Pattison v. Employers Reinsurance Corp.

• Decision Date: 20 April 1990
• Docket Number: No. 89-1517,89-1517
• Parties: K.L. PATTISON and Pattison, Stanger & Company, Plaintiffs-Appellees, v. EMPLOYERS REINSURANCE CORP., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 986

900 F.2d 986

K.L. PATTISON and Pattison, Stanger & Company, Plaintiffs-Appellees, v. EMPLOYERS REINSURANCE CORP., Defendant-Appellant.

No. 89-1517.

United States Court of Appeals, Sixth Circuit.

Argued Jan. 17, 1990.

Decided April 20, 1990.

James W. Heckman, Daniel S. Saylor, Nancy J. Bourget (argued), Garan, Lucow, Miller, Seward, Cooper & Becker, Detroit, Mich., for plaintiffs-appellees.

John R. Monnich, Mary Jo Diegel (argued), J. Michael Malloy, Holahan, Malloy, Maybaugh & Monnich, Troy, Mich., for defendant-appellant.

Before NELSON and BOGGS, Circuit Judges, and BERTELSMAN, ^* District Judge.

BERTELSMAN, District Judge.

The proper resolution of this appeal from the grant of summary judgment for the insured in this action on an errors and omissions policy presents little difficulty once the facts are understood. We hold that the trial court, per Judge Duggan correctly held that an obligation to defend the underlying action against the insureds existed under the ambiguous provisions of the policy.

FACTS

The facts are not in dispute and need not be stated at length. The plaintiff-appellee K.L. Pattison is an insurance broker. One Evans was a sub-agent of Pattison who had an independent contractor relationship with Pattison and operated a separate office. ¹ Evans issued certain binders to customers he had obtained and collected substantial premiums. Certain insurance companies issued policies at the direction of Evans. Evans, however, absconded with the premiums which were never received by the companies or by Pattison.

The insurance companies cancelled the policies because they did not receive the premiums. The insureds under the cancelled policies filed an action, referred to in the record as the "underlying action," against the insurance companies, Evans, Pattison and various others. The action sought to recover damages equal to the amounts paid as premiums since the underlying plaintiffs now had no insurance. The actual funds collected as premiums were long gone with Evans.

The primary theories advanced in the complaint in the underlying action were that Pattison had "constructively received" the premiums paid to Evans and that Pattison had negligently supervised Evans, its agent.

Pattison called on defendant-appellant Employers Reinsurance Corp., its errors and omissions carrier, to defend it in the underlying action. Employers declined, citing the "return of premiums" exclusion in its policy. The applicable policy provisions are:

"SECTION I

"COVERAGE. The Corporation does hereby agree to pay on behalf of the Insured such loss in excess of the applicable deductible stated and within the limit of liability specified in the Declarations sustained by the Insured by reason of liability imposed by law for damages caused by any negligent act, error or omission of the Insured or any person for whose acts the Insured is legally liable, arising out of the conduct of the business of the Insured in rendering services for others as a general insurance agent, insurance agent or insurance broker, and including activities as an insurance consultant or notary public, as respects claims first made against the Insured during the policy period.

* * * * * *

"SECTION III(a)

"With respect to such insurance as is afforded by this policy, the Corporation shall pay ... all expenses incurred in the defense of any claim or suit against the Insured....

* * * * * *

"SECTION VI

"EXCLUSIONS. This policy does not apply to:

* * * * * *

"(f) Claims or commissions, taxes, or the failure to collect, pay or return premiums."

Pattison filed this declaratory judgment action in the trial court to resolve the coverage issues. Meanwhile, the underlying action also proceeded. The underlying action was settled. Upon the filing of an amended complaint in the underlying action omitting any reference to return of premiums, Employers agreed to defend Pattison, but under a reservation of rights. Pattison does not seek reimbursement from Employers for defense costs incurred subsequent to the filing of the amended complaint in the underlying action. The issue remained, however, as to coverage for defense costs accruing prior to the filing of the amended complaint.

This issue was submitted to the trial court on cross-motions for summary judgment. The trial court held that the original complaint in the underlying action arguably stated a claim for negligence that was independent of any claim for a return of premiums. The trial court also based its decision, in part, on the maxim that any ambiguities in the language of a policy are to be construed against the insurer. The trial court emphasized that Pattison had never received the premiums, which, as the reader will recall, were presumably supporting Evans in living a life of leisure in parts unknown.

No claim is made on this appeal that there is any issue of fact, material or otherwise, so the court is not confronted with the problems sometimes arising concerning lurking issues of fact in connection with summary judgments. Cf. Street v. J.C. Bradford & Co., 886 F.2d 1472 (6th Cir.1989).

The parties are also in agreement as to the applicable principles of Michigan insurance law, although not how they apply.

Michigan Insurance Law

Michigan case law provides that an insurer must defend its insured when the allegations contained in the underlying complaint arguably come within the policy coverage. Reurink Brothers Star Silo, Inc. v. Maryland Casualty Company, 131 Mich.App. 139, 345 N.W.2d 659 (1983); Meridian Mutual Insurance Company v. Hunt, 168 Mich.App. 672, 425 N.W.2d 111 (1988). The duty to defend is not limited by the precise language in the underlying complaint. The insurer has the duty to look beyond the allegations in the complaint to determine whether coverage is possible. That is, if there are any theories of recovery that fall within the policy, the insurer owes a duty to defend the suit. The insurer's duty to defend depends upon the potential shown in the complaint that the facts ultimately proved fall within the coverage. Jonesville Products, Inc. v. Transamerica Insurance Group, 156 Mich.App. 508, 513, 402 N.W.2d 46, 48 (1986); Reurink, 131 Mich.App. at 143, 345 N.W.2d at 661.

An insurer has a duty to defend, despite theories of liability asserted against the insured which are not covered under the policy, if there are any theories of recovery that come within the policy coverage. Detroit Edison Company v. Michigan Mutual Insurance Company, 102 Mich.App. 136, 141-142, 301 N.W.2d 832, 835 (1980). Doubt as to whether the policy is applicable must be resolved in the insured's favor. Meridian, 168 Mich.App. at 677, 425 N.W.2d at 114.

Cases Involving Similar Exclusion Clauses

Employers argues that there is no ambiguity and that the exclusion applies to any action where the recovery sought is measured by premiums paid by the plaintiff, as was the situation in the underlying action.

In Evanston Ins. Co. v. Fred A. Tucker & Co., Inc., 872 F.2d 278 (9th Cir.1989), the court held that the exclusion applied where an insured paid a premium to a broker but an intermediary broker failed to obtain the coverage. The court rejected the argument of the broker "that the exclusion applie[d] to claims for premiums owed as legitimate business debts, rather than to claims for negligence where the measure of damages happens to be the amount of premiums paid." 872 F.2d at 279.

Although the language quoted from Evanston is broad enough to cover the facts of the instant case, we think it important to note that in Evanston the premiums had actually been received by the broker whereas here they had not. That in our view is the pivotal distinction.

This distinction was pointed up by the analysis of the court in Fremont Indemnity Co. v. Lawton-Byrne-Bruner Ins. Agency Co., 701 S.W.2d 737 (Mo.App.1985). There, a customer of the insured broker sued it for damages, measured by premiums paid, for negligence in failing to obtain the most economical insurance for the customer. A similar exclusion was proffered as a defense by the broker's errors and omissions carrier. The court observed:

"In Fremont's insurance agreement with LBB, Fremont did not define the meaning of a claim for premiums or...