Morbark Industries, Inc. v. Western Employers Ins. Co., s. 98451

• Decision Date: 27 September 1988
• Docket Number: Nos. 98451,98452,s. 98451
• Citation: 170 Mich.App. 603,429 N.W.2d 213
• Parties: MORBARK INDUSTRIES, INC., Plaintiff-Appellant, v. WESTERN EMPLOYERS INSURANCE COMPANY, Defendant-Appellee. MORBARK INDUSTRIES, INC., Plaintiff-Appellant, v. FIRST STATE INSURANCE COMPANY, Defendant-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 213

429 N.W.2d 213

170 Mich.App. 603

MORBARK INDUSTRIES, INC., Plaintiff-Appellant, v. WESTERN EMPLOYERS INSURANCE COMPANY, Defendant-Appellee.

MORBARK INDUSTRIES, INC., Plaintiff-Appellant, v. FIRST STATE INSURANCE COMPANY, Defendant-Appellee.

Nos. 98451, 98452.

Court of Appeals of Michigan.

Submitted April 19, 1988.

Decided Aug. 15, 1988.

Released for Publication Sept. 27, 1988.

Warner, Norcross & Judd by Roger M. Clark and Steven J. Vander Ark, Grand Rapids, for Morbark Industries, Inc.

Foster, Meadows & Ballard, P.C. by Robert N. Dunn and Camille A. Raffa, Detroit, and Tribler & Marwedel, P.C. by Robert N. Dunn, Chicago, Ill., for Western Employers Ins. Co.

Varnum Riddering, Schmidt & Howlett by Charles M. Denton and Donald P. Lawless, Grand Rapids, for First State Ins. Co.

Before WEAVER, P.J., and McDONALD and PETERSON, ^* JJ.

PETERSON, Judge.

The parties submitted these cases to the trial court on agreed statements of fact and motions for summary disposition. Plaintiff appeals as of right from the resulting final judgments in favor of the defendants.

Plaintiff is a Michigan manufacturer which purchased an umbrella, or excess, liability insurance policy from defendant First State Insurance Company for the period October 1, 1982, to October 1, 1983, which insurance was designed to insure against liability claims in excess of the $1,000,000 coverage provided by an underlying general liability insurance policy with Ambassador Insurance Company. For the period October 1, 1983, to October 1, 1984, plaintiff purchased a similar umbrella policy from Western Employers Insurance Company with $1,000,000 underlying general liability insurance provided by Union Indemnity Insurance Company of New York.

Products liability suits have been commenced against plaintiff for alleged causes of action arising during the terms of each of the insurance policies. Each of the general liability carriers became insolvent and were ordered into court-supervised liquidation. Plaintiff made demand on both defendants for coverage and that they assume defense in the pending actions. ¹ Each defendant refused to assume the defense of the pending actions and denied liability for payment of claims until they exceeded the $1,000,000 upper limit of the underlying general liability policies. These actions resulted.

Plaintiff's claim is that the umbrella coverage is not for liability in excess of the amount of $1,000,000 but rather for liability in excess of whatever amount may be recoverable from the carrier of the underlying $1,000,000 general liability insurance, e.g., if the general liability carrier becomes insolvent, the lower limit of the excess coverage "drops down" from $1,000,000 to whatever amount can be recovered from the insolvent general liability carrier. Plaintiff in reality seeks to make the umbrella carrier an insurer not only against the liabilities described in the contract but also of the solvency of the general insurance carrier.

Defendants, in turn, argue that the umbrella insurance provides coverage for liability in excess of $1,000,000. Had their policies said that and no more in describing the intended coverage, plaintiff clearly would have no claim. The insuring agreements of the policies may have once had "plain English" origins, simply defining the coverage in that way, but evolution through generations of legal usage have rendered the present insuring agreements prolix. The translation, however, is the same, for the coverage is still defined as being for an excess over an amount, which amount is elsewhere identified as $1,000,000. The insuring agreement of the First State policy, for instance, ² provides:

"I. COVERAGE

"To indemnify the INSURED for ULTIMATE NET LOSS, as defined hereinafter, in excess of RETAINED LIMIT, as herein stated....

* * *

* * *

"II. UNDERLYING LIMIT-RETAINED LIMIT

"The Company shall be liable only for the ULTIMATE NET LOSS in excess of the greater of the INSURED'S:

"A. UNDERLYING LIMIT--an amount equal to the limits of liability indicated beside the underlying insurance listed in the Schedule A of underlying insurance ³ ...; or,

"B. RETAINED LIMIT--The amount specified in Item 3 I B of the declarations as the result of any one occurrence not covered by said underlying insurance, and which shall be borne by the INSURED. ⁴ " (Emphasis added).

These provisions of the policy thus state the threshold of liability level thereof as an amount which is the policy limit of the underlying general liability insurance, $1,000,000.

Plaintiff contends, however, that this language is inconsistent with the language contained in the declarations page of the policies which speaks of the limits of liability as follows:

"[Western Employers policy] Limits of Liability: The limit of the Company's liability shall be as stated herein, subject to all the terms of this policy having reference thereto.

"A. $10,000,000. Single Limit any one occurrence combined Personal Injury, Property Damage and Advertising Injury or Damage in excess of:

"(1) UNDERLYING LIMIT

"The amount recoverable under the underlying insurance as set out in the Schedule of Underlying Insurance attached or

"(2) RETAINED LIMIT

"$10,000. Ultimate Net Loss as the result of any one occurrence not covered by said underlying insurance.

"B. $10,000,000. Limit in the aggregate for each annual period with respect to:

"(1) The Products Hazard or Completed Operations Hazard or both combined, or

"(2) Occupational Disease sustained by employees of the insured." (Emphasis added).

Plaintiff contends that this definition of the underlying limit in the declarations, unlike the language in the insuring agreement, does not indicate a set and specific amount; rather, plaintiff claims, the "amount recoverable" speaks to the ability of the primary carrier to pay out the limits of its policy, thereby defining the underlying limit as a variable amount, the policy limit of the underlying insurance or whatever amount is recoverable thereunder. Given this conflict between the language in the insuring agreement and the declarations, plaintiff argues, there is an ambiguity which, under accepted principles of insurance law, must be construed in favor of the insured. ⁵

The trial judge herein rejected that argument, pointing out that the language in the declarations to which plaintiff points begins: "The limit of the Company's liability shall be as stated herein, subject to all of the terms of this policy having reference thereto." (Emphasis added.) We agree with this conclusion that the policies, read as a whole, are unambiguous.

The financial vicissitudes of the insurance industry in recent years have spawned numerous similar cases, though this is the first of its genre in Michigan. Though there have been some differences in the language of the various insurance contracts construed in such cases, the result in most jurisdictions has been to reject the so-called "drop down" theory. ⁶ That accords with the recognized intent of the parties, the purpose of the umbrella coverage being to provide, at a relatively low premium, extended coverage up to high limits, over and above primary insurance coverage. 8A Appleman, Insurance Law & Practice, § 4909.85, pp. 452-457. No one has seriously contended that such inexpensive excess coverage was intended by the parties to provide primary insurance, as well, in the event of the insolvency of the primary carrier. In Continental Marble & Granite Co., Inc. v. Canal Ins. Co., 785 F.2d 1258, 1259 (CA 5, 1986), the Court said:

"We therefore look to the possible consequences of the rule Continental Marble propounds. Imposing the duty of indemnification on Canal would, in effect, transmogrify the policy into one guaranteeing the solvency of whatever primary insurer the insured might choose. See Golden Isles Hospital, Inc v Continental Casualty Co, 327 So 2d 789, 790 (Fla App, 1976). An excess liability insurer obviously does not anticipate this heavy onus:

" 'Excess or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted. A second insurer thus greatly reduces his risk of loss. This reduced risk is reflected in the cost of the policy.'

" Whitehead v Fleet Towing Co, 110 Ill App 3d 759; 66 Ill Dec 449; 442 NE2d 1362, 1366 (1982). Continental Marble's proposed rule would require insurance companies to scrutinize one another's financial well-being before issuing secondary policies. The insurance world is complex enough; to impose this additional burden on companies such as Canal would only further our legal system's lamentable trend of complicating commercial relationships and transactions."

Where a contrary result has been reached, it has been predicated upon the presence of language in the policy from which, the court has found, a policyholder might draw a reasonable expectation of coverage, contrary to other language in the policy denying coverage, thereby creating an ambiguity which is resolved in favor of the insured. ⁷ This is plaintiff's theory. To reach that result, however, one may not simply pick particular language from the contract to claim either a reasonable expectation of coverage or ambiguity. While, as noted above, it is hornbook law that ambiguities in insurance contracts are to be resolved in favor of the insured, it is also hornbook law that contracts, of insurance and otherwise, are to be read as a whole to determine the intent of the parties. Royal Globe Ins. Cos. v. Frankenmuth Mutual Ins. Co., 419 Mich. 565, 357 N.W.2d 652 (1984). As the Court noted in Raska v. Farm Bureau Mutual Ins. Co., 412 Mich. 355, 362, 314 N.W.2d 440 (1982):

"A contract is said to be ambiguous when its words may reasonably be understood in different ways.

"If a fair reading of the entire contract of insurance leads one to understand that there is coverage under particular circumstances and another...