546 N.W.2d 648 (1996).

Here, under the clear terms of the insurance policy, defendants agreed:

To pay all damages which the insured becomes legally obligated to pay because of

(C) bodily injury to any person, and

* * * * * *

(E) damage to property, except that arising out of the ownership, maintenance or use of any automobile

to which this insurance applies, caused by an occurrence. [Section II, 1.]

In addition, the policy provided that defendants "shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent." Id.

Temporarily ignoring the policy's exclusions, this general policy language would have led plaintiffs reasonably to expect that defendants were obligated to defend them against the suits brought by the underlying plaintiffs. Although the trial court found that there was no meeting of the minds regarding products liability coverage, there is no dispute that there was a meeting of minds that defendants would provide to plaintiffs the insurance coverage quoted above. A meeting of the minds is judged by an objective standard, looking to the express words of the parties and their visible acts, not their subjective states of mind. Kamalnath v. Mercy Memorial Hosp. Corp., 194 Mich.App. 543, 548, 487 N.W.2d 499 (1992). Thus, unless other policy language excluded coverage, the trial court erred in finding that plaintiffs did not have a reasonable expectation of coverage.


Defendants argue on cross appeal that the trial court erred in determining that the exclusion listed in § IV(4)(b) of the insurance policy did not apply. We disagree with the trial court's reasoning, but agree with the result.

An insurer is free to define or limit the scope of coverage as long as the policy language fairly leads to only one reasonable interpretation and is not in contravention of public policy. Zurich-American, supra, p. 531, 547 N.W.2d 52. Appellate courts strictly construe against an insurer exemptions that preclude coverage for the general risk. However, courts cannot create ambiguity where none exists. Pacific Employers, supra, p. 224, 549 N.W.2d 872; Diehl, supra, p. 687, 545 N.W.2d 602. Clear and specific exclusions must be given effect. Pacific Employers, supra, p. 224, 549 N.W.2d 872.

Here, the trial court held that the exclusion at issue did not apply because the products that allegedly injured the underlying plaintiffs were not prepared or developed by plaintiffs. This provision excluded coverage for

bodily injury or property damage resulting from a failure of the named insured's products or work completed by or for the named insured to perform the function or serve the purpose intended by the named insured if such failure is due to a mistake or deficiency in any design,...

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