RICHARD PAYLOR V FIRST MOUNTAIN MORTGAGE CORP
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STATE OF MICHIGAN
COURT OF APPEALS
RICHARD PAYLOR and ORPAH PAYLOR,
UNPUBLISHED
October 9, 2008
Plaintiffs-Appellees,
v
No. 278076
Washtenaw Circuit Court
LC No. 03-000639-CK
FIRST MOUNTAIN MORTGAGE
CORPORATION, BRIAN WINBORN, ERIC
STANLEY, and KELLI HACHEY,
Defendants,
and
CITIZENS INSURANCE COMPANY OF
AMERICA,
Garnishee Defendant-Appellant.
Before: Donofrio, P.J., and Murphy and Fitzgerald, JJ.
PER CURIAM.
Garnishee defendant Citizens Insurance Company of America appeals as of right from an
order granting summary disposition in favor of plaintiffs Richard and Orpah Paylor and
awarding them a money judgment of $480,000 against Citizens Insurance, plus interest, to satisfy
the full amount of a $480,000 judgment entered in favor of the Paylors against Citizens
Insurance’s insured, First Mountain Mortgage Corporation (“First Mountain”), following a bench
trial. Because the injuries suffered in the underlying negligence action fall within the personal
injury “special broadening endorsement” to a business liability policy, we affirm.
I. Background
In June 2003, the Paylors filed an action against First Mountain and two of its employees,
Brian Winborn and Eric Stanley, to recover damages for Winborn’s and Stanley’s allegedly
tortious dealings with the Paylors in connection with a residential mortgage. The Paylors alleged
that they wrote various checks to Winborn totaling $63,968.50 before closing on the mortgage,
but ultimately received no credit for the amount paid. They sought to recover the $63,968.50
and other damages from First Mountain, Stanley, and Winborn, alleging claims for fraudulent
misrepresentations, breach of the Michigan Consumer Protection Act, MCL 445.901 et seq.,
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conversion, negligence, breach of contract, unjust enrichment, and intentional infliction of
emotional distress.
The Paylors obtained a default judgment against Winborn and Stanley, and proceeded to
trial on their claims against First Mountain. The principal issue at trial was whether First
Mountain negligently trained and oversaw the work of Winborn and Stanley. The trial court
found that Stanley and Winborn defrauded and took advantage of the Paylors, and that First
Mountain was negligent for failing to train and oversee their work. The court awarded the
Paylors noneconomic damages of $480,000 for First Mountain’s negligence.
After a final judgment was entered, the Paylors served Citizens Insurance with a writ of
garnishment. Citizens Insurances denied having any funds owed to First Mountain. The Paylors
moved for summary disposition under MCR 2.116(C)(10), seeking full payment of the $480,000
judgment from Citizens Insurance on the basis that First Mountain was entitled to insurance
coverage for that amount under a business owner’s liability policy issued to it by Citizens
Insurance.
Before the hearing on the Paylors’ motion, the trial court entered a judgment on March 7,
2007, in favor of First Mountain in its separate action against Citizens Insurance in which First
Mountain sought coverage under an employee dishonesty provision in a business owner’s special
property coverage form (hereafter “property policy”) issued to it by Citizens Insurance. In that
action, the trial court limited First Mountain’s recovery for the $480,000 judgment to the
property policy’s limit of $100,000.
When ruling on the Paylors’ motion for summary disposition, the trial court rejected
Citizens Insurance’s argument that, under the doctrine of res judicata, the March 7, 2007,
judgment barred the Paylors’ garnishment claim based on the liability policy. The court entered
a garnishment order for the full amount sought by the Paylors based on its determination that the
liability policy provided coverage for bodily and personal injuries.
II. Standard of Review
Disputes concerning a garnishee’s liability are governed by MCR 3.101(M), which
generally provides for the dispute to be tried in the same manner as other civil actions. The
plaintiff’s verified statement serves as the complaint and the garnishee defendant’s disclosure
serves as the answer. MCR 3.101(M)(2). But in the absence of an admission to the contrary in a
garnishee’s disclosure, the failure to plead a defense specifically does not waive the defense.
LeDuff v Auto Club Ins Ass’n, 212 Mich App 13, 18; 536 NW2d 812 (1995).
Summary disposition pursuant to MCR 2.116(C) may be granted where a question of law
has been raised in a garnishment dispute. Admiral Ins Co v Columbia Cas Ins Co, 194 Mich App
300, 310; 486 NW2d 351 (1992). We review the trial court’s decision de novo. Adair v State of
Michigan, 470 Mich 105, 119; 680 NW2d 386 (2004). A motion under MCR 2.116(C)(10) tests
the factual sufficiency of a claim. Id. at 120. The motion is properly granted if there is no
genuine issue of material fact and the moving party is entitled to judgment as a matter of law.
Farm Bureau Ins Co v Abalos, 277 Mich App 41, 44; 742 NW2d 624 (2007).
III. Res Judicata
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Citizens Insurance argues that the trial court erred in rejecting its argument that the
Paylors’ garnishment claim based on the liability policy was barred by res judicata. Like a
motion for summary disposition, we review a trial court’s application of res judicata de novo.
Washington v Sinai Hosp of Greater Detroit, 478 Mich 412, 417; 733 NW2d 755 (2007). The
burden of establishing the applicability of res judicata is on the party asserting it. Baraga Co v
State Tax Comm, 466 Mich 264, 269; 645 NW2d 13 (2002).
“Res judicata bars a subsequent action between the same parties when the evidence or
essential facts are identical.” Sewell v Clean Cut Mgt, 463 Mich 569, 575; 621 NW2d 222
(2001). The second action is barred when “(1) the prior action was decided on the merits, (2)
both actions involve the same parties or their privies, and (3) the matter in the second case was,
or could have been, resolved in the first.” Adair, supra at 121. With respect to the second
requirement, it has been said:
To be in privity is to be so identified in interest with another party that the
first litigant represents the same legal right that the later litigant is trying to assert.
Baraga Co v State Tax Comm, 466 Mich 264, 269-270; 645 NW2d 13 (2002).
The outer limit of the doctrine traditionally requires both a “substantial identity of
interests” and a “working functional relationship” in which the interests of the
nonparty are presented and protected by the party in the litigation. Id., quoting
Baraga Co v State Tax Comm, 243 Mich App 452, 456; 622 NW2d 109 (2000),
citing Phinisee v Rogers, 229 Mich App 547, 553-554; 582 NW2d 852 (1998).
[Adair, supra, at 122.]
The Paylors were not parties to the separate action between First Mountain and Citizens
Insurance, and we agree with the trial court that the requisite privity between the Paylors and
First Mountain was not established. Contrary to what the Paylors argue on appeal, however, we
do not find any support for treating them as third-party beneficiaries to the insurance policy in
reaching this conclusion. A person is a third-party beneficiary only if the promisor undertakes a
promise directly to or for the person. MCL 600.1405; Schmalfeldt v North Pointe Ins Co, 469
Mich 422, 428; 670 NW2d 651 (2003). The insurance policy itself must be considered to
determine if a person is a third-party beneficiary. Id. at 429. The mere fact that the Paylors
obtained a money judgment against First Mountain does not make them third-party beneficiaries
under First Mountain’s insurance policy with Citizens Insurance.
Nonetheless, it is clear that an injured party has a potential interest in an insurance policy,
irrespective of whether the injured party is a third-party beneficiary. See Allstate Ins Co v
Hayes, 442 Mich 56; 499 NW2d 743 (1993). And if the injured party is placed in the shoes of
the insured for purposes of garnishment proceedings against the insurer, it is logical to conclude
that the injured party should be bound by a coverage decision rendered in a separate case with
respect to the insurance policy. Cloud v Vance, 97 Mich App 446, 451; 296 NW2d 68 (1980).
This can be accomplished by giving the injured party an opportunity to be heard in the insurance
case, but does not establish the necessary privity to bind the injured party. Allstate Ins Co, supra
at 67 n 12; Cloud, supra. Privity is lacking because the injured party and the alleged tortfeasor
have an adversary relationship. Cf. Husted v Auto-Owners Ins Co, 213 Mich App 547, 556-557;
540 NW2d 743 (1995), aff’d on other grounds 459 Mich 500 (1999).
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Thus, the trial court correctly determined that the requisite privity was lacking. Because
this element of res judicata was not met, it is unnecessary to address the parties’ arguments
regarding the other requirements of res judicata. Additionally, Citizens Insurance’s argument
that the Paylors’ garnishment action is precluded by the compulsory joinder rule in MCR
2.203(A) is not properly before us, as this issue was not raised in the trial court. Fast Air, Inc v
Knight, 235 Mich App 541, 549; 599 NW2d 489 (1999). In any event, while this rule might be
consistent with res judicata principles, Pierson Sand & Gravel, Inc v Keeler Brass Co, 460 Mich
372, 395 n 12; 596 NW2d 153 (1999) (Taylor, J., dissenting), Citizens Insurance has failed to
demonstrate that it applies to a person who is not a party to a lawsuit or itself provides a remedy
for a violation.
IV. Liability Coverage
Because the doctrine of res judicata did not preclude the Paylors’ garnishment action, we
consider the merits of the trial court’s decision granting the Paylors’ motion for summary
disposition with respect to whether First Mountain had coverage under the liability policy for the
$480,000 judgment against it.
With respect to Citizens Insurance’s claim that First Mountain was not entitled to
coverage for failure to comply with contractual notice requirements in the liability policy, we
conclude that Citizens Insurance did not properly preserve this issue for appeal by presenting it
to the trial court. Further, considering Citizens Insurance’s cursory treatment of this issue, we
decline to consider it. Peterson Novelties, Inc v City of Berkley, 259 Mich App 1, 14; 672 NW2d
351 (2003).
We also note that the Paylors’ argument that Citizens Insurance should be estopped from
denying coverage on any ground not set forth in its July 10, 2003, letter to First Mountain with
respect to the liability policy, while raised in their motion for summary disposition, was not
decided by the trial court. In any event, estoppel is generally not available where its application
would broaden coverage under an insurance policy. Smit v State Farm Mut Automobile Ins Co,
207 Mich App 674, 680; 525 NW2d 528 (1994). The dispositive issue before us is whether the
trial court correctly found as a matter of law that the liability policy provided coverage for bodily
and personal injuries. We are not persuaded that the Paylors have established any basis for
applying the estoppel doctrine to this issue.
A proper resolution of this case depends on the construction of the liability policy.
Summary disposition was appropriate under MCR 2.116(C)(10) only if the liability policy was
unambiguous. Mahnick v Bell Co, 256 Mich App 154, 159; 662 NW2d 830 (2003). A contract
will generally be read as a whole and in accordance with its plain and ordinary meaning to
determine the parties’ intent. Cole v Auto Owners Ins Co, 272 Mich App 50, 53; 723 NW2d 922
(2006). Dictionary definitions may be used to determine the plain and unambiguous meaning of
undefined terms in an insurance policy. State Farm Fire & Cas Co v Couvier, 227 Mich App
271, 275; 575 NW2d 331 (1998). An ambiguity will be found if two contractual provisions
irreconcilably conflict or a term is equally susceptible to more than one meaning. Coates v
Bastian Bros, Inc, 276 Mich App 498, 503; 741 NW2d 539 (2007).
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Paragraph A of the liability policy provides that coverage exists for “bodily injury” only
if it is “caused by an ‘occurrence’ that takes place in the ‘covered territory.’” “Bodily injury” is
defined in a special broadening endorsement to mean
bodily injury, sickness or disease sustained by a person, this includes mental
anguish, mental injury shock, fright or death resulting from such bodily injury,
sickness or disease.
Under the unambiguous language used to define “bodily injury,” mental anguish must
result from bodily injury. Here, there was no evidence of an actual bodily injury, but only
evidence that the Paylors’ mental anguish had physical manifestations. We therefore hold that
the trial court erred as a matter of law in finding the requisite bodily injury for coverage under
the policy. Cf. Fitch v State Farm Fire & Cas Co, 211 Mich App 468, 472-473; 536 NW2d 273
(1995) (plaintiff could not claim coverage for emotional injuries under policy definition of
bodily injury that excluded an emotional and mental disorder or disturbances unless “it arises out
of actual physical injury” where the claimed injuries were “apparently without physical
manifestation or injury and, most importantly, did not stem from an actual physical injury”).
Because there was no evidence of a bodily injury, it is unnecessary to consider Citizens
Insurance’s argument that there also was no “occurrence” for purposes of coverage. We note,
however, that the question whether there was an occurrence is generally analyzed from the
standpoint of the insured in Michigan. Allstate Ins Co v McCarn, 466 Mich 277, 281; 645
NW2d 20 (2002). Further, the weight of authority takes this approach in cases specifically
involving an employer’s negligent hiring, training, or supervision of an employee. See Colombia
Cas Co v Westfield Ins Co, 217 W Va 250, 252; 617 SE2d 797 (2005); see also Westfield Ins Co
v Tech Dry, Inc, 336 F3d 503 (CA 6, 2003); King v Dallas Fire Ins Co (On Rehearing), 85
SW3d 185, 191-192 (Tex, 2002).1
Given the absence of bodily injury, we are left to determine whether the garnishment
order could be upheld, in whole or in part, on the basis of a personal injury. Under ¶ A of the
liability policy, the insurance also applies to “‘personal injury’ caused by an offense arising out
of your business, excluding advertising, publishing, broadcasting or telecasting done by or for
you.” “Personal injury” is defined in ¶ F(13) to mean
injury, other than “bodily injury”, arising out of one or more of the following
offenses:
a. False arrest, detention or imprisonment;
b. Malicious prosecution;
1
We further note that only bodily injury and property damage coverage requires an occurrence.
The personal injury coverage only requires that the personal injuries arise out of the business of
the insured. Coverage, ¶ A(1)(a)(b)(2)(a)
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c. The wrongful eviction from . . . a room , dwelling or premises that a
person occupies . . . ;
d. Oral or written publication of material that slanders or libels a person . .
.;
e. Oral or written publication or material that violates a person’s right of
privacy.
A special broadening endorsement adds the following “offense.”
f. Discrimination or humiliation (unless insurance is prohibited by law)
that results in injury to the feelings or reputation of a natural person, but only if
such discrimination or humiliation is:
(1) Not done intentionally by or at the direction of:
(a) The insured; or
(b) Any officer of the corporation, director, stockholder, partner or
member of the insured; and
(2) Not directly or indirectly related to an “employee”, nor to the
employment, prospective employment or termination of any person or persons by
an insured.
We disagree with Citizens Insurance that the trial court erred in finding evidence to
support a personal injury arising from humiliation. The trial court found that there was a
personal injury within the meaning of the policy because its determination of mental anguish at
the bench trial included humiliation. The trial court explained that although it did not mention
the word “humiliation,” it had found humiliation predicated on evidence that Richard Paylor was
losing his home and had become dependent on his children. The trial court stated, “Whether you
want to call that mental distress or mental suffering or humiliation, it is what it is and it was a
serious impact on this man and his family.” Such statement is further supported by the record in
the underlying negligence action by the uncontroverted evidence of plaintiffs’ hurt feelings,
embarrassment, constant crying jags, and loss of self worth. Ordinarily, “[i]n the world of
liability insurance policies, coverage for ‘personal injury’ liability depends not primarily on the
type of injury sustained, but whether the injuries arose from the commission of certain offenses.”
Titan Holdings Syndicate, Inc v City of Keene, 898 F2d 265, 270 (CA 1, 1990), citing
Appeleman, 7 Insurance Law, § 4501.14 (emphasis in original); see also Kitsap Co v Allstate Ins
Co, 136 Wash 2d 567, 580; 964 P2d 1173 (1998). Coverage is afforded for defined risks. City
of Delray Beach v Agricultural Ins Co, 85 F3d 1527, 1533-1534 (CA 11, 1996).
It is apparent from the list of offenses in the personal injury definition of the liability
policy that it applies to various forms of tortious or wrongful conduct. The offenses are not
defined by the form of damages, but rather the conduct itself, such as a false arrest or wrongful
eviction, albeit the offense of humiliation is limited by the requirement that it result in injury to
feelings or reputation. This is consistent with the commonly understood meaning of the word
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“offense” itself. Although an “offense” can be a “transgression of the law,” it is also defined as a
“violation or breaking of a social or moral rule” and “something that offends or displeases.”
Random House Webster’s College Dictionary (1997). However, in this regard, counsel for
Citizens Insurance at argument interpreted the “special broadening endorsement” and admitted
that the personal injury coverage extends not only to an act or offense of humiliation, but
resultant humiliation from other acts.
The word “humiliation” is itself undefined in the definition of personal injury, albeit there
is no covered personal injury if the offense of humiliation is done intentionally by or at the
direction of “the insured.” The use of the definite article “the,” combined with the singular word
“insured,” is an indication that the offense of humiliation is examined from the standpoint of a
particular insured. See generally Hashem v Les Stanford Oldsmobile, Inc, 266 Mich App 61, 79;
697 NW2d 558 (2005) (“the” particularizes the subject spoken by reference to that object).2
“Humiliation” has been defined as “an act or instance of humiliating or being humiliated” and
the “state or feeling of being humiliated.” Random House Webster’s College Dictionary (1997).
The word “humiliate” means to “to cause (a person) a painful loss of pride, self-respect, or
dignity; mortify, abase.” Id.
The wrong committed by First Mountain was in the nature of negligent training and
supervising employees. As with any negligence action, the plaintiff must establish a duty owed
by the defendant and that a breach of that duty caused an injury. Lelito v Monroe, 273 Mich App
416, 418-419; 729 NW2d 564 (2006). The thrust of such a negligence claim is that the employer
acted unreasonably in letting an employee, whom it has a duty to control, commit a wrong
against the plaintiff. See generally United States Fidelity & Guaranty v Toward, 734 F Supp
465, 470 (SD Fla, 1990). The employee’s actual commission of some wrong is necessary for the
plaintiff to show damages. Id. Here the factual predicate of the underlying negligence action is
uncontested by Citizens Insurance. There was evidence in this case that First Mountain set in
motion the chain of events that enabled Winborn and Stanley to obtain the Paylors’ money
through fraud. And, while a court may conclude that a claim based on resultant humiliation is
insufficient to meet an offense of humiliation so as to invoke personal injury coverage, see, Air
Line Pilots Ass’n v Twin City Fire Ins Co, 803 A2d 1001 (DC, 2002), such is not the case when
the insurer interprets its own contract to include resultant humiliation as conceded by counsel.
2
Consistent with this understanding, the liability policy also contains a separation-of-insureds
clause, which provides:
Except with respect to the Limits of Insurance, and any rights or duties
specifically assigned in this policy to the first Named Insured, this insurance
applies:
a. As if each Named Insured were the only Named Insured; and
b. Separately to each insured against whom claim is made or “suit” is
brought.
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Citizens Insurance, therefore, argues that its exclusion for violation of a penal statute or
ordinance, (B)(i)(p)(3), applies because employees qualify as “an insured.” But the exclusion
requires that “the insured” commit or consent to the violation. The definite article “the”
particularizes the subject spoken to that object. Hashem, supra at 79. Also, as discussed earlier,
a separation of insureds clause is contained within the liability policy provision. The effect of a
separation of insureds provision on an exclusion depends on the terms of the exclusion.
Bituminous Cas Corp v Maxey, 110 SW3d 203, 214 (Tex App, 2003). If Citizens Insurance
wished to exclude coverage arising out of the violation of a penal statute, regardless of which
insured committed the violation, it could have done so by using the phrase “any insured.”
Because the phrase “the insured” was used, it is plain that the application of the exclusion must
be determined by reference to a particular insured. Therefore, Winborn’s and Stanley’s wrongful
conduct is irrelevant in applying the exclusion. As a matter of law, First Mountain committed
acts that either amounted to an offense of humiliation or resulted in humiliation by negligently
supervising and training Winborn and Stanley, the exclusion does not apply. Cf Silverband
Amusement, Inc v Utah home Fire Ins Co, 842 F Supp 1151, 1158 (WD Ark, 1994), aff’d 33 F3d
1476 (1994) (exclusion for willful violation of penal statute by or with consent of “the insured”
did not apply to employer who allegedly negligently hired and supervised the employee who
committed the violation.)
While the trial court found both bodily injury and personal injury coverage applied, it is
clear from the record that all the damages experienced by plaintiffs either constituted injury to
plaintiffs’ feelings, or resulted from the injury to plaintiffs’ feelings, as contained in the “special
broadening endorsement” personal injury coverage.
Affirmed.
/s/ Pat M. Donofrio
/s/ William B. Murphy
/s/ E. Thomas Fitzgerald
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