Sixth Circuit Predicts Michigan Legislature Did Not Intend To Invalidate Coinsurance Provisions By Repealing Coinsurance
December, 2005
The Sixth Circuit, predicting Michigan law, holds that coinsurance provisions remain valid despite the Michigan legislature’s decision to repeal M.C.L. § 500.2840 in 1990, the statute which specifically permitted insurers to include coinsurance provisions in property insurance policies. Melson v. Prime Insurance Syndicate, Inc., 2005 WL 3157966 (6th Cir. 2005).
Facts
In September, 1995, Sarah Melson (“Melson”) purchased two adjoining properties for commercial use in Detroit, Michigan. Melson insured both properties with Prime. A coinsurance provision was attached to the Prime policy which stated that Prime would “not pay the full amount of any loss if the replacement cost value of the Covered Property at the time of the loss times the Coinsurance Percentage shown for it in the Declarations is greater than the limit for the property.” The insurance policy stated the coinsurance percentage to be 80%. This provision “required Melson to insure the property at 80% of its replacement cost value to avoid triggering the coinsurance penalty.”
On January 16, 2001, a fire damaged one of Melson’s properties. Melson submitted an insurance claim to Prime for property damage. This property was insured under the Prime policy in the amount of $185,000.00. Both Melson and Prime agreed “that the actual cash value of the loss exceeded the total coverage of $185,000.00. Prime calculated the actual cash value of the loss at $255,778.28.” Prime, however, argued pursuant to the coinsurance requirement, that it was not responsible for payment in the amount of $185,000.00 “because Melson failed to meet the coinsurance requirement. Specifically, Prime contend[ed] that because Melson insured less than 80% of the building’s total replacement cost with them, it is only responsible for the proportion of the loss equal to the proportion that was ‘adequately insured.’” Prime calculated adequate insurance for this property to be $374,677.60, 80% of the property’s full replacement cost.
In accordance with the policy’s coinsurance provision, Prime submitted payment to Melson in the amount of $125,292.53, “the equivalent proportion of $185,000/$374,678 of whatever loss was incurred.” Litigation ensued: “Melson filed an action in federal district court, alleging that Prime’s refusal to pay the full $185,000 was a violation of … Michigan state law.” The district court granted summary judgment in favor of Prime, and Melson appealed.
Analysis
The Sixth Circuit affirmed. On appeal, Melson argued that although the Michigan legislature had previously codified acceptance of coinsurance provisions pursuant to M.C.L § 500.2840, it changed its position regarding such acceptance by deleting the statute in 1990.
Prime’s response was in two parts:
Prime responds that Melson’s characterization of the revocation of a permitting statute wrongly suggests that coinsurance clauses are invalid without prior statutory authorization. Second, Prime argues a version of the ‘dog that didn’t bark’ maxim of statutory interpretation, which counsels that legislative silence on what would be a fundamental change in the law provides evidence that the legislature did not intend such a change.
The Sixth Circuit, predicting Michigan law, agreed with Prime: “[a]lthough the Michigan Supreme Court has not yet addressed whether, after the repeal of § 500.2840, coinsurance provisions remain consistent with Michigan public policy, it is clear that Michigan courts have historically accepted coinsurance provisions. … Furthermore … a Michigan Court of Appeals has explicitly held that coinsurance provisions continue to be consistent with Michigan public policy despite the repeal of § 500.2840.”
Learning Point:
Although the Michigan Supreme Court has not addressed this issue, it seems likely that coinsurance provisions are accepted provisions in property insurance policies in the State of Michigan, and are typically applied by courts. •
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