CITY OF GROSSE POINTE PARK V MICHIGAN MUNI LIABILITY & PROP POOL
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Michigan Supreme Court
Lansing, Michigan
Chief Justice:
Opinion
Justices:
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
lawsuit under a reservation of rights.
a
defense
in
the
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.
not
We hold that this pollution exclusion clause is
ambiguous;
evidence
as
a
therefore,
consideration
construction
aid
is
of
not
extrinsic
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
Detroit’s treatment plant.
sewer
for
transport
to
Further, Grosse Pointe Park was
permitted under the contract to build a pump station and a
discharge
exceeded
became
pipe.
If
eighty-four
overtaxed,
Grosse
cubic
the
Pointe
feet
discharge
a
Park’s
second
pipe
would
sewer
and
flow
its
allow
line
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
Pool
is
a
Michigan
group
self-insurance
local governments.
in
1985
purchased
and
July
31.
one-year,
While
Liability
pool
See MCL 124.5.
running
from the pool.
Municipal
through
and
created
Property
by
certain
Every year, beginning
1998,
occurrence-based
Grosse
Pointe
liability
Park
policies
Each policy period ran from August 1 to
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. 95527115NZ).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
nuisance,
plaintiff
class
alleged
trespass/nuisance,
gross
claims
for
negligence,
trespass,
and
a
taking; also alleged were third-party beneficiary claims
arising under the contracts between Grosse Pointe Park and
Detroit.
complaint
Grosse
to
the
Pointe
pool
Park
for
submitted
defense
and
the
Etheridge
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
Detroit as a defendant.
5
also
named
the
city
of
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
other
noting
things,
the
the
allegations
pool’s
letter
and
exposures,
referred
the
among
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,
waste;
disposal,
processing
or
treatment
of
(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
hearings,
and
continued
to
Etheridge
by
facilitation.
cover
Etheridge lawsuit.
the
litigation
basement
attending
Notably,
backup
meetings,
the
claims
pool
also
during
the
Settlement was ultimately reached in
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
indemnification
notified
coverage
Grosse
would
be
Pointe
denied.
Park
that
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).
that
Judge O’Connell dissenting in part, asserted
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
dispositions de novo.
on
motions
for
summary
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
5
paid
basement
backup
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
pollution exclusion clause.
the
applicability
of
the
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.”
n 9.
Slip op at 7
We disagree with the Court of Appeals rationale.
“An insurance policy is much the same as any other
contract.”
566;
489
Auto-Owners Ins Co v Churchman, 440 Mich 560,
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
ambiguity where the terms of the contract are clear.”
In
light
of
these
principles,
we
create
Id.
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
applied or executed.”
when
the
document’s
terms
are
Black’s Law Dictionary (7th ed).
Because “the detection of a latent ambiguity requires a
consideration
of
factors
extrinsic
evidence
existence
of
the
is
outside
obviously
ambiguity,
ambiguity proven to exist.”
as
the
instrument
admissible
well
as
to
the
resolve
to
prove
any
McCarty v Mercury Metalcraft
Co, 372 Mich 567, 575; 127 NW2d 340 (1964).
words,
“where
extrinsic
a
latent
evidence
is
itself,
ambiguity
admissible
exists
to
in
In other
a
indicate
contract,
the
actual
intent of the parties as an aid to the construction of the
contract.”
ambiguity
Id.
exists
Thus,
in
the
this
question
insurance
becomes
whether
policy’s
an
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.”
13
The
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,
specifically define “waste.”
in
the
policy,
meaning.
it
is
does
not
Where a term is not defined
accorded
its
commonly
understood
Allstate Ins Co v McCarn, 466 Mich 277, 280; 645
NW2d 20 (2002) (McCarn I).
to include sewage.7
understood
to
dishwater,
toilet
condoms,
however,
and
In other words, “waste” is commonly
include
the
“Waste” is commonly understood
urine
paper,
and
feminine
countless
other
feces,
napkins
bathwater
and
substances
and
tampons,
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.
cardinal
ascertain
rule
in
and
the
give
effect
McIntosh, supra at 218.
Corbin’s
warning
interpretation
that
to
the
of
Again, the
contracts
parties’
is
to
intentions.
We are also mindful of Professor
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
conclude
of
that
contract
this
principle.
pollution
Nonetheless,
exclusion
clause
is
we
not
patently ambiguous because an ambiguity does not readily
appear in the text of the policy.
permitted
to
“create
contract are clear.”
will
apply
this
ambiguity
Again, courts are not
where
the
terms
Masters, supra at 111.
pollution
exclusion
of
the
Therefore, we
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
light
as
of
indicated
the
by
attendant
the
language
facts
and
used,
read in
circumstances.
the
Such
intent when ascertained must, if possible, be given effect
and
must
prevail
as
against
the
literal
meaning
(…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
of
expressions used in the agreement.”
Folsinski,
Further,
337
Mich
attendant
370,
facts
W O Barnes Co, Inc v
376-377;
and
60
NW2d
circumstances
302
(1953).
explain
the
context in which the words were used and may reveal the
meaning the parties intended.
242,
249;
detection
79
of
consideration
NW2d
a
of
471
latent
(1956).10
ambiguity
factors
McCarty, supra at 575.
Sobczak v Kotwicki, 347 Mich
In
this
respect,
unquestionably
outside
the
the
requires
policy
itself.
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
ambiguous.
that
this
pollution
exclusion
clause
is
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
countless
other
sewer system.
napkins
and
substances
tampons,
typically
condoms,
introduced
and
the
into
a
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.
considering
factors
outside
the
four
Accordingly, after
corners
policy, we cannot detect any latent ambiguities.11
11
of
this
In other
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
clause
sum,
is
we
extrinsic
not
conclude
patently
evidence
that
this
pollution
ambiguous.
neither
leads
Further,
to
the
ambiguity
does
not
exist,
review
detection
proves the existence of a latent ambiguity.
an
exclusion
of
nor
Thus, because
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
exclusion
we
clause
believe
is
that
this
unambiguous,
policy’s
we
will
pollution
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.
discharges
fell
under
Thus, we hold that the city’s
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.
disagree.
We
Under the facts of this case, a reasonable trier
of fact could not conclude that the city satisfied its
burden.
In
this
reliance
on
justified.
case,
the
it
pool’s
cannot
be
actions
said
or
that
the
city’s
representations
was
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
rights,
or
it
the
is
proceeding
insurance
denying its liability.”
under
company
will
a
reservation
be
estopped
of
from
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
reserving
its
pollution
exclusion
before,
and,
underlying
rights,
the
pool
clause,
arguably,
litigation
the
the
that
pool
nature
had
of
was
invoked
specifically
it
the
done
the
neither
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.
the
city’s
reliance
was
Because we find that
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
reservation
of
case
rights
basement backup claims.
from
enforcing
the
was
or
not
the
inconsistent
pool’s
practice
with
of
the
paying
Thus, the pool is not estopped
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
exclusion clause.
within
the
purview
of
the
pollution
This pollution exclusion clause is not
ambiguous; therefore, consideration of extrinsic evidence
as
aid
in
appropriate.
the
construction
of
the
policy
is
not
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
M I C H I G A N
O F
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
appropriate
this
legal
Court
is
equally
analysis,
this
regarding the proper result.
divided
Court
is
on
the
unanimous
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.”
agreement
Moreover,
that
Accordingly,
all
equitable
members
this
Court
estoppel
of
this
is
is
Court
in
not
unanimous
applicable.
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
language
parties’
used
in
intent
the
is
contract
manifested
itself
in
unless
the
the
actual
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
conclude
an
ambiguity
the
that
does
of
city
indeed
Grosse
exist.
Pointe
Here,
we
has
not
Park
presented clear and convincing evidence to demonstrate that
a latent ambiguity actually exits.
that
the
Pool
coverage
is
not
because,
equitably
under
the
We further conclude
estopped
from
denying
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
Release
of
because
Grosse
the
excess
Grosse
sewage
Pointe
Pointe
into
Park’s
Fox
Park-Detroit
Creek
border.
necessary
sewer
“combined”
was
system—a
single sewer line used to transport both sewage (e.g., from
toilets)
and
storm
water
runoff—would
during periods of heavy rainfall.
overtaxed
If Grosse Pointe Park
2
209 Mich 638; 177 NW 242 (1920).
3
459 Mich 587; 592 NW2d 707 (1999).
3
become
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
purchased
annual
liability
policies
1985
to
1998,
Grosse
Pointe
“occurrence-based”
commercial
from
self-insurance
the
Pool,
comprised of local governments.5
a
Park
general
pool
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
coverage.
(e)
Umbrella
coverages.
and
fidelity
and
5
insurance
excess
insurance
Grosse Pointe Park under various trespass, nuisance, and
negligence
theories
for
sewage
their homes and businesses.
backups
that
occurred
in
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.
specifically
quoted
the
In the letter, the Pool
insurance
policy’s
pollution
exclusion clause and warned the city that it had not yet
determined
whether
it
would
from the Etheridge suit.
cover
any
liability
arising
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
litigants.
all
pleadings
The
Pool
and
also
attended
paid
6
meetings
in-house
with
sewage
the
backup
claims involving residences and businesses unrelated to the
Etheridge
suit
proceeding.
while
the
Etheridge
litigation
was
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.
that
Subsequently, the Pool formally notified the city
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 crossmotions
for
2.116(C)(10).
held
that
the
summary
disposition
pursuant
to
MCR
Ruling in favor of the city, the trial court
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
reversed
a
two-to-one
the
trial
decision,
court’s
the
holding
Court
that
of
the
Appeals
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
proceedings.
case
to
the
trial
court
for
further
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 . . . .”
7
Judge O’Connell dissented, arguing
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
Appeals, issued October 30, 2003 (Docket No. 228347).
8
of
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.
A
for
motion
STANDARD
summary
OF
REVIEW
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.
A.
IS SEWAGE
A
ANALYSIS
“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, 250251; 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
insurance
policy
policy
is
itself.14
clear
and
If
the
unambiguous,
text
the
of
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.
as
The pollution exclusion clause defines “pollutant”
“any
solid,
liquid,
gaseous
or
thermal
irritant
or
contaminant . . . .”
The word “contaminant,” given its
plain
meaning,17
and
contaminates,”
ordinary
and
“contaminate”
is
is
“something
defined
as
that
“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
bolstered
by
of
the
insurance
the
fact
that
policy.
This
conclusion
is
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.
12
The city
is attempting to rely on the Pool’s payment of similar
basement sewer backup claims as a way to require the Pool
to
cover
argument
contracts.
the
present
sounds
more
claim.
in
equity
Accordingly,
than
in
the
the
city's
law
of
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,
19
deed,
or
other
instrument,
as
looked
at
in
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
contract as written.22
evidence
and
will
enforce
the
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-andtake 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
contracting
and
effectuate
parties.26
The
law
the
intent
presumes
of
the
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
reward
imprecision
in
the
A rule to the contrary would
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
therefore,
contract
that
has
contracting
been
executed.”30
parties
are
always
We
held,
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
modification, not contract
involved
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.
conclude,
therefore,
existence
of
proving
by
that
a
latent
clear
and
the
city,
ambiguity,
convincing
in
bears
evidence
asserting
the
burden
that
such
We
the
of
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
individual Grosse Pointe Park residences.
it
backs
up
into
Indeed, the Pool
has conceded that the source of the pollution in both cases
is the same.33
one
party
Thus, the record reflects no evidence that
contends
that
“pollutant”
means
something
different from how that term is defined in the policy.
(…continued)
enforced as written unless
contrary is presented.
substantial
evidence
to
the
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
defined in the contract.
other
than
how
it
is
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
ambiguity claim.
construction
this
claim—to
manufacture
a
latent
Such a tactic violates basic contract
principles
and
should
be
rejected
for
that
reason.
C. EQUITABLE ESTOPPEL
The city argues that, even if sewage is a “pollutant”
under
the
should
policy’s
nonetheless
coverage.
basement
pollution
be
exclusion
equitably
clause,
estopped
the
from
Pool
denying
It asserts that the Pool’s payment of prior
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
contract.”34
broad
in
the
specific
Although
theory,
practice.
for
a
provision
equitable
the
doctrine
contained
estoppel
is
in
appears
rather
the
to
be
limited
in
As then-Chief Justice Weaver stated in writing
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
established in Michigan law.
in
Kirschner
is
well
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
rejected
the
holding
that
for
denying
payment.
beneficiary’s
estoppel
will
This
equitable
not
be
Court
expressly
estoppel
argument,
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
letter.
invoked
in
its
reservation
of
rights
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
applied
so
to
again
today.
expand
Equitable
coverage
beyond
36
Ruddock, supra at 654.
37
See Kirschner, supra at 594.
22
estoppel
the
must
scope
not
be
originally
contemplated
written.
by
the
parties
in
the
insurance
policy
as
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
fatal
to
we
the
believe
city's
would
not
that
Kirschner
estoppel
apply
claim,
the
test
and
Ruddock
unlike
are
Justice
Cavanagh,
we
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
estoppel
its
mistaken
claim
justifiable.
filed,
the
letter
the
city's
fail
because
its
reliance
weeks
after
must
Three
that
belief,
Pool
sent
the
specifically
exclusion clause.
city
the
a
quoted
equitable
was
suit
Etheridge
reservation
the
policy’s
not
was
of
rights
pollution
The letter concluded by stating, “Please
be advised that if there is any judgment against the City
of
Grosse
Pointe
pollutants,
.
.
Park
.
for
the
.
.
Michigan
.
a
discharge
Municipal
of
any
Liability
&
Property Pool reserves the right not to indemnify Grosse
Pointe
Park
for
said
frequently
reminded
litigation
that
damages.”
the
“serious
city
Moreover,
during
coverage
the
Pool
the
Etheridge
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
Any
the
settlement
reliance
on
the
with
part
the
of
plaintiffs.40
Etheridge
the
city,
therefore,
was
unjustified.41
Because there was no justifiable reliance,
we
consider
need
not
prejudice
on
the
whether
basis
of
the
its
city
suffered
reliance;
the
any
city's
estoppel claim fails as a matter of law.
IV. CONCLUSION
Sewage
language
Moreover,
introduced
is
of
the
while
to
clearly
a
“pollutant”
policy’s
pollution
extrinsic
evidence
demonstrate
the
under
the
exclusion
may
existence
plain
clause.
generally
of
a
be
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
contracting
conclude that a court must presume that the
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
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