Sederholm v. Michigan Mut. Ins. Co.

• Decision Date: 12 July 1985
• Docket Number: Docket Nos. 73078,73100
• Citation: Sederholm v. Michigan Mut. Ins. Co., 370 N.W.2d 357, 142 Mich.App. 372 (Mich. App. 1985)
• Court: Court of Appeal of Michigan
• Parties: John L. SEDERHOLM, Jean Sederholm and John G. Sederholm, Plaintiffs-Appellants, v. MICHIGAN MUTUAL INSURANCE COMPANY, Defendant-Appellee. John L. SEDERHOLM, Jean Sederholm and John G. Sederholm, Plaintiffs-Appellees, v. MICHIGAN MUTUAL INSURANCE COMPANY, Defendant-Appellant.

Page 357

370 N.W.2d 357

142 Mich.App. 372

John L. SEDERHOLM, Jean Sederholm and John G. Sederholm, Plaintiffs-Appellants, v. MICHIGAN MUTUAL INSURANCE COMPANY, Defendant-Appellee.

John L. SEDERHOLM, Jean Sederholm and John G. Sederholm, Plaintiffs-Appellees, v. MICHIGAN MUTUAL INSURANCE COMPANY, Defendant-Appellant.

Docket Nos. 73078, 73100.

Court of Appeals of Michigan.

Submitted Oct. 15, 1984.

Decided May 6, 1985.

Released for Publication July 12, 1985.

McLean & McCarthy by John M. McCarthy, Houghton, for plaintiffs-appellants.

Weber, Swanson, Vicary & Wietek by Joseph R. Wietek, Marquette, for defendant-appellee.

Before ALLEN, P.J., and R.B. BURNS and MAHER, JJ.

ALLEN, Presiding Judge.

Plaintiffs, as assignees of Lynn Muree Salmi, one of defendant's policyholders, against whom plaintiffs had taken a default judgment in April, 1981, for $818,000, plus interest and costs, filed a two-count complaint in circuit court against defendant. Count I alleged breach of defendant's contract with Salmi by failure to defend Salmi in plaintiffs' action against her. Count II alleged tortious bad faith for defendant's failure to settle. Both parties moved for summary judgment pursuant to GCR 1963, 117.2(1) and (3). Both motions were initially denied on grounds of the existence of questions of fact for the jury.

On December 23, 1982, the Supreme Court released its opinion in Stockdale v. Jamison, 416 Mich. 217, 330 N.W.2d 389 (1982). Both parties felt that case supported their respective positions. Defendant again moved for summary judgment on both counts I and II, admitting liability for the full policy limit of $40,000, attending interest and costs. Plaintiffs moved for separate trials on counts I and II and for summary judgment in plaintiffs' favor on count I. In an opinion from the bench on April 8, 1983, followed by an order on July 29, 1983, the trial court granted both motions in part. On count I, judgment was granted to plaintiffs for $40,000 plus $5,736 in interest and $1,341 in costs, but recovery was denied on the full amount of the default judgment plus interest and costs thereon. Defendant's motion for summary judgment on count II was denied on the ground that the court found that genuine issues of fact concerning defendant's bad faith existed for determination by the jury. ¹

In Docket No. 73078, plaintiffs appeal as of right from that part of the trial court's order on count I denying summary judgment on the entire amount of the default judgment, plus interest and costs thereon. The judgment for $40,000, costs and interest has been paid by defendant and is not an issue in this appeal. In Docket No. 73100, the trial court certified that, as to count II, the question of whether the Stockdale rationale applies equally to count II was a controlling question of law. Leave to appeal was granted by this Court and the appeal was ordered consolidated with Docket No. 73078. Additional facts as submitted by the parties on stipulation follow.

On July 6, 1979, Lynn Muree Salmi contacted an independent insurance agent in Hancock, Michigan, and applied for automobile liability insurance coverage having policy limits of $20,000/$40,000. A policy was written with Michigan Mutual Insurance Company. Coverage was effective immediately but subject to cancellation by Michigan Mutual in accordance with statutory provisions authorizing and governing cancellations. Within statutory time limits, Michigan Mutual learned of an undisclosed driver's license suspension for failure to take an alcohol test and determined that Salmi was an unacceptable risk. It undertook to cancel the policy. A "Cancellation Notice" was forwarded by certified mail, return receipt requested, cancelling the policy effective September 13, 1979. Shortly thereafter, a refund of the unused premium was made.

Subsequent to the cancellation, Salmi discussed with her agent the possibilities for replacement coverage, including the Michigan Assigned Risk Pool. She did not, however, obtain any replacement coverage. On December 20, 1979, while operating her motor vehicle, she was involved in an automobile accident in which plaintiffs sustained various injuries and damages. No report, notice or claim of any kind was made to Michigan Mutual or the independent agent regarding the accident.

On August 21, 1980, plaintiffs commenced an action against Salmi alleging her gross negligence as the proximate cause of their injuries and damages. Salmi delivered the complaint and summons to Michigan Mutual. After reviewing its records and confirming that the policy had been cancelled more than three months prior to the accident, Michigan Mutual declined to defend her and returned the complaint and summons. When Salmi did nothing to defend herself, plaintiffs entered her default, for failure to appear, on November 17, 1980. Thereafter, on December 19, 1980, plaintiffs entered into an "Assignment of Claims and Covenant Not to Collect Judgment" with Salmi, whereby they agreed not to collect any judgment they might secure against her. In return, Salmi assigned to plaintiffs a claim against Michigan Mutual based upon the alleged ineffective cancellation of her automobile liability insurance policy.

On January 26, 1981, plaintiffs' counsel forwarded a letter to Michigan Mutual advising that his clients would accept the full policy limit in settlement of their claim against Salmi. Michigan Mutual responded by indicating its failure to understand the letter inasmuch as Salmi's policy had allegedly been cancelled three months prior to the accident and there was, to their knowledge, no applicable coverage. On April 21, 1981, plaintiffs obtained and entered a default judgment against Lynn Muree Salmi totaling $818,000, plus interest and costs, for a total exceeding $1,000,000. On April 27, 1981, plaintiffs and Salmi entered into a second "Assignment of Claims and Covenant Not to Collect Judgment", wherein the amount of the default judgment now secured was recited and the nature of the claim against Michigan Mutual expanded.

On June 5, 1981, plaintiffs commenced the within action against Michigan Mutual. Count I of the complaint alleges that Michigan Mutual had an "absolute duty" to defend its insured and for breach of that duty it is liable for the full amount of the default judgment plaintiffs had obtained against her together with interest and costs. Count II of plaintiffs' complaint alleges "tortious bad faith" in regard to Michigan Mutual's failure to settle the claim against Salmi and to properly investigate the accident, the injuries and the existence of applicable coverage. For this "misconduct", plaintiffs allege that Michigan Mutual is likewise liable for the full amount of the default judgment, plus interest and costs. In addition, plaintiffs demanded punitive and exemplary damages. Michigan Mutual, confident that its policy of insurance had been properly cancelled, answered by denying any liability to plaintiffs and alleging the facts of the cancellation as its affirmative defense.

Subsequently, Michigan Mutual discovered that the form utilized in cancelling Salmi's insurance policy did not comply with subsection (4) of M.C.L. § 500.3020; M.S.A. § 24.13020, in that it did not note that it was unlawful to drive an automobile in Michigan without insurance coverage. Having concluded that its policy of insurance had not been properly cancelled, Michigan Mutual amended its answer on July 9, 1982, to admit the existence of an applicable policy of insurance having liability limits of $20,000/$40,000. On August 16, 1982, pursuant to the provisions of GCR 1963, 519.1, Michigan Mutual made an offer of judgment in the full amount of its policy limit ($40,000) plus interest, in accordance with the provisions of M.C.L. § 600.6013; M.S.A. § 27A.6013, and costs. The offer was rejected by plaintiffs.

Upon amending its answer, Michigan Mutual also amended its affirmative defenses and alleged that plaintiffs were equitably estopped from recovering any amount in excess of the policy limit because of their misconduct, bad faith and deliberate effort to create a cause of action where none existed. The competing motions were argued before the court and on September 3, 1982, were denied on the grounds that there were substantial issues of fact.

On December 23, 1982, the decision in Stockdale, supra, was released. Both parties, believing that the decision was applicable to them, again filed motions for summary judgment. Plaintiffs' motion asked for summary judgment on the full amount of the default judgment secured against Salmi ($818,000), plus interest from August 21, 1980, the date the complaint was filed against Salmi, to the present, plus costs, for a total amount exceeding $1,000,000. In addition, plaintiffs demanded "penalty interest", under M.C.L. § 500.2006; M.S.A. § 24.12006, exceeding $50,000. Defendant asked for summary judgment in favor of defendant on any sums or interest exceeding the face amount of the policy ($40,000) plus interest thereon from June 5, 1981, (the date plaintiffs filed their complaint against defendant) to August 16, 1982, the date defendant made an offer of judgment as provided by M.C.L. § 600.6013(5); M.S.A. § 27A.6013(5).

On April 8, 1983, after additional briefing and arguments, the trial court issued its opinion which held in essence:

As To Count I (Refusal To Defend)

(1) Plaintiffs, as assignees of the insured Salmi, can recover no more than

she could have recovered from the insurer (Stockdale v. Jamison, supra ). Salmi having suffered no damages, plaintiffs are not entitled to recover anything in excess of the policy limit.

(2) Plaintiffs are not entitled to recover prejudgment and postjudgment interest based upon the amount of their default judgment.

(3) Plaintiffs are entitled to recover the policy limit of $40,000, together with interest on that amount commencing on the date of plaintiffs' action against Michigan Mutual to the date...