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March 06, 2017

COA holds that waiver doctrine will not be expanded to include risks not contracted for

Under Michigan law, an insurer waives a defense it fails to raise in a denial letter, the Michigan Court of Appeals held in Bartlett Investments Inc. v. Certain Underwriters at Lloyd’s London, No. 328922.  This is true even where the insured is not prejudiced by this waiver.  The waiver doctrine does not however apply to insurance disputes where application of the doctrine results in an expansion of the degree of risks undertaken by the insurer.

In this insurance-coverage dispute, the plaintiff owned a vacant building in the city of Highland Park for which it purchased a commercial property insurance policy.  The insurance policy protected the property against vandalism.  However, as a condition of coverage, the policy required plaintiff to report any loss or damage caused by vandalism to the defendant within ten days of learning of it.  In addition, plaintiff was obligated to fully secure and regularly inspect the property.

In February 2013, the plaintiff submitted an insurance claim to defendant to cover damages that occurred as a result of vandalism.  In a denial letter to plaintiff, the defendant rejected the claim, reasoning that the damages overlapped with a previous claim, and that the damages, in part, were the result of long-term water damage.  Following the denial, plaintiff filed suit.  In response, defendant moved for summary disposition under MCR 2.116(C)(10), asserting that there was no question that plaintiff failed to comply with the above-referenced provisions, and therefore, was not entitled to coverage.  The trial court agreed and granted defendant’s motion, and plaintiff appealed.

On appeal, plaintiff argued that the trial court erred in granting summary disposition in favor of defendant because defendant’s reasons for denial were not explicitly contained in its denial letter to plaintiff. 

The Michigan Court of Appeals affirmed.  Notably, the Court rejected defendant’s assertion that plaintiff was required to show prejudice for application of the waiver doctrine to this action, stating that Michigan case law has not required such proof.  However, while the Court agreed with plaintiff that defendant failed to specifically address in its denial letter the policy provisions plaintiff failed to comply with, the Court nevertheless concluded that the defendant had not waived its defense that plaintiff failed to secure and regularly inspect the property, as required by the insurance policy.   The Court held that the doctrine on waivers has an exception for waivers that would protect the insured against risks that were not included in the policy.   In this case, the Court found that requiring the defendant to insure the plaintiff for vandalism that occurred as a result of plaintiff’s failure to secure and inspect the property regularly would substantially expand the degree of risk undertaken by defendant.  Therefore, despite the defendant’s failure in its denial letter to raise the defense that plaintiff, contrary to a condition of the policy, failed to secure and inspect the building, the waiver doctrine did not apply to this action. 

With respect to whether there was a question of fact regarding plaintiff’s failure to secure and regularly inspect the property, the Court held that the plaintiff failed to create a genuine issue of material fact on whether it complied with this provision.  The Court defined “regular inspection” as critically appraising the property for property damage at reasonable intervals.  Plaintiff’s owner asserted that he, at most, walked by the front door of the property and casually viewed the outside of the building from time to time.  The Court found that this conduct did not rise to the level of regular inspection, and held the trial court did not err in granting defendant’s motion for summary disposition.

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