Royal Property Group, LLC v. Prime Insurance Syndicate, Inc.

• Decision Date: 23 August 2005
• Docket Number: Docket No. 249043.
• Citation: 267 Mich. App. 708,706 N.W.2d 426
• Parties: ROYAL PROPERTY GROUP, LLC, Plaintiff-Appellee, v. PRIME INSURANCE SYNDICATE, INC., Defendant-Appellant and Whitcomb & Company, Inc., Defendant-Appellee.
• Court: Michigan Supreme Court

706 N.W.2d 426

267 Mich. App. 708

ROYAL PROPERTY GROUP, LLC, Plaintiff-Appellee, v. PRIME INSURANCE SYNDICATE, INC., Defendant-Appellant and Whitcomb & Company, Inc., Defendant-Appellee.

Docket No. 249043.

Court of Appeals of Michigan.

Submitted April 6, 2005, at Detroit.

Decided August 23, 2005, at 9:05 a.m.

Released for Publication November 10, 2005.

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Duncan M. Szymanski, Detroit, for Royal Property Group, LLC.

Grotefeld & Denenberg, L.L.C. (by Jeffrey R. Learned), Bingham Farms, for Prime Insurance Syndicate, Inc.

Sills, Charboneau, Fiedler & Barnett, P.C. (by Thomas R. Charboneau, Jr.), Bloomfield Hills, for Whitcomb & Company, Inc.

Before: WHITBECK, C.J., and ZAHRA and OWENS, JJ.

ZAHRA, J.

In this insurance case, defendant insurer, Prime Insurance Syndicate, Inc. (Prime), appeals as of right the trial court's entry of judgment in favor of plaintiff insured, Royal Property Group, LLC (Royal), for $228,729.84. The significant issues in this case are (1) whether the insurance policy is ambiguous in regard to the method of valuation used to determine coinsurance liability and (2) whether a coinsurance clause that determines an insured's coinsurance liability on the basis of the replacement cost value (RCV) of the property is against public policy where an insurer's liability is limited to the actual cash value (ACV) of the loss. Reading the policy as a whole, we hold that there is but one reasonable interpretation of the policy. The insured's coinsurance obligation is based on the RCV of the property and the insurer's limit of liability is based on the ACV of the loss. We further hold that Michigan's public policy does not prohibit an insurer from issuing a policy of insurance that measures an insured's coinsurance liability using the RCV of the property while limiting its liability to the ACV of the loss. We reverse the trial court's order granting Royal partial summary disposition, and remand with instructions that summary disposition be granted to Prime.

I. Basic Facts and Proceedings

Royal, through its agent, defendant Whitcomb & Company, Inc., applied for commercial property insurance from Prime to cover three apartment buildings that Royal owned and operated in the city of Detroit. The coverage for "Building 2" is at issue in this case. In regard to Building 2, the policy application contains the following section:¹

                  SUBJECT OF    AMOUNT    COINS    VALUATION    CAUSES    INFLATION    DEDUCTIBLE    FORMS AND
                  INSURANCE               %                     OF LOSS   GUARD %                    CONDITONS
                                                                                                     TO APPLY
                  Bldg          600,000   80       ACV          Special                1500          Excl theft
                  Loss of       156,000   12       ACV          Special                1500          Excl theft
                  Rents                   months
                

Prime later issued a policy to Royal. The declarations page of the policy contains a section titled, "COVERAGES PROVIDED — INSURANCE AT THE DESCRIBED PREMISES FOR COVERAGES FOR WHICH A LIMIT OF INSURANCE IS SHOWN," which provides in regard to Building 2:²

                                                            COVERED
                  PREM.    BLDG.               LIMIT OF     CAUSES
                   NO.      NO.    COVERAGE   INSURANCE     OF LOSS    COINSURANCE %    RATES
                    2        1      BUILDING   600,000      BROAD-ACV       80           .81
                    2        1      BUS. INC.  156,000      BROAD-ACV      1/3           .81
                

In a section titled, "ADDITIONAL CONDITIONS," the policy states:

The following conditions apply in addition to the Coverage Conditions and the Loss Conditions.

1. Coinsurance

A Coinsurance percentage of 80% applies to this policy.

a. We will not pay the full amount of any loss if the replacement cost value of Covered Property at the time of loss multiplied by the 80% Coinsurance percentage shown for it in the Declarations is greater than the limit of insurance for the property.

Instead we will determine the most we will pay using the following steps:

(1) multiply the replacement cost value of covered property at the time of loss by the coinsurance percentage;

(2) divide the limit of insurance of the property by the figure determined in step (1);

(3) multiple the total amount of loss, before the application of any deductible, by the figure determined in step (2); and

(4) subtract the deductible from the figure determined in step (3).

We will pay the amount determined in step (4) or the limit of insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself.

Three detailed examples are provided that show how the coinsurance clause operates when the sum of the RCV of the covered property and the coinsurance percentage is more than (underinsurance), less than (overinsurance), and equal to (adequate insurance) the amount of the policy limit.

Building 2 was destroyed in a fire on April 16, 2002. At the time of the fire, Building 2 had an ACV of between $814,270 and $1,280,769, and an RCV of $3,659,396. Prime paid out $372,270.16 under the policy.³ Royal disputed the amount of the payment and claimed that Prime reduced its payment by improperly applying the coinsurance clause.

Royal filed this action to recover the policy limit. In Royal's view, the policy application and the declarations page of the policy require the coinsurance clause be construed to state "actual cash value" instead of "replacement cost value." Under this formulation, the ACV of the loss would exceed the policy limit of $600,000 and would entitle Royal to the policy limit.

Prime moved for partial summary disposition, arguing that it had properly applied the coinsurance clause to reduce Royal's recovery. After holding a hearing, the trial court concluded that the notations on the declarations page of the policy rendered the policy ambiguous in regard to coinsurance liability. The trial court denied Prime's motion for summary disposition and ordered that summary disposition be issued in favor of Royal.⁴ The trial court subsequently granted Royal's motion for entry of final judgment and ordered Prime pay Royal an additional $228,729.84. This appeal ensued.

II. Operation of the Coinsurance Clause

A. Standard of Review

"This Court reviews the grant or denial of summary disposition de novo to determine if the moving party is entitled to judgment as a matter of law." Maiden v. Rozwood, 461 Mich. 109, 118, 597 N.W.2d 817 (1999). Summary disposition is appropriate under MCR 2.116(C)(10) when, "[e]xcept as to the amount of damages, there is no genuine issue as to any material fact, and the moving party is entitled to judgment or partial judgment as a matter of law." "A genuine issue of material fact exists when the record, giving the benefit of reasonable doubt to the opposing party, leaves open an issue upon which reasonable minds might differ." West v. Gen. Motors Corp., 469 Mich. 177, 183, 665 N.W.2d 468 (2003). Accordingly, when deciding a motion under MCR 2.116(C)(10), this Court reviews "the entire record in the light most favorable to the party opposing the motion, including affidavits, pleadings, depositions, admissions, and other evidence submitted by the parties." Corley v. Detroit Bd. of Ed., 470 Mich. 274, 278, 681 N.W.2d 342 (2004).

Further, resolution of this issue depends on interpretation of the insurance policy, which is also reviewed de novo. Wilkie v. Auto-Owners Ins. Co., 469 Mich. 41, 47, 664 N.W.2d 776 (2003). "Similarly, whether contract language is ambiguous is a question of law that we review de novo." Klapp v. United Ins. Group Agency, Inc., 468 Mich. 459, 463, 663 N.W.2d 447 (2003), citing Farm Bureau Mut. Ins. Co. v. Nikkel, 460 Mich. 558, 563, 596 N.W.2d 915 (1999).

B. Analysis

"An insurance policy is much the same as any other contract. It is an agreement between the parties in which a court will determine what the agreement was and effectuate the intent of the parties." Auto-Owners Ins. Co. v. Churchman, 440 Mich. 560, 566, 489 N.W.2d 431 (1992), citing Eghotz v. Creech, 365 Mich. 527, 530, 113 N.W.2d 815 (1962).⁵ "[I]nsurance polices are subject to the same contract construction principles that apply to any other species of contract." Rory v. Continental Ins. Co., 473 Mich. 457, 461, 703 N.W.2d 23 (2005) (emphasis in original). "`The primary goal in the construction or interpretation of a contract is to honor the intent of the parties[.]'" Klapp, supra at 473, 663 N.W.2d 447, quoting Rasheed v. Chrysler Corp., 445 Mich. 109, 127 n. 28, 517 N.W.2d 19 (1994). "[T]he language of the parties' contract is the best way to determine what the parties intended." Klapp, supra at 476, 663 N.W.2d 447.

Accordingly, an insurance contract should be read as a whole and meaning should be given to all terms. Wilkie, supra at 50 n. 11, 664 N.W.2d 776. The policy application, declarations page of policy, and the policy itself construed together constitute the contract. Hall v. Equitable Life Assurance Society of the United States, 295 Mich. 404, 408, 295 N.W. 204 (1940).⁶ The contractual language is to be given its ordinary and plain meaning. Id. at 408, 295 N.W. 204. An insurance contract must be construed so as to give effect to every word, clause, and phrase, and a construction should be avoided that would render any part of the contract surplusage or nugatory. Klapp, supra at 467, 663 N.W.2d 447. "[U]nless a contract provision violates law or one of the traditional [contract] defenses to the enforceability of a contract applies, a court must construe and apply unambiguous contract provisions as written." Rory, supra at 461, 703 N.W.2d 23. "[T]he judiciary is without authority to modify unambiguous contracts or rebalance the contractual equities struck by the contracting parties because fundamental principles of contract law preclude such subjective post hoc judicial determinations of `reasona...