Westfield Insurance Company v. Enterprise 522, LLC

Filing 69

ORDER DECLARING JUDGMENT FOR FIRE COVERAGE IN FAVOR OF ENTERPRISE AND DISMISSING FRAUD AND INDEMNITY CLAIMS; granting in part and denying in part 46 Motion for Summary Judgment; granting in part and denying in part 47 Motion for Summary Judgment; granting in part and denying in part 49 Motion for Summary Judgment. Signed by District Judge Victoria A. Roberts. (CPin)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
WESTFIELD INSURANCE COMPANY,

Plaintiff,

CASE NUMBER: 12-15373
HONORABLE VICTORIA A. ROBERTS

v.
ENTERPRISE 522, LLC,
Defendant,
and
KEARNS INSURANCE AGENCY, INC.,
a Michigan corporation,

Intervenor.
/
ORDER DECLARING JUDGMENT FOR FIRE COVERAGE IN FAVOR OF
ENTERPRISE AND DISMISSING FRAUD AND INDEMNITY CLAIMS
(Doc. #s 46, 47, and 49)
I.

INTRODUCTION
For years, Westfield Insurance Company (“Westfield”) continuously renewed

commercial building fire insurance coverage to Enterprise 522, LLC (“Enterprise”), even
when it became clear that Kearns Insurance Agency Inc. (“Kearns”), acting as agent for
Westfield and Enterprise, mistakenly stated on Enterprise’s initial application for
coverage in 2003, that Enterprise had an automatic sprinkler system.
In fact, as late as 2011, an inspector reported to Westfield that no automatic
sprinkler system was in place. Nonetheless, Westfield renewed the policy requiring that

the automatic sprinkler system be maintained, reducing the premium because of an
automatic sprinkler system on the premises. When a fire in 2012 totally destroyed
Enterprise’s commercial building, Westfield denied coverage because the automatic
sprinkler system was not there.
Westfield seeks a declaratory judgment that fire coverage is precluded.
Enterprise filed a counterclaim:
1.

Count I: Declaration that the damage is covered;

2.

Count II: Indemnity, requesting payment for all amounts paid to fix the
building, including 12% penalty interest under MCL 500.2006,
And alternatively;

3.

Count III: Reformation of the contract to state the parties original intent to
include fire coverage;

4.

Count IV: Recovery for silent fraud; and

5.

Count V: Damages for misrepresentation.

Kearns intervened and filed a counterclaim alleging that the insurance coverage
is illusory. Kearns says Westfield’s coverage violates MCL 500.2006, unfair trade
practice. Kearns also requests that the Court exercise equity and reform the insurance
contract to provide coverage.
All parties move for summary judgment on their respective claims.
The Court declares that coverage was in place at the time of the loss and
Westfield must pay Enterprise. The Court GRANTS Enterprise’s and Kearns’ motion for
declaratory judgment and DENIES declaratory judgment in favor of Westfield. The

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Court need not decide the alternative arguments, but notes that reformation is proper.
The Court DENIES and DISMISSES Enterprise’s claim for indemnity and penalty
interest; this argument is not briefed.
The Court GRANTS Westfield’s motion and DISMISSES Enterprise’s
counterclaim of silent fraud and misrepresentation; Enterprise’s and Kearns’ motions for
judgment on these claims are DENIED.
II.

BACKGROUND

Kearns employs licensed insurance agents to sell insurance. Kearns has
agreements (“Agency Agreement”) with insurance companies allowing it to quote and
bind coverage; one of those companies is Westfield. The Agency Agreement with
Westfield allows Kearns “to solicit applications, bind coverage, countersign, deliver and
endorse insurance policies.” The Agency Agreement also has an indemnification clause
which says “The Agent shall indemnify and hold the Company harmless from and
against liability for damage arising out of any Agent error or omission in the preparation
or handling of any insurance policy or billing procedure to which this Agreement applies
. . . .”
Kearns says that when quoting insurance, its agents enter information into a
system which generates a dollar amount for the risk. If the potential insured accepts the
coverage and quote, an application with property information is completed. If the
insured is not available to sign the application, Kearns’ agents submit the application to
insurance underwriters without the insured’s signature. Kearns’ agents then give a copy
of the application to the insured for review; insurance is bound. The selected insurance

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company’s underwriters review the risk and issue a policy.
Gary Fletcher, an owner of Enterprise, was delegated the duty to find coverage
for the property; he used Kearns to secure commercial insurance for the property for
roughly twenty years. In 2003, the insurance company which Fletcher selected left
Kearns’ network, requiring him to switch insurance companies or leave Kearns.
Fletcher’s testimony is that he did not want to leave Kearns; he instructed Kearns
to handle the insurance issue, i.e., secure new coverage for the building with a
company in network. Kearns recommended Westfield.
To get a Westfield quote, Kearns submitted information about Enterprise’s
property. Fletcher accepted the terms of the quote and Kearns prepared the
application. Mistakenly, Kearns selected a box saying that the property had an
automatic sprinkler system. A premium reduction was given for the sprinkler system.
Kearns testimony is that after completing the application, it mailed a copy to
Fletcher. Fletcher testified that he did not receive a copy of the application and did not
even know that an application was required. Fletcher verified with others at Enterprise;
all say no application was received.
Because the existence of a sprinkler system could not be verified through
Westfield’s preliminary search in 2003, an inspection was ordered by Westfield’s
underwriter to confirm the presence of an automatic sprinkler system. The 2003
inspection report did not confirm the existence of a sprinkler system, rather it said:
“FIRE PROTECTION: . . . are the following satisfactory? . . . Sprinkler System: N/A.”
Westfield issued the policy before this inspection was performed and continued
to re-issue it after review of the 2003 inspection report. The policy had an exclusion: “as
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a condition of insurance [Enterprise] is required to maintain the protective devices or
services listed in the schedule above.” P-1 is the code for automatic sprinklers and it
was not listed in the schedule. The schedule said “Information required to complete this
Schedule, if not shown above, will be shown in the Declarations.” P-1 was referenced
in the Declarations, but not listed as a limitation on coverage; instead, it was listed
under “Optional Coverages.”
The full policy was provided to Kearns. Enterprise disputes that it received a copy
of the policy; it says it only received a declaration page listing coverage, which does not
provide details about exclusions. Enterprise did not request a complete policy before
filing its claim. Kearns’ testimony is that Westfield sent the policy to Kearns which, in
turn, mailed it to Enterprise.
Westfield continued to issue this same policy until 2011. In 2011, Westfield
requested a second inspection of Enterprise’s building. At the hearing before this Court,
Westfield said that this inspection was requested because Westfield thought that
Enterprise’s premium was too low; it wanted to verify certain information. When the
inspector arrived, Enterprise informed the inspector that the building did not have an
automatic sprinkler system. The 2011 inspection report is clear that there was no
sprinkler system, and this report was given to Westfield’s underwriting department. It
was placed in Enterprise’s file.
Westfield says that its underwriters did not review the 2011 inspection report.
According to Westfield’s policies, the report was logged by a clerical employee and filed
away. Enterprise’s account activity from Westfield’s system shows that the inspection
report was received on April 7, 2011.
5

Even so, Westfield issued the same policy with fire coverage and no protective
safeguard listed in the schedule for exclusions.
Westfield does not dispute that it would have issued a policy for fire coverage to
Enterprise even had it known no automatic sprinkler system was in place. Westfield’s
underwriters testimony is that a policy would have issued without the exclusion and
premium reduction: “[i]f a building does not have a sprinkler system, the protective
safeguard endorsement should not be on it.” Westfield’s underwriter Buyers testified
that if “there was no sprinkler, then we would have likely issued the policy with no
sprinkler credit and no protective safeguard endorsements.”
On October 29, 2013, Hurricane Sandy caused a power line to break, which
landed on Enterprise’s building, destroying it by fire. The fire department arrived within
minutes, but could not stop the fire from spreading because of the high winds. An
insurance claim was filed. When Enterprise asked Westfield’s adjuster about the
exclusion, it’s adjuster did not know what the exclusion meant. Enterprise asked
Kearns; Kearns advised that the exclusion required that the building comply with code;
an automatic sprinkler system is not required by law.
Westfield filed this declaratory action and denied Enterprise’s claim a day later.
A hearing was held on June 24, 2014.
III.

STANDARD OF REVIEW
The Court will grant summary judgment “if the movant shows that there is no

genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
250-57 (1986). “[T]he filing of cross-motions for summary judgment does not

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necessarily mean that an award of summary judgment is appropriate.” Spectrum Health
Continuing Care Group v. Anna Marie Bowling Irrevocable Trust, 410 F.3d 304, 309 (6th
Cir.2005). “The standard of review for cross-motions for summary judgment does not
differ from the standard applied when a motion is filed by only one party to the litigation.”
Lee v. City of Columbus, 636 F.3d 245, 249 (6th Cir.2011).
When reviewing cross-motions for summary judgment, the court must assess
each motion on its own merits. Federal Ins. Co. v. Hartford Steam Boiler Insp. and Ins.
Co., 415 F.3d 487, 493 (6th Cir. 2005). The facts must be viewed in the light most
favorable to the non-moving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio
Corp., 475 U.S. 574, 587 (1986).
A fact is material for purposes of summary judgment if proof of that fact would
have the effect of establishing or refuting an essential element of the cause of action or
a defense advanced by the parties. Kendall v. Hoover Co., 751 F.2d 171, 174 (6th Cir.
1984).
IV.

LAW AND DISCUSSION
The parties dispute whether Enterprise is entitled to coverage if the policy says

Enterprise must maintain an automatic sprinkler system. From the inception of the
policy, in 2003, to the date of the fire, Enterprise’s building never had an automatic
sprinkler system. However, a 2003 application mistakenly indicated it did have one.
Westfield’s 2011 inspection made clear none was installed. Nonetheless, Westfield
issued the policy for coverage, with the protective safeguard endorsement and premium
reduction.
1. Declaratory Judgment (Count I)

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Enterprise and Kearns argue that the exclusion is not applicable because it is
ambiguous. In the alternative, Enterprise and Kearns say that Westfield waived the
exclusion and is estopped from arguing that it bars coverage because it issued -- and
reissued -- the policy with knowledge that Enterprise’s building did not have an
automatic sprinkler system. They say, if the exclusion is applicable, coverage is
illusory.
The Court need not address Enterprise and Kearns’ arguments of estoppel and
illusory coverage; the exclusion is ambiguous.
“An insurance policy is much the same as any other contract.” Auto-Owners Ins.
Co. v. Churchman, 440 Mich. 560, 566, 489 N.W.2d 431 (1992). “The cardinal rule in
the interpretation of contracts is to ascertain the intention of the parties. To this rule all
others are subordinate.” McIntosh v. Groomes, 227 Mich. 215, 218, 198 N.W. 954
(1924). “If the language of the contract is clear and unambiguous, it is to be construed
according to its plain sense and meaning; but if it is ambiguous, testimony may be taken
to explain the ambiguity.” New Amsterdam Cas. Co. v. Sokolowski, 374 Mich. 340, 342,
132 N.W.2d 66 (1965); see also Frankenmuth Mut. Ins. Co. v. Masters, 460 Mich. 105,
111, 595 N.W.2d 832 (1999).
An ambiguity can be either: patent or latent. Shay v. Aldrich, 487 Mich 648, 641;
790 NW2d 629 (2010). A patent ambiguity is one “that clearly appears on the face of a
document, arising from the language itself.” Black's Law Dictionary (7th ed); see also
Hall v. Equitable Life Assurance Society, 295 Mich. 404, 409, 295 N.W. 204 (1940). A
latent ambiguity “does not readily appear in the language of a document, but instead
arises from a collateral matter when the document's terms are applied or executed.”

8

Black's Law Dictionary (7th ed.). “A latent ambiguity exists when the language in a
contract appears to be clear and intelligible and suggests a single meaning, but other
facts create the necessity for interpretation or a choice among two or more possible
meanings.” Aldrich, 487 Mich. at 668.
Westfield refutes Enterprise’s and Kearns’ allegation of ambiguity, arguing that a
full reading of the endorsement, coupled with the declarations details that Enterprise
was required to maintain an automatic sprinkler system.
The applicability of the exclusion is patently ambiguous on its face; even a
reading of the policy, i.e., endorsement and its declarations fails to adequately show
that the exclusion is a condition of fire coverage.
The exclusion is only defined on one page of a 150 page policy, page BP 04 30
01 06. Westfield conceded at oral argument that the exclusion is only defined under the
protective safeguards page of the policy; yet it is not listed in the schedule which makes
the exclusion applicable to Enterprise. Nor is it listed as an exclusion on the
declarations page.
The declarations say: “Optional Coverages.” P-1 is listed under the Optional
Coverages subheading, and is not even defined on the declarations page, nor is there
text directing Enterprise to the page which defines the symbol.
At the hearing, Westfield conceded: “nothing in the declarations directs the
insured to the policy [that defines P-1].”
Nonetheless, Westfield argues that an adequate connection can be made
between the endorsement and declarations because on page two of the declarations,
under “Forms and Endorsements,” a series of codes list 01/06* BP0430 01/06*.

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Westfield says this is the page number where the exclusion is defined.
This encrypted series of codes is not enough to link the two documents; the text
is not even the same. The page with the exclusion is labeled as BP 04 30 01 06, on the
bottom right hand side of the policy. The Forms and Endorsements section of the
declarations lists many series of numbers less than two spaces apart; it is hard to tell
where one page number starts and ends. The declarations cannot be traced to the
schedule.
P-1 is tucked among twenty different coverages, all of which provide additional
insurance. At the hearing, Westfield could not name one of the coverages under the
column that limited coverage. This, too, supports ambiguity.
Neither of the parties really understood the meaning of P-1 listed under the
Optional Coverages column:
1.

Westfield’s own insurance adjuster did not know the meaning of P-1 listed on the
declarations page:
Q. Do you recall stating that you didn’t know what exactly the P1 protective
safeguards endorsement meant during the October 31st, 2012 meeting?
A. Yes, I recall that.
Q. And you indicated that you have to go get some additional documents,
research it and get back with us.
A. That’s correct.

2.

Westfield’s insurance agent who sold Westfield’s insurance regularly, did not
understand the meaning of P-1. Kearns testified that it instructed Enterprise that
P-1 required Enterprise to “have what the code required, which was smoke
detectors, illuminated exit signs and fire extinguishers.”

3.

Enterprise testified that it thought P-1 provided additional coverage as stated by
its heading. Enterprise said that it asked both Westfield and Kearns to explain
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the meaning; neither of them informed it that coverage required Enterprise to
have and/or maintain a sprinkler system.
A review of the policy shows that when coverage was conditioned on an
exclusion; Westfield explicitly said so. Throughout the policy, Westfield has headings
saying “exclusion” and “limitation.” Westfield could have taken the same precaution
when conditioning fire coverage.
Enterprise says that, ambiguities in insurance contracts are automatically
construed against the drafter. This is only true in Michigan if the parties’ intent cannot
be determined; otherwise, an ambiguity is submitted to a jury. Holland v. Trinity Health
Care Corp., 287 Mich.App.524, 527; 791 N.W.2d 724 (2010).
Because the parties intent is undisputed, there is no jury question. Enterprise
purchased fire coverage; Westfield intended to issue fire coverage. Westfield’s own
testimony is that P-1 would have been excluded from the contract had the underwriters
corrected the file; fire coverage without the condition would have been issued. It is clear
that the exclusion was not intended to be part of the agreement.
Summary judgment is granted in favor of Enterprise and Kearns; Westfield’s
motion is denied.
2.

Reformation (Count III)

Assuming arguendo, that the applicability of the exclusion was not ambiguous,
the exclusion would not bar coverage. Reformation of the contract to comport to the
parties meaning is a proper, equitable remedy. Bleam v. Sterling Ins. Co., 360 Mich.
208, 213-214; 103 N.W.2d 466 (1960)(“Reformation is particularly appropriate where
the record indicates the forms are confusing or ambiguous. If, as the proofs indicate,

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defendant’s agent misunderstood and misinterpreted the language of defendant’s own
printed materials, it is not surprising that plaintiff … misunderstood them.”).
“Courts may reform a contract where there has been a mutual mistake made by
the parties or where there is a mistake by one party and fraud or inequitable conduct by
the other.” Stein, Hinkle, Dawe & Associates, Inc. v. Continental Casualty Co., 110
Mich. App. 410, 418-419; 313 N.W.2d 299 (1981). Mutual mistake is “an erroneous
belief, which is shared and relied on by both parties, about a material fact that affects
the substance of the transaction,” Ford Motor Co v. City of Woodhaven, 475 Mich. 425,
442; 716 NW2d 247 (2006), and established by the “certainty of the error.” Holda v.
Glick, 312 Mich. 394, 404; 20 N.W.2d 248 (1945)(“Courts of equity do not grant the high
remedy of reformation upon a probability, nor even upon a mere preponderance of
evidence, but only upon a certainty of the error.”).
While Westfield argues that it did not make a mistake by issuing a policy which
conditions fire coverage on the maintenance of an automatic sprinkler system that
Enterprise did not have, Westfield is wrong; a mistake was made.
Westfield’s underwriter testified that had read he read the 2011 inspection report,
he would have issued the policy without the exclusion: “[i]f a building does not have a
sprinkler system, the protective safeguard endorsement should not be on it” and if
“there was no sprinkler, then we would have likely issued the policy with no sprinkler
credit and no protective safeguard endorsements.” Enterprise says that had it caught
the exclusion, it would have asked for a correction. This, alone, establishes a mistake.
Alternatively, Westfield argues that it did not make a mistake because it did not
know Enterprise’s building was not sprinklerized. Enterprise argues that under Michigan

12

law, agent knowledge is imputed to the principal. The Court finds that knowledge is
imputed to Westfield by its inspector.
In Upjohn Co v New Hampshire Ins Co, 438 Mich. 197, 208-209, n.8; 476
N.W.2d 392 (1991), the Michigan Supreme Court adopting the holding of Copeman
Laboratories Co. v. General Motors Corp., 36 F. Supp. 755, 762 (D. Mich. 1941):
When a person representing a corporation is doing a thing which is in
connection with and pertinent to that part of the corporation business which
he is employed, or authorized or selected to do, then that which is learned or
done by that person pursuant thereto is in the knowledge of the corporation.
The knowledge possessed by a corporation about a particular thing is the
sum total of all the knowledge which its officers and agents, who are
authorized and charged with the doing of the particular thing acquire, while
acting under and within the scope of their authority.
Upjohn Co v. New Hampshire Ins Co, 438 Mich. 197, 208-209, n.8; 476 N.W.2d 392
(1991)(“We adopt this reasoning and apply it in this case. This Court concludes that the
Upjohn Company had sufficient information available to it, through its various
employees and through its records kept at the UMC facility, to allow us to find, as a
matter of law, that the release of chemical by-product from tank FA-129 was expected
by the Upjohn Company.”).
Westfield disputes that Upjohn is controlling by arguing that unlike Upjohn, none
of its employees had actual knowledge that the building was not sprinklered because its
underwriter did not read the 2011 inspection report.
It is irrelevant that Westfield did not read the report. Westfield hired an inspector
to examine the building for a sprinkler. Enterprise told the inspector that the building did
not have a sprinkler system. The inspector examined the building and did not find a
sprinkler system. The inspector completed a report saying that the building did not have
a sprinkler system. The 2011 report was provided to Westfield’s underwriter and placed
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in Enterprise’s file.
And, as Enterprise and Kearns argue, the doctrine of unclean hands does not bar
equity. Unclean hands is an equitable doctrine which says that “[t]hose who seek equity
must first do equity,” Lemke v. H&R Block Mortgage Corp., No. 11-14979, 2012 (E.D.
Mich. March 6, 2012), this is “invoked by the Court in its discretion to protect the
integrity of the Court.” Stachnik v. Winkel, 394 Mich. 375, 386 (Mich. 1975).
While failing to read a policy can preclude equitable reformation, it does not in
this instance; reading Westfield’s encrypted policy would have been an exercise in
futility.
Because a mutual mistake existed, the contract is reformed and the exclusion is
redacted.
3.

Indemnity (Count II)

Enterprise seeks indemnification with penalty interest from Westfield; it says
Westfield was required to pay the claim when made.
Westfield argues that indemnity is an equitable remedy foreclosed to Enterprise
because it has unclean hands.
Enterprise does not have unclean hands; but, the Court denies Enterprise’s
poorly briefed request for penalty interest. Enterprise’s only argument is a reference to
MCL 500.2006, which is not enough to develop the claim for relief. See United States v.
Robinson, 390 F.3d 853, 886 (6th Cir. 2004)(“We have cautioned that issues adverted
to in a perfunctory manner, unaccompanied by some effort at developed argumentation,
are deemed waived, and that it is not sufficient for a party to mention a possible
argument in the most skeletal way, leaving the court to . . . put the flesh on the bones.”)

14

(citations and internal quotations omitted).
4.

Silent Fraud (Count IV)

Enterprise says that Westfield is liable for silent fraud because it failed to disclose
that: (1) fire coverage was conditioned on Enterprise maintaining -- and thus having -- a
sprinkler system, and (2) Enterprise made a mistake on its application.

Westfield says

that it did not have a duty to disclose either.
Under Michigan law, "[a] fraud arising from the suppression of the truth is as
prejudicial as that which springs from the assertion of a falsehood, and courts have not
hesitated to sustain recoveries where the truth has been suppressed with the intent to
defraud.'’ Williams v Benson, 3 Mich. App. 9, 18-19; 141 N.W.2d 650 (1966)(quoting
Tompkins v Hollister, 60 Mich. 470, 483; 27 N.W. 651 (1886)). To recover, Enterprise
needs to show that Westfield had a duty to disclose a material fact and failed to do so.
Lorenzo v. Noel, 522 N.W.2d 724, 725 (Mich. Ct. App. 1994).
Even if a duty to disclose existed, these allegations fail because no evidence
shows that Westfield hid information from Enterprise. See Clement-Rowe v. Mich.
Health Care Corp., 212 Mich. App. 503, 538 N.W.2d 20, 23 (Mich. Ct. App. 1995)
(discussing "silent fraud" and noting that in Michigan, a claim of fraud predicated on a
failure to disclose fails if the defendant fulfilled its duty to disclose); see also Bye v.
Nationwide Mut. Ins. Co., 733 F. Supp. 2d 805, 822 ( E.D. Mich. 2010) (no reasonable
reliance, thus no fraud because there was no evidence that defendant hid information).
There is no silent fraud; Count IV is dismissed.
5.

Fraud (Count V)

Enterprise argues -- in one paragraph -- that Westfield made fraudulent

15

misrepresentations by issuing it a policy that conditions fire coverage.
This argument is both poorly briefed and alleged, and it is waived and dismissed.
Even it were properly briefed, it would still be dismissed. In Belle Isle Grill Corp v
Detroit, 256 Mich. App. 463 (2003), the Michigan Appeals Court set forth the elements a
plaintiff must demonstrate to sustain a claim for fraud based on a misrepresentation:
(1) the defendant made a material representation; (2) the
representation was false; (3) when the defendant made the
representation, the defendant knew that it was false, or made
it recklessly, without knowledge of its truth and as a positive
assertion; (4) the defendant made the representation with the
intention that the plaintiff would act upon it; (5) the plaintiff
acted in reliance upon it; and (6) the plaintiff suffered damage.
Belle Isle Grill Corp, 256 Mich. App. 463, 477; 666 N.W.2d 271 (2003).
Enterprise failed to show a single representation or assertion made by Westfield
that constitutes fraud.
Count IV is dismissed.
IV.

CONCLUSION
The Court declares that coverage was in place at the time of the loss and

Westfield must pay Enterprise. The Court GRANTS Enterprise’s and Kearns’ motion for
declaratory judgment. Declaratory judgment in favor of Westfield is DENIED. The Court
need not decide the alternative arguments, but notes that reformation is proper.
The Court DENIES and DISMISSES Enterprise’s claim for indemnity and penalty
interest; these arguments are not briefed.
The Court GRANTS Westfield’s motion and DISMISSES Enterprise’s
counterclaim of silent fraud and misrepresentation; Enterprise’s and Kearns’ motions for
judgment on these claims are DENIED.
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IT IS ORDERED.

S/Victoria A. Roberts
Victoria A. Roberts
United States District Judge
Dated: July 29, 2014
The undersigned certifies that a copy of this
document was served on the attorneys of
record by electronic means or U.S. Mail on
July 29, 2014.
S/Carol A. Pinegar
Deputy Clerk

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