Michigan Supreme Court
Lansing, Michigan 48909
____________________________________________________________________________________________
C h i e f J u s ti c e J u s t ic e s
Maura D. Corrigan
Opinion
Michael F. Cavanagh
Elizabeth A. Weaver
Marilyn Kelly
Clifford W. Taylor
Robert P. Young, Jr.
Stephen J. Markman
____________________________________________________________________________________________________________________________
FILED JULY 16, 2003
KAY WILKIE, Personal Representative
of the ESTATE OF PAUL K. WILKIE,
Deceased, and Janna Lee Frank,
Plaintiff-Appellees,
v No. 119295
AUTO-OWNERS INSURANCE COMPANY,
Defendant-Appellants.
____________________________________
BEFORE THE ENTIRE BENCH
TAYLOR, J.
This case involves a dispute between Auto-Owners
Insurance Company and its insureds, Janna L. Frank and the
decedent, Paul K. Wilkie, regarding underinsured-motorist
coverage.1 Defendant Auto-Owners argues that plaintiffs Frank
and Wilkie’s2 recoveries from Auto-Owners are limited under
the terms of the policy to $50,000 each. Frank and Wilkie
argue that they are each owed $75,000. The trial court and
Court of Appeals agreed with Frank and Wilkie. We reverse.
1
The policy holder was Wilkie’s mother, Kay Wilkie.
2
The personal representative of Paul Wilkie’s estate, Kay
Wilkie, is the plaintiff in this case.
I. Facts
On April 17, 1996, Janna Frank was driving east on Maple
Rapids Road in Clinton County, with Paul Wilkie as a
passenger. At the same time, Stephen Ward was driving west on
Maple Rapids Road. Witnesses described his driving as erratic
shortly before his vehicle crossed the center line and
collided with Frank’s car, injuring her and causing the deaths
of Ward and Wilkie.
Ward’s vehicle was insured under a Citizens Insurance
Company no-fault automobile-insurance policy having limits of
$50,000. Wilkie’s estate and Frank shared this sum, with each
receiving $25,000. Wilkie’s vehicle was insured under an
Auto-Owners no-fault automobile-insurance policy that
provided, in addition to the mandatory coverages required
under Michigan’s no-fault automobile-insurance statute, MCL
500.3101 et seq., an optional coverage described as
underinsured-motorist coverage. Speaking generally, this
coverage was intended to supplement insurance proceeds
received by the insured from the tortfeasor had the tortfeasor
not been underinsured. This added coverage had limits of
$100,000 for each person to a total of $300,000 for each
occurrence, and also provided that Auto-Owners’ liability was
limited to the amount by which these limits exceeded the
underinsured motorist’s own insurance coverage. The policy
clearly stated that the Auto-Owners’ limits of liability were
not to be increased because of the number of persons injured,
2
claims made, or automobiles involved in the accident.3
Auto-Owners did not contest that the accident was Ward’s
fault and agreed that both Wilkie’s and Frank’s damages were
at least $100,000. Disputed, however, was the total amount
due from Auto-Owners to Wilkie and Frank. Auto-Owners
3
The relevant portions of the contract provide as
follows:
2. COVERAGE
a. We will pay compensatory damages any
person is legally entitled to recover:
(1) from the owner or operator of an
underinsured automobile;
(2) for bodily injury sustained while
occupying or getting into or out of an automobile
that is covered by Section II—LIABILITY COVERAGE of
the policy.
* * *
4. LIMIT OF LIABILITY
a. Our Limit of Liability for Underinsured
Motorists Coverage shall not exceed the lowest of:
(1) the amount by which the Underinsured
Motorist Coverage limits stated in the Declarations
exceed the total limits of all bodily injury
liability bonds and policies available to the owner
or operator of the underinsured automobile; or
(2) the amount by which compensatory damages
for bodily injury exceed the total limits of those
bodily injury liability bonds and policies.
b. The Limit of Liability is not increased
because of the number of:
(1) automobiles shown or premiums charged in
the Declarations;
(2) claims made or suits brought;
(3) persons injured; or
(4) automobiles involved in the occurrence.
3
asserted that it only owed Wilkie and Frank $50,000 each. As
it understood the contract terms, the $100,000 policy limit
would be reduced by the $50,000 coverage of the Ward policy.
Wilkie and Frank, for their part, claimed that Auto-Owners
owed each of them $75,000. They reasoned that, having equally
split the Ward policy limits of $50,000, only the $25,000 they
received should have been subtracted from the $100,000 policy
limit to determine the amount each was due.
Unable to reach a resolution of this dispute, Wilkie and
Frank sought declaratory relief against Auto-Owners in the
Clinton Circuit Court. The plaintiffs moved for summary
disposition predicated on their understanding of the
contract’s requirements. The trial court granted their motion
and ruled that only the amount actually received by each of
them, $25,000, and not the entire amount of Ward’s policy
limits, $50,000, should be set off against the amount
available to them, $100,000, under the underinsured-motorist
provision. Thus, according to the trial court, Wilkie and
Frank were each entitled to $75,000 from Auto-Owners.
Auto-Owners appealed, and the Court of Appeals4 held that
the language of the Auto-Owners policy was ambiguous in
directing how to apply the underinsured policy limit as a
setoff against the amounts Auto-Owners owed. That is, Auto-
Owners’ or the insured’s readings were equally plausible, or
as the Court described it, the contract, in this particular,
could be interpreted in “at least two ways . . . .” Id. at
4
245 Mich App 521; 629 NW2d 86 (2001).
4
527. Pursuant to the doctrine of interpreting an ambiguous
contract against the drafter,5 it construed the language that
it found unclear against the drafter and in favor of the
insureds. Id. Thus, each claimant was awarded $75,000. The
Court bolstered this by stating that the conclusion was the
same as one that a utilization of the doctrine of “reasonable
expectations” would produce. The Court determined the
reasonable expectation of an insured with a similar policy was
to expect to always be able to predict with certainty how much
coverage will be available from an underinsured motorist.
Accordingly, to allow the insurer to utilize variables such as
the number of claimants, automobiles involved, claims made, or
suits brought to alter the amount due the insured would run
the contract afoul of those expectations. To preclude this
occurring, the Court concluded that the Court’s duty was to
conform the contract to what it had determined was reasonable
to expect in a contract of this sort. In this case, that
meant that on the basis of variables such as those mentioned
above, which were, in fact, included in the Auto-Owners
policy, Auto-Owners could not alter the insured’s recovery.
The sum of this argument was to return the Court’s
consideration to the clauses they had already determined were
ambiguous, and, thus, to the earlier conclusion that Auto-
Owners was required to pay Wilkie and Frank $75,000 each.
5
Klapp v United Ins Group Agency, Inc, 468 Mich 461; ___
NW2d ___ (2003); Raska v Farm Bureau Ins Co, 412 Mich 355,
362; 314 NW2d 440 (1982).
5
We granted Auto-Owners leave to appeal.6
II. Standard of Review
The proper interpretation of a contract is a question of
law, which this Court reviews de novo. Archambo v Lawyers
Title Ins Corp, 466 Mich 402, 408; 646 NW2d 170 (2002). The
same standard applies to the question of whether an ambiguity
exists in an insurance contract. Farm Bureau Mut Ins Co v
Nikkel, 460 Mich 558, 563; 596 NW2d 915 (1999). Accordingly,
we examine the language in the contract, giving it its
ordinary and plain meaning if such would be apparent to a
reader of the instrument. Bianchi v Automobile Club of
Michigan, 437 Mich 65, 71 n 1; 467 NW2d 17 (1991).
III. Analysis
A
Under the language of the underinsurance policy at issue
here, the insurer agreed to pay $100,0007 for each person to
a total of $300,000 for each occurrence for bodily or
compensatory damages to individuals covered by the policy if
each person would have been entitled to recover all those sums
from the other driver, but was precluded from doing so because
the other driver was underinsured (¶ 1[a] and [b]).8 The
6
467 Mich 867 (2002).
7
The actual policy language states “$100,00
person/$300,000 occurrence” (emphasis added). That this is a
typographical error is clear because the parties agree that
the policy actually refers to limits of $100,000 per person.
8
Under ¶ 1(a) and (b) of Wilkie’s policy with Auto-
Owners, an underinsured automobile
[i]s an automobile to which a bodily injury
liability bond or policy applies at the time of the
6
insurer’s liability was then limited by a provision (¶ 4[a][1]
and [2]) that states that the amount by which the $100,000 for
each person to a total of $300,000 for each occurrence exceeds
the total limits available to the owner or operator of the
underinsured vehicle will determine the amount to be paid.9
Further clarity is given to this clause by the next provisions
(¶ 4[a][2] and [3]), which say that the amounts available are
not increased because of the claims made or persons injured.10
occurrence:
a. In at least the minimum amounts required
by [state law]; and
b. In which the limits of liability are less
than the amount of damages the injured person is
legally entitled to recover for bodily injury.
Paragraph 2(a)(1) of the contract states that Auto-Owners
“will pay compensatory damages any person is legally entitled
to recover . . . from the owner or operator of an underinsured
automobile.” See n 3 where this provision is set out in
contex
9
The limiting language of the policy, ¶ 4(a), states:
(1) the amount by which the Underinsured
Motorist Coverage limits stated in the Declarations
exceed the total limits of all bodily injury
liability bonds and policies available to the owner
or operator of the underinsured automobile; or
(2) the amount by which compensatory damages
for bodily injury exceed the total limits of those
bodily injury liability bonds and policies.
See n 3 where this provision is set out in context.
10
Paragraph 4(b) of the policy states:
b. The Limit of Liability is not increased
because of the number of:
* * *
(2) claims made or suits brought;
(continued...)
7
The Court of Appeals, as urged by the plaintiffs,
approached this language by holding that ¶ 4(a)(1) of the
contract was ambiguous because it could be “reasonably
understood in differing ways.” 245 Mich App 524. That is, ¶
4(a)(1) of the contract could be interpreted to direct that
the $100,000 from the Auto-Owners policy be reduced by either
$50,000 or $25,000, depending on how one chose to read it.
That being the case, the Court construed the contract against
its drafter, Auto-Owners. The Court’s ambiguity analysis of
the language of ¶ 4(a)(1) is, at best, questionable because
the language appears clearer than the Court found it to be.
Paragraph 4(a)(1) states that the limit of liability for
underinsured-motorist coverage shall not exceed “the amount by
which the Underinsured Motorist Coverage limits stated in the
Declarations exceeds the total limits of all bodily injury
liability bonds and policies available to the owner or
operator of the underinsured automobile . . . .” (Emphasis
added.) In this case, the underinsured-motorist coverage
limit stated in Auto-Owner’s declaration is $100,000. The
total limit of all bodily-injury liability policies available
to the owner of the underinsured automobile, i.e., Ward, is
$50,000. Therefore, the amount by which the underinsured
motorist-coverage limits stated in the declarations exceeds
the total limits of all bodily-injury policies available to
the owner of the underinsured automobile is clearly $50,000,
(...continued)
(3) persons injured . . . .
See n 3 where this provision is set out in context.
8
not $75,000. Contrary to the contention of Court of Appeals,
this provision cannot be “reasonably understood” to be
referring to the amount actually received by the claimant
because the provision specifically refers to the total
available to the owner. Yet, whatever the merits of the Court
of Appeals analysis, the panel’s conclusion is fatally
undermined when ¶ 4(a)(1) is read, as it must be,11 with ¶¶
4(b)(2) and (3). These later paragraphs settle any perceived
ambiguity in ¶ 4(a)(1) by stating that the amounts to be paid
will not be increased because of claims made, suits brought,
or persons injured. Interpreting this provision to mean that
each plaintiff is entitled to $75,000 would increase the limit
of liability “because of” the number of claims brought or
persons injured, which is clearly contrary to the plain
language of ¶¶ 4(b)(2) and (3).12
Quite simply, if ¶ 4(a)(1) appears ambiguous by itself,
when read with ¶¶ 4(b)(2) and (3) the ambiguity is eliminated.
That being the case, the insurance contract at issue is
unambiguous and should be enforced as its terms dictate.
Thus, no consideration of the doctrine of construing the
contract against the drafter is appropriate.
11
We read contracts as a whole, giving harmonious effect,
if possible, to each word and phrase. Singer v Goff, 334 Mich
163, 168; 54 NW2d 290 (1952).
12
If there were only one claimant, Auto-Owners’ limit of
liability would clearly be $50,000. Plaintiffs argue,
however, that because there are two claimants, Auto-Owners’
limit of liability is $75,000. This cannot be true because
the policy specifically states that Auto-Owners’ limit of
liability shall not increase “because of” the number of
claimants.
9
B
The Court of Appeals, in declining to give the contract
the construction ¶¶ 4(b)(2) and (3) compel, also relied on the
argument that to allow such a construction would defy the
insured’s reasonable expectations, which, as the Court
characterized them, would be that no change in the amount due
would be occasioned by the vicissitudes of such things as
claims made or persons injured.
This approach, where judges divine the parties’
reasonable expectations and then rewrite the contract
accordingly, is contrary to the bedrock principle of American
contract law that parties are free to contract as they see
fit, and the courts are to enforce the agreement as written
absent some highly unusual circumstance, such as a contract in
violation of law or public policy. This Court has recently
discussed, and reinforced, its fidelity to this understanding
of contract law in Terrien v Zwit, 467 Mich 56, 71; 648 NW2d
602 (2002). The notion, that free men and women may reach
agreements regarding their affairs without government
interference and that courts will enforce those agreements, is
ancient and irrefutable. It draws strength from common-law
roots and can be seen in our fundamental charter, the United
States Constitution, where government is forbidden from
impairing the contracts of citizens, art I, § 10, cl 1.13 Our
own state constitutions over the years of statehood have
13
"No state shall . . . pass any . . . Law impairing the
Obligation of Contracts . . . .”
10
similarly echoed this limitation on government power.14 It is,
in short, an unmistakable and ineradicable part of the legal
fabric of our society. Few have expressed the force of this
venerable axiom better than the late Professor Arthur Corbin,
of Yale Law School, who wrote on this topic in his definitive
study of contract law, Corbin on Contracts, as follows:
One does not have “liberty of contract” unless
organized society both forbears and enforces,
forbears to penalize him for making his bargain and
enforces it for him after it is made. [15 Corbin,
Contracts (Interim ed), ch 79, § 1376, p 17.]
In contrast to this legal pedigree extending over the
centuries, the rule of reasonable expectations is of recent
origin. Moreover, it is antagonistic to this understanding of
the rule of law, and is, accordingly, in our view, invalid as
an approach to contract interpretation.
The rule of reasonable expectations had innocent origins
in 1970. Professor Robert E. Keeton of Harvard Law School
wrote an article entitled Insurance law rights at variance
with policy provisions, 83 Harv L R 961, 967 (1970), in which
he examined and attempted to rationalize a number of cases in
which the results appeared to defy the principle that
contracts will be construed according to their unambiguous
terms. To explain this phenomenon, as best he could, he
concluded that certain courts would evidently not enforce
clear contract language in the face of one of the parties’
“reasonable expectations” of coverage. As Professor Keeton
described it:
14
See, for example, Const 1963, art 1, § 10.
11
The objectively reasonable expectations of the
applicants and intended beneficiaries regarding the
terms of insurance contracts will be honored even
though painstaking study of the policy provision
would have negated those expectations. [Id.]
Whether Professor Keeton intended this analysis to spawn
a frontal assault on the ability of our citizens to manage, by
contract, their own affairs, it had that effect because
numerous courts, to one degree or another, adopted some form
of the rule.15
15
Writing in 1990, Professor Roger C. Henderson of the
University of Arizona School of Law discussed the development
of the doctrine in the years after 1970. See Henderson, The
doctrine of reasonable expectations in insurance law after two
decades, 51 Ohio St L J 823, 827-838 (1990), outlining the
development of the doctrine. According to Professor
Henderson, the following ten jurisdictions have clearly
adopted the rule: Lambert v Liberty Mut Ins Co, 331 So 2d 260,
263 (Ala, 1976); Stewart-Smith Haidinger, Inc v Avi-Truck,
Inc, 682 P2d 1108, 1112 (Alas, 1984); Gordinier v Aetna Cas &
Surety Co, 154 Ariz 266, 272; 742 P2d 277 (1987); Smith v
Westland Life Ins Co, 15 Cal 3d 111, 121-122; 123 Cal Rptr
649; 539 P2d 433 (1975); Farm Bureau Mut Ins Co v Sandbulte,
302 NW2d 104 (Iowa, 1981); Transamerica Ins Co v Royle, 202
Mont 173; 656 P2d 820 (1983); Nile Valley Coop Grain & Milling
Co v Farmers Elevator Mut Ins Co, 187 Neb 720; 193 NW2d 752
(1972) (construing standard fire policy); Catania v State Farm
Life Ins Co, 95 Nev 532; 598 P2d 631 (1979); Grimes v Concord
Gen Mut Ins Co, 120 NH 718; 422 A2d 1312 (1980); Werner
Industries, Inc v First State Ins Co, 112 NJ 30; 548 A2d 188
(1988).
Professor Henderson notes that seventeen jurisdictions
have adopted some form of the rule at various times: Davis v
MLG Corp, 712 P2d 985, 986 (Colo, 1986); Simses v North
American Co for Life & Health Ins, 175 Conn 77; 394 A2d 710
(1978); Hallowell v State Farm Mut Automobile Ins Co, 443 A2d
925 (Del, 1982); Richards v Hanover Ins Co, 250 Ga 613; 299
SE2d 561 (1983); Fortune v Wong, 68 Hawaii 1; 702 P2d 299
(1985); Eli Lilly & Co v Home Ins Co, 482 NE2d 467 (Ind,
1985); Gowing v Great Plains Mut Ins Co, 207 Kan 78; 483 P2d
1072 (1971) (applying reasonable expectations of insured as a
rule for resolving ambiguities); Simon v Continental Ins Co,
724 SW2d 210 (Ky, 1986); Cataldie v Louisiana Health Service
& Indemnity Co, 456 So 2d 1373 (La, 1984); Baybutt Constr Corp
v Commercial Union Ins Co, 455 A2d 914 (Me, 1983), but see
Peerless Ins Co v Brennon, 564 A2d 383 (Me, 1989) (reversing
(continued...)
12
Michigan has had a puzzling history with the doctrine.
The first mention of the rule of reasonable expectations in
Michigan was in Zurich Ins Co v Rombough, 384 Mich 228, 232
233; 180 NW2d 775 (1970), in which this Court held,
unexceptionally, that ambiguous policy provisions in an
insurance contract had to be construed against the insurance
company and in favor of the insured. In the course of this
(...continued)
Baybutt); Powers v Detroit Automobile Inter-Ins Exch, 427 Mich
602; 398 NW2d 411 (1986); Atwater Creamery Co v Western Nat’l
Mut Ins Co, 366 NW2d 271 (Minn, 1985) (Wahl, J., lead
opinion); Brown v Blue Cross & Blue Shield of Mississippi, 427
So 2d 139 (Miss, 1983); Davison v Business Men's Assurance Co
of America, 85 NM 796; 518 P2d 776 (1974); Great American Ins
Co v CG Tate Constr Co, 177 W Va 734; 303 NC 387; 279 SE2d 769
(1981) rev'd on other grounds, 315 NC 714; 340 SE2d 743
(1986); American Universal Ins Co v Russell, 490 A2d 60, 62
(RI, 1985); Nat’l Mut Ins Co v McMahon & Sons, 177 W Va 734;
356 SE2d 488 (1987); Garriguenc v Love, 67 Wis 2d 130; 226
NW2d 414 (1975). Pennsylvania has taken an inconsistent
approach. Compare Standard Venetian Blind Co v American
Empire Ins Co, 503 Pa 300, 307; 469 A2d 563 (1983), which
rejects the rule, with Tonkovic v State Farm Mut Automobile
Ins Co, 513 Pa 445; 521 A2d 920 (1987), which accepts the
rule.
For the purpose of fully understanding the rule,
Professor Henderson also pointed out that ten jurisdictions
have not adopted the rule: Casey v Highland Ins Co, 100 Idaho
505, 509; 600 P2d 1387 (1979); Bain v Benefit Trust Life Ins
Co, 123 Ill App 3d 1025, 1032; 463 NE2d 1082 (1984); Bond Bros
v Robinson, 393 Mass 546, 551; 471 NE2d 1332 (1984); Walle Mut
Ins Co v Sweeney, 419 NW2d 176, 181 n 4 (ND, 1988); Sterling
Merchandise Co v Hartford Ins Co, 30 Ohio App 3d 131, 135; 506
NE2d 1192 (1986); Anderson v Continental Assurance Co, 1983 Ok
Civ App 25; 666 P2d 245, 248 (1983); Allstate Ins Co v Mangum,
299 SC 226, 231; 383 SE2d 464 (1989); Keenan v Industrial
Indemnity Ins Co, 108 Wash 2d 314, 322; 738 P2d 270 (1987); St
Paul Fire & Marine v Albany Co School Dist 1, 763 P2d 1255,
1263 (Wy, 1988).
The remaining jurisdictions, in Professor Henderson’s
opinion, have not addressed the issue, or, have managed to
avoid ruling on it. See also Max True Plastering Co v United
States Fidelity & Guarantee Co, 1996 Ok 28; 912 P2d 861, 863
n 5 (1996), for a discussion of the doctrine’s acceptance.
13
holding, the Court cited a California Supreme Court case, Gray
v Zurich Ins Co, 65 Cal 2d 263, 269-270; 54 Cal Rptr 104; 419
P2d 168 (1966), in which Justice Mathew Tobriner fleetingly
referenced the rule of reasonable expectations.16 Whatever the
effect on California law Gray created, we must assume that our
Court’s use of the quotation was only to fully outline Justice
Tobriner’s position, because Rombough was decided on the basis
of construing against the drafter and the remarks about the
16
Justice Tobriner, writing for the California
Supreme Court in [Gray, supra], construing similar
provisions, said:
“In interpreting an insurance policy we apply
the general principle that doubts as to meaning
must be resolved against the insurer and that any
exception to the performance of the basic
underlying obligation must be so stated as clearly
to apprise the insured of its effect.
“These principles of interpretation of
insurance contracts have found new and vivid
restatement in the doctrine of the adhesion
contract. As this court has held, a contract
entered into between two parties of unequal
bargaining strength, expressed in the language of a
standardized contract, written by the more powerful
bargainer to meet its own needs, and offered to the
weaker party on a ‘take it or leave it basis’
carries some consequences that extend beyond
orthodox implications. Obligations arising from
such a contract inure not alone from the consensual
transaction but from the relationship of the
parties.
“Although courts have long followed the basic
precept that they would look to the words of the
contract to find the meaning which the parties
expected from them, they have also applied the
doctrine of the adhesion contract to insurance
policies, holding that in view of the disparate
bargaining status of the parties we must ascertain
that meaning of the contract which the insured
would reasonably expect.” [Rombough, supra at 232
233.]
14
rule of reasonable expectations were obiter dicta.
Nonetheless, Rombough is the case that opened the door to
the rule of reasonable expectations in Michigan. The next
case to address the issue is Bradley v Mid-Century Ins Co, 409
Mich 1, 60-61; 294 NW2d 141 (1980). Discussing a setoff
provision in an insurance contract, the Court, in an equivocal
passage of the opinion, held that “[t]he set-off clause,
whether regarded as ambiguous or inconsistent with the rule of
reasonable expectations of the insured, cannot be enforced as
written.” Id. Regarding Michigan authority, the Bradley
Court cited Rombough. Id. at 61 n 69.17
By 1982, however, when this Court next addressed the rule
in Raska v Farm Bureau Ins Co, 412 Mich 355, 362-363; 314 NW2d
440 (1982), a majority of the Court took pains to reject the
rule of reasonable expectations. Justice Kavanagh, writing
for the majority, pithily targeted the difficulty with the
rule of reasonable expectations as follows:
[T]he expectation that a contract will be
enforceable other than according to its terms
surely may not be said to be reasonable. If a
person signs a contract without reading all of it
or without understanding it, under some
circumstances that person can avoid its obligations
on the theory that there was no contract at all for
there was no meeting of the minds.
But to allow such a person to bind another to
an obligation not covered by the contract as
written because the first person thought the other
was bound to such an obligation is neither
reasonable nor just. [Id.]
Interestingly, the majority did not mention the Bradley
17
The Court also cited several of Professor Keeton’s
works, pointing out that the rule had been accepted in several
jurisdictions. Bradley, supra at 61 n 69.
15
decision of only two years before. We surmise this was not an
oversight, a finding reinforced by the fact that there had
been no change in the composition of the Court in those two
years. Rather, we conclude that the majority did not refer to
Bradley because it reasoned that Bradley was premised on an
ambiguity analysis or, perhaps, the requirement to conform
automobile-insurance contracts to the requirements of the no
fault automobile-insurance act. Thus, it was probable that
the majority considered any discussion of the rule of
reasonable expectations in Bradley dicta, not requiring
analysis. Buttressing this view is the fact that, Justice
Williams, writing in dissent, invoked the rule of reasonable
expectations, but never cited Bradley as support for his
position. Raska, supra at 380.
This was not the end of the rule of reasonable
expectations, however, because it was again mentioned in a
plurality opinion in Powers v Detroit Automobile Inter-Ins
Exch, 427 Mich 602, 631-635; 398 NW2d 411 (1986). In writing
the plurality opinion18, Chief Justice Williams cited Raska for
the proposition that a reasonable expectation of a reader of
the contract was enforceable. Id. at 631. This is a curious
source of authority, as the Raska majority made no mention of
that proposition. Moreover, breaking new ground, the Powers
plurality also stated that the rule of reasonable expectations
does not require an ambiguity as a prerequisite to the
18
Justice Archer concurred with Chief Justice Williams,
and Justices Cavanagh and Brickley concurred in the result
only.
16
application of the doctrine. Powers, supra at 631 n 7.19 For
additional authority, the plurality relied on Rombough and
Bradley for the limited proposition that insured parties do
not have a reasonable expectation of coverage in the face of
antistacking clauses in insurance contracts. The Powers
plurality apparently misconceived the preceding Michigan cases
regarding the acceptance in this state of the rule of
reasonable expectations. In any case, whatever the Powers
opinion’s difficulties, it remains a plurality opinion and
thus is not binding on subsequent courts. People v Carines,
460 Mich 750, 767 n 15; 597 NW2d 130 (1999).20
In 1991, in Vanguard Ins Co v Clarke, 438 Mich 463, 471
472; 475 NW2d 48 (1991), this Court again discussed the rule,
agreeing with the Powers plurality and holding the rule to be
an adjunct to the rules of construction of insurance
contracts.21 This was an unusual use of precedent because
Powers was not binding and Raska was. Adding to the
confusion, the Court characterized the “sole issue” in the
case as whether to adopt the theory of dual or concurrent
causality in insurance. Vanguard, supra at 465-466. This
19
The plurality further referred to the rule of reasonable
expectations as “[a]n adjunct to the rules of construction of
insurance contracts . . . .” Powers, supra at 631.
20
See also Robinson v Detroit, 462 Mich 439, 470 n 1; 613
NW2d 307 (2000)(Corrigan, C.J., concurring), and People v
Anderson, 389 Mich 155, 170; 205 NW2d 461 (1973).
21
The Court, however, declined to adopt the Powers
plurality’s view that the rule does not require an ambiguity
in the contract as a prerequisite to its application.
Instead, the Vanguard majority concluded that, without an
ambiguity, there could be no application of the rule of
reasonable expectations. Id. at 472-473.
17
issue was resolved without any need to delve into the doctrine
of reasonable expectations, and, thus, discussion of
reasonable expectations was merely dicta.
In the wake of Vanguard, this Court applied, but did not
address the provenance of, the rule of reasonable
expectations, apparently assuming it to be the law. See
Gelman Sciences, Inc v Fidelity Cas Co, 456 Mich 305, 318; 572
NW2d 617 (1998)(citing Vanguard and Powers); Fire Ins Exch v
Diehl, 450 Mich 678, 687; 545 NW2d 602 (1996)(citing Powers);
and Michigan Millers Mut Ins Co v Bronson Plating Co, 445 Mich
558, 594 n 17; 519 NW2d 864 (1994)(citing Powers and
Vanguard). Significantly, none of these cases mentions Raska.
We next discussed the rule of reasonable expectations in
Nikkel. This Court approvingly cited Raska and, repudiating
the Powers approach, stated:
[W]e decline defendants’ invitation to discern
ambiguity solely because an insured might interpret
a term differently than the express definition
provided in a contract. “This court has many times
held that one who signs a contract will not be
heard to say, when enforcement is sought, that he
did not read it, or that he supposed it was
different in its terms.” . . . To the extent that
the plurality in Powers gleaned ambiguity by
relying on an understanding of a term that differed
from the clear definition provided in the policy,
Powers is contrary to the most fundamental
principle of contract interpretation—the court may
not read ambiguity into a policy where none exists.
[Nikkel, supra at 567-568.]
We concluded by holding that, while the rule of
reasonable expectations was, at most, an adjunct to the rules
of construction, there was no occasion to invoke it because,
under Vanguard, it could only be utilized where there was an
ambiguity in the contract, which was not present in Nikkel.
18
Id. at 568-569.
Viewing the puzzling thirty-three-year history of the
rule of reasonable expectations in Michigan, we are confronted
with a confused jumble of ignored precedent,22 silently
acquiesced to plurality opinions,23 and dicta,24 all of which,
with little scrutiny, have been piled on each other to
establish authority. At no point has an effort been made to
establish priorities among the competing holdings. To bring
order to this area of the law, it falls on us today to clearly
articulate the status of the rule of reasonable expectations
in this jurisdiction.
The rule of reasonable expectations clearly has no
application to unambiguous contracts. That is, one’s alleged
“reasonable expectations” cannot supersede the clear language
of a contract. Therefore, if this rule has any meaning, it
can only be that, if there is more than one way to reasonably
interpret a contract, i.e., the contract is ambiguous, and one
of these interpretations is in accord with the reasonable
expectations of the insured, this interpretation should
prevail. However, this is saying no more than that, if a
contract is ambiguous and the parties’ intent cannot be
discerned from extrinsic evidence, the contract should be
interpreted against the insurer. In other words, when its
application is limited to ambiguous contracts, the rule of
22
Raska.
23
Powers.
24
Rombough, arguably Bradley, and Vanguard.
19
reasonable expectations is just a surrogate for the rule of
construing against the drafter. As the Court of Appeals has
recently explained:
Well-settled principles of contract
interpretation require one to first look to a
contract’s plain language. If the plain language
is clear, there can be only one reasonable
interpretation of its meaning and, therefore, only
one meaning the parties could reasonable expect to
apply. If the language is ambiguous, longstanding
principles of contract law require that the
ambiguous provision be construed against the
drafter. Applied in an insurance context, the
drafter is always the insurer. Thus, it appears
that the “rule of reasonable expectations” is
nothing more than a unique title given to
traditional contract principles applied to
insurance contracts . . . . [Singer v American
States Ins, 245 Mich App 370, 381 n 8; 631 NW2d 34
(2002).]
Several commentators have expressed this same view. See
Comment, A critique of the reasonable expectations doctrine,
56 U Chi L R 1461, 1468 (1989) (The rule of reasonable
expectations “is identical to the practice of construing
ambiguities against the insurer except that it purports to
provide an additional justification for doing so, i.e., to
satisfy the insured’s reasonable expectations.”); Popik &
Quackenbos, Reasonable expectations after thirty years: A
failed doctrine, 5 Conn Ins L J 425, 429 (1998)(“Courts
applying an ‘ambiguity’-based version of the doctrine have
apparently abandoned the doctrine as a rule of substantive law
altogether, treating it instead as a rule of construction
analogous to—indeed, virtually indistinguishable from—the
contra proferentem doctrine.”); Henderson, The doctrine of
reasonable expectations in insurance law after two decades, 51
Ohio St L J 823, 827 (1990)(“[D]ecisions using [the rule of
20
reasonable expectations] solely to construe [ambiguous] policy
language do not support a new principle at all, but fall
within the time-honored canon of construing ambiguities
against the drafter of the contract-contra proferentem.”).
In sum, the rule of reasonable expectations clearly has
no application when interpreting an unambiguous contract
because a policyholder cannot be said to have reasonably
expected something different from the clear language of the
contract. Further, it is already well established that
ambiguous language should be construed against the drafter,
i.e., the insurer. Therefore, stating that ambiguous language
should be interpreted in favor of the policyholder’s
reasonable expectations adds nothing to the way in which
Michigan courts construe contracts, and thus the rule of
reasonable expectations should be abolished.
The rights and duties of parties to a contract are
derived from the terms of the agreement. Evans v Norris, 6
Mich 369, 372 (1859). As this Court has previously stated,
“The general rule [of contracts] is that competent persons
shall have the utmost liberty of contracting and that their
agreements voluntarily and fairly made shall be held valid and
enforced in the courts.” Terrien, supra at 71, quoting Twin
City Pipe Line Co v Harding Glass Co, 283 US 353, 356; 51 S Ct
476; 75 L Ed 1112 (1931).25 Under this legal principle, the
parties are generally free to agree to whatever they like,
25
“Freedom of contract is the general rule and restraint
the exception.” Morehead v New York ex rel Tipaldo, 298 US
587, 610-611; 80 L Ed 1347; 56 S Ct 918 (1936).
21
and, in most circumstances, it is beyond the authority of the
courts26 to interfere with the parties’ agreement. St Clair
Intermediate School Dist v Intermediate Ed Ass’n, 458 Mich
540, 570-572; 581 NW2d 707 (1998). Respect for the freedom to
contract entails that we enforce only those obligations
actually assented to by the parties. Evans, supra at 372. We
believe that the rule of reasonable expectations markedly
fails in this respect. The words of Justice Kavanagh bear
repeating:
[T]he expectation that a contract will be
enforceable other than according to its terms
surely may not be said to be reasonable. If a
person signs a contract without reading all of it
or without understanding it, under some
circumstances that person can avoid its obligations
on the theory that there was no contract at all for
there was no meeting of the minds.
But to allow such a person to bind another to
an obligation not covered by the contract as
written because the first person thought the other
was bound to such an obligation is neither
reasonable nor just. [Raska, supra at 362-363.]
Accordingly, we hold that the rule of reasonable expectations
has no application in Michigan, and those cases that
recognized this doctrine are to that extent overruled.
IV. Conclusion
We reverse the judgment of the Court of Appeals and find
the insurance contract between Auto-Owners and Wilkie
unambiguously limited Auto-Owners’ liability to $50,000 each
for Wilkie and Frank.
26
Duties imposed by courts are to be avoided in order to
respect the freedom of parties to fashion agreements of their
own design. See Comment, A critique of the doctrine of
reasonable expectations, supra at 1487.
22
Clifford W. Taylor
Maura D. Corrigan
Robert P. Young, Jr.
Stephen J. Markman
23
S T A T E O F M I C H I G A N
SUPREME COURT
KAY WILKIE, PERSONAL REPRESENTATIVE
OF THE ESTATE OF PAUL K. WILKIE,
DECEASED, AND JANNA LEE FRANK,
Plaintiff-Appellees,
v No. 119295
AUTO-OWNERS INSURANCE COMPANY,
Defendant-Appellant.
____________________________________
WEAVER, J. (concurring in part dissenting in part).
I concur with the majority that the rule of reasonable
expectations “has no application when interpreting an
unambiguous contract” and that “it is already well established
that ambiguous language should be construed against the
drafter, i.e., the insurer.” Ante at 25.
However, I dissent from the majority’s determination that
the underinsured-motorist provisions of the automobile
insurance contract at issue are unambiguous. I would conclude
that the policy is ambiguous and, therefore, construe it
against the drafter.
The policy provides on its declarations page that Auto
Owners’ underinsured-motorist liability limit is $100,000 per
person and $300,000 per occurrence. However, the policy
endorsement provides in pertinent part that “[t]he Limit of
Liability is not increased because of the number of . . .
persons injured . . . .” While the declarations page appears
to base its underinsured premium on either a per person or a
per occurrence maximum, the endorsement’s language can be read
as limiting liability to strictly a per occurrence maximum
because it states the liability limit will not be increased by
the number of persons injured.
On the facts of this case, under the per person
interpretation, defendant is liable to each injured person
covered by the underinsured-motorist provisions for $75,000,
the per person limit ($100,000) minus the amount each person
received from the underinsured motorist ($25,000). Under a
per occurrence interpretation, defendant is liable to each
injured person covered by the underinsured-motorist provisions
for $50,000, the per person limit ($100,000) minus the total
amount available from the underinsured-motorist for the
occurrence ($50,000).
I would construe this ambiguity against the drafter and
hold that each plaintiff is entitled to $75,000.
Elizabeth A. Weaver
2
S T A T E O F M I C H I G A N
SUPREME COURT
KAY WILKIE, personal
representative of the estate
of PAUL K. WILKIE, deceased,
and JANNA LEE FRANK,
Plaintiffs-Appellees,
v No. 119295
AUTO-OWNERS INSURANCE COMPANY,
Defendant-Appellant.
________________________________
CAVANAGH, J. (dissenting).
The majority holds today that an insured party’s
objectively reasonable expectations are no longer relevant in
determining the meaning of an insurance contract. Because I
would not discard the doctrine of reasonable expectations, I
must respectfully dissent.
I
The doctrine of reasonable expectations allows a court to
contemplate the scope of insurance coverage anticipated by an
insured party seeking benefits. Unlike the doctrine of contra
preferentem, i.e., construing a document against the drafter,
the reasonable-expectations doctrine is generally confined to
the field of insurance law and, when correctly applied, is not
limited to those circumstances in which a document is clearly
ambiguous on its face.1 Rather, the doctrine may assist a
court in making the ambiguity determination, i.e., whether an
insurance contract contains language that could reasonably be
interpreted in two or more ways.2
Although courts normally limit the ambiguity inquiry to
the four corners of a contract’s text in other contexts, few
have failed to recognize the unique character of insurance
1
As I noted in my dissent in Farm Bureau Mut In Co of
Michigan v Nikkel, 460 Mich 558, 571; 596 NW2d 915 (1999), an
insurance company may not benefit from employing otherwise
straightforward and unambiguous terms in a manner an insured
could find confusing. See also Spaulding v Morse, 322 Mass
149, 152-153; 76 NE2d 137 (1947):
Every instrument in writing is to be
interpreted, with a view to the material
circumstances of the parties at the time of the
execution, in the light of the pertinent facts
within their knowledge and in such manner as to
give effect to the main end designed to be
accomplished. . . . [The] instrument is to be so
construed as to give effect to the intent of the .
. . [parties] as manifested by the words used
illumined by all the attendant factors, unless
inconsistent with some positive rule of law or
repugnant to other terms of the instrument. An
omission to express an intention cannot be supplied
by conjecture. But if the instrument as a whole
produces a conviction that a particular result was
fixedly desired although not expressed by formal
words, that defect may be supplied by implication
and the underlying intention . . . may be
effectuated, provided it is sufficiently declared
by the entire instrument. [Citations omitted.]
2
See Holmes, The Theory of Legal Interpretation, 12 Harv
L R 417, 418 (1899):
[W]e let in evidence of intention not to help
out what theory recognizes as an uncertainty of
speech, and to read what the writer meant into what
he has tried but failed to say, but recognizing
that he has spoken with theoretic certainty, we
inquire what he meant in order to find out what he
has said.
2
agreements:
There is no meeting of the minds except
regarding the broad outlines of the transaction,
the insurer's desire to sell a policy and the
insured's desire to buy a policy of insurance for a
designated price and period of insurance to cover
loss arising from particular perils (death,
illness, fire, theft, auto accident,
"comprehensive"). The details (definitions,
exceptions, exclusions, conditions) are generally
not discussed and rarely negotiated. [Lotoszinski
v State Farm Mut Automobile Ins Co, 417 Mich 1, 14
n 1; 331 NW2d 467 (1982) (Levin J., dissenting).]
See also Keeton, Insurance law rights at variance with policy
provisions, 83 Harv L R 961 (1970), and cases cited therein.
Hence, in the context of such adhesion contracts, it is
appropriate to consider not just the contractual text, but
also the objectively reasonable expectations of the insured
party and the circumstances surrounding the transaction.
In Steven v Fidelity & Cas Co of N Y, 58 Cal 2d 862; 27
Cal Rptr 172; 377 P2d 284 (1962), for example, appellant’s
husband purchased a life-insurance policy from a vending
machine before leaving on a business flight. The insured was
required to sign and mail the entire document before boarding
the flight. The text of the contract, which could be fully
reviewed only after purchase, contained an exception,
prohibiting coverage for charter flights, while permitting
coverage for reasonable methods of substitute transportation
by land. On the return trip, appellant’s husband was forced
to make emergency arrangements on a charter flight. The
insured died while traveling on the charter plane, and the
insurer denied benefits.
On appeal, California’s high court refused to enforce the
3
exclusion. The court held that a reasonable insured party
would purchase such insurance expecting coverage for the
entire trip, including any reasonable emergency substitute
form of transportation. Because the contract did not
expressly prohibit the type of substitute transportation
utilized by the insured, though it did prohibit coverage for
travel “on other than scheduled air carriers,” id. at 866, a
lay person could not reasonably be expected to foresee the
force of the exclusion. Moreover, the court emphasized that
the inanimate vending machine emitted a complex document that
most people would be unable to decipher before boarding a
plane. Likewise, the sticker on the face of the machine
prohibiting coverage for nonscheduled air carriers could not
aid the purchaser in weighing the benefits of the contract
because the definition was buried in its text. Id., supra at
877. In support of this result, Justice Tobriner noted that
“California courts have long been disinclined to effectuate
clauses of limitation of liability which are unclear,
unexpected, inconspicuous or unconscionable.” Id. at 879,
relying on Raulet v Northwestern Nat’l Ins Co, 157 Cal 213,
230; 107 P 292 (1910) (holding that insured parties would not
be stringently bound to contract provisions because “[i]t is
a matter almost of common knowledge that a very small
percentage of policy-holders are actually cognizant of the
provisions of their policies . . . . [I]n their numerous
conditions and stipulations [insurance contracts] furnish[]
what sometimes may be veritable traps for the unwary.”).
Recognizing these same principles, dissenting Justice
4
Williams noted in Raska v Farm Bureau Ins Co, 412 Mich 355,
370; 314 NW2d 440 (1982):
This Court is made up of human beings who are
aware that very few insureds will try to read the
detailed, cross-referenced, standardized,
mass-produced insurance form, nor necessarily
understand it if they do. Courts generally have
gradually moved away from the traditional rule of
caveat emptor, realizing that the modern insurance
contract is not made between parties of equal
bargaining strength with each side taking a part in
choosing the language of the agreement and
understanding what the contract means.
Thus the approach we must take in examining
insurance contracts such as the one in issue was
accurately described by the New Jersey Supreme
Court as follows:
"An insurance policy, though in form a
contract, is a product prepared and packaged by the
insurer. The buyer scarcely understands the
detailed content of what he is buying. When a
court construes a policy, it cannot be indifferent
to that reality." [Raska, quoting DiOrio v New
Jersey Manufacturers Ins Co, 63 NJ 597, 602; 311
A2d 378 (1973).]
For these reasons, I must express my agreement with
Justice Levin’s approach in Lotoszinski, supra at 15-16:
It is the historic responsibility of the
courts to protect, in the exercise of the judicial
power, against imposition in commercial
transactions. Fairness is the proper inquiry where
a court is assessing policy language marketed and
purchased without negotiation or explanation of the
scope of the coverage. 3 . . .
The governing rule of law cannot rightfully be
predicated on the assumption that [the plaintiff]
would read the policy, that if she did read it she
would or could understand its esoteric verbiage,
anticipate the situation which developed and deduce
that she was not covered. Many competent lawyers
would, unless they set aside time for careful
reading and reflection, have failed that exam.
__________________________________________________
3
See Bradley v Mid-Century Ins Co, 409 Mich 1, 61;
294 NW2d 141 (1980); DiOrio v New Jersey
Manufacturers Ins Co, [supra]; C & J Fertilizer,
5
Inc v Allied Mutual Ins Co, 227 NW2d 169, 175
(Iowa, 1975); Hionis v Northern Mutual Ins Co, 230
Pa Super 511, 516-517; 327 A2d 363, 365 (1974);
Henningsen v Bloomfield Motors, Inc, 32 NJ 358,
399-400; 161 A2d 69, 92 (1960); Ady v West American
Ins Co, 69 Ohio St 2d 593, 597; 433 NE2d 547, 549
(1982).
See also Keeton, Insurance Law, § 63, pp
350-351; 2 Restatement Contracts, 2d, § 208; 1
Corbin, Contracts, § 128, p 554; Grismore,
Contracts (Murray), § 294, p 508.
___________________________________________________
Though few would deny that the majority has artfully
attempted to diminish the significance of this Court’s
jurisprudence with regard to the reasonable-expectations
doctrine, it cannot be denied that, before today, Michigan
joined the majority of states that integrated the doctrine
into their jurisprudence.3 In doing so, such jurisdictions
did nothing more than recognize our timeworn rules of contract
interpretation, i.e., contract formation requires a meeting of
the minds.
Though I acknowledge that the majority’s position is
consistent with the notion that “free men and women may reach
agreements regarding their affairs without government
interference and that courts will enforce those agreements,”
ante at 12 citing Terrien v Zwit, 467 Mich 56, 71; 648 NW2d
602 (2002), I object to its attempt to distance itself from
the policy choices inherent in its decision today. Simply
put, the majority and I differ with regard to the policies
3
See Nikkel, supra at 567. See also Stempel, Unmet
expectations: Undue restriction of the reasonable expectations
approach and the misleading mythology of judicial role, 5 Conn
Ins L J 181, 191 (1998) (noting that “38 states ‘have
recognized some variation of the reasonable expectations
doctrine.’").
6
that should guide the interpretation of insurance law.
I
would prefer not to disregard the manner in which the
insurance industry operates. Though an adhesion contract may
be a necessary ingredient in the trade, I cannot condone a
doctrine of interpretation that all but ignores the
potentially precarious effect on the bound party.
II
In light of these standards, I cannot agree that the
contract terms are free of ambiguity.4 Defendant insurer
4
As the majority notes, the relevant portions of the
insurance contract provide that Auto Owners underinsured
motorist policy limit is $100,000 for each person and $300,000
for each occurrence. The policy endorsement provides as
follows:
4. LIMIT OF LIABILITY
a. Our Limit of Liability for Underinsured
Motorist Coverage shall not exceed the lowest of:
1. the amount by which the Underinsured
Motorist Coverage limits stated in the Declarations
exceed the total limits of all bodily injury
liability bonds and policies available to the owner
or operator of the underinsured automobile; or
2. the amount by which compensatory damages
for bodily injury exceed the total limits of those
bodily injury liability bonds and policies.
b. The Limit of Liability is not increased
because of the number of:
1. automobiles shown or premiums charged in
the Declarations;
2. claims made or suits brought;
3. persons injured; or
4. automobiles involved in the occurrence.
c. The amount we pay will be reduced by any
amount paid or payable for the same bodily injury.
(continued...)
7
based its premium for underinsured-motorist coverage on a “per
person” and “per occurrence” maximum. This portion of the
contract, found on the declarations page, was among the few
terms actually negotiated by the parties.
Even assuming the purchasing party read and understood
the policy upon receipt (which often arrives weeks after the
original purchase), review of the exclusions in section four
suggests the insurer simply attempted to clarify that its
liability was limited to making the insured whole, paying out
no more than necessary to meet the limits on which the
purchase price was based, i.e., $100,000 per person and
$300,000 per occurrence.
If the insurer intended to limit coverage in the manner
it now claims, it had a duty to expressly state not only that
“coverage will not be increased,” but also that coverage may
be decreased from the coverage limits specifically negotiated.
Instead of acknowledging this rational deduction, defendant
insurer has asked this Court to pretend that both plaintiffs
received the negligent party’s maximum benefit ($50,000 per
person or per accident), when in fact defendant insurer had
previously authorized a settlement agreement wherein the
injured plaintiffs split the negligent party’s benefits,
receiving only $25,000 each.
More specifically, the insurer’s inclusion of ¶ 4(1)(a)
(b) merely assure that an insured will be reimbursed up to the
policy limits on the declarations page, while clarifying no
4
(...continued)
. . .
8
windfall payments will be made, i.e., an insured will not
receive duplicate reimbursement or payments exceeding the
underinsured policy limits on the declarations page.
Paragraph (4)(a)(1), for example, provides that an insurer
will pay no more than the difference between policy limits.
This clause clarifies that an insurer is simply obligated to
make up the difference between benefits received from the
underinsured party and the insurer. Though free of ambiguity
when only one person is injured, the text’s vagueness becomes
evident when multiple insured parties are injured if the
negligent party’s policy has no separate per person and per
occurrence coverage.
Further, the use of the term “available” is ambiguous, as
noted by Justice Kelly in her dissent. While it is true in
this case that the underinsured negligent motorist has $50,000
available for the total occurrence with no per person limit,
it is impossible to conclude from the text of the contract at
issue that the underinsured has $50,000 available to pay each
plaintiff, though that is exactly the interpretation defendant
asks this Court to adopt. By inserting text that ensures that
payments for the same injuries are not duplicated, while
simultaneously asking the Court—on the basis of the vague
text—to assume that one limit could be paid out more than
once, defendant has convinced this Court to further shift the
balance of power in favor of insurance companies for the
purpose of reducing an insurer’s liability.
Properly interpreted, the computation required in ¶
4(a)(1) should be the difference between the insurer’s per
9
person limit ($100,000) and the underinsured’s per occurrence
limit as actually received (in this case, $25,000 per
plaintiff). Similarly, if it were necessary to determine the
per occurrence liability, the amount purchased by the
underinsured motorist ($50,000) should be deducted from the
amount of per occurrence coverage purchased from the insurer
($300,000).
Paragraph 4(a)(2) also supports a ruling in favor of
plaintiffs. That paragraph clarifies that an insurer will pay
benefits only for damages actually incurred, i.e., if an
insured is hurt by a driver with a $40,000 per person policy
limit and the insured incurs $60,000 in individual damages,
the insurance company need pay only $20,000, assuming an
insured has purchased a $100,000 per person underinsured
motorist policy. This clause makes clear the insurer will pay
benefits to make an insured whole, but no more.
Paragraphs (4)(b)(1)-(4) also clarify that an insurer’s
liability will not be increased because of (1) the number of
vehicles for which premiums are charged in the declaration,
(2) the number of claims brought, (3) the number of people
injured, or (4) the number of automobiles involved in an
occurrence. On the basis of subsection (3) alone, one could
logically infer that benefits should not decrease as a result
of the number of people injured, i.e., if an insurer indicates
a benefit will not be increased just because more than one
person is injured, it is also reasonable to assume an insurer
will not decrease benefits for the same reason.
This conclusion is buttressed by the fact that defendant
10
sold the underinsurance coverage for a limit of $100,000 per
person and $300,000 per occurrence. This implies that at
least three insured parties could be compensated up to the
full per person limit if injured by an underinsured motorist.
Instead, the majority has adopted an interpretation that
prohibits full recovery where multiple parties are injured.
Finally, ¶ 4(c) clarifies that the benefits paid will be
reduced by any amount actually “paid or payable for the same
bodily injury.” Again, this subsection ensures that an
insured may not receive a duplicate payment for a single
injury. The text of this clause suggests the reduction will
be limited to that actually paid or logically payable for one
particular injury. I am persuaded that the insurer’s
interpretation of its contract renders ¶ 4(c) generally
superfluous and logically invalid. How can an insurer reduce
benefits by any amount “payable” to two people for their
injuries, where the “payable” amount—the res—cannot be paid to
more than one person? The problems with the text in ¶ 4(c)
echo the concerns raised with regard to ¶ 4(a)(1).
In sum, even if the insured purchaser actually reviewed
the terms of the contract and all its exclusions, it would
have remained impossible to anticipate the insurer’s
interpretation on the basis of the text of the contract
purchased. Only when read in light of the underinsured
negligent party’s contract could one predict the majority’s
interpretation. Moreover, this interpretation ignores the
significance of the sole negotiated term at issue in light of
¶ 4, which merely aims to clarify that the insured will be
11
made whole, but no more. Therefore, in light of the manner in
which the contract terms could be understood by a reasonable
lay person, I would hold in favor of plaintiffs.
III
The roots of the doctrine of reasonable expectations run
far deeper than the majority implies and could be properly
characterized as nothing more than an overt attempt to clarify
the scope of the parties’ contract. Applied in this case, I
suspect even the most experienced analyst would have failed to
predict the outcome affirmed by the majority. Because the
inquiry merely aids in the resolution of ambiguous insurance
contract terms, I must respectfully dissent and would affirm
the decision of the Court of Appeals.
Michael F. Cavanagh
Marilyn Kelly
12
S T A T E O F M I C H I G A N
SUPREME COURT
KAY WILKIE, personal representative
of the ESTATE OF PAUL K. WILKIE,
deceased, and JANNA LEE FRANK,
Plaintiffs-Appellee,
v No. 119295
AUTO-OWNERS INSURANCE COMPANY,
Defendant-Appellant.
___________________________________
KELLY, J. (dissenting).
I join Justice Cavanagh's dissenting opinion regarding
the rule of reasonable expectations. I write separately to
express my disagreement with the majority's holding that no
ambiguity exists in the contract terms under consideration.
Because I believe that the Court of Appeals properly found the
terms of the policy ambiguous and properly construed them
against defendant, their drafter, I would affirm.
I
A contractual provision is ambiguous if reasonably
susceptible to two different interpretations. Farm Bureau
Mutual Ins Co of Michigan v Nikkel, 460 Mich 558, 566; 596
NW2d 915 (1999).
The disagreement in this case surrounds the
interpretation of the "limit of liability clause" in the
underinsured motorist endorsement. That provision states:
4. LIMIT OF LIABILITY
a. Our Limit of Liability for Underinsured
Motorist Coverage shall not exceed the lowest of:
(1) the amount by which the Underinsured
Motorist Coverage limits stated in the Declarations
exceed the total limits of all bodily injury
liability bonds and policies available to the owner
or operator of the underinsured automobile; or
(2) the amount by which compensatory damages
for bodily injury exceed the total limits of those
bodily injury liability bonds and policies.
b. The Limit of Liability is not increased
because of the number of:
(1) automobiles shown or premiums charged in
the Declarations;
(2) claims made or suits brought;
(3) persons injured; or
(4) automobiles involved in the occurrence.
Under this provision, plaintiffs may recover underinsured
motorist benefits only up to the "Limit of Liability." The
"Limit of Liability" constitutes the difference between the
$100,000 per person maximum and the liability amount
"available to [Ward,] the owner or operator of the
underinsured automobile." Here, Ward's policy covered
$50,000 worth of liability per occurrence. Thus, Ward had
available $50,000 for payment to those claiming against him.
Ambiguity results from the use of "available" in this
contract.1 Webster's dictionary defines the term as
1
I note that the Court of Appeals in Auto-Owners Ins Co
v Leefers, 203 Mich App 5; 512 NW2d 324 (1993), interpreting
(continued...)
2
1. suitable or ready for use; at hand . . . . 2.
readily obtainable; accessible . . . . 3. free or
ready to be seen, spoken to, employed, etc. . . . .
4. having sufficient power or efficacy; valid
. . . . [Random House Webster's College Dictionary
(1995).]
In a multiple claimant situation, these dictionary
definitions support two interpretations of the word. First,
"available" can mean the amount actually available to each
claimant against Ward, considering that the claimants will
split the benefits. Second, it can mean the amount
potentially available to each claimant against Ward, as if
only one claimant existed. Under the former interpretation,
the insurance company should reduce the $100,000 per person
limit by only $25,000, leaving a payment to each plaintiff of
$75,000. Under the latter interpretation, the insurance
company should reduce the $100,000 per person limit by
$50,000, leaving a payment to each plaintiff of $50,000.
Given the reasonableness of both interpretations, the
Court should affirm the decision of the Court of Appeals in
1
(...continued)
a different provision of an insurance contract written by the
present defendant, found "available" to be ambiguous. The
Court cited Hoffman v United Services Automobile Ass'n, 671 F
Supp 922, 924-925 (D Conn, 1987), which commented upon the
term as follows:
The word "available" could mean anything from
"in hand" or "actually received" to "within reach"
or "conceivably obtainable." . . . What is
available, or accessible or obtainable, can range
widely depending on what conduct or events are
necessary to bring the tangible object into
possession . . . . As the extent of those events
or conduct is not defined, the word is ambiguous.
The Leefers Court defined the term to mean those funds
actually or reasonably available to the insured. 203 Mich App
11-12.
3
holding this contract provision ambiguous.
II
The majority attempts to sidestep this ambiguity by
relying on ¶ 4(b)(2) and ¶ 4(b)(3) to interpret the word
"available" in ¶ 4(a). According to the majority, "[t]hese
later paragraphs settle any perceived ambiguity in ¶ 4(a)(1)
by stating that the amounts to be paid will not be increased
because of claims made, suits brought, or persons injured."
Ante at 10-11. The majority errs in relying on this
provision.
Paragraph 4(b) does not state that the "amounts to be
paid" will not be increased; rather, it states that the "Limit
of Liability" will not be increased. Though the difference is
subtle, the structure of the contract provisions makes the
difference critical to the contract's interpretation.
Paragraph 4(a) defines the limit of liability. Paragraph 4(b)
prevents an increase in that limit, but says nothing at all
about what the limit is in the first place. It is in
determining the limit of liability that we encounter the
ambiguous term "available" and its several possible meanings.2
Thus, the provisions on which the majority relies fail to
"settle any perceived ambiguity," ante at 10. Because my
examination of ¶¶ 4(b)(2) and (3) represents a reasonable
interpretation of the contract provisions, it supports the
conclusion that those provisions are ambiguous.
2
Indeed, plaintiffs do not claim that the limit should be
increased. Rather, they argue that defendant erred in
calculating the limit initially by setting it too low.
4
III
In sum, the Court of Appeals properly held the contract
terms to be ambiguous. It was appropriate for the Court to
construe them against defendant. Clevenger v Allstate Ins Co,
443 Mich 646, 654; 505 NW2d 553 (1993). Therefore, I would
affirm the decision of the Court of Appeals.
Marilyn Kelly
5