One Court of Justice

On remand from the Michigan Supreme Court, the Court of Appeals determined in Auto-Owners Insurance Co. v. Ferwerda Enterprises, Inc., No. 277574 (Jan. 28, 2010), that the trial court should not have awarded attorney fees against the insurer when the insurer’s argument that no coverage existed was not frivolous.  The Court also reversed the award of penalty interest because the liability of the insurer was reasonably in dispute.  The opinion, authored by Judge O’Connell, is available here.

The case began when a pipe for a heating system in the swimming pool of a Holiday Inn blew out and released a cloud of gas that entered the pool area and injured a family.  The family filed a personal injury action against Holiday Inn, but Auto-Owner, Holiday Inn’s insurer, refused to indemnify and defend Holiday Inn.  Auto-Owner claimed that the pollution exclusion in the applicable policy barred coverage (because the release of gases counted as a release of pollutants), while Holiday Inn argued that the “heating equipment exception” to the pollution exclusion provided coverage (because the heating system heated not just the pool but the whole pool building).  While the trial court concluded that heating-equipment exception applied, it specifically found that the insurer’s pollution-exclusion argument was not frivolous.  Despite this finding, the trial court awarded attorney fees to Holiday Inn.

The issue of which provision applied wound its way all the way to the Michigan Supreme Court.  A divided panel of the Court of Appeals concluded that the heating-equipment exception did not provide coverage (with Judge O’Connell dissenting), but the Supreme Court reversed, holding that the policy unambiguously provided coverage.  The Supreme Court then remanded for consideration of the trial court’s awards of attorney fees and penalty interest.

On remand, the Court of Appeals reversed the award of attorney fees against the insurer.  Under MCR 2.625(A)(2), a trial court may award fees only “if the court finds . . . that an action or defense was frivolous.”  Because the trial court made the opposite finding—specifically finding the argument was not frivolous—the trial court erred in awarding attorney fees.

As for penalty interest, MCL § 500.2006 allows an award of penalty interest when the claimant is a third-party tort claimant only “if the liability of the insurer is not reasonably in dispute.”  Holiday Inn argued that it was the claimant and that it was relying on a breach-of-contract theory based on the policy, so the “reasonably in dispute” standard did not apply; instead, the part of MCL § 500.2006 addressing late payments to an insured should apply, which does not include that standard.  Describing the issue as one of first impression, the Court of Appeals concluded that because the trial court awarded breach-of-contract damages specifically because the insurer had not paid the  underlying third-party tort claim, the “reasonably in dispute” standard did apply and the award of penalty interest in this case was error.