Schanz v. New Hampshire Ins. Co.

Decision Date05 February 1988
Docket NumberDocket No. 95127
Citation418 N.W.2d 478,165 Mich.App. 395
PartiesGeorge P. SCHANZ and Linda K. Schanz, Plaintiffs-Appellees, v. NEW HAMPSHIRE INSURANCE COMPANY, Defendant-Appellant.
CourtCourt of Appeal of Michigan — District of US

van Benschoten, Hurlburt & Tsiros, P.C. by Harvey E. van Benschoten and Lawrence A. Hurlburt, Saginaw, for plaintiffs-appellees.

Denenberg, Tuffley, Bocan, Jamieson, Black, Hopkins & Ewald, P.C. by John L. Hopkins, Jr., and Dana L. Ramsay, Southfield, for defendant-appellant.

Before CYNAR, P.J., and SAWYER and J.A. GILLIS, * JJ.

CYNAR, Presiding Judge.

Defendant, New Hampshire Insurance Company, appeals as of right from a March 3, 1986, judgment in favor of plaintiffs and an August 19, 1986, order denying its motions for a directed verdict, judgment notwithstanding the verdict new trial, or remittitur.

This case arose out of the complete destruction by fire of plaintiffs' office building located at 971 Midland Road, Saginaw, Michigan, on February 12, 1979. At trial, the evidence indicated that in early June, 1976, plaintiffs, Dr. George Schanz, a neurosurgeon, and his wife, Linda, purchased the office building. In order to close on the building and obtain a mortgage, plaintiffs were required to purchase fire and casualty insurance. They contacted their insurance agent, Michael Klein of the Phoenix Agency, Inc. Plaintiffs desired replacement cost value coverage.

However, neither the plaintiffs nor Klein were competent to appraise the building. Because most of plaintiffs' insurance was written with the Aetna Life & Casualty Insurance Company, Klein contacted Aetna and requested that an appraisal be done on the building. An Aetna employee, Eric Barkham, performed the appraisal and set the replacement cost value of the building at approximately $450,000. 1

Barkham's appraisal figure was based upon his incorrect assumption that the building contained 2 1/2 floors rather than the actual 3 1/2 floors. Neither plaintiffs nor Klein were given a copy of the appraisal or advised as to the basis upon which the replacement cost value was calculated. Because of the time constraints involved with the mortgage, Klein utilized the $450,000 figure while shopping for an insurance binder required for the closing.

Meanwhile, Jay English, plaintiffs' accountant, asked Klein to determine whether Aetna's quoted premium on a $450,000 replacement cost value insurance policy was competitive. Klein discovered that defendant could provide the same coverage at a lesser rate.

Plaintiffs entered into a contract with defendant on a replacement cost, ninety percent coinsurance policy with a $450,000 limit on the replacement cost value, subject to defendant's follow-up inspection. Under the coinsurance provision, plaintiffs were required to maintain ten percent insurance coverage and defendant would be responsible for ninety percent coverage of the value of the building in the event of a total loss. The effective date of the policy was June 2, 1976.

Pursuant to defendant's standard operating procedure with respect to insuring property valued over $100,000, defendant retained Commercial Services, Inc., to perform an inspection of the building. An inspection was performed and a report was completed showing the condition of the building, its dimensions, the number of floors, and estimated replacement cost of the structure based on a square foot replacement formula used by Commercial Services. Inspector Thomas Warren of Commercial Services estimated the replacement cost value of the building at $514,600 on the basis that the building would cost $30.90 per square foot to replace. The report also stated that the building's dimensions were 40 feet by 150 feet and 2 1/2 stories tall. In fact, the building was 40 feet by 180 feet and had 3 1/2 floors. Plaintiffs testified that they had not seen the report until after the fire. Defendant's employee, S. St. Cyr, reviewed the report and did not catch the errors, despite the fact that defendant did have a square footage figure of 33,588 from the Aetna appraisal in its records. Defendant disclaimed any knowledge of any other appraisal or inspection of the property at the time it issued plaintiffs' policy.

Approximately three or four months after the policy was purchased, Klein was notified by Dzintra Kingsley, an underwriter for defendant, that the building was underinsured based on their inspection. Klein advised plaintiffs that the replacement cost coverage should be $514,000, rather than the original $450,000. At the June, 1977, installment date, coverage was increased to $540,000, to reflect both the increase in coverage required by defendant and an inflationary adjustment. Thereafter, subsequent adjustment in coverage was steadily increased to a final figure of $585,000.

After the fire and pursuant to the policy, defendant paid plaintiffs $524,682. The balance of approximately $61,000 was to be paid upon the rebuilding of the structure. After plaintiffs consulted architect Calvin Smith and discovered that it would cost $1.2 million to rebuild, plaintiffs did not rebuild. Plaintiffs' expert, Edward Deyo, stated that his estimate for the 1976 replacement cost value for the building was $1,212,004. For 1979, the estimate was increased to $1,328,629.

The jury returned a verdict of $739,784 in favor of plaintiffs. A judgment was entered on the verdict on March 3, 1986. 2 Thereafter, defendant moved for a JNOV, new trial or remittitur. Defendant's motions were denied. The instant appeal followed.

Defendant first alleges that the trial court erred by denying its motions for a directed verdict and JNOV. Defendant claims it owed no duty to plaintiffs to inspect and appraise the building. As to this contention, plaintiffs' cause of action did not allege a duty to inspect or appraise. Instead, plaintiffs' claim was based on a negligent appraisal. Plaintiffs alleged that once defendant undertook to appraise the building for purposes of informing plaintiffs of the required insurance coverage, defendant assumed a duty to use reasonable care in establishing the replacement cost value of the building.

In reviewing a trial court's denial of a motion for a directed verdict, this Court must view the evidence in the light most favorable to the nonmoving party and determine whether a prima facie case was established. If there were material issues of fact upon which reasonable minds could differ, they were properly admitted to the jury. Ritchie v. Mich. Consolidated Gas Co., 163 Mich.App. 358, 367, 413 N.W.2d 796 (1987). When faced with a motion for JNOV, the court must view the evidence in the light most favorable to the nonmoving party and decide if the facts presented preclude judgment for the nonmoving party as a matter of law. If the evidence is such that reasonable persons could differ, the question is one for the jury and JNOV is improper. Id., at pp. 367-368, 413 N.W.2d 796. A JNOV may be granted only where there is insufficient evidence, as a matter of law, to make an issue for the jury. Willoughby v. Lehrbass, 150 Mich.App. 319, 344, 388 N.W.2d 688 (1986).

The trial judge did not err in denying defendant's motions. Plaintiffs' claim was premised on the fact that defendant owed them a duty to use reasonable care in appraising the building once defendant undertook the task of appraising the building for replacement cost coverage insurance.

At the outset, we note that the law does not impose a duty on insurers to inspect the premises of their insureds, although such an obligation may be undertaken. Smith v. Allendale Mutual Ins. Co., 410 Mich. 685, 705, 303 N.W.2d 702 (1981), reh. den. 411 Mich. 1154 (1981). Plaintiffs do not dispute this proposition. They contend, rather, that defendant, by inspecting the premises and performing the appraisal, incurred a duty to them to exercise reasonable care in appraising under common-law tort principles expressed in § 323 of the Restatement Torts, 2d:

"s 323. Negligent Performance of Undertaking to Render Services

"One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of the other's person or things, is subject to liability to the other for physical harm resulting from his failure to exercise reasonable care to perform his undertaking, if

"(a) his failure to exercise such care increases the risk of such harm, or

"(b) the harm is suffered because of the other's reliance upon the undertaking."

Plaintiffs' claim was essentially a negligence action. A prima facie case of negligence requires proof of four elements: (1) a duty owed to plaintiff by defendant; (2) breach of the duty; (3) causation; and (4) damages. Moning v. Alfono, 400 Mich. 425, 437, 254 N.W.2d 759 (1977), reh. den. 401 Mich. 951 (1977). The primary element which is in issue here, that of "duty," has been defined as an obligation, to which the law will give recognition and effect, to conform to a particular standard of conduct towards one another. Locklear v. Stinson 161 Mich.App. 713, 716, 411 N.W.2d 834 (1987). Whether the law will impose such an obligation depends upon the relationship between the actor and the injured person. Moning, supra, 400 Mich. at pp. 438-439, 254 N.W.2d 759.

It is for the court to determine, as a matter of law, what characteristics must be present for a relationship to give rise to a duty. Thereafter, the jury determines whether the evidence establishes the elements of that relationship. Smith, supra, 410 Mich. at p. 714, 303 N.W.2d 702.

The dispute in the instant case concerns whether defendant's inspection and appraisal constituted an "undertaking" either for compensation or gratuitously to provide services to plaintiffs in which the undertaking increased the risk of harm to plaintiffs or plaintiffs, in reliance on the undertaking, suffered harm.

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