LAWRENCE v WILL DARRAH & ASSOCIATES, INC
Docket No. 94885
Supreme Court of Michigan
April 19, 1994
Rehearing denied post, 1205
445 MICH 1
Argued November 2, 1993 (Calendar No. 4)
In an opinion by Justice BOYLE, joined by Chief Justice CAVANAGH, and Justices BRICKLEY, RILEY, and MALLETT, the Supreme Court held:
The plaintiff presented sufficient evidence that the parties knew or had reason to know that lost profits would occur if the defendants breached the contract.
- Damages recoverable for breach of contract are those that arise naturally from the breach or those that were in the contemplation of the parties at the time the contract was made, i.e., damages the parties knew or had reason to know about. Michigan law embodies a flexible approach to determining the foreseeability of contract damages. Thus, lost profits are recoverable for breach of an insurance contract if they were in the contemplation of the parties at the time the contract was formed.
- In this case, the plaintiff submitted enough evidence of the element of foreseeability to make out a prima facie case for lost profits. When combined with the nature of the underlying transaction, the evidence was sufficient to allow a jury to infer that at the time the parties entered into the contract, the
defendants reasonably knew or should have known that in the event of breach the plaintiff would lose profits.
Reversed and remanded.
Justice LEVIN, joined by Justice GRIFFIN, dissenting, stated that
Whatever may be the correct resolution of the conflicting views regarding the recovery of lost profits for delay in payment of an insurance claim, the judgment entered by the circuit court for lost profits over a five and one-half-year period is problematic under the circumstances that payment by the insurer would have been timely as late as the latter part of October, 1982, and Lawrence delayed three years in commencing this action, and another three and one-half years in filing a motion for partial summary disposition.
The facts of this case underscore that the Supreme Court should adhere to the tendency of its earlier decisions, the decision of the Court of Appeals in the instant case, and the result in another Court of Appeals case denying recovery for consequential damages for delay by an insurer in payment to an insured of an insurance claim. This is not the case to let the camel get his nose under the tent.
194 Mich App 635; 487 NW2d 820 (1992) reversed.
Hay & O‘Rourke, P.C. (by Timothy A. O‘Rourke), for the plaintiff.
Plunkett & Cooney, P.C. (by Ernest R. Bazzana), for the defendants.
BOYLE, J. The present action involves a suit by plaintiff, Benjamin P. Lawrence, filed against defendants, Will Darrah & Associates, Inc., and Lucy
I
In November, 1981, the plaintiff purchased an over-the-road tractor-trailer. At the time of purchase, he obtained an insurance policy covering theft through Fawcett & Associates, Inc., with Will Darrah & Associates, Inc., the managing general agent for Lloyd‘s of London, as the insurers. The policy notes on its front page that the vehicle will be used for commercial purposes and that the plaintiff ‘s occupation is hauling dry freight. The policy covered only one truck, and the plaintiff personally was named as the insured. The plaintiff used the tractor to haul freight from November,
For reasons that remain largely unknown, the defendants delayed in settling under the policy.2 When the defendants’ adjuster finally offered the plaintiff a settlement, it was only under the condi-
II
The defendants’ argument in essence, is that the commercial nature of this transaction was not in itself sufficient to put the parties on notice that the plaintiff would suffer lost profits. Defendants contend that the measure of damages for breach of a contract to pay money is the contract price plus interest, absent evidence that the parties contemplated other damages at the time they entered into the contract. From this premise, defendants conclude that plaintiff‘s failure to introduce testimony that he was unable to replace the vehicle when the defendants breached the contract defeats his prima facie case. It is with this final assertion that we disagree.
The controlling case in this area is Kewin v Massachusetts Mutual Life Ins Co, 409 Mich 401; 295 NW2d 50 (1980). Kewin involved a breach of contract suit. The plaintiff sought damages arising out of the nonpayment of benefits under a disability income protection policy. The alleged damages included mental anguish and exemplary (punitive) damages. After reviewing Michigan law on the matter, we held that neither the mental distress5 nor exemplary damages6 were recoverable under the circumstances presented.
We acknowledged the rule of Hadley v Baxendale, 9 Exch 341; 156 Eng Rep 145 (1854), and its usual application to the commercial contract setting:
[T]he damages recoverable for breach of contract are those that arise naturally from the breach or those that were in contemplation of the parties at the time the contract was made. 5 Corbin, Contracts, § 1007. Application of this principle in the commercial contract situation generally results in a limitation of damages to the monetary value of the contract had the breaching party fully performed under it. [409 Mich 414-415.]
Miholevich v Mid-West Mutual Auto Ins Co, 261 Mich 495; 246 NW 202 (1933), was such a case. This Court began by reaffirming the general rule stated in Clark v Craig, 29 Mich 397, 402 (1874), that “[f]or any mere delay in payment, interest is in law regarded as a sufficient compensation.” The Court noted, however, that this rule is not absolute:
The damages claimed by plaintiff are for a breach of defendant‘s contract to pay the judgment. In Frederick v Hillebrand, 199 Mich 333, 341 [165 NW 810 (1917)], in which damages were claimed for a breach of contract, it was said:
“The damage which a party ought to receive in respect to such breach of contract may be said to be such as may fairly and reasonably be considered either as arising naturally—that is, according to the usual course of things—from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of a breach of it.”
The rule thus stated is in accord with that laid down in the English case of Hadley v Baxendale, 9 Exch 341 (156 Eng Repr 145; 23 LJ Exch 179; 18 Jur 358; 5 Eng Rul Cas 502) [1854], and has been followed quite generally by all the courts in this country. (See citations in footnote in 8 RCL [Damages, § 25], p 455 et seq.) Let us apply it to the facts in this case. The plaintiff was a man without
means. He owned an automobile, and was aware of the fact that a judgment might at some time be recovered against him for his negligence in driving it. It must be presumed that he knew that, if he did not pay such judgment, a body execution might issue against him. To protect himself from this liability he sought and secured the policy in question. The defendant must also be presumed to have known that, in case of plaintiff‘s default in payment, his arrest might follow. Must it not then be reasonably supposed that the liability to arrest to which plaintiff was exposed was in the contemplation of these parties at the time the contract was entered into? While there are many cases in which this rule of law has been so applied, we find none involving the question here presented.
The wilful neglect of the defendant to pay the judgment was not due to an oversight on its part. It resulted in the imprisonment of plaintiff, with the shame and mortification as well as loss of time incident thereto. A reasonable interpretation of the contract and the application of the law thereto justified the award of damages by the trial court. [261 Mich 498-499.]
The Miholevich analysis illustrates how in a given case an application of Hadley can allow for more than interest damages.8
[t]hat the measure of damages where one fails to advance money as agreed is the excess in interest which the borrower is compelled to pay to procure the money elsewhere. . . . In such cases the law presumes that the borrower can obtain money elsewhere, and the increased rate of interest therefore furnishes full compensation for his damages. [Alderton, supra at 300.]
The Alderton Court noted that this general limitation on damages only applies “where the defaulting party failed to advance money which he had
Those cases [limiting interest to damages] and the principle underlying them have no application to the case at bar. Here plaintiff defaulted, not in making an agreed loan, but in contributing to a joint adventure. Even if defendants had the right to do so, it cannot be presumed that they could have obtained such a contribution from some other source. [Id. at 300-301.]
Alderton is valuable not because it limits commercial contract damages to cases involving “loans.” Kewin does not so limit its holding. Rather, Alderton indicates that the rule limiting damages to interest in cases involving commercial contracts is not an inflexible bar to consequential damages. Instead, the rule is to be sensibly applied where the justifications for application, namely, that the parties did not contemplate the additional damages, are present. The federal courts, interpreting Michigan law, have recognized this approach.
In Salamey v Aetna Casualty & Surety Co, 741 F2d 874 (CA 6, 1984), a diversity action, the United States Court of Appeals9 recognized that under the circumstances of a given case, lost profits are recoverable under Michigan law for breach of an insurance contract:
[The defendant] argues that the trial court erred in allowing the jury to award as damages compensation for lost profits beyond the two and a half months required for rebuilding. [The defendant] urges that the business interruption clause should be enforced according to its terms, which limit the
recovery to income lost during the period theoretically required for rebuilding the premises. [Id. at 876-877.]
That court rejected the defendant‘s assertions. It began by noting:
This claim for lost profits is separate from the claims to enforce the insurance contract. “The policy limits restrict the amount the insurer may have to pay in the performance of the contract, not the damages that are recoverable for its breach.” . . . Salamey here is seeking to collect damages for losses occasioned by Aetna‘s breach of contract in failing to pay Salamey‘s claim under the policy. The business interruption clause is thus irrelevant to the measure of damages for breach of contract. [Id. at 877.]
Regarding the defendants’ second claim, the court recognized Michigan follows Hadley v Baxendale and held that a review of Michigan law demonstrated that consequential damages could be recovered if they were in the contemplation of the parties at the time the contract is formed.10 Applying this standard to the circumstances of the case before it, the court allowed consequential damages:
[T]he instant case involves only one enterprise, the convenience store in Bay City. Since Aetna did not argue that Salamey failed to mitigate his damages, the jury was entitled to conclude that his inability to rebuild and reopen the store resulted naturally and directly from Aetna‘s refusal to pay benefits for the fire loss. Accordingly, Salamey may recover lost profits from the store as conse-
quential damages for the breach of this insurance contract. [Salamey at 877.]
B
While this brief survey of Michigan law is not exhaustive,11 it reveals a flexible approach when determining the foreseeability of contract damages.12 Defendants’ assertion that Michigan applies the objective standard of foreseeability is consistent with this flexible approach.13 It is with the
Specifically, the defendants maintain that
[i]n order for a plaintiff to establish a prima facie entitlement to lost profits damages for the breach of a commercial contract, he must present evidence to overcome the presumption of the availability of funds in the marketplace and show that, at the time the contract was made, the insurer knew that, if the contract were breached, it would be impossible for the insured to procure money in the marketplace.
The Hadley rule, as stated in Kewin, demands no such showing, requiring only that “[t]he damages recoverable are those damages that arise naturally from the breach,14 or which can reasonably be said to have been in contemplation of the parties at the time the contract was made.” Id. at 419 (emphasis added). Applying this objective standard, restated by Calamari and Perillo as damages “the promisor knows or has reason to know” about, the plaintiff submitted enough evidence regarding the element of foreseeability to make out a prima facie case for lost profits. Calamari & Perillo, Contracts (3d ed), § 14-5, p 595.
The plaintiff introduced the insurance policy, which noted on its face that the truck would be used for commercial purposes, namely, to haul dry freight. The policy named the plaintiff, individually, as the insured and covered only the one truck. The plaintiff introduced the testimony of
The evidence in this case, when combined with the nature of the underlying transaction,17 was
The defendants’ assertion that the plaintiff must prove he could not obtain money in the marketplace to establish a prima facie case confuses the contemplation requirements of Hadley with mitigation. At common law, while a plaintiff has a duty to mitigate his loss, it is the defendant who bears the burden of proving a failure to mitigate, Edgecomb v Traverse City School Dist, 341 Mich 106, 115; 67 NW2d 87 (1954).18 In the instant case, the defendants did not plead mitigation,19 nor did they attempt to support it with proofs at trial.20
CONCLUSION
The plaintiff presented sufficient evidence that
CAVANAGH, C.J., and BRICKLEY, RILEY, and MALLETT, JJ., concurred with BOYLE, J.
LEVIN, J. (dissenting). I would affirm the decision of the Court of Appeals.
I
The factual predicate for the premise of the majority that there was a significant delay in payment by the defendant insurer is tenuous. It appears that the insurer, Underwriters at Lloyds of London, offered to pay $19,250, the agreed value of the tractor-trailer,1 within the sixty days, prescribed by statute, “after receipt of proof of loss by the insurer.”2
The plaintiff, Benjamin T. Lawrence, declined the offer of $19,250 because the insurer refused to compensate the plaintiff for “down time.” Lawrence sought remuneration for “down time” because of an asserted delay in payment.
Lawrence‘s lawyer forwarded, on May 12, 1982,
The insurer declined to increase its offer to include “down time,” or the other elements of damage claimed by Lawrence‘s lawyer, and promptly so notified Lawrence. After this action was commenced, in April 1985, Lawrence‘s then-lawyer acknowledged that the policy of insurance did not provide coverage for “down time.”
It was not until August 28, 1982, that the insurer might be said to have “received” “satisfactory” proof of loss. On that date, the issue regarding the value of the tractor-trailer having been resolved, the insurer forwarded to Lawrence a proof of loss which, in effect, offered to settle for $19,250 on the understanding that Lawrence‘s acceptance would, in effect, waive his claim for “down time” and the other asserted claims.4
Because the statute5 provides that a claim shall be deemed to be paid timely if paid within sixty days after receipt of proof of loss by the insurer, payment by the insurer by the latter part of October would have been timely.
It could not properly be said that the insurer acted unreasonably in declining to pay the $19,250 unless Lawrence waived his claim for “down time”
- Lawrence‘s claim for mental anguish was clearly barred by this Court‘s decision in Kewin v Massachusetts Mutual Life Ins Co, 409 Mich 401; 295 NW2d 50 (1980),6
- there was and is, until today, no decision by either the Court of Appeals or this Court upholding an award of consequential damages for delay by an insurer in payment to an insured7 and
the statute provides for payment of interest at twelve percent if there is a failure to pay within sixty days “after satisfactory proof of loss was received.”8
In all events, in August, 1982, and, sixty days later, October, 1982, Lawrence had no valid claim for lost profits because payment by the latter part of October, 1982, would have been timely under the statute. Lawrence delayed the commencement of this action almost three years, until April 22, 1985. Lawrence did not file a motion for partial summary disposition for an additional three and one-half years, until October 25, 1988, shortly before the trial of the instant action, whereupon judgment was entered for $19,250 in Lawrence‘s favor.
It therefore appears that had Lawrence promptly filed this action, and had promptly moved for partial summary disposition, he could have obtained payment of the $19,250 before the end of 1982. Lawrence was not without an effective remedy for any delay in payment after October, 1982, of the agreed-upon loss in the amount of $19,250.
Whatever may be the correct resolution of our conflicting views regarding the recovery of lost profits for delay in payment of an insurance claim, the judgment entered by the circuit court for lost profits over a five and one-half-year period9 is problematic under the circumstances that pay-
Both the insurer and Lawrence were arguably at fault. The insurer could have paid the $19,250 without regard to the validity of the claims asserted by Lawrence‘s succession of lawyers for mental and emotional stress. But Lawrence, or one or more of his lawyers, was apparently seeking to build up a case, and the legally invalid claims made by them for “mental anguish and other expenses” contradict the assertion that Lawrence‘s purpose truly was to obtain prompt payment of $19,250 and no more.
II
The facts of this case underscore that this Court should adhere to the tendency of its decisions in Kewin and Kassab v Michigan Basic Property Ins Ass‘n, 441 Mich 433; 491 NW2d 545 (1992), the decision of the Court of Appeals in the instant case, and the result, if not some of the language, in Parmet Homes, Inc v Republic Ins Co, 111 Mich App 140; 314 NW2d 453 (1981), denying recovery for consequential damages for delay by an insurer in payment to an insured of an insurance claim. This is not the case to let the camel get his nose under the tent.
The decision of the United States Court of Appeals for the Sixth Circuit in Salamey v Aetna Casualty & Surety Co, 741 F2d 874 (CA 6, 1984), is not persuasive. Salamey purports to apply Michigan law. It predicts that Michigan would join the “few courts” that have held that an owner of a business may recover lost profits as consequential
In Salamey, supra, p 876, Aetna defended the action by attempting to show that Salamey “had an economic motive to set the fire by introducing expert testimony that the store was losing money.” I think it most unwise to incorporate into our jurisprudence, through the majority opinion in the instant case, the notion that an insurer runs the risk of becoming responsible for lost profits if it fails to establish, to the satisfaction of the trier of fact, that the insured was the person responsible for the arson loss of a business.11
The majority opinion will be read by insureds and their counsel as justifying an action seeking lost profits whenever there is a loss of commercial property,12 and the insurer has not paid the claim as promptly as a trier of fact might conclude it
III
The remedy provided by the statute for delay in payment of an insurance claim is interest at twelve percent. I am inclined to the view that the Legislature has provided, as a matter of public policy, the sole remedy therefor.13
GRIFFIN, J., concurred with LEVIN, J.
Notes
The defendant waived any arguments relating to the proof of loss and its timeliness by not pleading this defense, “specifically and with particularity” as required by
Even if the defendant had preserved a proof of loss claim, the statutory underpinnings of its timeliness arguments are questionable. The dissent notes correctly that
In Kewin, this Court set aside jury verdicts that included $75,000 for mental or emotional distress and $50,000 for exemplary damages for delay in payment under policies providing for disability income protection insurance and life insurance. The Court affirmed the awards of $16,500 for breach of the disability insurance contract, and $798.40 for breach of the life insurance policy. Id. at 423.
The Court reviewed the rule set forth in Hadley v Baxendale, 9 Exch 341; 156 Eng Rep 145 (1854), and the discussion in Corbin on Contracts and the Restatement of Contracts of the rule of law there stated respecting damages for breach of contract, and concluded that the application of the rule “in the commercial contract situation generally results in a limitation of damages to the monetary value of the contract had the breaching party fully performed under it.” Kewin, supra, pp 414-415.
The majority relies on Miholevich v Mid-West Mutual Auto Ins Co, 261 Mich 495; 246 NW 202 (1933). There an automobile insurer promised to satisfy any judgment rendered against the plaintiff, but, as set forth in Kewin, supra, p 417, “wilfully neglected to satisfy it until after the plaintiff had been placed in jail for failure to pay the judgment.”
Miholevich, thus, did not concern a failure by an insurer to pay the insured, but rather a failure to pay a third party. The injury suffered in Miholevich, loss of liberty, is clearly different from the loss, in excess of the statutory twelve percent, of the use of money asserted in Kewin and in the instant case.
This Court in Kewin did not regard Miholevich as precedentially supporting the claim for mental distress and exemplary damages asserted in Kewin.
Alderton v Williams, 139 Mich 296; 102 NW 753 (1905), also relied on by the majority, was not an action against an insurance company, but rather an action to recover $5,000 that the plaintiff claimed to have advanced as surety for the defendants in payment of six notes on which the plaintiff and the defendants were joint makers. The
defendants claimed that after advancing the $5,000, the plaintiff refused to make further advances, and, in consequence, their joint venture failed. The jury found for the defendants, and, on appeal, the plaintiff challenged the instructions. This Court said that the principle underlying cases that limit damages for failure to loan money to the rate of interest are not applicable where the default was “not in making an agreed loan, but in contributing to a joint adventure.” Alderton, supra, p 301. Lawrence and Lloyds of London were not engaged in a “joint adventure.”While in Kewin we distinguished Miholevich on the basis that it involved an insurer‘s failure to pay a third party under a liability contract, we do not read Kewin to preclude lost profit damages for breach of an indemnity contract. Rather, the Kewin Court was seemingly acknowledging that the liability nature of the contract in Miholevich made the damages suffered by the plaintiff more foreseeable under the Hadley test. A similar distinction has been drawn with regard to lost profits stemming from “collateral” transactions in which some courts have employed more rigorous formulations of lack of foreseeability and absence of proximate cause as reasons to deny recovery. In Mohr v Dix Mutual Co Fire Ins Co, 143 Ill App 3d 989, 997; 493 NE2d 638 (1986), the Illinois Court of Appeals noted:
When profits which are sought arise out of the breached contract, profits are considered an element of the contract and are presumed to have been within the contemplation of the parties. However, as in the instant case, where the profits sought arise out of a collateral transaction, the plaintiff must establish the damages with reasonable certainty and also show lost profits were within the contemplation of the parties at the time they entered the agreement.
Defendants have not specifically urged the collateral transaction formulation or asked us to adopt a rule of subjective foreseeability. We note, however, that one commentator has observed that lost profit damages should be awarded on proof of actual or constructive knowledge.
The collateral transaction rule has vitality, but more as a principle of proximate cause than as an aspect of Hadley v Baxendale. The courts properly see that liability for the consequences of a breach of contract must be cut off somewhere. A strict test of actual knowledge of the collateral transaction . . . goes too far, however. A reasonable test would require plaintiff to show only that defendant knew or should have known, from the nature of the transaction, that plaintiff would enter collateral transactions based upon it of the type actually entered. If this was foreseeable, then it is reasonable to hold defendant liable for plaintiff‘s losses. [Dunn, Recovery of Damage for Lost Profits (3d ed), § 1.17, pp 48-49. See also Royal College Shop v Northern Ins Co of NY, n 7 supra at 678, 679.]
See n 2 for text.Lorenz Supply Co v American Standard, Inc, 100 Mich App 600; 300 NW2d 335 (1980), adverted to by the Court of Appeals in Parmet and by the Sixth Circuit in Salamey, was an action for breach of a distributorship agreement. Lost profits might, indeed, be an appropriate element of damage in such a case.
In Salamey the insured had business interruption insurance. Lawrence did not.
Commentators agree that courts should be flexible when ruling on what damages are available for breach of contract. Professor Corbin notes:
The rules of law governing the recovery of damages for breach of contract are very flexible. Their application in the infinite number of situations that arise is beyond question variable and uncertain. Even more than in the case of other rules of law, they must be regarded merely as guides to the court, leaving much to the individual feeling of the court created by the special circumstances of the particular case. [5 Corbin, Contracts, § 1002, p 33.]
Likewise, professors Calamari and Perillo observe:
It should be noted that the rule is not applied blindly and mechanically. Courts must be aware of the transactional context in which the transactions occur. [Calamari & Perillo, Contracts (3d ed), § 14-7, p 599.]
The majority concludes that the “plaintiff submitted enough evidence regarding the element of foreseeability to make out a prima facie case for lost profits” on the basis that “[t]he plaintiff introduced the insurance policy, which noted on its face that the truck would be used for commercial purposes, namely, to haul dry freight,” and the testimony of the vice president of the adjustor that he understood that the loss of the vehicle would result in lost profits unless it was replaced. Ante, pp 13-14.
The tendency of the majority opinion would permit recovery whenever the insured is engaged in a commercial enterprise, and it can be demonstrated, as will readily be done in almost every case, that, until
the fire-damaged structure or the collision or fire-damaged truck or machinery is replaced, there will be loss of profits.We disagree that the nature of the transaction alone can never be enough. The defendants’ assertions about the availability of money in the marketplace do not necessarily ring true in the insurance contract setting:
Legal rates of interest, however, fall far short of commercial rates and the credit worthiness of an insured following a loss
may be doubtful. In fact, the insured‘s purpose in obtaining insurance is often intended to avoid the financial losses the insured would otherwise be unable to bear. [Freemon, Reasonable and foreseeable damages for breach of an insurance contract, 21 Tort & Ins LJ 108, 111 (1985).]