Summary
compelling business circumstances do not make an insured's actions "any less voluntary" and deprive the insurer of its "bargained for . . . contractual right to contest the liability of its insured instead of having its money given away by an agreement to which it was not a party."
Summary of this case from West Bend Mut. Ins. Co. v. Willmez Plumbing, Inc.Opinion
Docket No. 58306.
Decided October 5, 1982.
Landman, Luyendyk, Latimer, Clink Robb (by Jon D. Vander Ploeg), for plaintiff.
Dilley, Dewey Waddell, P.C. (by Jonathan S. Damon), for defendant.
Plaintiff appeals the trial court's granting of summary judgment, GCR 1963, 117.2(3), to defendant. The trial court held that, on the basis of the facts and pleadings before the trial court, there was no genuine issue of any material fact and defendant was entitled to judgment as a matter of law. We affirm.
Plaintiff is engaged in the business of anodizing aluminum, a process by which a finish is applied to previously produced aluminum sheet metal. For several years, plaintiff anodized aluminum for Prime Metals, which in turn sold the treated aluminum to Avion Coach Corporation for incorporation into Avion's trailers and motor coaches. In 1978, some of the aluminum treated by plaintiff developed a marked yellowing, because a defect in the salt used in the anodization process caused a chemical reaction upon exposure to sunlight. Needless to say, Avion was distressed at the jaundice which its lustrous silver trailers developed and informed its supplier, Prime, that the aluminum was unacceptable and would have to be replaced. Prime, in turn, informed plaintiff that it would hold plaintiff financially responsible for the cost of replacing the defective aluminum. Plaintiff agreed that its anodization treatment had caused the damages and agreed to settle the matter by having Avion set off its accounts payable to Prime and Prime set off its accounts payable to plaintiff.
When plaintiff first learned it would he held responsible for the damages, it informed its insurance carrier, defendant, of the claim; however, defendant denied liability and refused to aid plaintiff in investigating the claim. Consequently, plaintiff agreed to the aforementioned settlement with its customers. No lawsuits of any kind were ever initiated by plaintiff against Avion or Prime, or by either Prime or Avion against plaintiff. In his affidavit, plaintiff's president alleged that defendant refused "to investigate said claim or undertake any defense of Coil Anodizers, Inc."
The insurance contract issued by defendant provides in pertinent part:
"The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence. The company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage * * * and may make such investigation and settlement of any claim or suit as it deems expedient."
Two other contract provisions are pertinent to this dispute. Paragraph B(c) is a condition precedent to liability and provides:
"The insured shall not, except at his own cost, voluntarily make any payment, assume any obligation, or incur any expense other than for first aid to others at the time of occurrence."
Paragraph C, also a condition precedent, provides:
"No action shall lie against the company unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of this policy, nor until the amount of the insured's obligation to pay shall have finally been determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant, and the company."
Since it is undisputed that formal proceedings were never begun and defendant never formally acquiesced in the settlement arrangement, the trial judge held that plaintiff was not "legally obligated" for the damages incurred by Prime and Avion, and that its setoff arrangement constituted a "voluntary payment" excusing defendant from liability under the insurance contract. The trial judge also held that defendant had not waived the "no action" clause so as to excuse plaintiff's non-compliance with it, since defendant had merely denied liability and refused to investigate but had not refused to defend an existing action brought against plaintiff on the claim.
The term "legally obligated" has not been construed by this Court or by the Supreme Court. Relying on Giffels v Home Ins Co, 19 Mich. App. 146; 172 N.W.2d 540 (1969), and MacDonald v State Farm Mutual Automobile Ins Co, 14 Mich. App. 408; 165 N.W.2d 665 (1968), the trial court found this term to mean an obligation established by judicial proceedings or by formal acquiescence of the insurer to the payment obligation. In Giffels the Court upheld the trial court's finding that an insurer was not liable pursuant to a policy which provided that "the insurer shall be liable for the property of others * * * for which the assured may be liable". The trial court found that the plaintiff-insured's voluntary issuance of a trade acceptance to a party damaged by the plaintiff's business practices denied the insurer an opportunity to adjust the loss with the damaged party. The voluntary settlement, made without attempting to secure a determination of legal liability, precluded the plaintiff from recovering from the insurer.
Although these cases imply that the term "legal obligation" requires either a judicial determination of liability or a settlement between the insurer, insured and the claimant, neither case expressly defines the term.
Notwithstanding the failure of any party to this dispute to obtain a judgment or initiate any formal proceedings, plaintiff contends that it incurred a "legal obligation" since, plaintiff argues, the Michigan Uniform Commercial Code, MCL 440.1101 et seq.; MSA 19.1101 et seq., entitled Avion and Prime, as aggrieved buyers, to recoup their damages by setoff against accounts payable. Since we affirm on other grounds, we do not address the question whether a voluntary setoff agreed to by an aggrieved buyer and his seller under appropriate UCC provisions constitutes a "legal obligation". However, we do question the applicability of the UCC to this case. Generally, the UCC applies only to transactions in goods. Lorenz Supply Co v American Standard, Inc, 100 Mich. App. 600, 607; 300 N.W.2d 335 (1980). Plaintiff's anodization process may more properly be characterized as a service than a transaction in goods.
We affirm summary judgment for defendant because of plaintiff's noncompliance with the unambiguous conditions of liability quoted above in paragraphs B(c) and C. The language of the contract's "no action" clause clearly contemplates that the insured's liability to the claimant shall first be fixed by formal judgment or be formally acquiesced in by defendant as a condition precedent to recovery. Neither a judgment nor formal consent in the three-way setoff between plaintiff, Prime, and Avion was obtained here. Accordingly, plaintiff's settlement with Prime and Avion effectively excused defendant from liability. That plaintiff may have felt a certain "compulsion" to settle in order to retain the good will of its customers does not render the settlement any less voluntary for purposes of paragraphs B(c) and C of the contract; defendant has bargained for the contractual right to contest the liability of its insured instead of having its money given away by an agreement to which it was not a party. As noted in Giffels, supra, p 151, clauses are usually found in liability insurance policies giving the insurer the right to defend and settle any claim made against its insured and prohibiting the insured from voluntarily settling any claims without the insurer's consent. The purpose of such clauses is to prevent collusion between the claimant and the insured and to give the insurer control over settlement negotiations. In this case, plaintiff's interest in retaining the good will of its customers may have led it to settle, believing the claim to be insured, for a larger amount than defendant may have been able to obtain had defendant conducted the negotiations. In fact, defendant did not even believe the claim to be covered, since it denied liability when plaintiff first notified it.
The trial court was also correct in ruling that the allegation that defendant had refused to "undertake any defense" did not establish waiver of the "no action" clause. To show waiver, an insured must show that the insurer both denied liability and refused to defend an action brought against the insured. Elliott v Casualty Ass'n of America, 254 Mich. 282; 236 N.W. 782 (1931); Stephens v Pennsylvania Casualty Co, 135 Mich. 189; 97 N.W. 686 (1903). The undisputed facts show that no lawsuit was ever brought against plaintiff.
Affirmed, costs to appellee.