Oakland County Bd. of County Road Com'rs v. Michigan Property & Cas. Guar. Ass'n

Decision Date24 March 1998
Docket NumberNos. 9-10,Docket Nos. 106446,107251,s. 9-10
Citation575 N.W.2d 751,456 Mich. 590
PartiesBOARD OF COUNTY ROAD COMMISSIONERS FOR the COUNTY OF OAKLAND, Plaintiff-Appellant, v. MICHIGAN PROPERTY & CASUALTY GUARANTY ASSOCIATION, Defendant-Appellee. Frank J. KELLEY, Attorney General for the State of Michigan, ex rel. DIRECTOR OF the MICHIGAN DEPARTMENT OF NATURAL RESOURCES, Plaintiff-Appellant, v. MICHIGAN PROPERTY & CASUALTY GUARANTY ASSOCIATION, Defendant-Appellee. Calendar
CourtMichigan Supreme Court
OPINION

BRICKLEY, Justice.

I

We are called upon to decide several issues in the two cases before us. First, we must determine whether the "net worth" exclusion of the Property and Casualty Guaranty Association Act, M.C.L. § 500.7901 et seq.; M.S.A. § 24.17901 et seq., applies to insureds or to third-party claimants. Then we must decide whether the state is a "person" within the meaning of the act. Third, we must determine whether the net-worth exclusion violates the Equal Protection Clauses of the federal and Michigan Constitutions. 1 Finally, we must decide whether the net-worth exclusion applies to public and governmental entities.

We conclude that the net-worth exclusion applies to insureds and that the state is a person within the meaning of the act. We also hold that the road commission may not assert an equal protection claim. Finally, we find that the networth exclusion applies to both public and governmental entities. Thus, we affirm both decisions of the Court of Appeals.

II Oakland Co. Rd. Comm. v. MPCGA

Between 1981 and 1985, the Board of County Road Commissioners for the county of Oakland maintained general liability insurance through Midland Insurance Company. During that period, personal injury claims were made against the road commission, which fell under the coverage provisions of that insurance. In 1986, Midland was deemed insolvent and liquidated. The road commission paid the third-party claims and sought indemnification from the Michigan Property and Casualty Guaranty Association (MPCGA), a statutorily created association of property and casualty insurers licensed to do business in Michigan. See M.C.L. § 500.7901 et seq.; M.S.A. § 24.17901 et seq. The MPCGA has a duty to pay certain obligations of insolvent insurers that come within the act's definition of covered claims. The MPCGA refused to indemnify the road commission because its net worth exceeded the statutory maximum and, therefore, its claims did not constitute covered claims under the act. See M.C.L. § 500.7925(3); M.S.A. § 24.17925(3).

To understand the facts as they developed below, an examination of the pertinent statutory language is necessary. Section 7925(1) provides, in part, 2 the following definition of covered claims:

"Covered claims" means obligations of an insolvent insurer which meet all of the following requirements:

(a) Arise out of the insurance policy contracts of the insolvent insurer issued to residents of this state or are payable to residents of this state on behalf of insureds of the insolvent insurer. [Emphasis added.]

Section 7925 further defines covered claims by setting forth five circumstances in which a claim is excluded from the definition of a covered claim. The relevant exclusion provides:

Covered claims shall not include obligations to an insurer, insurance pool, underwriting association, or to a person who has a net worth greater than 1/10 of 1% of the aggregate premiums written by member insurers in this state in the preceding calendar year. [M.C.L. § 500.7925(3); M.S.A. § 24.17925(3)(emphasis added).]

Finally, "person" is defined under the Insurance Code to include

an individual, insurer, company, association, organization, Lloyds, society, reciprocal or interinsurance exchange, partnership, syndicate, business trust, corporation, and any other legal entity. [M.C.L. § 500.114; M.S.A. § 24.1114.]

In 1985, the calendar year preceding Midland's insolvency, the aggregate premiums written by member insurers totaled $5,820,973,000, yielding the applicable net worth limit of $5,820,973 as set forth in the affidavit of James Lunsted, controller for the MPCGA. In 1985, the road commission's net worth was $18,446,051. In determining the road commission's net worth, Nola Yew, CPA, and semiretired partner in the management consulting service department of an accounting firm, relied on the road commission's financial report for the fiscal year that ended on September 30, 1985, which was prepared by the road commission's own certified public accountants in accordance with generally accepted government accounting standards. She also provided a definition of "net worth" from Kohler's Dictionary of Accountants, explaining that the net worth of any entity is the recorded assets minus the recorded liabilities. Lastly, she stated that all entities have a net worth.

In support of its opposition to the MPCGA's motion for summary disposition, the road commission submitted an amicus curiae brief of the Michigan Municipal League, the work sheet generated by the MPCGA in determining whether the road commission's claim was a covered claim, and the road commission's balance account sheet. All were submitted in support of its position that a genuine issue of material fact existed regarding whether the road commission had a cognizable net worth.

The trial court, in its opinion and order granting MPCGA's motion for summary disposition pursuant to MCR 2.116(C)(8), (10), held: The net-worth exclusion did not violate equal protection; the obligations of an insolvent insurer are obligations to an insured, not the claimant; the net-worth exclusion applied to obligations to a person and the road commission fell within the broad definition of person, which includes "any other legal entity"; the road commission had a net worth evidenced by its own financial statements and the affidavits of Nola Yew; and the road commission provided no authority to dispute this. The Court of Appeals affirmed the trial court's decision in a per curiam opinion. 217 Mich.App. 154, 550 N.W.2d 856 (1996).

Attorney General v. MPCGA

The Michigan Department of Natural Resources is the holder and obligee of two surety bonds by which the principals, two oil and gas well owners/operators, and the surety, Oil & Gas Insurance Company, are bound. These bonds were required to be purchased pursuant to a provision of the supervisor of wells act. See M.C.L. § 324.61506(p); M.S.A. § 13A.61506(p). The wells were then abandoned by the owners without having been properly plugged and without the sites having been cleaned up in accordance with the applicable statutory provisions and administrative regulations. The Supervisor of Wells, pursuant to statutory authority, took proper action to plug the wells and clean up the well sites. The costs of that action are to be borne by the state of Michigan, subject to its statutory reimbursement rights. See M.C.L. § 324.61501 et seq.; M.S.A § 13A.61501 et seq. The owners or operators of the wells and the surety on the bonds may be jointly and severally liable for all expenses incurred in the cleanup. M.C.L. § 324.61519; M.S.A. § 13A.61519.

The surety was determined insolvent and liquidated in 1990. The DNR filed its proof of claims with the MPCGA. The MPCGA rejected the claims on the basis of the net-worth exclusion. The DNR filed this action, seeking a declaratory judgment that the net-worth exclusion may not be applied to the state or the DNR. The DNR filed a motion for summary disposition, arguing that it was not a person within the meaning of the net-worth exclusion. The MPCGA also filed a motion for summary disposition, arguing that the term net worth may be properly applied to the state and that the state's net worth exceeded the statutory limitation. The MPCGA's controller calculated the net-worth limitation in 1989 at $7,895,198 on the basis of the aggregate premiums written by member insurers in 1989, totaling $7,895,198,000.

Nola Yew, a certified public accountant retained by the MPCGA, calculated the state's net worth for 1989 at $886,688,000. In determining the state's net worth, she relied on the Michigan comprehensive annual financial report for the fiscal year ending on September 30, 1989, which was prepared by the Department of Management and Budget in accordance with generally accepted government accounting standards. The DNR "vigorously contested" her calculations with the affidavit of Susan Work Martin, Ph.D., CPA, who stated: The concept of net worth was foreign to the field of governmental accounting, net worth is not an appropriate measurement for a government entity, and net worth is not a defined term in the generally accepted accounting principles for government entities.

After examining the affidavit of Ms. Martin, Ms. Yew, providing the Kohler's definition of net worth, stated that all entities have a net worth and that the common and acceptable meaning of net worth is what matters, i.e., recorded assets minus recorded liabilities. Instead of submitting a calculation regarding the state's net worth, after Ms. Yew submitted her second affidavit, Ms. Martin simply...

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