Michigan Mun. Risk v. State Farm Fire and Cas.

• Decision Date: 05 June 2008
• Docket Number: No. 07-15136.,07-15136.
• Citation: 559 F.Supp.2d 794
• Parties: MICHIGAN MUNICIPAL RISK MANAGEMENT AUTHORITY, Plaintiff, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Michigan

559 F.Supp.2d 794

MICHIGAN MUNICIPAL RISK MANAGEMENT AUTHORITY, Plaintiff, v. STATE FARM FIRE AND CASUALTY COMPANY, Defendant.

No. 07-15136.

United States District Court, E.D. Michigan, Southern Division.

June 5, 2008.

COPYRIGHT MATERIAL OMITTED

James T. Mellon, Mellon, McCarthy, Troy, MI, for Plaintiff.

Cary R. Berlin, Paul H. Johnson, Jr., Patrick, Johnson, Southfield, MI, for Defendant.

OPINION AND ORDER DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [19] AND GRANTING IN PART PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT [32]

NANCY G. EDMUNDS, District Judge.

This insurance dispute arises out of the termination of Michelle Horton, an employee of the 48th District Court located in Bloomfield Hills, Michigan. As a result of her termination, Ms. Horton filed two lawsuits; one in federal court against her employer (which resulted in a jury verdict of approximately $3 million in her favor) and another in state court against Sharon Law, the elected Township Clerk for the Township of West Bloomfield, Michigan (which was subsequently settled for $200,000). The state court action against Sharon Law alleged that Ms. Law spread false rumors about Ms. Horton to Ms. Horton's employer thus triggering an investigation that led to her unlawful termination and asserted a claim of intentional interference with Ms. Horton's advantageous business relationship and expectancy with her employer, the 48th District Court.

This lawsuit concerns only the state court action against Ms. Law. More specifically, it concerns a dispute between Ms. Law's employer's insurer, Michigan Municipal Risk Management Authority ("Michigan Municipal"), and her homeowner's insurer, State Farm Fire and Casualty Company ("State Farm"), about State Farm's duty to defend and indemnify Ms. Law in the state court action against her. Initially, both Michigan Municipal and State Farm undertook Ms. Law's defense in the state court action. State Farm did so under a reservation of rights. State Farm subsequently denied Ms. Law's claim for a defense and indemnification under her homeowner's and umbrella policies. It did so after the Oakland County Circuit Court denied her motion for summary disposition, finding material questions of fact existed for trial. Michigan Municipal continued its defense of Ms. Law and, shortly thereafter, settled Ms. Horton's lawsuit against Ms. Law for $200,000. Michigan Municipal demanded and State Farm refused to participate in or to contribute to payment of the agreed-upon settlement. Michigan Municipal then filed this lawsuit against State Farm (Ms. Law having assigned all her rights to Michigan Municipal) alleging that State Farm (1) breached its homeowner's and umbrella insurance contract with Ms. Law; (2) breached the implied covenant of good faith and fair dealing in those insurance contracts; and (3) breached its duty to act in good faith in settling the claims in the state court action.

This matter is now before the Court on the parties' cross-motions for summary judgment. Defendant State Farm argues that it is entitled to summary judgment because (1) under the terms of Ms. Law's homeowner's and umbrella insurance contracts, it had no duty to defend or indemnify for the claims asserted against her in the underlying state court action; and (2) under Michigan law, there is no cause of action for the alleged breach of an implied covenant of good faith and fair dealing and no cause of action for the failure to act in good faith in settling claims arguably covered by its insurance policies. Plaintiff Michigan Municipal's cross motion argues the opposite: that (1) State Farm breached its duty to defend under Ms. Law's policies; and (2) breached the implied covenant of fair dealing and good faith when it retained counsel that was not independent, prematurely withdrew its defense, and failed to participate in the settlement of the state court action—contract claims that are well-established under Michigan law.

For the reasons stated below, Defendant State Farm's motion for summary judgment is DENIED. Plaintiff Michigan Municipal's cross motion is GRANTED as to Defendant State Farm's liability for the breach of its contractual duty to defend and the breach of its policy's implied covenant of good faith and fair dealing for the premature withdrawal of its defense and its refusal to participate in settlement negotiations. Plaintiffs motion is DENIED without prejudice as to the amount of damages owed by Defendant as a result of its breach.

I. Facts

A. Underlying State Court Action

After her termination from the 48th District Court, Michelle Horton filed a lawsuit against Sharon Law in Oakland County Circuit Court ("state court action") asserting a claim for tortious interference with an advantageous business relationship or expectancy. Ms. Horton alleged that Ms. Law spread false and negative rumors about her to 48th District Court officials, causing inter alia damage to her good name and reputation in the community and leading to her termination. (Def.'s Ex. A, Horton Am. Compl.) Specifically, she alleged the following.

Ms. Horton worked at the 48th District Court for 14 years.¹ In 2004, she was designated "Employee of the Year." Nonetheless, she was terminated on December 16, 2004. At the time of her termination, Marc Barron had recently won a contested judicial seat on the 48th District Court but had not yet assumed the position. (Horton Am. Compl. ¶¶ 7-10.)

In July 2004, during Marc Barron's judicial election campaign, his wife, Lori Barron, was arrested for operating a vehicle while intoxicated. Her arrest record was entered at the 48th District Court via a document called a "Register of Actions" or "ROA." (Id. at ¶ 12.) At some point, two hand-written notes were attached to that ROA. One note stated: "Kim: Interesting—This should be her 2nd offense. This is `Mark Barron' [sic] wife. Running for District Court." (Id. at ¶ 13.) The other note stated: "No Media coverage. What's to hide?" (Id.) Upon becoming aware of the notes, Marc Barron became angry and sought to find out who wrote them. He was particularly concerned about the political consequences of the "second offense" notation. (Id. at ¶¶ 15-16.)

During this time, Sharon Law held the elected position of Clerk for the Township of West Bloomfield. Her son had worked with Marc Barron in the Oakland County Prosecutor's Office, and Ms. Law supported Barron in his campaign for the 48th District Court judicial seat. (Id. at ¶¶ 16-17.) A Township employee who reported to Ms. Law gave her a copy of Mrs. Barron's ROA with the handwritten notes. According to testimony given by 48th District Court Judge Diane D'Agostini in the federal court action, Ms. Law told her about the ROA and handwritten notes while they were both attending a political fundraiser. Ms. Law identified Ms. Horton as the person who wrote the notes and/or had circulated a copy around the Township. Ms. Horton denied that she did either. She also denied that she contacted the media about Mrs. Barron's arrest. (Id. at ¶¶ 17-22.)

Ms. Horton alleged that she became the target of an investigation launched by her employer, the 48th District Court, and the target of a criminal investigation based on (1) false and negative rumors about her passed along by Ms. Law, and (2) a desire to harm the person Ms. Law believed was responsible for disseminating information that could damage Marc Barron's judicial campaign. (Id. at 23-25.)

Shortly after Marc Barron won the election for the judicial seat on the 48th District Court, Ms. Horton (who served as the vacating judge's clerk) was moved to the Probation Department. On December 16, 2004, Ms. Horton was notified that her employment at the 48th District Court was being terminated because of her "personal use" of the Court's "SOS" and "LIEN" systems. Ms. Horton denies that she ever did so. (Id. at ¶¶ 26, 32-33.) In her state court action, Ms. Horton alleged that her termination was a direct result of Ms. Law's wrongful, vindictive, and politically-motivated interference and efforts to get her fired. (Id. at ¶¶ 11, 35.) She further alleged that Ms. Law actively sought to undermine her employment by making groundless attacks against her and demanding that her employment be terminated. It is also alleged that Ms. Law acted with malice in interfering with her business relationship and expectancy with the 48th District Court. (Id. at ¶¶ 39-41.) Ms. Horton alleged that, as a result of Ms. Law's wrongdoing, she lost (among other things) her job and career opportunities, suffered damage to her good name and reputation in the community, suffered mental and emotional distress, humiliation and embarrassment, and sustained money damages. (Id. at ¶ 48.)

B. Ms. Law Tenders a Claim to Plaintiff and Defendant

Ms. Horton filed her state court action against Ms. Law on November 13, 2006. Plaintiff Michigan Municipal defended Ms. Law in the state court action because there was a question whether she was acting within the scope of her official duties or operations at the time of the alleged wrongdoing. (Pl.'s Mot. at 1.) Plaintiff Michigan Municipal is a self-insurance pool created by intergovernmental contract pursuant to Mich. Comp. Laws § 124.5, Ms. Law is the elected Township Clerk for the Township of West Bloomfield, Michigan. As a member of Michigan Municipal the Township of West Bloomfield is entitled to insurance coverage under the intergovernmental Coverage Document as are its employees when acting within the scope of their official duties or operations. (Pl.'s Mot. at 1, n. 1.) Michigan Municipal retained the law firm of Johnson, Rosati, LaBarge, Aseltyne and Field, P.C. ("retained counsel") to defend Ms. Law in the state court action.

Ms. Law also sought and initially obtained a defense from Defendant State Farm under her homeowner's and umbrella insurance policies. State Farm defended her under a reservation of rights while it investigated whether it owed her a duty to...