Michigan Supreme Court
Lansing, Michigan
Chief Justice: Justices:
Opinion Clifford W. Taylor Michael F. Cavanagh
Elizabeth A. Weaver
Marilyn Kelly
Maura D. Corrigan
Robert P. Young, Jr.
Stephen J. Markman
FILED JULY 19, 2005
CITY OF GROSSE POINTE PARK,
Plaintiff-Appellee,
v No. 125630
MICHIGAN MUNICIPAL LIABILITY
AND PROPERTY POOL,
Defendant-Appellant.
_______________________________
BEFORE THE ENTIRE BENCH (except CORRIGAN, J.).
CAVANAGH, J.
Plaintiff city of Grosse Pointe Park had a practice of
discharging sewage into a nearby creek when its sewer
system became overtaxed during, for example, heavy periods
of rain. As a result of these discharges, the residents
who lived near the creek filed a lawsuit against the city.
Defendant Michigan Municipal Liability and Property Pool
was the city’s insurer and provided a defense in the
lawsuit under a reservation of rights. Although the pool
covered other claims regarding sewage backups into homes
and businesses, the pool refused to cover claims regarding
the discharges into the creek on the basis of the insurance
policy’s pollution exclusion clause.
In this insurance coverage case, we must decide
whether the insurance policy’s pollution exclusion clause
is ambiguous and whether extrinsic evidence may be examined
in this particular case to aid in the construction of the
policy. We hold that this pollution exclusion clause is
not ambiguous; therefore, consideration of extrinsic
evidence as a construction aid is not appropriate.
Further, we conclude that the city’s discharges fell within
the scope of the pollution exclusion provision and, thus,
coverage was properly denied on this basis.
Because we conclude that the pollution exclusion
clause applies, we must also decide whether the pool is
nonetheless estopped from enforcing this clause because of
its practice of covering sewage backup claims or because of
the manner in which it provided a defense to the city. We
hold that under these facts, the pool is not estopped from
enforcing the pollution exclusion clause. The pool timely
reserved its rights under the policy, and the city was
aware of the reservation. While the city claims to have
suffered prejudice as a result of its reliance on a belief
that the underlying lawsuit would be covered, this belief
was not justifiable under the facts presented in this case.
2
Accordingly, the decision of the Court of Appeals is
reversed, and we remand this case to the trial court for
entry of an order of summary disposition in favor of the
pool.
I. Facts and Proceedings
In 1938, plaintiff city of Grosse Pointe Park entered
into a contract with the city of Detroit to use Detroit’s
sewer system. Under the terms of the contract, Grosse
Pointe Park acquired the right to pump the contents of its
sewer line into an interceptor sewer for transport to
Detroit’s treatment plant. Further, Grosse Pointe Park was
permitted under the contract to build a pump station and a
discharge pipe. If Grosse Pointe Park’s sewer flow
exceeded eighty-four cubic feet a second and its line
became overtaxed, the discharge pipe would allow Grosse
Pointe Park to discharge the overflow into Fox Creek. Fox
Creek is a tributary located in Detroit, but rests close to
the Detroit-Grosse Pointe Park border.
At the time, Grosse Pointe Park had what is known as a
combined sewer system, whereby sewage and rainwater are
transported to a treatment plant in a single sewer line.
If, for example, there was a heavy rainfall and the
capacity of the sewer system became strained, both sewage
and rainwater would flow into the basements of buildings
3
connected to the city’s sewer line. To relieve the
overflow and prevent basement backups, the city would pump
sewage and rainwater into Fox Creek. Beginning in about
1940, the city began discharging overflow from the combined
sewer system into Fox Creek. Soon after the first
discharges, residents near Fox Creek began to complain of
this practice. Nonetheless, this practice continued until
1995, roughly fifty-five years.1
Defendant Michigan Municipal Liability and Property
Pool is a group self-insurance pool created by certain
local governments. See MCL 124.5. Every year, beginning
in 1985 and running through 1998, Grosse Pointe Park
purchased one-year, occurrence-based liability policies
from the pool. Each policy period ran from August 1 to
July 31. While these policies were in effect, Grosse
Pointe Park residents made numerous claims against the city
for sewage backups into their homes and businesses, and the
pool covered these claims. At issue in this case is the
policy issued on August 1, 1994, and effective through July
31, 1995.
1
Grosse Pointe Park now uses a separated sewer system,
whereby sewage and rainwater are collected and transported
in separate sewer lines. Further, the city has blocked the
discharge pipe leading into Fox Creek.
4
Underlying this case is a class action filed in Wayne
Circuit Court against the city by residents who lived near
Fox Creek, Etheridge v Grosse Pointe Park (Docket No. 95-
527115NZ).2 The Etheridge complaint was filed on September
14, 1995, and the plaintiffs alleged that their homes were
flooded by the city’s discharge of sewer overflow into Fox
Creek on July 24, 1995. Because of this discharge, as well
as the city’s long-term practice of discharging into Fox
Creek, the plaintiff class alleged claims for trespass,
nuisance, trespass/nuisance, gross negligence, and a
taking; also alleged were third-party beneficiary claims
arising under the contracts between Grosse Pointe Park and
Detroit. Grosse Pointe Park submitted the Etheridge
complaint to the pool for defense and indemnification
coverage.
On October 6, 1995, the pool sent a letter to the
city, indicating that it would provide the city a defense,
but that it was reserving its rights under the policy. The
letter provided, in pertinent part:
Our review of the [Etheridge] Complaint
reveals that if judgment or damages are awarded
based on certain allegations, the judgments based
on those allegations may not be covered by the
2
The Etheridge complaint also named the city of
Detroit as a defendant.
5
coverage contract. The purpose of this letter is
to point out the allegations and exposures that
may not be covered, and to formally advise you
that we will defend the entire action, with your
cooperation, but will not pay any damages not
covered by our contract. In legal terms, we are
reserving our rights to restrict payments to
those owed under the coverage contract.
* * *
Please be advised that if there is any
judgment against the City of Grosse Pointe Park
for eminent domain, a discharge of any
pollutants, or an intentional act, the Michigan
Municipal Liability & Property Pool reserves the
right not to indemnify Grosse Pointe Park for
said damages.
After noting the allegations and exposures, among
other things, the pool’s letter referred the city to
section V of the insurance policy and specifically quoted
the following language from that section—the pollution
exclusion clause:
In addition to the specific exclusions in
SECTION I–COVERAGES A–BODILY INJURY AND PROPERTY
DAMAGE LIABILITY, B–PERSONAL AND ADVERTISING
INJURY LIABILITY, C–MEDICAL PAYMENTS, D–PUBLIC
OFFICIALS ERRORS AND OMISSIONS, AND E–AUTO, this
coverage does not apply to:
d. bodily Injury or Property Damage arising
out of the actual, alleged or threatened
discharge, dispersal, seepage, migration, release
or escape of pollutants:
(1) At or form [sic] any premises, site or
location which is or was at any time owned or
occupied by, or rented or loaned to, any Member;
(2) At or from any premises, site or
location which is or was at any time used by or
fro [sic] any Member or others for the handling,
6
storage, disposal, processing or treatment of
waste;
(3) Which are or were at any time
transported, handled, stored, treated, disposed
of, or processed as waste by or fro [sic] may
[sic] Member or any person or organization for
whom you may be legally responsible, or
(4) At or from any premises, site or
location on which any Member or any contractors
or subcontractors working directly or indirectly
on any Member's behalf are performing operations:
(a) if the pollutants are brought on or to
the premises, site or location in connection with
such operations by such Member contractor or
subcontractor; or
(b) if the operations are to test for,
monitor, clean up, remove, contain, treat,
detoxify or neutralize, or in any way respond to,
or assess the effects of pollutants.
* * *
Pollutants mean any solid, liquid, gaseous
or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis,
chemicals and waste. Waste includes materials to
be recycled, reconditioned or reclaimed.
The pool received all the pleadings and participated
in the Etheridge litigation by attending meetings,
hearings, and facilitation. Notably, the pool also
continued to cover basement backup claims during the
Etheridge lawsuit. Settlement was ultimately reached in
the Etheridge lawsuit, whereby Grosse Pointe Park and
Detroit would each pay the plaintiffs $1.9 million and take
the necessary action to stop the discharges into Fox Creek.
7
The pool then notified Grosse Pointe Park that
indemnification coverage would be denied. Nonetheless,
Grosse Pointe Park finalized the Etheridge settlement and
filed this declaratory judgment action.3 Both parties moved
for summary disposition, and the trial court concluded that
the pool was equitably estopped from invoking the pollution
exclusion clause to deny coverage because the pool had
previously paid basement backup claims without incident.4
Thus, the trial court granted the city’s motions for
summary disposition and ordered the pool to indemnify the
city for the amount of the Etheridge settlement. The pool
appealed this decision.
In a two-to-one decision, the Court of Appeals
reversed the trial court’s determination that the pool was
estopped as a matter of law from denying coverage,
reasoning that a question of fact existed on this issue.
3
In count I, the city alleged that the pool breached
the insurance contract by failing to provide coverage in
the Etheridge lawsuit. Count II alleged that the pool
breached its duty to timely investigate, decide whether the
claims were covered, and timely communicate its decision to
deny coverage. In counts III through V, the city alleged
alternative theories seeking equitable relief. And count
VI alleged a violation of the Michigan Consumer Protection
Act.
4
The trial court also dismissed counts II and VI of
the complaint and dismissed counts III through V as moot in
light of the relief granted under count I.
8
Unpublished opinion per curiam of the Court of Appeals,
issued October 30, 2003 (Docket No. 228347). Moreover, the
Court of Appeals majority concluded, among other things,
that the city presented a question of fact regarding the
parties’ intent concerning the application and meaning of
the pollution exclusion clause. Because of the pool’s
practice of paying basement backup claims without invoking
the pollution exclusion clause, the Court of Appeals held
that extrinsic evidence regarding such payments may reveal
an ambiguity in the insurance policy, relying on Michigan
Millers Mut Ins Co v Bronson Plating Co, 197 Mich App 482;
496 NW2d 373 (1992), aff’d 445 Mich 558 (1994), overruled
on other grounds in Wilkie v Auto-Owners Ins Co, 469 Mich
41 (2003). Judge O’Connell dissenting in part, asserted
that because the policy was unambiguous and the pool
reserved its rights under the policy, (1) consideration of
extrinsic evidence was unwarranted, and (2) equitable
estoppel did not apply.
This Court granted the pool’s application for leave to
appeal, limited to the issues whether: (1) sewage is a
“pollutant” under the applicable insurance policy's
pollution exclusion clause; (2) extrinsic evidence may be
used to establish an ambiguity in this pollution exclusion
9
clause; and (3) the pool may be estopped from asserting the
pollution exclusion clause.5
II. Analysis
We review decisions on motions for summary
dispositions de novo. American Federation of State, Co &
Muni Employees v Detroit, 468 Mich 388, 398; 662 NW2d 695
(2003). Similarly, the proper interpretation and
application of an insurance policy is a question of law
that we review de novo. Cohen v Auto Club Ins Ass’n, 463
Mich 525, 528; 620 NW2d 840 (2001).
A. Extrinsic Evidence and the Pollution Exclusion Clause
The Court of Appeals observed that although an
insurance policy is enforced according to its terms, the
contracting parties’ intent controls. Further, the Court
of Appeals reasoned that because the city had presented
evidence that the pool repeatedly paid basement backup
5
471 Mich 915 (2004). After granting leave to appeal
and before this Court heard oral arguments in this case, we
granted the pool’s motion for immediate consideration but
denied its motion to strike the city’s brief on appeal.
Unpublished order of the Supreme Court, entered March 4,
2005 (Docket No. 125630). In response to the pool’s
motions, the city filed a brief in opposition to the
motions, a motion for immediate consideration, and a motion
to supplement the record on appeal. We did not rule on the
city’s motions before entertaining oral arguments. Thus,
we take this opportunity to grant the city’s motion for
immediate consideration, but deny its motion to supplement
the record on appeal.
10
claims, a question of fact existed with respect to the
parties’ intent regarding the applicability of the
pollution exclusion clause. Relying on Michigan Millers,
supra,6 the Court of Appeals concluded that the insurance
policy was not “so unambiguous that no extrinsic evidence
6
In Michigan Millers, the defendant insured submitted
discovery requests to the plaintiff and other insurers,
desiring information on the plaintiff’s handling of certain
types of insurance claims. The insurers denied the
requests. The trial court agreed that the information
sought was irrelevant and assessed sanctions on the
defendant. On appeal, the defendant claimed that how the
insurers handled past claims was relevant to show whether
the term “suit,” as used in the contract, was ambiguous.
Stated differently, the defendant argued that extrinsic
evidence would tend to show that the insurers’ construction
of “suit” was wrong, or at least ambiguous. The plaintiff
asserted that the requested information was irrelevant
because: (1) if the term is unambiguous, extrinsic evidence
is not admissible to contradict the insurance policy; or
(2) if the term is ambiguous, the term is construed against
the insurers and in favor of the defendant. The Court of
Appeals agreed with the defendant.
The Court of Appeals noted that the plaintiff’s
rationale ignored “a third principle of evidence.
Extrinsic evidence is admissible to show the existence of
an ambiguity.” Michigan Millers, supra at 495 (emphasis in
original). Accordingly, the Court of Appeals found that
the information the defendant sought was relevant to show
the insurers’ prior interpretations of the term “suit.”
Thus, the Court of Appeals vacated the trial court’s order
assessing sanctions. However, the Court of Appeals noted
that the purpose for which the defendant wanted the
information was rendered moot because the Court of Appeals
actually interpreted the term “suit” and concluded that a
“suit” had been brought.
11
of the parties’ intent can be considered.” Slip op at 7
n 9. We disagree with the Court of Appeals rationale.
“An insurance policy is much the same as any other
contract.” Auto-Owners Ins Co v Churchman, 440 Mich 560,
566; 489 NW2d 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 NW 954 (1924).
In light of this cardinal rule, and to effectuate the
principle of freedom of contract, this Court has generally
observed that “[i]f 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 NW2d 66 (1965); see
also Frankenmuth Mut Ins Co v Masters, 460 Mich 105, 111;
595 NW2d 832 (1999). “However, we will not create
ambiguity where the terms of the contract are clear.” Id.
In light of these principles, we note that
consideration of extrinsic evidence generally depends on
some finding of contractual ambiguity. Ambiguity in
written contracts can fairly be said to consist of two
types: patent and latent. A patent ambiguity is one “that
clearly appears on the face of a document, arising from the
12
language itself.” Black’s Law Dictionary (7th ed). See
also Hall v Equitable Life Assurance Society, 295 Mich 404,
409; 295 NW 204 (1940). Accordingly, resort to extrinsic
evidence is unnecessary to detect a patent ambiguity. A
latent ambiguity, however, is one “that 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.” Black’s Law Dictionary (7th ed).
Because “the detection of a latent ambiguity requires a
consideration of factors outside the instrument itself,
extrinsic evidence is obviously admissible to prove the
existence of the ambiguity, as well as to resolve any
ambiguity proven to exist.” McCarty v Mercury Metalcraft
Co, 372 Mich 567, 575; 127 NW2d 340 (1964). In other
words, “where a latent ambiguity exists in a contract,
extrinsic evidence is admissible to indicate the actual
intent of the parties as an aid to the construction of the
contract.” Id. Thus, the question becomes whether an
ambiguity exists in this insurance policy’s pollution
exclusion clause.
This insurance policy provides that coverage is
excluded when bodily injury or property damage results from
“the actual, alleged or threatened discharge, dispersal,
seepage, migration, release or escape of pollutants.” The
13
policy further defines “pollutants” as “any solid, liquid,
gaseous or thermal irritant or contaminant, including
smoke, vapor, soot, fumes, acids, alkalis, chemicals and
waste.” The insurance policy, however, does not
specifically define “waste.” Where a term is not defined
in the policy, it is accorded its commonly understood
meaning. Allstate Ins Co v McCarn, 466 Mich 277, 280; 645
NW2d 20 (2002) (McCarn I). “Waste” is commonly understood
to include sewage.7 In other words, “waste” is commonly
understood to include urine and feces, bathwater and
dishwater, toilet paper, feminine napkins and tampons,
condoms, and the countless other substances typically
introduced into a sewer system.
We believe that the term “waste” in this policy is not
patently ambiguous and the text of the policy fairly admits
of but one interpretation.8 We must observe, however, that
7
See, e.g., American Heritage Dictionary (2d college
ed, 1982) (defining “waste” to include “[a] useless or
worthless by-product . . . [g]arbage; trash . . . [t]he
undigested residue of food eliminated from the body”).
8
See, e.g., Raska v Farm Bureau Mut Ins Co of
Michigan, 412 Mich 355, 362; 314 NW2d 440 (1982) (“Yet if a
contract, however inartfully worded or clumsily arranged,
fairly admits of but one interpretation it may not be said
to be ambiguous or, indeed, fatally unclear.”). See also
Bianchi v Automobile Club of Michigan, 437 Mich 65, 70-73;
(continued…)
14
we do not make this determination lightly. Again, the
cardinal rule in the interpretation of contracts is to
ascertain and give effect to the parties’ intentions.
McIntosh, supra at 218. We are also mindful of Professor
Corbin’s warning that when judges attempt to enforce a
contract according to their own understanding of what is
plain and clear, these judges run the risk of substituting
their own judgment for the intent of the parties and, thus,
making a contract for the parties that was never intended.
See Stark v Budwarker, Inc, 25 Mich App 305, 314; 181 NW2d
298 (1970).9 Indeed, such a result would actually undermine
(…continued)
467 NW2d 17 (1991); Auto Club Ins Ass’n v DeLaGarza, 433
Mich 208, 213; 444 NW2d 803 (1989).
9
Professor Corbin observes:
On reading the words of a contract, a judge
may jump to the instant and confident opinion
that these words have but one reasonable meaning.
A greater familiarity with dictionaries and the
usages of words, a better understanding of the
uncertainties of languages, and a comparative
study of more cases in the field of
interpretation, will make one beware of holding
such an opinion. A judge who believes that
contract terms can have a single, reasonable
meaning that is apparent without reference to
extrinsic evidence of the parties’ intentions
“retires into that lawyer’s Paradise where all
words have a fixed, precisely ascertained
meaning; where [people] may express their
purposes, not only with accuracy, but with
(continued…)
15
the freedom of contract principle. Nonetheless, we
conclude that this pollution exclusion clause is not
patently ambiguous because an ambiguity does not readily
appear in the text of the policy. Again, courts are not
permitted to “create ambiguity where the terms of the
contract are clear.” Masters, supra at 111. Therefore, we
will apply this pollution exclusion clause as written
unless we determine that a latent ambiguity arises from a
matter outside of the text of the policy.
We initially observe that it is well-established that
“[i]n construing [contractual provisions] due regard must
be had to the purpose sought to be accomplished by the
parties as indicated by the language used, read in the
light of the attendant facts and circumstances. Such
intent when ascertained must, if possible, be given effect
and must prevail as against the literal meaning of
(…continued)
fulness [sic]; and where, if the writer has been
careful, a lawyer . . . may sit in [a] chair,
inspect the text, and answer all questions
. . . .” Such a belief is unrealistic, for “the
fatal necessity of looking outside the text in
order to identify persons and things, tends
steadily to destroy such illusions and to reveal
the essential imperfection of language, whether
spoken or written.” [5 Corbin, Contracts,
§ 24.7, pp 32-33 (rev ed, 1998) (internal
citations omitted).]
16
expressions used in the agreement.” W O Barnes Co, Inc v
Folsinski, 337 Mich 370, 376-377; 60 NW2d 302 (1953).
Further, attendant facts and circumstances explain the
context in which the words were used and may reveal the
meaning the parties intended. Sobczak v Kotwicki, 347 Mich
242, 249; 79 NW2d 471 (1956).10 In this respect, the
detection of a latent ambiguity unquestionably requires
consideration of factors outside the policy itself.
McCarty, supra at 575. Therefore, extrinsic evidence is
admissible to prove the existence of the ambiguity, and, if
a latent ambiguity is proven to exist, extrinsic evidence
may then be used as an aid in the construction of the
contract. Id.; see also Goodwin, Inc v Orson E Coe
Pontiac, Inc, 392 Mich 195, 209-210; 220 NW2d 664 (1974).
In light of the attendant facts and circumstances of this
case, we conclude that a latent ambiguity does not exist.
10
See also 5 Corbin, Contracts § 24.7, p 31 (rev ed,
1998) (“It is therefore invariably necessary, before a
court can give any meaning to the words of a contract and
can select a single meaning rather than other possible ones
as the basis for the determination of rights and other
legal effects, that extrinsic evidence be admitted to make
the court aware of the ‘surrounding circumstances,’
including the persons, objects, and events to which the
words can be applied and which caused the words to be
used.” [internal citations omitted]); see also 2
Restatement Contracts, 2d, §§ 200-203.
17
We are unpersuaded by Grosse Pointe Park’s arguments
that the pool’s practice of covering basement backup claims
somehow shows that this pollution exclusion clause is
ambiguous. The pool’s practice of paying backup claims
does not render the clause susceptible to two reasonable,
yet mutually exclusive, interpretations. Indeed, the
pool’s practice does not change our conclusions that the
parties intended for coverage to be excluded when property
damage results from the actual discharge of pollutants,
that pollutants include waste, and that the term “waste”
include urine and feces, bathwater and dishwater, toilet
paper, feminine napkins and tampons, condoms, and the
countless other substances typically introduced into a
sewer system. Indeed, a latent ambiguity does not exist
under this policy because when we consider how the clause
applies or has been applied, it cannot be said that the
clause was intended to have a different meaning than that
reflected in the text of the policy. Accordingly, after
considering factors outside the four corners of this
policy, we cannot detect any latent ambiguities.11 In other
11
We disagree with Justice Young’s proposal to adopt a
clear and convincing standard with respect to proving the
existence of a latent ambiguity. In support of this
standard, Justice Young relies on a broad reading of
Quality Products & Concepts Co v Nagel Precision, Inc, 469
(continued…)
18
words, the extrinsic evidence introduced by Grosse Pointe
Park does not prove the existence of a latent ambiguity.
Thus, it is unnecessary to examine outside factors as an
aid in construing this policy.
(…continued)
Mich 362; 666 NW2d 251 (2003). However, Nagel was
concerned with the circumstances under which a contract can
be waived or modified. Accordingly, where a party alleges
waiver or modification, that party is alleging that both
contracting parties mutually assented to alter or amend the
existing contract. Therefore, a clear and convincing
standard in this context makes sense. This standard,
however, does not necessarily make sense where a party
alleges the existence of a latent ambiguity.
When a party alleges the existence of a latent
ambiguity, that party, contrary to Justice Young’s
implications, is not attempting to alter or amend the
bargain struck. Rather, the party argues that application
of the contract’s terms would be inconsistent with the
parties’ intent. Thus, the party alleging the existence of
a latent ambiguity is arguing that the parties’ intent
should be effectuated-the cardinal rule of contract
interpretation. However, the party alleging the existence
of a latent ambiguity is not arguing that the contract was
altered or amended.
Accordingly, Nagel is distinguishable and we believe
that Justice Young’s broad reading of that decision to
support his view cannot withstand scrutiny. Further, the
other decisions Justice Young uses to support his rationale
are distinguishable as well. In our view, none of these
cases supports his preference to impose a clear and
convincing standard on a party arguing the existence of a
latent ambiguity. While Justice Young may be inclined to
broadly extend “common theme[s],” without more we must
decline in this instance to adopt Justice Young’s
preference to impose a clear and convincing standard on
contracting parties.
19
In sum, we conclude that this pollution exclusion
clause is not patently ambiguous. Further, review of
extrinsic evidence neither leads to the detection nor
proves the existence of a latent ambiguity. Thus, because
an ambiguity does not exist, extrinsic evidence is
inadmissible as an aid in the construction of this policy.
Accordingly, we hold that the Court of Appeals erred when
it concluded that the insurance policy was not “so
unambiguous” and, thus, extrinsic evidence was generally
admissible.
Because we believe that this policy’s pollution
exclusion clause is unambiguous, we will enforce it
according to its terms and consistent with the parties’
intent. When we accord “waste” the meaning intended by the
parties, as well as its commonly understood meaning, we
have little difficulty concluding that the city discharged
“pollutants” into Fox Creek. Thus, we hold that the city’s
discharges fell under the purview of this insurance
policy’s pollution exclusion clause.
B. Estoppel
Having concluded that the discharges fall under the
pollution exclusion clause, we must next decide whether the
pool is nonetheless estopped from enforcing the clause.
“The principle of estoppel is an equitable defense that
20
prevents one party to a contract from enforcing a specific
provision contained in the contract.” Morales v Auto-
Owners Ins Co, 458 Mich 288, 295; 582 NW2d 776 (1998). For
equitable estoppel to apply, the city must establish that
(1) the pool’s acts or representations induced the city to
believe that the pollution exclusion clause would not be
enforced and that coverage would be provided, (2) the city
justifiably relied on this belief, and (3) the city was
prejudiced as a result of its reliance on its belief that
the clause would not be enforced and coverage would be
provided. See, e.g., Morales, supra at 296-297.
The city maintains that the pool should be estopped
from enforcing the pollution exclusion clause because of
the pool’s practice of covering basement backup claims
before, during, and after the underlying litigation in this
case, without ever invoking the pollution exclusion clause.
According to the city, the pool’s failure to enforce this
clause, as well as the manner in which the pool conducted
the defense, led the city to believe that the underlying
litigation would be covered. The city maintains that were
it not for this belief, it would have conducted discovery
and settlement negotiations differently. Thus, the city
contends that it was prejudiced by its reliance on its
21
belief that coverage would be provided in the underlying
suit.
The Court of Appeals, in part, remanded this matter to
the trial court for consideration of this issue, concluding
that a question of fact remained whether the pool should be
estopped from asserting the pollution exclusion clause. We
disagree. Under the facts of this case, a reasonable trier
of fact could not conclude that the city satisfied its
burden.
In this case, it cannot be said that the city’s
reliance on the pool’s actions or representations was
justified. At the beginning of the underlying litigation,
the pool notified the city that it would provide a defense
in the underlying litigation, “but will not pay any damages
not covered by our contract. In legal terms, we are
reserving our rights to restrict payments to those owed
under the coverage contract.” The pool timely notified the
city that if any judgment was entered against the city for
the discharge of pollutants into Fox Creek, the pool was
reserving the right to not indemnify, specifically quoting
the pollution exclusion clause. We find the pool’s
reservation of rights particularly damaging to the city’s
estoppel theory.
22
“[W]hen an insurance company undertakes the defense of
its insured, it has a duty to give reasonable notice to the
insured that it is proceeding under a reservation of
rights, or the insurance company will be estopped from
denying its liability.” Kirschner v Process Design Assoc,
Inc, 459 Mich 587, 593; 592 NW2d 707 (1999). Here, the
pool duly reserved its rights, and the city was aware of
the reservation. Accordingly, the city was on notice that
the pool might not indemnify it. Moreover, by the city’s
own account, the pool had never before reserved its right
to contest coverage under the auspices of the pollution
exclusion clause. Yet the city claims that it was
justified in believing that the pool would indemnify it.
We believe, however, that these facts, when viewed in the
light most favorable to the city, weigh against a finding
of estoppel.
The city was clearly on notice that the pool might not
provide coverage under the pollution exclusion clause.
While the city was aware that the pool had never sought to
enforce the pollution exclusion clause before the
underlying litigation, this Court had not been presented
with any evidence that the pool reserved its rights on the
basis of the pollution exclusion clause with regard to any
other claim. Because the pool timely notified the city at
23
the start of the underlying litigation that it was
reserving its rights, the pool specifically invoked the
pollution exclusion clause, the pool had done neither
before, and, arguably, the nature of the discharges
differed from the nature of the basement backups, we fail
to see how the city was justified in believing that
indemnification would be provided in this particular case.12
12
We disagree with Justice Young’s expansive reading
of Kirschner, supra. Relying on that decision, Justice
Young posits that even if Grosse Pointe Park could prove
all the elements for the application of estoppel, the city
will still be unprotected because estoppel can never be
applied to extend coverage, period. In our view, Justice
Young misreads Kirschner. Kirschner does not set forth the
inflexible rule that Justice Young prefers. Indeed,
Justice Weaver’s Kirschner opinion was careful to avoid
making sweeping generalizations or extending Ruddock v
Detroit Life Ins Co, 209 Mich 638; 177 NW 242 (1920),
beyond its intended bounds. Further, Kirschner, supra at
594-595, prudently observed that in some instances, courts
have applied the doctrine of estoppel to bring within
coverage risks not covered by the policy. Kirschner then
provided a few examples–examples that we believe are not
exhaustive nor could reasonably be inferred to be
exhaustive. Justice Young further laments that we do not
give credence to the “prominent language” from Kirschner
that emphasizes that “[t]he application of . . . estoppel
is limited . . . .” Post at 21 n 35, quoting Kirschner,
supra at 593-594. We respectfully disagree. Rather, we
believe that our evenhanded reading of Kirschner considers
all of the opinion’s “prominent language.” For example,
this Court observed that the “application of waiver and
estoppel is limited, and, usually, the doctrines will not
be applied to broaden the coverage of a policy . . . .”
Kirschner, supra at 594 (emphasis added).
(continued…)
24
In sum, we find the city’s position untenable. No
reasonable trier of fact could conclude that the city was
justified in believing that indemnification was certainly
going to be provided in this case when the pool reasonably
notified the city to the contrary. Because we find that
the city’s reliance was unjustified, the estoppel claim
fails and it is unnecessary for us to consider whether the
city was prejudiced by its reliance. Moreover, we believe
that the manner in which the pool provided a defense in
this particular case was not inconsistent with the
reservation of rights or the pool’s practice of paying
basement backup claims. Thus, the pool is not estopped
from enforcing the pollution exclusion clause, and the
trial court erred in concluding otherwise.13
(…continued)
In any event, because Grosse Pointe Park’s estoppel
claim fails and the discharges fall under the purview of
the pollution exclusion clause-as Justice Young likewise
concludes-it is unnecessary to determine whether estoppel
could be used to bring the discharges within coverage. In
other words, because Grosse Pointe Park’s estoppel claim
fails, it is unnecessary to adopt Justice Young’s preferred
rule, decide whether coverage in this case should be
expanded, or depart from this Court’s prior precedent.
13
In Kirschner, supra, I joined Justice KELLY’s
concurrence. I do not retreat from the view expressed in
that opinion. Our state would be well-served by a rule
that requires an insurer to timely notify the court, the
insured, and other parties that it is reserving its rights
(continued…)
25
Accordingly, the decision of the Court of Appeals is
reversed and we remand this case to the trial court for
entry of an order of summary disposition in favor of the
pool. MCR 7.302(G)(1).
III. Conclusion
Under the facts of this case, we hold that the city’s
discharges fell within the purview of the pollution
exclusion clause. This pollution exclusion clause is not
ambiguous; therefore, consideration of extrinsic evidence
as aid in the construction of the policy is not
appropriate. Further, we hold that under these facts, the
pool is not estopped from enforcing the pollution exclusion
clause. Therefore, the decision of the Court of Appeals is
reversed and we remand this case to the trial court for
entry of an order of summary disposition in favor of the
pool.
Michael F. Cavanagh
Elizabeth A. Weaver
Marilyn Kelly
(…continued)
under the policy. Further, a court should be empowered to
refuse to effectuate an untimely reservation of rights when
the court determines that the insured was prejudiced. In
this case, however, the pool timely reserved its rights and
the city was made aware of the reservation of rights.
26
S T A T E O F M I C H I G A N
SUPREME COURT
CITY OF GROSSE POINTE PARK,
Plaintiff-Appellee,
v No. 125630
MICHIGAN MUNICIPAL LIABILITY
& PROPERTY POOL,
Defendant-Appellant.
_______________________________
BEFORE THE ENTIRE BENCH (except CORRIGAN, J.).
YOUNG, J.
Although this Court is equally divided on the
appropriate legal analysis, this Court is unanimous
regarding the proper result. All members of this Court
agree that the insurance policy at issue is not latently
ambiguous and that it must therefore be enforced as
written. According to the plain language of the policy’s
pollution exclusion clause, it is clear that sewage is a
“pollutant.” Moreover, this Court is in unanimous
agreement that equitable estoppel is not applicable.
Accordingly, all members of this Court agree that the
judgment of the Court of Appeals must be reversed and this
case remanded to the trial court for entry of an order
granting the Michigan Municipal Liability and Property
Pool’s motion for summary disposition.1
While all justices conclude that sewage is a
“pollutant” under the clear and unambiguous language of the
policy’s pollution exclusion clause, the justices joining
this opinion believe that principles of contract
enforcement require special proofs when a contracting party
seeks to vary the terms of a written agreement by alleging
latent ambiguity. Thus, while extrinsic evidence generally
may be introduced to demonstrate the existence of a latent
ambiguity, we conclude that a court must presume that the
contracting parties’ intent is manifested in the actual
language used in the contract itself unless the party
alleging the existence of the latent ambiguity rebuts this
presumption by proving with clear and convincing evidence
1
It is important to note that neither Justice
Cavanagh’s opinion nor ours has garnered a majority.
Therefore neither establishes binding precedent. As we
stated in People v Anderson, 389 Mich 155, 170; 205 NW2d
461 (1973), overruled in part on other grounds by People v
Hickman, 470 Mich 602 (2004),“The clear rule in Michigan is
that a majority of the Court must agree on a ground for
decision in order to make that binding precedent for future
cases. If there is merely a majority for a particular
result, then the parties to the case are bound by the
judgment but the case is not authority beyond the immediate
parties.”
2
that such an ambiguity does indeed exist. Here, we
conclude that the city of Grosse Pointe Park has not
presented clear and convincing evidence to demonstrate that
a latent ambiguity actually exits. We further conclude
that the Pool is not equitably estopped from denying
coverage because, under the well-established rule
articulated by this Court in Ruddock v Detroit Life Ins Co2
and reiterated in Kirschner v Process Design Assoc, Inc,3
estoppel will not be applied to expand coverage beyond the
particular risks covered by the actual insurance policy
itself.
I. FACTS & PROCEDURAL HISTORY
In 1938, Grosse Pointe Park and the city of Detroit
entered into an agreement under which Grosse Pointe Park
was permitted to discharge overflow sewage into Fox Creek,
a tributary near the Grosse Pointe Park-Detroit border.
Release of excess sewage into Fox Creek was necessary
because Grosse Pointe Park’s “combined” sewer system—a
single sewer line used to transport both sewage (e.g., from
toilets) and storm water runoff—would become overtaxed
during periods of heavy rainfall. If Grosse Pointe Park
2
209 Mich 638; 177 NW 242 (1920).
3
459 Mich 587; 592 NW2d 707 (1999).
3
did not use Fox Creek as a release valve during such
periods, sewage would back up into the basements of homes
and businesses. It is undisputed that from 1940 to 1995,
Grosse Pointe Park released overflow rainwater and sewage
into Fox Creek hundreds of times.4
Each year from 1985 to 1998, Grosse Pointe Park
purchased annual “occurrence-based” commercial general
liability policies from the Pool, a self-insurance pool
comprised of local governments.5 During this period, under
4
Grosse Pointe Park has built and now operates a
“separate” sewer system, which uses different lines for
sewage and rainwater runoff. As such, Grosse Pointe Park
no longer releases overflow sewage into Fox Creek.
5
Municipal insurance pools are statutorily authorized
under MCL 124.5, which provides:
(1) Notwithstanding any other provision of
law to the contrary, any 2 or more municipal
corporations, by intergovernmental contract,
may form a group self-insurance pool to
provide for joint or cooperative action
relative to their financial and
administrative resources for the purpose of
providing to the participating municipal
corporations risk management and coverage for
pool members and employees of pool members,
for acts or omissions arising out of the
scope of their employment, including any or
all of the following:
(a) Casualty insurance, including general
and professional liability coverage.
(continued…)
4
successive annual policies, the Pool paid numerous
insurance claims submitted by Grosse Pointe Park residents
for sewage backups that occurred in their basements. It
did so without issuing reservation of rights letters based
on the policies’ pollution exclusion clauses, unlike in the
present case. The particular insurance policy at issue
covers the period from August 1, 1994, to August 1, 1995.
The current dispute derives from an underlying class
action (the Etheridge litigation) brought by Grosse Pointe
Park residents against the city for discharges made into
Fox Creek in July 1995. In the Etheridge complaint, filed
on September 14, 1995, the class action plaintiffs sued
(…continued)
(b) Property insurance, including marine
insurance and inland navigation and
transportation insurance coverage.
(c) Automobile insurance, including motor
vehicle liability insurance coverage and
security for motor vehicles owned or
operated, as required by section 3101 of the
insurance code of 1956, 1956 PA 218, MCL
500.3101, and protection against other
liability and loss associated with the
ownership of motor vehicles.
(d) Surety and fidelity insurance
coverage.
(e) Umbrella and excess insurance
coverages.
5
Grosse Pointe Park under various trespass, nuisance, and
negligence theories for sewage backups that occurred in
their homes and businesses. In addition to basement backup
claims, the Etheridge plaintiffs also submitted insurance
claims for alleged damage caused to boats, docks, seawalls,
garages, lawns, shrubbery, and outdoor furniture resulting
from the city's release of sewage into Fox Creek.
On October 6, 1995, three weeks after the Etheridge
suit was filed, the Pool provided the city a defense under
a reservation of rights letter. In the letter, the Pool
specifically quoted the insurance policy’s pollution
exclusion clause and warned the city that it had not yet
determined whether it would cover any liability arising
from the Etheridge suit. The letter concluded by stating:
Please be advised that if there is any
judgment against the City of Grosse Pointe
Park for eminent domain, a discharge of any
pollutants, or an intentional act, the
Michigan Municipal Liability & Property Pool
reserves the right not to indemnify Grosse
Pointe Park for said damages. [Emphasis
added.]
The Pool subsequently assigned an outside adjusting
firm to monitor the Etheridge lawsuit. During the course
of the Etheridge litigation, the Pool’s adjuster received
copies of all pleadings and attended meetings with the
litigants. The Pool also paid in-house sewage backup
6
claims involving residences and businesses unrelated to the
Etheridge suit while the Etheridge litigation was
proceeding. After several facilitation sessions, in August
1997, the Etheridge plaintiffs agreed to settle with Grosse
Pointe Park for $1.9 million.6
Before the Etheridge settlement was finalized,
however, the Pool informed the city that the Pool's outside
counsel did not believe that the Pool was obligated to
indemnify the city given the policy’s pollution exclusion
clause. Subsequently, the Pool formally notified the city
that coverage would be denied. Nevertheless, the city
proceeded to approve the $1.9 million settlement with the
Etheridge plaintiffs a few months later.
The city then filed suit in the Wayne Circuit Court
seeking a declaratory judgment that the Pool was obligated
to indemnify the city for the Etheridge settlement. After
lengthy discovery, both the Pool and the city filed cross-
motions for summary disposition pursuant to MCR
2.116(C)(10). Ruling in favor of the city, the trial court
held that the Pool was equitably estopped from denying
coverage under the pollution exclusion clause because the
6
A similar settlement was reached with the city of
Detroit, which was also named as a defendant in the class
action, for $1.9 million.
7
Pool had paid prior backup claims made by Grosse Pointe
Park residents.7
In a two-to-one decision, the Court of Appeals
reversed the trial court’s holding that the Pool was
equitably estopped from invoking the pollution exclusion
clause.8 The Court of Appeals held that a question of fact
existed with regard to the estoppel claim and therefore
remanded the case to the trial court for further
proceedings. It also held that the Pool’s payment of prior
backup claims was “extrinsic evidence” of ambiguity in the
insurance policy and remanded the case to the trial court
to determine “the parties’ intent as to the exclusion’s
applicability . . . .” Judge O’Connell dissented, arguing
7
Ruling from the bench, Judge Amy P. Hathaway stated:
It’s clearly an issue of equity, which I’m
not sure is going to necessarily trump the
contract claim, at least in front of the
Court of Appeals. But in this case we have a
contract that was paid and paid and paid
again under this pollutant, this sewage, and
now there’s a reservation of rights issue.
I’ve got a big problem. To the point where
I’m going to deny the motion, the Defendant’s
motion, and grant the inapplicability of the
pollution exclusion based on estoppel.
8
Unpublished opinion per curiam of the Court of
Appeals, issued October 30, 2003 (Docket No. 228347).
8
that extrinsic evidence should not be considered because
the insurance policy was clear and unambiguous. He further
argued that equitable estoppel was not applicable because
the Pool timely provided the city a reservation of rights
letter. We granted the Pool’s application for leave to
appeal.9
II. STANDARD OF REVIEW
A motion for summary disposition under MCR
2.116(C)(10), which tests the factual support of a claim,
is reviewed by this Court de novo.10 Similarly, the
interpretation of an insurance policy is also a question of
law that is reviewed by this Court de novo.11
III. ANALYSIS
A. IS SEWAGE A “POLLUTANT” UNDER THE INSURANCE POLICY’S POLLUTION
EXCLUSION CLAUSE?
The insurance policy at issue provides:
Section V – General Exclusions
In addition to the specific exclusions in
SECTION I – COVERAGES A – BODILY INJURY AND
PROPERTY DAMAGE LIABILITY, B – PERSONAL AND
9
471 Mich 915 (2004).
10
Oade v Jackson Nat’l Life Ins Co, 465 Mich 244, 250-
251; 632 NW2d 126 (2001); Smith v Globe Life Ins Co, 460
Mich 446, 454; 597 NW2d 28 (1999).
11
Klapp v United Ins Group Agency, Inc, 468 Mich 459,
463; 663 NW2d 447 (2003); Archambo v Lawyers Title Ins
Corp, 466 Mich 402, 408; 646 NW2d 170 (2002).
9
ADVERTISING INJURY LIABILITY, C – MEDICAL
PAYMENTS, D – PUBLIC OFFICIALS ERRORS AND
OMISSIONS, AND E – AUTO, this coverage also
does not apply to:
* * *
d. Bodily Injury or Property Damage
arising out of the actual, alleged or
threatened discharge, dispersal, seepage,
migration, release or escape of pollutants:
* * *
Pollutants means any solid, liquid,
gaseous or thermal irritant or contaminant,
including smoke, vapor, soot, fumes, acids,
alkalis, chemicals and waste. Waste includes
materials to be recycled, reconditioned or
reclaimed. [Emphasis added.]
As this Court has previously held, “The principles of
construction governing other contracts apply to insurance
policies.”12 As such, the foremost duty of a court in
construing an insurance policy is to determine the intent
of the contracting parties.13 In doing so, a court must
always begin with the actual language used by the parties
in the insurance policy itself.14 If the text of the
insurance policy is clear and unambiguous, the contract
12
Farm Bureau Mut Ins Co v Nikkel, 460 Mich 558, 566;
596 NW2d 915 (1999).
13
Quality Products & Concepts Co v Nagel Precision,
Inc, 469 Mich 362, 375; 666 NW2d 251 (2003); see also
Nikkel, supra at 566; Morley v Automobile Club of Michigan,
458 Mich 459, 465; 581 NW2d 237 (1998).
14
Quality Products, supra at 375.
10
must be enforced as written.15 “[A]n unambiguous
contractual provision is reflective of the parties’ intent
as a matter of law.”16
It is difficult to imagine an insurance policy that is
clearer or more explicit than the one found in the present
case. The pollution exclusion clause defines “pollutant”
as “any solid, liquid, gaseous or thermal irritant or
contaminant . . . .” The word “contaminant,” given its
plain and ordinary meaning,17 is “something that
contaminates,” and “contaminate” is defined as “to make
impure or unsuitable by contact or mixture with something
unclean, bad, etc.; pollute; taint . . . .”18 It is
undeniable that Fox Creek was “made impure” and “tainted”
by the sewage that the city released. The record indicates
that the sewage contained dirt, debris, garbage, condoms,
feminine hygiene products, urine, feces, dishwater, toilet
paper, cleaning fluids, and compounds containing E.coli.
15
Id.; Wilkie v Auto-Owners Ins Co, 469 Mich 41, 51;
664 NW2d 776 (2003); Nikkel, supra at 566.
16
Quality Products, supra at 375.
17
In Frankenmuth Mut Ins Co v Masters, 460 Mich 105,
112; 595 NW2d 832 (1999), this Court unanimously held that
courts are to “interpret [undefined] terms of an insurance
contract in accordance with their ‘commonly used meaning.’”
(Citations omitted.)
18
Random House Webster’s College Dictionary (1995).
11
Therefore, because these “solid” and “liquid” materials are
“contaminants,” the sewage the city released is necessarily
a “pollutant” under the plain terms of the insurance
policy.
This conclusion is bolstered by the fact that the
pollution exclusion clause also provides specific examples
of “pollutants,” such as “smoke, vapor, soot, fumes, acids,
alkalis, chemicals and waste.” Given the composition of
the sewage described above, it is clear that most, if not
all, of these specific examples of “pollutants” were found
in Fox Creek. We conclude, therefore, that the sewage
released by the city into Fox Creek is within the scope of
the policy’s pollution exclusion clause.
B. THE ROLE OF EXTRINSIC EVIDENCE IN ILLUMINATING A LATENT AMBIGUITY
The city argues that the word “pollutant” is latently
ambiguous and that extrinsic evidence must be introduced to
give the word the true meaning that the parties intended.
According to the city, the Pool’s payment of prior basement
backup claims demonstrates that the parties intended the
word “pollutant” to have a meaning different than the one
used in the insurance policy itself.
We find the city's argument unpersuasive. The
argument that the city is advancing is actually one of
equitable estoppel, not contract interpretation. The city
12
is attempting to rely on the Pool’s payment of similar
basement sewer backup claims as a way to require the Pool
to cover the present claim. Accordingly, the city's
argument sounds more in equity than in the law of
contracts. For the reasons discussed in part III(C) of
this opinion, we are unpersuaded by the city's equitable
estoppel argument. Nonetheless, to the extent that the
city argues that a latent ambiguity exits, we disagree.
There are generally two categories of ambiguity that
may arise in a contract: patent and latent.19 A patent
ambiguity is one that is “apparent upon the face of the
instrument, arising by reason of inconsistency, obscurity
or an inherent uncertainty of the language adopted, such
that the effect of the words in the connection used is
either to convey no definite meaning or a double one.”20 In
contrast, a latent ambiguity “‘arises not upon the words of
the will, deed, or other instrument, as looked at in
19
See 11 Williston, Contracts (4th ed), § 33:40, p
816.
20
Zilwaukee Twp v Saginaw-Bay City R Co, 213 Mich 61,
69; 181 NW 37 (1921); 11 Williston, Contracts (4th ed), §
33:40, p 816 (“Patent ambiguities are those that are
apparent on the face of the document . . . .”).
13
themselves, but upon those words when applied to the object
or to the subject which they describe.’”21
By asserting the existence of a latent ambiguity, the
city illustrates an inherent tension found in contract law.
On the one hand, it is well-settled law that when a
contract is clear and unambiguous on its face, a court will
not consult extrinsic evidence and will enforce the
contract as written.22 On the other hand, a party generally
is permitted to introduce extrinsic evidence to demonstrate
the existence of a latent ambiguity—one that is not
apparent on the face of the contract.23
21
Zilwaukee Twp, supra at 69 (citation omitted); 11
Williston, Contracts (4th ed), § 33:40, p 816 (“[L]atent
ambiguities are those which appear only as the result of
extrinsic or collateral evidence showing that a word,
thought to have but one meaning, actually has two or more
meanings.”).
The classic example of a latent ambiguity is found in
the traditional first-year law school case of Raffles v
Wichelhaus, 2 Hurl & C 906; 159 Eng Rep 375 (1864). In
Raffles, two parties contracted for a shipment of cotton
“to arrive ex Peerless” from Bombay. However, as it turned
out, there were two ships sailing from Bombay under the
name “Peerless.” Thus, even though the contract was
unambiguous on its face, there was a latent ambiguity
regarding the ship to which the contract referred.
22
Quality Products, supra at 375; Cruz v State Farm
Mut Automobile Ins Co, 466 Mich 588, 594; 648 NW2d 591
(2002); Nikkel, supra at 566; Morley, supra at 465.
23
Hall v Equitable Life Assurance Society of the
United States, 295 Mich 404, 408; 295 NW 204 (1940) (“It is
(continued…)
14
In balancing these two seemingly conflicting
principles of contract law, a court must never cross the
point at which the written contract is altered under the
guise of contract interpretation.24 Indeed, it is during
litigation that a party’s motivations are the most suspect
and the party’s incentives the greatest to attempt to
achieve that which the party could not during the give-and-
take of the contract negotiation process. As this Court
stated in Nikkel, a "court may not read ambiguity into a
policy where none exists.”25 Therefore, in clarifying the
proper role of extrinsic evidence in illuminating a latent
ambiguity, it is helpful to turn to basic principles of
contract law.
As stated, the primary goal of contract interpretation
is to ascertain and effectuate the intent of the
contracting parties.26 The law presumes that the
(…continued)
a well-settled rule that extrinsic evidence is admissible
to show that a latent ambiguity exists.”).
24
Wilkie, supra at 51 (“This approach, where judges
. . . rewrite the contract . . . 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 . . . .”).
25
Nikkel, supra at 568.
26
Quality Products, supra at 375 (“In interpreting a
contract, our obligation is to determine the intent of the
(continued…)
15
contracting parties’ intent is embodied in the actual words
used in the contract itself.27 A rule to the contrary would
reward imprecision in the drafting of contracts. More
significant, it would create an incentive for an aggrieved
party to enlist the judiciary in an attempt to achieve a
benefit that the party itself was unable to secure in
negotiating the original contract—a proposition this Court
flatly rejected in Wilkie.28 These principles require that,
(…continued)
contracting parties.”); McIntosh v Groomes, 227 Mich 215,
218; 198 NW 954 (1924) (“The cardinal rule in the
interpretation of contracts is to ascertain the intention
of the parties. To this rule all others are subordinate.”);
Mills v Spencer, 3 Mich 127, 135 (1854) (“In the
construction of a contract, we are to look at the intention
of the parties.”); 17A CJS, Contracts, § 308, p 321 (“The
primary and overriding purpose of contract law is to
ascertain and give effect to the intentions of the parties
. . . .”); 17A Am Jur 2d, Contracts, § 345, p 332 (“[T]he
fundamental and cardinal rule in the construction or
interpretation of contracts is that the intention of the
parties is to be ascertained, and effect is to be given to
that intention . . . .”); 1 Restatement Contracts, 2d,
§201(1), p 83 (“Where the parties have attached the same
meaning to a promise or agreement or a term thereof, it is
interpreted in accordance with that meaning.”).
27
Michigan Chandelier Co v Morse, 297 Mich 41, 49; 297
NW 64 (1941)(“‘The law presumes that the parties understood
the import of their contract and that they had the
intention which its terms manifest.’” [citation omitted]);
see also United States ex rel Int'l Contracting Co v
Lamont, 155 US 303, 310; 15 S Ct 97; 39 L Ed 160 (1894);
17A Am Jur 2d, Contracts, § 348, p 336 (“[T]he parties are
presumed to have intended what the terms clearly state.”).
28
Wilkie, supra at 51.
16
when a party asserts that a latent ambiguity exists, a
court presume that the contracting parties’ intent is
manifested in the actual language used in the contract.
The party alleging the existence of the latent ambiguity
may rebut this presumption only by proving, through clear
and convincing evidence, that such an ambiguity does indeed
exist.
This Court emphasized these same bedrock principles of
contract law in Quality Products, which held that
contracting parties are free, with mutual assent, to modify
a contract notwithstanding a written anti-modification or
anti-waiver clause present in the original agreement.29 We
recognized that the anti-modification clause contained in
the written contract was presumptive of the parties’ intent
as a matter of law, but also that “the parties possess, and
never cease to possess, the freedom to contract even after
the original contract has been executed.”30 We held,
therefore, that contracting parties are always entitled
mutually to modify the underlying contract, but the party
29
Quality Products, supra at 372-373.
30
Id. at 372.
17
asserting that a modification has occurred must present
clear and convincing evidence to that effect.31
Although Quality Products involved contract
modification, not contract interpretation, the same core
principles of contract law apply in the present case. It
must be presumed that the city and the Pool intended the
actual language that they used in the insurance policy. We
conclude, therefore, that the city, in asserting the
existence of a latent ambiguity, bears the burden of
proving by clear and convincing evidence that such an
ambiguity actually exists.32
31
Id. at 373.
32
Justice Cavanagh asserts that we are relying on a
“broad reading” of Quality Products and that the principles
adopted by this Court in Quality Products should be limited
to cases involving contract modification or waiver and not
to cases when one party asserts the existence of a latent
ambiguity. Ante at 18 n 11. There is no principled basis
for the distinction Justice Cavanagh draws. In both cases—
a claimed contract modification/waiver and the claimed
existence of a latent ambiguity—a party to a contract is
asserting that the written terms of the contract should not
be enforced. This Court has gone to great lengths in the
past few terms to clarify the law so that contracts will be
enforced as written. See Wilkie v Auto Owners Ins Co, 469
Mich 41; 664 NW2d 776 (2003); Klapp v United Ins Group
Agency, Inc, 468 Mich 459; 663 NW2d 447 (2003). By
applying a clear and convincing standard of proof for
latent ambiguities, this Court would simply be adhering to
the common theme we articulated in Quality Products and all
our other recent contract cases: that contracts will be
(continued…)
18
The city has failed to satisfy that burden of proof.
The reality is that none of the parties to this insurance
contract asserts that the term “pollutant” contained in the
exclusion clause means something different when city sewage
is discharged into Fox Creek or when it backs up into
individual Grosse Pointe Park residences. Indeed, the Pool
has conceded that the source of the pollution in both cases
is the same.33 Thus, the record reflects no evidence that
one party contends that “pollutant” means something
different from how that term is defined in the policy.
(…continued)
enforced as written unless substantial evidence to the
contrary is presented.
Justice Cavanagh also states that we do not cite
decisions other than Quality Products for the clear and
convincing rule discussed above. We are unaware of the
bedrock jurisprudential rule on which Justice Cavanagh
relies: that a legal principle duly adopted by this Court
is not binding unless there are other related cases with
the same holding. Quality Products is a binding decision
of this Court and the doctrinal underpinnings of that case
are applicable here. As such, it must be given due regard.
Nevertheless, as we indicate above, the clear and
convincing rule regarding latent ambiguities is not a new
concept, but an embodiment of the precise contract
principle to which this Court has steadfastly adhered in
our recent contract jurisprudence: that contracts will be
enforced as written unless compelling evidence to the
contrary is offered. See Schmalfeldt v North Pointe Ins
Co, 469 Mich 422, 428; 670 NW2d 651 (2003); Klapp, supra at
467; Wilkie, supra at 51-52, 62-63; Rednour v Hastings Mut
Ins Co, 468 Mich 241, 251; 661 NW2d 562 (2003); Nikkel,
supra at 566-568.
33
Pool reply brief at 4.
19
That being the case, there is no “latent ambiguity”
requiring the introduction of extrinsic evidence to show
that “pollutant” means something other than how it is
defined in the contract. Rather, the city is attempting to
bootstrap its estoppel argument—that the Pool paid similar
claims involving pollutants so it is precluded from denying
indemnification on this claim—to manufacture a latent
ambiguity claim. Such a tactic violates basic contract
construction principles and should be rejected for that
reason.
C. EQUITABLE ESTOPPEL
The city argues that, even if sewage is a “pollutant”
under the policy’s pollution exclusion clause, the Pool
should nonetheless be equitably estopped from denying
coverage. It asserts that the Pool’s payment of prior
basement backup claims and the Pool’s involvement in
monitoring the Etheridge litigation led the city to believe
that the Pool would indemnify any eventual settlement that
was reached. According to the city, it would have altered
its strategy in the Etheridge litigation had it known that
the Pool would not cover the settlement and, therefore, it
was prejudiced by the Pool’s actions.
In general, “[t]he principle of estoppel is an
equitable defense that prevents one party to a contract
20
from enforcing a specific provision contained in the
contract.”34 Although equitable estoppel appears to be
broad in theory, the doctrine is rather limited in
practice. As then-Chief Justice Weaver stated in writing
for the Court in Kirschner, “The application of . . .
estoppel is limited, and, usually, the doctrine[] will not
be applied to broaden the coverage of a policy to protect
the insured against risks that were not included in the
policy or that were expressly excluded from the policy.”35
Indeed, the rule discussed in Kirschner is well
established in Michigan law. In Ruddock, the beneficiary
of a life insurance policy sought to estop the insurer from
invoking the policy’s “military service” exclusion clause
as a basis for denying payment. This Court expressly
rejected the beneficiary’s equitable estoppel argument,
holding that estoppel will not be applied to broaden
34
Morales v Auto-Owners Ins Co, 458 Mich 288, 295; 582
NW2d 776 (1998).
35
Kirschner, supra at 593-594 (emphasis added). While
Justice Cavanagh cites Kirschner for the proposition that
an insurer may be equitably estopped from denying coverage
if the insurer does not timely reserve its rights, Justice
Cavanagh omits the prominent language from Kirschner that
emphasizes that “[t]he application of . . . estoppel is
limited . . . ." Ante at 23.
21
coverage beyond the specific risks covered by the policy
itself. This Court stated:
To apply the doctrine of estoppel and
waiver here would make this contract of
insurance cover a loss it never covered by
its terms, to create a liability not created
by the contract and never assumed by the
defendant under the terms of the policy. In
other words, by invoking the doctrine of
estoppel and waiver it is sought to bring
into existence a contract not made by the
parties, to create a liability contrary to
the express provisions of the contract the
parties did make.[36]
By asking this Court to hold that the Pool is
equitably estopped from denying coverage for the Etheridge
settlement, the city is essentially requesting this Court
to ignore the policy’s pollution exclusion clause that the
Pool specifically invoked in its reservation of rights
letter. To do so, however, would be to alter fundamentally
the nature of the bargain struck between the city and the
Pool and to protect the city “against risks that were . . .
expressly excluded from the policy.”37 This Court
explicitly rejected this argument in Ruddock and Kirschner.
We do so again today. Equitable estoppel must not be
applied to expand coverage beyond the scope originally
36
Ruddock, supra at 654.
37
See Kirschner, supra at 594.
22
contemplated by the parties in the insurance policy as
written. A court must not bestow under the veil of equity
that which the aggrieved party itself failed to achieve in
negotiating the contract.38
Because we believe that Kirschner and Ruddock are
fatal to the city's estoppel claim, unlike Justice
Cavanagh, we would not apply the test articulated in
Morales. Nevertheless, to the extent that the city relies
on the principles in Morales, its reliance is misplaced.
In Morales, this Court applied a three-part test to
determine whether equitable estoppel should apply: (1) the
defendant's acts or representations induced the plaintiff’s
belief, (2) the plaintiff justifiably relied on its belief,
38
Justice Cavanagh states that we are giving Kirschner and
Ruddcok an “expansive reading” and setting forth an
“inflexible rule” regarding the application of estoppel.
Ante at 24 n 12. To the contrary, we are merely applying
the well-established rule this Court adopted in Ruddock and
reiterated in Kirschner that estoppel will not be applied
to give the insured a benefit that was never negotiated in
the first place. Ruddock, supra at 654; Kirschner, supra at
594. Indeed, in our view, it is Justice Cavanagh who is
unduly limiting the holding of Kirschner by implying
exceptions to the Kirschner rule beyond the two explicitly
recognized: (1) misrepresentation by the insurer and (2)
the insurer’s failure to provide a timely reservation of
rights. Id. at 594-595.
23
and (3) the plaintiff was prejudiced as a result of its
belief.39
Even assuming, arguendo, that the Pool’s payment of
prior basement backup claims and its involvement in
monitoring the Etheridge suit led the city to hope that the
settlement would be covered, and that the city actually
relied on its mistaken belief, the city's equitable
estoppel claim must fail because its reliance was not
justifiable. Three weeks after the Etheridge suit was
filed, the Pool sent the city a reservation of rights
letter that specifically quoted the policy’s pollution
exclusion clause. The letter concluded by stating, “Please
be advised that if there is any judgment against the City
of Grosse Pointe Park for . . . a discharge of any
pollutants, . . . the Michigan Municipal Liability &
Property Pool reserves the right not to indemnify Grosse
Pointe Park for said damages.” Moreover, the Pool
frequently reminded the city during the Etheridge
litigation that “serious coverage issues” remained.
Despite all this, and after being notified by the Pool that
coverage was formally denied, the city still proceeded to
39
Morales, supra at 296-297.
24
finalize the settlement with the Etheridge plaintiffs.40
Any reliance on the part of the city, therefore, was
unjustified.41 Because there was no justifiable reliance,
we need not consider whether the city suffered any
prejudice on the basis of its reliance; the city's
estoppel claim fails as a matter of law.
IV. CONCLUSION
Sewage is clearly a “pollutant” under the plain
language of the policy’s pollution exclusion clause.
Moreover, while extrinsic evidence may generally be
introduced to demonstrate the existence of a latent
40
The City Attorney for Grosse Pointe Park testified
in his deposition that “a decision [was made] by the city
that it was in the best interests of the city if there was
to be no coverage to proceed with a settlement because we
were where we were.”
41
Since at least 1911, in the case of Sargent Mfg Co v
Travelers’ Ins Co, 165 Mich 87; 130 NW 211 (1911), this
Court has adhered to the rule that a timely reservation of
rights letter will protect an insurer against an insured’s
claims of estoppel. This Court reiterated this fundamental
rule of insurance law in Kirschner by noting that an
insurer who complies with its “duty to give reasonable
notice . . . that it is proceeding under a reservation of
rights” will be shielded from subsequent claims of estoppel
or waiver. Kirschner, supra at 593. Accordingly, if an
insurer timely reserves its rights, an insured will
generally not be able to sustain a claim of estoppel on the
basis that it altered its litigation strategy in reliance
on the insurer’s payment of previous claims. To conclude
otherwise would be to emasculate completely the entire
purpose of the reservation of rights process.
25
ambiguity, we conclude that a court must presume that the
contracting parties’ intent is manifested in the actual
language used in the contract itself and that the party
alleging the existence of the latent ambiguity may rebut
this presumption only by proving, through clear and
convincing evidence, that such an ambiguity does actually
exist. The city has failed to meet this burden of proof.
Moreover, any reliance on Morales is misplaced. Under
Ruddock and Kirschner, the Pool is not equitably estopped
from denying coverage because estoppel will not be applied
to broaden coverage beyond the particular risks
specifically covered by the policy itself.
The judgment of the Court of Appeals is reversed, and
this matter is remanded to the trial court for entry of an
order granting the Pool’s motion for summary disposition.
Robert P. Young, Jr.
Clifford W. Taylor
Stephen J. Markman
26