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FRANKENMUTH MUTUAL INSURANCE COMPANY, Plaintiff/Counter Defendant-Appellee, v. George Edwin MASTERS and George Enger Masters, d/b/a Masters Men's Shop, Defendant/Cross Defendant, Beverly Masters, Auto Owners Insurance Company, City of Aplena, and Citizens Insurance Company of America, Defendants, Lake States Insurance Company, Larry D. Sanderson, Barbara A. Sanderson, G & L Ventures, Inc., d/b/a Owl Café, Richard J. Ritzler, Suzette E. Ritzler, and Shirley J. Ritzler, Defendants-Appellants, Meridian Mutual Insurance Company and State Mutual Insurance Company, Defendants/Counter Plaintiffs-Appellants, National Fire & Indemnity Exchange, Defendant/Cross Plaintiff.
In this declaratory judgment action, appellants appeal as of right from a March 6, 1996, order of the circuit court granting summary disposition in favor of plaintiff Frankenmuth Mutual Insurance Company pursuant to MCR 2.116(C)(10). We affirm in part, reverse in part, and remand for further proceedings.
This case arises out of a fire that damaged several buildings located on Chisholm Street in the City of Alpena on August 17, 1993. The fire destroyed the business located at 115 W. Chisholm Street, Masters Men's Shop, owned by George Edwin Masters (hereafter referred to as George Sr.). George Sr. owned the clothing store, and his son, George Enger Masters (hereafter referred to as George Jr.) worked there for George Sr. Both Masters initially confessed to the police that they had intentionally set fire to the store. The fire had a single point of origin and was fueled by paper and cardboard boxes. In the police statement, they admitted starting the fire and that they intended to cause smoke damage to the inventory in their store. They also indicated that they did not intend to cause damage to the other buildings. However, the fire spread to other buildings and caused damage to the Owl Café and Ritzler's Cleaners, among others. The Masters were charged with arson involving the businesses at 115, 117, and 121 W. Chisholm Street. Each was convicted, following a jury trial, of arson involving 115 W. Chisholm, but each was acquitted of the other two arson charges. During their depositions, both Masters denied even setting the fire and stated that they did not intend to cause damage to the other buildings.
George Sr. had a homeowner's insurance policy and a commercial general liability insurance policy with Frankenmuth Mutual. The various other businesses that suffered losses as the result of the fire and their insurers (hereinafter referred to as appellants) filed suit against the Masters, alleging negligence. Frankenmuth Mutual then filed this declaratory judgment action, contending that there was no coverage under either insurance policy. Frankenmuth Mutual later moved for summary disposition under MCR 2.116(C)(10). The trial court granted the motion with respect to both insurance policies, finding that there was no “occurrence” within the meaning of either policy because the Masters intentionally set the fire. The trial court alternatively found that the intentional acts exclusion of each policy barred coverage because damage to the nearby businesses would have been readily apparent to a reasonable person. Accordingly, the trial court ruled that Frankenmuth Mutual had no duty to defend or indemnify the Masters.
We review de novo the trial court's decision regarding a motion for summary disposition under MCR 2.116(C)(10). Stamps v. City of Taylor, 218 Mich.App. 626, 636, 554 N.W.2d 603 (1996). A motion under MCR 2.116(C)(10) tests the factual basis underlying a plaintiff's claim. Radtke v. Everett, 442 Mich. 368, 374, 501 N.W.2d 155 (1993). The court considers the pleadings, affidavits, depositions, admissions, and any other documentary evidence submitted to it in a light most favorable to the party opposing the motion. Quinto v. Cross & Peters Co., 451 Mich. 358, 362, 547 N.W.2d 314 (1996). If the documentary evidence shows that there is no genuine issue with regard to any material fact and the moving party is entitled to judgment as a matter of law, then the trial court may grant summary disposition under MCR 2.116(C)(10). Id.
Appellants first contend that the trial court erred in ruling, as a matter of law, that there was no “occurrence” as defined in the commercial liability policy. An insurance policy is a contract between the parties. To decide whether a policy covers a particular act, the court must determine what the parties agreed to in the policy. Fire Ins. Exchange v. Diehl, 450 Mich. 678, 683, 545 N.W.2d 602 (1996). To determine what the parties agreed to, the court must apply a two-part analysis. First, the court must decide if the occurrence section of the policy includes a particular act. If so, the court must then decide if coverage is denied under one of the policy's exclusions. Id.
The commercial liability policy provides:
This insurance applies to “bodily injury” and “property damage” only if:
(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory;” and
(2) The “bodily injury” or “property damage” occurs during the policy period.
* * * * * *
“Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
The word “accident” is not defined in the insurance policy. Therefore, the commonly used meaning of the word is to be used. Arco Industries Corp. v. American Motorists Ins. Co., 448 Mich. 395, 404, 531 N.W.2d 168 (1995). Our Supreme Court has defined accident as
“anything that begins to be, that happens, or that is a result which is not anticipated and is unforeseen and unexpected by the person injured or affected thereby-that is, takes place without the insured's foresight or expectation and without design or intentional causation on his part. In other words, an accident is an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected.” [Group Ins. Co. of Michigan v. Czopek, 440 Mich. 590, 597, 489 N.W.2d 444 (1992), quoting Guerdon Industries, Inc. v. Fidelity & Casualty Co. of New York, 371 Mich. 12, 18-19, 123 N.W.2d 143 (1963).]
Further, we are required to evaluate the accident from the standpoint of the insured because the insurance policy is silent with respect to perspective. Auto Club Group Ins. Co. v. Marzonie, 447 Mich. 624, 646-648, 659, 527 N.W.2d 760 (1994) (opinions of Justice Griffin, joined by Chief Justice Cavanagh and Justice Brickley, and Justice Levin); Arco, supra, p. 405, 531 N.W.2d 168. Therefore, we must evaluate whether the fire was accidental from the standpoint of the Masters.
The evidence in this case is that the Masters intentionally started a fire in their store by using paper products and cardboard boxes. No accelerants were used to start the fire, and the fire had a single point of origin. In their statements to the police, the Masters stated that they intended to cause smoke damage to their store only. They did not intend to burn the other buildings. The Masters were charged with three separate counts of arson, but were convicted only of the one count involving their own store. They were acquitted of the other two counts of arson involving two neighboring buildings. At their depositions, the Masters denied even setting the fire and denied intending to burn the other buildings. Additional deposition testimony of Gweneth White-Erickson, the lead fire investigator, was that most people do not realize how quickly fire spreads and how destructive it can be. White-Erickson also testified that because there had been a relatively small area of fire and that flammable liquids had not been poured throughout the entire floor, the primary purpose of the fire could have been for destroying the inventory or Masters Men's Store itself and not the adjoining buildings.
This Court has held that evidence of a criminal conviction is admissible in a declaratory judgment action in order to determine whether an insurer has a duty to defend and indemnify its insured. State Farm Fire & Casualty Co. v. Fisher, 192 Mich.App. 371, 376, 481 N.W.2d 743 (1991); State Farm Fire & Casualty Co. v. Moss, 182 Mich.App. 559, 562, 452 N.W.2d 816 (1989). However, in this case, while the Masters were convicted of arson with respect to their store, they were acquitted of the other two arson charges regarding the adjoining stores. Therefore, we do not believe that the arson conviction can be conclusive of the Masters' intent with regard to the adjoining buildings.
Moreover, our Supreme Court's decision in Arco, supra, p. 416, 531 N.W.2d 168, instructs that there may be an occurrence (an accident) even though the insured committed an intentional act. In the absence of explicit policy language to the contrary, we are required to apply a subjective standard to determine whether the insured intended the harm caused. Id., p. 408, 531 N.W.2d 168. First, we must analyze whether the Masters' conduct, from their perspective, evidenced an intent to burn the two adjoining buildings. Second, we must analyze whether the Masters had an awareness that harm was likely to follow from the performance of their actions. Id., pp. 409-410, 531 N.W.2d 168. Further, the Court stated: “Mere knowledge of potential danger does not equal knowledge of actual, intentional, expected harm.” Id., p. 409, 531 N.W.2d 168.
In the present case, the trial court found that the Masters had the specific intent to burn property and that the questions of whose property and how much property they intended to burn were “wholly irrelevant.” The trial court also stated that the character of the resulting harm was consistent with the harm intended by the Masters. We believe that the trial court erred in ruling that the Masters, as a matter of law, intended to burn the adjoining buildings and that the question of whose property they intended to burn was irrelevant. The Supreme Court's decision in Arco certainly instructs to the contrary. In Arco, although there were intentional discharges of volatile organic compounds into the environment by the insured, there was no evidence presented establishing that the intentional discharges were intended or expected to harm the environment. Thus, there was an occurrence within the meaning of the policy such that the insurer had a duty to defend. See id., pp. 417-418, 531 N.W.2d 168.
The case before us presents a similar situation. Although the Masters intended to start a fire in their store, there is evidence that they did not intend or expect to burn the adjoining buildings. Therefore, the trial court erred in deciding this case under a motion for summary disposition. There is a question of fact regarding whether the Masters intended or expected to burn the adjoining buildings. This issue should not have been decided as a matter of law.
Appellants also argue that the Masters' failure to install a fire suppression system in their store and the resulting damage to the adjoining buildings caused by the fire constitutes an occurrence under the commercial liability policy.
This argument merits little consideration because the question is whether there was an occurrence within the meaning of the commercial liability policy. Because an occurrence is an accident, not defined in the policy, we must apply the Supreme Court's analyses to the facts of this case. Whether the Masters installed a sprinkler system is not relevant to determining whether there was an occurrence as set forth in the commercial liability policy. However, we have already determined that there is a factual dispute regarding whether the Masters' conduct constituted an accident such that the insurer is under a duty to defend and indemnify. That question will involve further factual development in the lower court.
Appellants also contend that the trial court erred in finding, as a matter of law, that there was no occurrence as defined in the homeowner's policy requiring the insurer to defend and indemnify. The homeowner's policy provides in relevant part:
5. “occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period, in:
a. bodily injury; or
b. property damage.
This language is virtually identical to the language in the commercial liability policy. Therefore, for the same reasons set forth in part III(A) of this opinion, we conclude that the trial court erred in granting summary disposition in favor of plaintiff with respect to this issue.
There is a question of fact regarding whether the Masters, from their perspective, intended or expected to burn the adjoining buildings. We emphasize that, contrary to the trial court's ruling, whether the actual harm was intended or expected is very relevant. See also, Diehl, supra, p. 686, 545 N.W.2d 602 (because there was no evidence that the child actor subjectively intended the harm that resulted from the assaults, summary disposition on the basis of the policy's definition of occurrence was denied). The mere knowledge of potential danger does not equal knowledge of actual, intentional, or expected harm. Rather, the question is whether the Masters had an awareness that harm was likely to follow from the performance of their actions. This question cannot be decided as a matter of law.
Accordingly, the trial court erred in finding that there was no occurrence as defined in the commercial liability policy and the homeowner's policy.
Next, appellants contend that the trial court erred in ruling, as a matter of law, that the intentional acts exclusion in the commercial liability policy also precluded coverage. Exclusionary clauses in insurance policies are strictly construed in favor of the insured. Auto-Owners Ins. Co. v. Churchman, 440 Mich. 560, 567, 489 N.W.2d 431 (1992). Coverage under a policy is lost if any exclusion within the policy applied to an insured's particular claims. Id. Clear and specific exclusions must be given effect because an insurance company cannot be liable for a risk it did not assume. Id.
The commercial liability policy provides in relevant part:
This insurance does not apply to:
a. “Bodily injury” or “property damage” expected or intended from the standpoint of the insured. This exclusion does not apply to “bodily injury” resulting from the use of reasonable force to protect persons or property.
Once again, the insurance company must show that the insured subjectively intended and expected injury to result from the intentional act in order to avoid its duty to defend and indemnify. Churchman, supra, p. 567, 489 N.W.2d 431.
The evidence indicates that there is a question of fact regarding whether the Masters subjectively intended or expected property damage to occur. There is evidence, as previously mentioned, that the Masters neither intended nor expected harm to be caused to the adjoining buildings. Therefore, the trial court erred in deciding this issue as a matter of law. Summary disposition in favor of Frankenmuth Mutual should have been denied. A trier of fact, after hearing all the evidence on the matter, will have to resolve whether the Masters subjectively intended or expected the damage to occur to the adjoining buildings.
We must next determine whether the intentional acts exclusion in the homeowner's policy applies so that Frankenmuth Mutual is not under a duty to defend and indemnify under that policy. The homeowner's policy states in relevant part:
Personal Liability and ․ Medical Payments to Others do not apply to bodily injury or property damage:
a. which may be reasonably expected from the intentional or criminal acts of an insured or which is in fact intended by an insured.
The difference between the language in the homeowner's policy and the commercial liability policy in this regard is significant. Because the homeowner's policy includes the “may be reasonably expected” language, it is to be evaluated using an objective standard. Buczkowski v. Allstate Ins. Co., 447 Mich. 669, 673, 526 N.W.2d 589 (1994) (Brickley, J.); Allstate Ins. Co. v. Freeman, 432 Mich. 656, 688, 443 N.W.2d 734 (1989).
To this end, the word “expected” in the policy has been defined to include situations in which the actor knew or should have known that there was a substantial probability that certain consequences would result from the actions. Id., p. 675, 443 N.W.2d 734. It is not enough that a result is reasonably foreseeable, because substantial probability requires more than this. Id. The Supreme Court stated that for there to be substantial probability, the indications not only must be strong enough to alert a reasonably prudent person to the possibility of the results occurring, but also must be sufficient to forewarn the person that the results are highly likely to occur. Id.
In the present case, we believe that, under an objective standard, the damage to the adjoining buildings may reasonably have been expected as a matter of law. The testimony of the fire investigators was that fire is very destructive and spreads very quickly. Further, the intentional acts exclusion applies because the Masters intentionally set fire in one building and should have known that there was a substantial probability that the fire would spread to the adjoining buildings. Thus, the act in this case of setting fire to one building is highly likely to cause property damage to buildings that immediately adjoin it. Accordingly, we agree with the trial court that Frankenmuth Mutual's homeowner's policy does not apply. The intentional acts exclusion in the homeowner's policy precludes coverage in this case.
In sum, we hold that the trial court erred in ruling as a matter of law that there was no occurrence as defined in the commercial liability and homeowner's policies. The trial court also erred in ruling that the intentional acts exclusion in the commercial liability policy precluded coverage as a matter of law. These issues involve a material factual dispute that must be resolved by a trier of fact. However, the trial court did not err in ruling that the intentional acts exclusion in the homeowner's policy precludes coverage as a matter of law. Accordingly, we reverse the grant of summary disposition in favor of Frankenmuth Mutual with respect to the commercial liability policy and remand for further proceedings. Summary disposition in favor of Frankenmuth Mutual is affirmed with respect to the homeowner's policy. No taxable costs pursuant to MCR 7.219, none of the parties having prevailed in full.
Response sent, thank you
Docket No: Docket No. 193649.
Decided: August 15, 1997
Court: Court of Appeals of Michigan.
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