Sun Communities, Inc. v. Navigators Insurance CompanySun Communities, Inc. v. Navigators Insurance Company
ORDER DENYING DEFENDANT‘S MOTION FOR JUDGMENT ON THE PLEADINGS (ECF No. 17)
This case is before the court on Defendant Navigators Insurance Company‘s (“Navigators“) motion for judgment on the
I. FACTUAL BACKGROUND
Sun is a “fully integrated real estate investment trust that acquires, operates, develops, and expands manufactured home and RV communities.” (ECF No. 1, PageID.2). As part of its operations, Sun maintains several layers of insurance coverage for any personal injury claims that may arise at its properties. Id. At the time of the events underlying this claim, Sun‘s primary insurance policy included a $1,000,000 coverage limit (the “Primary Policy“). (ECF No. 17, PageID.221). Sun‘s first excess insurance policy, issued by Allied World National Assurance Company, “provide[d] insurance in excess of Sun‘s $1,000,000 primary policy with a $10,000,000 policy limit” (the “Allied Policy“). Id. The policy at issue in this case, issued by Navigators (the “Navigators Policy“), covered a period from November 29, 2020 to November 29, 2021 and “provided up to $15,000,000[] in coverage for a ‘loss’ as defined in the policy,” in excess of the $11,000,000 in total underlying insurance coverage from the Primary Policy and the Allied Policy. (ECF No. 1, PageID.3). As such, the Navigators Policy was referred to as Sun‘s “second excess layer of coverage.” Id.
On April 3, 2021, an incident occurred at a Sun property in Cape May, New Jersey, involving a three-year old child who died after falling into a septic tank. Id. Following the incident, the deceased child‘s parents filed suit against Sun in a New Jersey state court, raising clams for wrongful death, survival, negligent infliction of emotional distress, punitive damages, and intentional infliction of emotional distress, all based on Sun‘s alleged “failure to maintain the Property in a reasonably safe condition and [failure to] adequately inspect it” (the “Cape May Lawsuit“). Id., PageID.3-4. Sun argues each of the claims included in the Cape May Lawsuit fell within the scope of the insurance coverage they maintained for the property, including the second excess layer of coverage provided by the Navigators Policy. Id., PageID.4.
As part of the proceedings in the Cape May Lawsuit, Sun and its insurers participated in a private mediation with the opposing party after conducting several rounds of discovery. Id. It is not contested that, at this mediation, Sun received a settlement offer which “exceeded the primary insurer and first excess insurer‘s policy limits.” (ECF No. 17, PageID.21). The parties’ arguments diverge as to the events that followed. Sun argues that, while “Navigators was present at the mediation,” they “failed and refused to meaningfully participate in the proceeding, failed and refused to give meaningful consideration to the plaintiffs’ settlement proposals,
Alternatively, Navigators argues they are not liable because they “did not agree to settlement and did not consent to Sun‘s voluntary payment of its own funds to settle the case.” (ECF No. 17, PageID.219). As evidence, Navigators provides an e-mail which was sent to Sun‘s counsel during the mediation and prior to the settlement agreement being entered into by Sun. (ECF No. 17-2, email from Todd Hanson). This email includes an excerpt from the terms and conditions of the Allied Policy1 and states, in part: “[p]lease be advised Navigators does not consent to Sun Communities’ funding of the proposed settlement. Navigators objects to Sun Communities incurring the obligation to fund a settlement of this case. Any such payment will be considered voluntary and at your own cost.” Id., PageID.239. Navigators argues that, despite this objection, “Sun decided to voluntarily contribute its own funds to settle the [Cape May Lawsuit] anyway.” (ECF No. 17, PageID.220). Sun eventually filed this lawsuit seeking damages from Navigators based on the amount they contributed to the settlement. (ECF No. 1, PageID.8).
II. STANDARD OF REVIEW
A motion for judgment on the pleadings pursuant to
III. ANALYSIS
Navigators’ motion argues they are entitled to judgment as a matter of law because (1) Sun violated the voluntary payment and no action clauses incorporated in
It is not contested that Sun entered into a settlement agreement in the Cape May Lawsuit without obtaining Navigators’ express consent. (ECF No. 17, PageID.218-19) (“Sun decided not to negotiate further, and accept the underlying plaintiffs’ settlement demand, by contributing its own funds to make up the difference between the amount provided by the two underlying insurers up to the plaintiffs’ settlement demand.“); (ECF No. 1, PageID.6) (“Sun reasonably determined that it would be in Sun‘s best interests to contribute its own funds to a settlement.“). While they participated in the private mediation, it is also not contested that Navigators was not a party to the final Cape May settlement agreement. See id. As such, Sun would ordinarily not be entitled to recover the settlement amount under the plain language of the Navigators Policy. However, Sun‘s complaint raises a slightly different claim, arguing that Navigators breached the underlying contract by acting in bad faith and “failing and refusing to meaningfully or reasonably participate in the mediation, meaningfully or reasonably evaluate the plaintiffs’ settlement offers and/or contribute to settlement.” (ECF No. 1, PageID.6).
Under Michigan law, “the covenant of good faith and fair dealing is an implied promise contained in every contract ‘that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.‘” Rodgers v. JPMorgan Chase Bank NA, 315 Mich. App. 301, 310-11 (2016). Michigan does not recognize an independent cause of action for a breach of the covenant, or duty, of good faith and fair dealing, but it may form the basis of a claim for breach of contract. See Belle Isle Grill Corp. v. Detroit, 256 Mich. App. 463, 476 (2003); Gorman v. American Honda Motor Co., Inc., 302 Mich. App. 113, 133 (2013) (“The obligation of good faith is not an independent duty, but rather a modifier that requires a subject to modify. It is a principle by which contractual obligations...are to be measured and judged.“). A breach of contract claim based on the duty of good faith and fair dealing must include “some underlying contractual term to which the duty can apply.” Gorman, 302 Mich. App. at 134. Courts apply this duty especially where a party makes its performance of that contractual term “a matter of its own discretion.” Burkhardt v. City Nat. Bank of Detroit, 57 Mich. App. 649, 652 (1975); Ferrell v. Vic Tanny Int‘l, Inc., 137 Mich. App. 238, 243 (1984) (“Where a party to a contract makes the manner of its performance a matter of its own discretion, the law does not hesitate to imply the proviso that such discretion be exercised honestly and in good faith.“).
Michigan courts have previously applied the covenant of good faith and fair dealing to insurance contracts and have found that insurers generally have an implied contractual duty to act in good faith when investigating an insurance claim and when negotiating a settlement. Auman v. Fed. Ins. Co., 81 Mich. App. 740, 742 (1978) (“An insurance company in negotiating settlements has a duty to act in good faith with respect to the interest of the insured, and if it fails so to act, the insured may bring an action for the damages he suffers as a result.“) (citing City of Wakefield v. Globe Indem. Co., 246 Mich. 645, 650 (1929) (“The power to control settlements having been granted to insurer for the purpose of its own protection under the policy, it is bound to use the power in good faith for that purpose.“)); see also Limatta v. Lukkari, 185 Mich. App. 144, 146 (1990) (“The duty to use good faith in attempting to settle a claim runs...to the insured“); Tibble v. Am. Physicians Cap., Inc., No. 306964, 2014 WL 5462573, at *6 (Mich. Ct. App. Oct. 28, 2014) (“An insured may sue its insurer for acting in bad faith in refusing to settle.“) (citations omitted). This duty to negotiate settlements in good faith arises once a lawsuit is filed against the insured. See Trident Fasteners, Inc. v. Selective Ins. Co. of S.C., No. 21-1439, 2022 WL 3088238, at *5 (6th Cir. 2022) (“The duty to negotiate settlements likewise requires a lawsuit before a duty to act in good faith arises.“). It is generally not considered “bad faith” for an insurer to refuse a settlement based on an honest error in judgment, a belief that they might defeat the action or keep the verdict within policy limits, an opinion that the settlement amount is excessive, or if there are legal defenses that have not yet been raised. See City of Wakefield, 246 Mich. at 652-53; Com. Union Ins. Co. v. Liberty Mut. Ins. Co., 426 Mich. 127 (1986).3
However, bad faith may be found where there is a “failure to accept a reasonable compromise offer of settlement when the facts of the case or claim indicate obvious liability and serious injury,” a “rejection of a reasonable offer of settlement within the policy limits,” an “undue delay in accepting a reasonable offer to settle a potentially dangerous case within the policy limits where the verdict potential is high,” a “failure to make a proper investigation of the claim prior to refusing an offer of settlement within the policy limits,” “disregarding the advice or recommendations of an adjuster
Sun‘s complaint argues Navigators acted in bad faith by: (1) “failing and refusing to meaningfully or reasonably participate in the mediation;” (2) “failing and refusing the give meaningful or reasonable consideration to the plaintiffs’ settlement proposals;” (3) “failing and refusing to reasonably consider and evaluate Sun‘s potential risk and exposure;” and (4) refusing to contribute to the settlement reached at mediation notwithstanding the substantial risk and exposure Sun faced and the unanimous agreement of the mediation participants as to the reasonableness of the settlement.” (ECF No. 1, PageID.8). Settlement was within Navigators’ discretion under the contract and a lawsuit had already been filed in this case, so Navigators was under a duty to exercise good faith in negotiating, investigating, and settling the underlying case at the time of the mediation. Auman, 81 Mich. App. at 742. Viewing these factual allegations in the light most favorable to Sun, they have sufficiently stated a claim for breach of contract based on Navigators’ alleged failure to participate in the settlement process in good faith.
In opposition, Navigators relies on two key cases, Coil Anodizers and Tenneco, to argue the terms of the underlying contract, including the voluntary payment and no action clauses, preclude Sun from recovering any portion of its settlement payment regardless of the underlying circumstances. (ECF No. 17, PageID.224-30). In Coil Anodizers, Inc. v. Wolverine Ins. Co., the plaintiff‘s aluminum anodizing process caused a defect in their products, which was not realized until after they were delivered to various customers. 120 Mich. App. 118, 120 (1982). The plaintiff‘s customers then sought to hold them financially responsible for the cost of replacing the defective aluminum. Id. The plaintiff informed its insurance carrier about the damage, but they “denied liability and refused to aid plaintiff in investigating the claim.” Id. Despite the existence of voluntary settlement and no action clauses in their contract, the plaintiff nevertheless agreed to pay a settlement to their customers. Id. The court held that the plaintiff‘s decision to enter into this voluntary settlement, in violation of the terms of their contract, “effectively excused defendant from liability.” Id. at 123 (“That plaintiff may have felt a certain ‘compulsion’ to settle in order to retain the goodwill of its customers does not render the settlement any less voluntary...“). However, this case is distinguishable, as it involved only the question of whether the plaintiff could recover from the defendant under their contract; it did not involve a claim for breach of that contract based on the defendant‘s separate duty to participate in settlement negotiations in good faith. Additionally, the duty to settle in good faith had not yet attached, as no formal legal proceedings had been initiated. Id. at 121 (“since it is undisputed that formal proceedings were never begun...“); see also Trident Fasteners, Inc., 2022 WL 3088238, at *5.
Tenneco, Inc. v. Amerisure Mut. Ins. Co., similarly involved the argument that “plaintiff had forfeited any coverage by making ‘voluntary’ payments and entering
Finally, Navigators argues that “Sun‘s claim also fails...[because] its liability was never judicially determined and thus is not for amounts that Sun was ‘legally obligated to pay as damages,’ in contravention of the express requirement in the Policy‘s insuring agreement.” (ECF No. 17, PageID.231). While Navigators is correct that there was never a trial or a binding judgment entered against Sun, there was a binding settlement agreement. See Dabish v. Gayar, 343 Mich. App. 285, 289 (2022) (citing Reicher v. SET Enterprises, Inc., 283 Mich. App. 657, 665 (2009)) (“A settlement agreement is a binding contract.“). Navigators cites Detroit Water Team Joint Venture v. Agric. Ins. Co., to argue that a legal obligation to pay requires “either a judicial determination of liability or a settlement between the insurer, the insured, and the claimant,” neither of which exist here. (ECF No. 17, PageID.232) (citing 371 F.3d 336, 339 (6th Cir. 2004)). However, Detroit Water Team Joint Venture involved a situation where the plaintiff proactively paid the relevant funds before either a judicial determination or settlement agreement had been entered. Detroit Water Team, 371 F.3d at 338 (“Detroit Water Team immediately repaired the damaged electrical system and notified American National and Agricultural of its expenses.“). This is unlike the case at hand, where Sun paid the funds after settlement negotiations and pursuant to a valid settlement agreement. The fact that there was no judgment entered after a trial and Navigators did not sign the settlement agreement does not remove Navigators’ duty to participate in the underlying settlement process in good faith.
For the reasons stated above, Sun has sufficiently stated a claim for breach of contract based on the covenant of good faith and fair dealing, and Navigators is not entitled to judgment as a matter of law. Navigators’ motion for judgment on the pleadings is DENIED.
SO ORDERED.
Date: March 13, 2024
s/F. Kay Behm
F. Kay Behm
United States District Judge