Michigan Mut. Ins. Co. v. Sports, Inc.

• Decision Date: 27 August 1998
• Docket Number: No. 84A04-9707-CV-314,84A04-9707-CV-314
• Citation: 698 N.E.2d 834
• Parties: MICHIGAN MUTUAL INSURANCE COMPANY, Appellant-Defendant, v. SPORTS, INC., d/b/a Imperial Lanes of Sports, Inc., Appellee-Plaintiff.
• Court: Indiana Appellate Court

Page 834

698 N.E.2d 834

MICHIGAN MUTUAL INSURANCE COMPANY, Appellant-Defendant, v. SPORTS, INC., d/b/a Imperial Lanes of Sports, Inc.,

Appellee-Plaintiff.

No. 84A04-9707-CV-314.

Court of Appeals of Indiana.

Aug. 27, 1998.

Michael A. Wilkins, Ice, Miller, Donadio & Ryan, Indianapolis, Gary R. Chopp, Jeffrey R. Learned, Morrison, Mahoney & Miller, Southfield, MI, for Appellant-Defendant.

Stephen L. Williams, John T. Roach, Mann Law Firm, Terre Haute, for Appellee-Plaintiff.

OPINION

DARDEN, Judge.

STATEMENT OF THE CASE

Michigan Mutual Insurance Company appeals the jury verdict in favor of Imperial Lanes of Sports, Inc. We affirm.

ISSUES

1. Whether the trial court erred in instructing the jury.

2. Whether the punitive damage award violates due process.

FACTS

Beginning in the 1970's, Imperial Lanes, Inc. owned a bowling alley in Terre Haute. One of the long-time shareholders was Pierre Miller. Miller had been a chartered property casualty underwriter (CPCU) since 1955 and had operated his own Terre Haute insurance agency since 1964. In the late 1980's, he was president of Imperial Lanes, Inc, held 20% of the shares, and acted as the conduit for communication between the shareholders and staff operating the lanes. In 1989, Imperial Lanes, Inc., with aging shareholders and facing an oncoming tripling of the bowling alley's land lease expense, began seeking a buyer.

Miller's agency, as part of its approximately 60% commercial property insurance business, obtained insurance for the bowling alley from Michigan Mutual Insurance Company in 1987. After Miller ceased being an agent for Michigan Mutual in 1989, he coordinated continued coverage for the bowling alley from Michigan Mutual through his colleague Boyd Hopper at Hopper's insurance agency. The last such coverage was for the period of November 1, 1990, to November 1, 1991.

Ray Goddard had owned and operated a golf course in Terre Haute for several years. Goddard's sister was married to Pierre Miller, and Goddard became interested in the bowling alley as a business whose winter season would complement the timing of his golf business. Goddard's long time manager at the golf course, Denise Wooden, and her brother Rick Purcell, joined with Goddard to form Sports, Inc., d/b/a Imperial Lanes of Sports, Inc., which purchased the bowling alley building and assets effective May 1, 1991. All the new owners had business management experience and were financially secure. After the sale, Mrs. Wooden's husband, Kenneth, began managing the bowling alley, and Mrs. Wooden was there every day assisting with various matters. All personnel of the bowling alley under the previous owners continued to be employed by the new owners, and Pierre Miller acted as a consultant to the new owners.

Goddard had obtained personal and business insurance coverage from Miller's agency for over twenty years; Mrs. Wooden, her personal insurance from the agency for ten years. Before the sale, both discussed with Miller's agency the desire for coverage like that in place on the bowling alley. They asked Miller to procure coverage for the bowling alley. Miller prepared and signed a computer generated binder, dated April 29, 1991, which indicated the existing Michigan Mutual policy (# MGCPP0212939), with identical limits, was extended to cover the bowling alley at the Terre Haute address for Imperial Lanes of Sports, Inc. during the period of May 1 to June 1, 1991. The day of closing on the sale, Goddard and Mrs. Wooden specifically queried the Miller agency as to whether the alley was "properly covered" and were so assured. That same day Miller sent the bowling alley its copy of the binder.

On May 10, 1991, Miller called Hopper's agency and, because Hopper was out of town, talked with Donna King ¹ there. Miller advised King that the bowling alley had been sold, he had issued a binder, there was "a new owner," and the Hopper agency should take necessary steps "to keep the coverage in full force." (R. 613, 614). She agreed to so inform Mr. Hopper and indicated she saw "no problem." (R. 614). Miller also asked that worker's compensation coverage be procured for the bowling alley. When Hopper returned, Miller talked with him about these same matters, and Hopper expressed no concerns about being able to continue the coverage. Miller sent a note verifying this conversation, along with the binder, to Hopper. Upon receipt of the binder, the Hopper agency forwarded it to Michigan Mutual. ²

On May 31, 1991, King prepared, signed, and mailed to Michigan Mutual a "request for policy change" asking that the "insured's name" on policy # MGCPP0212939 be changed to Imperial Lanes of Sports, Inc. (R. 550). ³ Also on May 31st, Miller prepared a second binder for coverage from June 1st to July 1st, and sent it to Hopper.

The next evening, Saturday, June 1, 1991, a fire damaged the bowling alley.

On June 3rd, King learned about the bowling alley fire and faxed a notice of loss to Michigan Mutual. ⁴ On June 4th, she received the second binder, signed it, and mailed it to Michigan Mutual. That same day, an underwriting assistant from Michigan Mutual called King to ask for information on the new owners. The assistant informed King that the company had not received the binders, and asked that she send copies--which King did. ⁵ Also on June 4th, Richard Watson, an adjuster for IRM, the reinsurer for Michigan Mutual on policy # MGCPP0212939, arrived in Terre Haute to begin determining the scope of the loss at the bowling alley on behalf of Michigan Mutual. Watson returned to Terre Haute on June 7th. Before departing that day, he had most of the information necessary to adjust the claim. However, he also informed Mrs. Wooden on June 7th that Sports, Inc. might not be covered by the Michigan Mutual policy.

On June 19th, Warren Williams, Michigan Mutual's senior commercial underwriter, sent Hopper's agency a letter indicating the company was declining coverage because (1) it had exceeded its binding authority; ⁶ and (2) written consent for assignment or transfer of the policy was not obtained prior to issuance of the binder, and "from a financial or other standpoint" Michigan Mutual was unable to underwrite "this new risk." (R. 749). The next day, adjuster Watson, pursuant to instruction by IRM's counsel and with a copy of Williams' letter as guidance, wrote to Sports, Inc., stating that "no policy was ever written to cover [its] interest" in the bowling alley (R. 1671), and its claim for loss was denied.

Repairs to the bowling alley were initially stalled by these events. Then, as contractors proceeded with the work, liens were placed against the property. The shareholders took some loans to bridge the 2 1/2 months the business was shut down. Sports, Inc. hired an attorney to press a claim for more than $389,000 against the insurance carrier for Forsythe Brothers, the electrical contractor responsible for the damaged extension cord which caused the fire. ⁷ At the end of 1991, Sports, Inc. received $300,000, the limits of the contractor's policy, from the insurance carrier. By that time, damages totaled $409,675.95.

Sports, Inc. brought an action against Michigan Mutual claiming the insurance company had breached its obligation of good faith and fair dealing and further seeking punitive damages for having done so. ⁸ The case was tried by jury over the course of seven days.

Williams, Michigan Mutual's senior underwriter, had underwritten the bowling alley coverage since 1987. Williams testified that he was aware of Miller's involvement in the bowling alley's insurance after Hopper became the Michigan Mutual agent on the account in 1989. Williams knew of the arrangement between Miller and Hopper to maintain the bowling alley's insurance and was aware that everything went through Hopper. He confirmed that despite Miller's name appearing on previous binders, the amount of the coverage, ⁹ and receipt of a binder by the company after its effective date, Michigan Mutual had continued to accept premiums and to insure the bowling alley. Williams also acknowledged that when an agent consents to provide coverage, as Hopper had done, a valid insurance contract arises, and the agent's representation binds the company. In 1990, the reinsurer (IRM) indicated its desire to renew coverage of the bowling alley, and Williams assessed the account as a "nice risk." (R. 965). Finally, Williams testified that when he wrote the letter saying coverage was denied because Michigan Mutual was unable to underwrite the risk from a financial standpoint, he had no financial information from Sports, Inc., to consider; however, had the new owners been equal or better on those factors which the company considers, he probably would have underwritten the account. The current regional manager for Michigan Mutual's business in Indiana, Bonnie Uber, confirmed that if an agent takes action to properly bind coverage for a loss, and "somehow the company was not notified until after the loss," coverage would be in place for that loss. (R. 1766).

Boyd Hopper testified that Sports, Inc. was insured by Michigan Mutual on June 1st for two reasons. Given the previous practice on the bowling alley's insurance, the two binders issued by Miller were effective until the company rejected them. ¹⁰ Further, King's signed application on May 31st for a change of name was effective until accepted or rejected by Michigan Mutual. ¹¹

The Michigan Mutual claims manual provided that where "all parties in good faith intended the coverage to be written and Company rules would have permitted its acceptance," and a technical error occurred in notifying the company, that situation deserves special consideration. (R. 1022). No such consideration was undertaken with respect to Sports, Inc., despite the unequivocal testimony of an intent to afford coverage on the part Miller, Hopper, and King, ¹² and the belief that such coverage existed on the part of Sports, Inc.

Michael...