Allied Mechanical Services, Inc. v. National Fire and Marine Insurance Company

Filing 22

OPINION; Order to issue; signed by Judge Janet T. Neff (Judge Janet T. Neff, clb)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
ALLIED MECHANICAL SERVICES, INC.,
Plaintiff,
Case No: 1:16-cv-334
v.
HON. JANET T. NEFF
NATIONAL FIRE AND MARINE
INSURANCE COMPANY,
Defendant.
/
OPINION
This is a diversity action for breach of contract brought by Plaintiff Allied Mechanical
Services, Inc. (“Allied”) against Defendant National Fire and Marine Insurance Company
(“NFMIC”). Allied sues NFMIC for breach of an insurance contract. Count I of the complaint seeks
an order compelling NFMIC to participate in the appraisal process described in the contract. NFMIC
has filed a counterclaim alleging that appraisal is premature, and asking the Court to find that a
particular clause in the insurance contract applies to the appraisal process. (ECF No. 4, Page ID.84.)
Before the Court are motions for summary judgment filed by the parties. (ECF Nos. 13, 15.) For the
reasons discussed herein, Allied’s motion will be granted and NFMIC’s motion will be denied.
I.
Rule 56 of the Federal Rules of Civil Procedure requires the Court to 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). In evaluating a motion for
summary judgment the Court must look beyond the pleadings and assess the proof to determine

whether there is a genuine need for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574, 587 (1986). “[T]he district court must construe the evidence and draw all reasonable
inferences in favor of the nonmoving party.” Martin v. Cincinnati Gas & Elec. Co., 561 F.3d 439,
443 (6th Cir. 2009). The proper inquiry is whether the evidence is such that a reasonable jury could
return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252
(1986); see generally Street v. J.C. Bradford & Co., 886 F.2d 1472, 1476-80 (6th Cir. 1989).
II.
NFMIC issued Allied an insurance policy (the “Policy”) covering a vacant building located
at 2211 Miller Road, Kalamazoo, Michigan. The building was destroyed in a fire. The Policy
provides that NFMIC will pay the “actual cash value” for damaged or lost property, which is defined
as follows in paragraph E.6:
d. Actual Cash Value
...
(1) when damage to property is economically repairable, “actual cash value” means
the cost of repairing the damage, less reasonable deduction for wear and tear,
deterioration, and obsolescence;
(2) when the loss or damage to property creates a total loss, actual cash value means
the market value of the property in a condition equal to that of the destroyed
property, if reasonably available on the used market or
(3) otherwise actual cash value means the market value of new property of like kind
and quality, less reasonable reduction for wear and tear, deterioration, and
obsolescence.
(Policy, ECF No. 12-1, PageID.136.) The parties agree that paragraph (1) does not apply because
the damage to Allied’s property created a “total loss.” However, the parties disagree about whether
paragraph (2) or paragraph (3) applies.

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After Allied submitted a claim for coverage, NFMIC hired an appraiser who determined that
the market value of the property was $279,000. The appraiser determined this value by comparing
the property to “actual sales of similar properties,” and then making adjustments based on “time,
location, physical characteristics, and any other factors affecting value[.]” (Brown Letter, ECF 12-4,
PageID.208.) After further research, the appraiser also determined that other properties “in a
condition equal” to the destroyed property were available for sale on April 6, 2015, the date of
Allied’s loss. (Brown Aff. ¶¶ 10-11, ECF No. 16-1, PageID.371-72.)
Allied disagreed with NFMIC’s valuation of the property. It maintained that there were no
properties “in a condition equal to that of the destroyed property . . . reasonably available on the
used market,” so it relied on paragraph (3), and came up with an actual cash value of approximately
$598,000. (Ex. A to Pl’s Sworn Statement in Proof of Loss, ECF No. 12-7, PageID.231.) Because
of its disagreement with NFMIC, Allied submitted a demand for appraisal under the Policy, which
states:
If we and you disagree on the value of the property or the amount of loss, either may
make written demand for an appraisal of the loss. In this event, each party will select
a competent and impartial appraiser. The two appraisers will select a competent and
impartial umpire. If they cannot agree either may request that selection be made by
a judge of a court having jurisdiction. The appraisers will state separately the value
of the property and amount of loss. If they fail to agree, they will submit their
differences to the umpire. A decision agreed to by any two will be binding. Each
party will:
a. Pay its chosen appraiser; and
b. Bear the other expenses of the appraiser and umpire equally.
If there is an appraisal, we will still retain our right to deny the claim.
(Policy ¶ E.2, PageID.135.) NFMIC declined to participate in the appraisal process, arguing that the
appraisal process was premature because there were “coverage questions” that needed to be

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resolved, including the proper method to value the property. (NFMIC’s Response to Appraisal
Demand, ECF No. 12-6, PageID.216.) Allied then brought this action to compel appraisal. In
response, NFMIC filed its counterclaim.
III.
Michigan law requires fire insurance contracts to contain an appraisal provision like the one
in the Policy. See Mich. Comp. Laws § 500.2833(1)(m). The purpose of this provision is to “ resolve
the ‘amount of the loss’ in insurance disputes when liability has already been admitted.” The D Boys,
LLC v. Mid-Century Ins. Co., 644 F. App’x 574, 579 (6th Cir. 2016) (citing Auto-Owners Ins. Co.
v. Kwaiser, 476 N.W.2d 467, 467-68 (Mich. Ct. App. 1991)). The appraisal process is a “‘substitute
for judicial determination of a dispute concerning the amount of a loss,’ [and] is ‘a simple and
inexpensive method for the prompt adjustment and settlement of claims.’” Kwaiser, 476 N.W.2d at
469 (quoting Thermo-Plastics R & D, Inc. v. General Accident Fire & Life Assurance Corp., Ltd.,
202 N.W.2d 703, 706 (Mich. Ct. App. 1972)). However, “[w]here the parties cannot agree on
coverage, a court is to determine coverage in a declaratory action before an appraisal of the damage
to the property.” Id. at 469-70. “Matters of an insurance policy’s coverage are generally for a court
and not for appraisers.” Id. at 469. In short, because the appraisal process is a substitute for a judicial
determination concerning the amount of loss, “any disputes between the parties other than the
amount of loss must be resolved through judicial determination.” Luke v. Home-Owners Ins. Co.,
No. 329433, 2017 WL 239459, at *3 (Mich. Ct. App. Jan. 19, 2017).
A. Nature of the Dispute
Allied maintains that appraisal is appropriate because there is no “coverage” dispute to be
resolved by the Court. The parties do not dispute that the destroyed building is covered by the

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Policy. According to Allied, the only dispute concerns the amount of loss, which is for an appraiser
to decide. Allied contends that an appraiser will determine whether property “in a condition equal
to that of the destroyed property” is reasonably available on the used market, and after doing so, will
be able to determine whether to apply paragraph (2) or paragraph (3) in the definition of actual cash
value. Allied further contends that this determination is a straightforward one that can be made by
applying the “ordinary meaning” of the Policy. (Pl.’s Reply in Supp. of Mot. for Summ. J. 5, ECF
No. 20.) Allied argues that the ordinary meaning of “equal” in paragraph (2) is “same,” which means
that the appraiser must determine whether any properties of the same size, age, geographic location,
features, and construction as the destroyed property were reasonably available on the used market
at the time of the loss. (Id. at 6; Pl.’s Resp. in Opp’n to Def.’s Mot. for Summ. J. 6, ECF No. 17.)
Allied has acknowledged that finding even one property with all these characteristics, let alone one
that was reasonably available on the used market, “is a virtually impossible task.” (ECF No. 12-7,
PageID.228.) Nevertheless, Allied believes that a plain reading of the Policy requires that such a
property exist in order for paragraph (2) to apply. If such a property did not exist on the date of the
loss, then the appraiser must determine actual cash value according to paragraph (3).
NFMIC, on the other hand, maintains that the appraisal process is premature because there
is a dispute about which definition of actual cash value applies, the one in paragraph (2) or the one
in paragraph (3). NFMIC asks for a declaration from the Court that paragraph (2) applies based on
its evidence that properties “in a condition equal” to the destroyed property were available for sale
on the date of Allied’s loss. NFMIC believes that “in a condition equal” means an equivalent
physical state. Thus, the dispute in this case boils down to a disagreement about what must be
“reasonably available on the used market” in order for paragraph (2) to apply. Allied contends that

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a property that is essentially identical to the destroyed property must have been reasonably available,
whereas NFMIC contends that a comparable property of an equivalent physical state must have been
reasonably available. This is not strictly a dispute about the amount of loss. This is a dispute about
the interpretation of the contract.
The Court agrees with Allied that the Policy can be applied according to its ordinary
meaning, but disagrees with Allied as to what that meaning is. And insofar as the parties disagree
about this meaning, the Court can adjudicate this dispute before requiring the parties to participate
in the appraisal process. Although it is not a “coverage” dispute in the ordinary sense of that term,
it is a dispute that calls for a judicial determination of the meaning of the Policy rather than a
determination of the amount of loss. Allied implies that all disputes that are not “coverage” disputes
should be addressed by the appraisal process, but the appraisal process has a specific purpose: to
determine the amount of loss. Kwaiser, 476 N.W.2d at 469. All other disputes must be resolved by
a court. See Luke, 2017 WL 239459, at *3. A dispute about how a contract should be interpreted
concerns “a question of law for a court to determine[.]” Henderson v. State Farm Fire & Cas. Co.,
596 N.W.2d 190, 193 (Mich. 1999) (describing the standard for appellate review). It is not a dispute
that can or should be resolved by an appraiser.
B. Interpreting the Contract
When interpreting a contract in a diversity case, the court applies the law, including the
choice-of-law rules, of the forum state. Uhl v. Komatsu Forklift Co., 512 F.3d 294, 302 (6th Cir.
2008). The insurance policy here has no choice-of-law provision, so the Court must consider the
following five factors: place of contracting, place of negotiation, place of performance, location of
the subject-matter of the contract, and place of incorporation of the parties. Id. (citing Chrysler

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Corp. v. Skyline Indus. Servs., 528 N.W.2d 698, 702 (Mich. 1995); Restatement (Second) of Conflict
of Laws § 188(2) (1971)). In this case, the place of performance, the place of contracting, and the
location of the subject-matter of the contract is Michigan. In addition, the parties agree that
Michigan law applies, so the Court will apply Michigan law.
Insurance policies are governed by the same principles of contract construction as any other
type of contract. Hastings Mut. Ins. Co. v. Safety King, Inc., 778 N.W.2d 275, 278 (Mich. Ct. App.
2009). The policy must be read as a whole to determine and effectuate the parties’ intent. McKusick
v. Travelers Indemnity Co., 632 N.W.2d 525, 528 (Mich. Ct. App. 2001). The terms of a contract
are accorded their “plain and ordinary meaning that would be apparent to a reader of the
instrument.” Rory v. Continental Ins. Co., 703 N.W.2d 23, 28 (Mich. 2005). A court may rely on
dictionary definitions to determine the plain and ordinary meaning of a term. Hastings Mut., 778
N.W.2d at 279. “But contract terms should not be considered in isolation and contracts are to be
interpreted to avoid absurd or unreasonable conditions and results.” Id. at 281.
Allied believes that “condition equal” means, in essence, “identical”; that is, having the same
characteristics, including: age, size, construction, location, and features. This interpretation does not
comport with the ordinary meaning of these terms. With regard to objects, “equal” means “[h]aving
the same measure; identical in magnitude, number, value, intensity, etc.” or “[p]ossessing a like
degree of a (specified or implied) quality or attribute[.]” Oxford English Dictionary,
http://www.oed.com/;

see

also

Merriam-Webster,

http://www.merriam-

webster.com/dictionary/equal (defining “equal” as “of the same measure, quantity, amount or
number as another” or “like in quality, nature, or status”). In other words, equal means the same with
regard to a specific quality or attribute. It does not necessarily mean the same in all respects.

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In the Policy, the term “equal” modifies the word “condition.” Consequently, equality is
required with respect to the condition of the property. “Condition” means a “particular mode of
being”; e.g., whether something is “[p]roper . . . for work, market, etc.” Oxford English Dictionary,
http://www.oed.com/;

see

also

Merriam-Webster,

http://www.merriam-

webster.com/dictionary/condition (defining “condition” as “a state of being” or “a state of physical
fitness or readiness for use”). Thus, a property in a condition equal to another likely means one that
has an equivalent state of readiness or fitness for use. Paragraphs (1) and (3) in the definition of
actual cash value provide an additional clue as to what is meant by “condition” in paragraph (2).
They provide for a reasonable reduction in the cost of repairs, or in the calculation of the value of
new property of like kind and quality, to account for “wear and tear, deterioration, and
obsolescence” in the covered property. (Policy, PageID.136.) Wear and tear, deterioration, and
obsolescence are attributes relating to the condition of a property. They also impact its market value.
In contrast, one does not ordinarily associate features like age, size, location, and construction, with
a property’s condition. The condition of a property can decline over time, even though its size,
location, and construction remain the same. Likewise, if a property is well-maintained and cared for,
its condition can remain relatively constant, even as its age increases. Put another way, one property
is not necessarily in a “better” condition than another simply because it is newer, larger, made from
higher quality materials, or is located in a particular area. Thus, interpreted according to its plain and
ordinary meaning, “in a condition equal” refers to equivalence in attributes like wear and tear,
deterioration, and/or obsolescence, rather than equivalence in attributes like age, size, location, and
construction.

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Finally, the phrase “in a condition equal to that of the destroyed property” modifies the
phrase “the property,” which ostensibly refers to the covered property. So construed, the entire
phrase, “the market value of the property in a condition equal to that of the destroyed property,”
serves to clarify that the market value of the covered property should take into account the condition
of that property before it was destroyed. Thus, the answer to the question of what needs to be
reasonably available on the used market is not “[a] property in a condition equal to that of the
destroyed property,” it is this: “the market value of the [covered] property.” This interpretation is
different from the one proposed by Allied, but not significantly different from the one proposed by
NFMIC. The Court’s interpretation does not require an appraiser to identify a specific property that
was available for sale on the date of the loss. However, determining a property’s market value
through the used market necessarily requires that there be information (e.g., sales, listings) about
similar properties such that a reasonable comparison can be made. If the covered property is so
unique, or the market for similar properties so scarce, that the property’s market value is not
“reasonably available,” i.e., it cannot reasonably be ascertained from the used market, then the
Policy allows the appraiser to determine actual cash value by another means: estimating the market
value of new property “of like kind and quality” under paragraph (3).
Adopting Allied’s interpretation would mean that paragraph (2) would almost never apply.
Rarely, if ever, would there exist another property with all the same attributes as the covered
property, let alone one that is reasonably available on the used market on the date of the loss. The
Court will not interpret the Policy in a way that would effectively eliminate this paragraph and lead
to an absurd result. See Hastings Mut., 778 N.W.2d at 281.

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Moreover, Allied’s interpretation is inconsistent with the purpose of the Policy, which is to
cover the insured for the value of the destroyed property. The Policy gives NFMIC the option to
either pay the value of the lost property or pay the cost of repairing or replacing it. (Policy ¶ E.4,
PageID. 136.) It does not require NFMIC to provide a suitable replacement. Under paragraph (2),
value is determined by examining the “market value” of the destroyed property. The market value
of real property is often determined by looking at the value of comparable properties and making
appropriate adjustments based on the differences between those properties and the property being
appraised. It does not require a comparison to an identical property, let alone one that is currently
available for sale on the market. Indeed, if a comparable property was sold shortly before the date
of the loss, that sale would be useful for determining the market value of the covered property, even
though the property that was sold is no longer available. It makes little sense for a policy covering
the value of destroyed property to require that a property with essentially identical features, or in the
same condition, as the destroyed property exist for sale on the used market on the date of the loss.
C. Relief
Having addressed the dispute over interpretation of the Policy, the Court must consider the
specific relief requested by the parties in their respective motions. Allied asks for an order to compel
NFMIC to participate in the appraisal process. In contrast, NFMIC seeks an order declaring that
paragraph (2), and not paragraph (3), in the definition of actual cash value applies, and instructing
the appraiser accordingly. NFMIC relies on evidence from its appraiser that other properties “in a
condition equal” to the covered property were available for sale on the date of the loss.
NFMIC’s motion will be denied because the Court cannot determine whether paragraph (2)
or paragraph (3) applies without resolving a factual issue that is squarely within the ambit of the

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appraisal process. An appraiser is in a better position than the Court to determine whether the market
value of the destroyed property can be ascertained from the used market. This is not a coverage issue
or a matter for judicial determination. The parties agreed to submit to an appraisal process to resolve
this type of issue, and their agreement will be enforced. To the extent that the parties disagree about
the meaning of paragraph (2), this Opinion provides guidance on that issue.
NFMIC also asserts that it is not required to participate in the appraisal process because
Allied has not submitted an adequate proof of loss. NFMIC contends that Allied’s proof of loss is
based on an improper assessment of actual cash value under paragraph (3) rather than paragraph (2);
thus, according to NFMIC, there is no dispute to submit to an umpire. The Court rejects this
argument because the parties clearly disagree about the amount of loss and Allied has requested an
appraisal. Any further disputes about the amount of loss should be resolved through the appraisal
process.
Finally, Allied’s motion will be granted because an appraiser is capable of determining actual
cash value based on the ordinary meaning of the terms in the Policy. There is, thus, no genuine
dispute that Allied is entitled to an order compelling appraisal.1
An order will enter consistent with this Opinion.
Dated: April 10, 2017

/s/ Janet T. Neff
JANET T. NEFF
United States District Judge

1

For the sake of clarity, the Court has not found that NFMIC breached the terms of the Policy, as
Allied alleges in Counts I and II of the complaint. The parties have not asked the Court to make a finding on
that issue; thus, the Court expresses no opinion as to whether Allied is entitled to any other relief requested
in the complaint, such as damages or penalty interest.

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