Employers Mutual Casualty Company v. Helicon Associates Inc
313 Mich. App. 401
| Mich. Ct. App. | 2015Background
- The Funds bought about $7 million in bonds from a charter school operated by Helicon and managed by Michael Witucki; the school lacked authority to issue the debt.
- The bond issue was unwound; the Funds accepted $3.2 million in replacement bonds and sued in federal court asserting securities and related tort claims.
- The federal suit concluded with a consent judgment finding violation of the Connecticut Uniform Securities Act and awarding the Funds over $4 million.
- EMC, insurer for Helicon and Witucki, provided a defense under a reservation of rights but filed this declaratory-judgment action seeking a declaration that its Linebacker/Umbrella policies do not cover the federal judgment.
- EMC invoked multiple policy exclusions (fraud/dishonesty, personal profit/advantage, guarantees on bonds, and return of remuneration); the trial court found at least the fraud/dishonesty, personal profit/guarantee exclusions applied and granted summary disposition for EMC.
Issues
| Issue | Plaintiff's Argument (EMC) | Defendant's Argument (Funds) | Held |
|---|---|---|---|
| Whether the fraud/dishonesty exclusion applies where underlying claim resolved by consent judgment for securities-law violation | Consent judgment finding statutory violation establishes that insureds made untrue statements/omissions amounting to fraud/dishonesty; exclusion applies | Underlying federal action was negligence-based; fraud/dishonesty was not adjudicated and the exclusion requires a judgment/adjudication of fraud/dishonesty | Court: Consent judgment is a judgment; finding statutory violation necessarily involves untrue statements/omissions, so exclusion applies |
| Whether a consent judgment qualifies as a judgment/adjudication triggering the exclusion | A consent judgment, once entered/sanctioned by the court, has the same force as a litigated judgment | Consent judgments are contractual settlements, not true adjudications of wrongdoing | Court: A consent judgment is a court judgment and is treated the same as litigated judgments for these purposes |
| Whether finding statutory violation under CUSA necessarily establishes fraud/dishonesty under the policy | The CUSA violation requires untrue statements/omissions known or reasonably knowable, which is deceitful conduct within meaning of fraud/dishonesty exclusion | Even if statute addresses untrue statements, liability could rest on negligence; exclusion should be inapplicable absent explicit adjudication of dishonest intent | Court: Statutory language requires untrue statement/omission and knowledge standard; such findings constitute acts of fraud/dishonesty for the exclusion |
| Whether applying the fraud/dishonesty exclusion renders coverage illusory | Exclusion does not make coverage illusory because it does not eliminate coverage for honest/negligent conduct; doctrine applies only when a designated premium-funded coverage is functionally nonexistent | Funds: Broad exclusion sweeps most claims and makes policy coverage illusory | Court: Exclusion does not render policy illusory; negligence remains recoverable and exclusions do not eliminate all possible coverage |
Key Cases Cited
- Maiden v. Rozwood, 461 Mich. 109 (review standard for summary disposition) (discusses de novo review and MCR 2.116(C)(10))
- Burkhardt v. Bailey, 260 Mich. App. 636 (contract interpretation reviewed de novo) (general rules for construing contracts)
- Reicher v. SET Enterprises, 283 Mich. App. 657 (contract language unambiguous must be enforced as written)
- Stone v. Auto-Owners Ins. Co., 307 Mich. App. 169 (primary goal to honor intent of parties in contract interpretation)
- Pioneer State Mut. Ins. Co. v. Dells, 301 Mich. App. 368 (insured bears burden to show coverage; insurer must show exclusion applies)
- Acorn Inv. Co. v. Michigan Basic Prop. Ins. Ass'n, 495 Mich. 338 (consent judgments, once entered, treated as judgments for force and effect)
- Clohset v. No Name Corp., 302 Mich. App. 550 (consent judgments treated like litigated judgments once entered)
- Ile v. Foremost Ins. Co., 293 Mich. App. 309 (doctrine of illusory coverage and when it applies)