State Farm Fire and Casualty Co. v. Liberty Ins. Underwriters, Inc.

Decision Date16 March 2009
Docket NumberNo. 1:07-cv-1088.,1:07-cv-1088.
Citation613 F.Supp.2d 945
CourtU.S. District Court — Western District of Michigan

Gregory G. Timmer, Mark E. Fatum, Rhoades McKee, PC, Grand Rapids, MI, for Plaintiff.

Julie Chenot Mayer, Harvey R. Heller, Richard M. Mitchell, Maddin Hauser Wartell Roth & Heller PC, Southfield, MI, for Defendant.


PAUL L. MALONEY, Chief Judge.

Granting in Part and Denying in Part the Plaintiff's Motion for Summary Judgment; Denying the Defendant's Motion for Summary Judgment; Directing the Parties to File a Notice Advising the Court How they Wish to Proceed


Henry Bouma ("Bouma") founded Lumbermen's, Inc. ("Lumbermen's") about 50 years ago and at the time relevant to this case, he was CEO and Chairman of the Board. On a Saturday in September 2005, Bouma was driving a vehicle jointly leased to him and Lumbermen's when he accidentally struck and seriously injured a pedestrian. The pedestrian settled her claims for $9 million. Bouma's own automobile liability insurer paid its $1 million policy limit without reservation of any rights, and it is not a party to this action.

That left $8 million to be paid. The plaintiff, State Farm Fire and Casualty Company ("State Farm"), paid $3 million, its limit under the personal liability umbrella policy issued to Bouma. The defendant, Liberty Insurance Underwriters, Inc. ("Liberty"), paid the remaining $5 million, under a $10 million commercial liability umbrella policy that it issued to Lumbermen's. Both State Farm and Liberty reserved their right to seek a declaration in federal court that a different allocation of liability might be appropriate.

State Farm concedes that Bouma was the named insured under its personal-liability policy and that it is liable for some portion of the settlement.

The dispute is over whether defendant Liberty is also liable, under a commercial umbrella liability policy that it issued to Bouma's employer, Lumbermen's. State Farm seeks a declaration that Liberty's policy provides coverage, and that the two insurers must pay pro rata in proportion to their respective policy limits. Liberty seeks a declaration that Bouma was not an insured under its policy.

Alternately, Liberty contends that even if Bouma was an insured under its policy, State Farm's policy is merely a pro rata policy, while Liberty's is a true "excess" policy, such that Liberty was not obligated to pay anything until State Farm paid its $3 million policy limit.

There are two issues regarding defendant Liberty's liability for contributing to the settlement. First, under Michigan law, was the driver of the vehicle, Bouma, an insured based on his conduct at the time of the accident? The parties agree that this depends on whether he was acting, in the language of Liberty's policy, within his duties for his employer, Lumbermen's (the policyholder). Bouma's deposition testimony tends to support the conclusion that he was acting within the scope of his (self-appointed) duties as CEO and Chairman of the Board of Lumbermen's, but that conclusion is not ineluctable.

Liberty counters with roughly equally sound reasoning and evidence that Bouma should not be considered to have acted within the scope of his duties during the Ann Arbor trip. For example, there was conflicting evidence as to whether Bouma would have used the Lumbermen's company credit card to pay for dinner if the party had made it safely to the game. Bouma claims that he would have charged dinner to the company, see Bouma Dep at 87. But if Morehouse is to be believed, the couples' past pattern and practice did not lead to a solid inference that Bouma/Lumbermen's would have paid for dinner: Morehouse explained that when the two couples got together, sometimes Morehouse paid for dinner, sometimes Bouma paid for dinner, and sometimes the couples split the bill. See Morehouse Dep 14:21-25.

Moreover, it is undisputed that Bouma personally paid for the tickets to the game on the day of the accident, not Lumbermen's. Bouma explained, however, that for a period of about 14-15 years, Lumbermen's had purchased the University of Michigan football season tickets, and stopped doing so only when an IRS agent, in the course of an audit, suggested they not do so. Since that time, and for 14-15 years prior to his May 2008 deposition Bouma advanced his own money for all the tickets. See Bouma Dep at 31:5 to 32:15. Bouma stated that he had "taken just about every one of our managers to a football game over the years, retired and active." Bouma Dep 32:15-17. The record does not reflect whether Lumbermen's ever reimbursed Bouma for the cost of game tickets or attendant entertainment, meal, and travel expenses.

And Morehouse testified that they and their wives were long-time close personal friends, and that they "typically" and "regularly" discussed Lumbermen's personnel and the lumber business, even at social gatherings where the business purpose was "incidental." See Morehouse Dep 14:2-15. (That was not surprising, given that they met in the business, Morehouse worked for Bouma, and Morehouse worked in the business for decades before joining Lumbermen's). Liberty argues, reasonably, that the parties could not have intended that every get-together between a Lumbermen's officer and a personal friend who worked, or used to work, in the lumber business, would be considered "within the scope of the officer's duties" and therefore covered by the Liberty policy. See Liberty's Opp at 2.

Thus, this court will not hold that as a matter of law, Bouma was or was not "acting within the scope of his duties" at the time of the accident, i.e., whether he was an insured at the time of the accident as defined by the Liberty policy.1 On this record, whether Bouma was acting within the scope of his duties for Lumbermen's is an issue for a properly instructed jury. But fashioning jury instructions acceptable to the Michigan Supreme Court will be a significant challenge. No binding authority has been found. For example, the jury instructions might adopt the test of Idaho, which asks whether the employee was "furthering the interests" of the employer at the time of the accident. However, this court might deem some qualifier appropriate, such as whether the primary purpose of the trip was to further the interests of the employer.

The second liability issue is whether the "excess coverage" clauses of the State Farm and Liberty policies render the State Farm policy primary vis-a-vis Liberty's policy under Michigan law. State Farm's excess clause also used the term "pro rata" — though not in the customary location within the policy, or in the customary sense — while Liberty's policy had merely an "excess" coverage clause and never mentioned the words "pro rata." Nonetheless, the court determines that there is no genuine issue as to the interplay between the two policies: both policies are excess policies, putting them in the same "layer" of coverage, so neither is primary to the other.

That means that if Bouma was an insured under Liberty's policy, State Farm and Liberty will share responsibility for the remainder of the settlement pro rata, i.e., each will pay according to its policy limit's proportion of the two insurers' combined policy limit. Liberty will be obligated to reimburse State Farm for the amount that State Farm has paid above its obligation. Michigan law provides that under a pro rata policy clause, the insurers are liable in proportion to their policy limits. It is undisputed that State Farm's policy limit is $3 million and Liberty's policy limit is $10 million, so State Farm would be liable for 3 thirteenths and Liberty would be liable for 10 thirteenths of the remaining settlement amount. In other words:

                State Farm would be
                  liable for:          3 / 13 × $8 million = $1,846,154
                Liberty would be
                  liable for:         10 / 13 × $8 million = $6,153,846

Because State Farm already paid its $3 million policy limit towards the settlement, Liberty would owe State Farm $3 million minus about $1,846,154 = about $1,153,846. State Farm also seeks interest on that amount.


On a Saturday in September 2005, four people were traveling to Ann Arbor to attend a football game between the University of Michigan Wolverines and the Notre Dame Fighting Irish. Henry Bouma, the founder and Chairman of the Board of Directors of Lumbermen's, was driving the vehicle, which was jointly leased to Bouma and Lumbermen's. In the vehicle were three other passengers: Robert Morehouse, former long-time Vice-President of the Grand Rapids Division of Lumbermen's, who had recently retired; Bouma's wife; and Morehouse's wife. It is undisputed that the Boumas and the Morehouses are close personal friends, but it is also undisputed that Bouma intended to discuss, and the two men did discuss, specific lumber business during the trip.

They stopped at a rest area, the women exited the vehicle, and the men remained in the vehicle talking. After some time, Bouma decided to exit the vehicle, but he did not put the vehicle in "park." Bouma opened the door and tried to put his foot on the brake, but he hit the accelerator instead; the car jumped forward over the curb and struck a 45-year-old woman, who sustained serious permanent injuries.

Three potentially relevant insurance policies were in effect at the time of the accident.

First, Bouma's vehicle was co-leased to him and his company, Lumbermen's, Inc. ("Lumbermen's"). It was insured by Old Republic Insurance Company policy number MWTB-19118, with a limit of $1 million and a coverage period of February 1, 2005 to February 1, 2006. Old Republic is not a party to this action.

Second, Lumbermen's itself had a commercial umbrella liability policy from defendant Liberty Insurance Underwriters, Inc. ("Liberty"), number LQ1B71078606042, with a limit of $10 million and a...

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