United States District Court,W.D. Michigan,Southern Division.

AMERISURE MUTUAL INSURANCE COMPANY, Plaintiff,

v.

CAREY TRANSPORTATION, INC., a Florida corporation, and Great West Casualty Co., as subrogee of February Fourteen, Inc., Defendants.

Carey Transportation, Inc., Counterclaim-Plaintiff,

v.

Amerisure Mutual Insurance Company, Counterclaim-Defendant.

Carey Transportation, Inc., Third-Party Plaintiff,

v.

Adriatic Insurance Company, Third-Party Defendant.

No. 1:06-CV-892.

Sept. 26, 2008.

OPINION and ORDER

PAUL L. MALONEY, Chief Judge.

Granting in Part & Denying in Part Amerisure’s Motion for Summary Judgment;

Granting in Part & Denying in Part Carey Transport’s Motion for Summary Judgment;

Granting Adriatic’s Motion for Summary Judgment on Carey’s Third-Party Complaint;

Terminating the Case

This is a diversity insurance coverage dispute governed by Michigan state law.Plaintiff Amerisure Mutual Insurance Company (“Amerisure”) issued a commercial trucker’s insurance policy to defendant Carey Transportation, Inc. (“Carey”). Non-party February Fourteen, Inc. (“FFI”) hired Carey to transport goods to Florida. Carey did so in May 2005, using its own tractor to pull an attached trailer owned by FFI. A fire broke out which damaged Carey’s tractor, FFI’s attached trailer, and cargo inside the trailer.

Defendant Great West Casualty Company (“Great West”) provided coverage to FFI.In early 2006, Great West (as subrogee of FFI) sued Carey in this court, Civil Case No. 1:2006-cv-106 (“the underlying action”). Great West asserted claims for breach of contract, negligence, and strict liability under the federal statutory provision known as the Carmack Amendment. In early 2006, Amerisure sent a letter to Carey entitled “Reservation of Rights”, advising that it believed that policy exclusion number 6 precluded coverage, that it reserved its right and defenses, and that it would investigate further. Exclusion 6 (hereinafter the “care, custody or control” exclusion) excludes coverage for “ ‘property damage’ to or ‘covered pollution cost or expense’ involving property owned or transported by the ‘insured’ or in the ‘insured’s’ care, custody or control.”

In November 2006, Amerisure sent a second letter to Carey entitled “Reservation of Rights”, this time advising that it believed policy exclusion number 2 and policy exclusion number 6 precluded coverage, and again reserving its rights and defenses and promising further investigation. Exclusion 2 (hereinafter “the contractual liability exclusion”) excludes coverage for liabilities “assumed in a contract or agreement that is an ‘insured contract’ [as defined elsewhere in the policy,] provided that the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement.”Exclusion 2 states that it admits two exceptions, which will be discussed below. About that same time, in late 2006, about six months after Great West v. Carey was instituted, Amerisure assumed Carey’s defense. That action was stayed pending resolution of the instant action.

In this action, Amerisure asserts claims for declaratory relief under the federal Declaratory Judgment Act, and for restitution and unjust enrichment under Michigan common law. Amerisure seeks a declaration that it has no duty to indemnify Carey or Great West because the Amerisure-Carey policy’s exclusions 2 and 6 each eliminate coverage for all types of damages sought in the underlying action. Amerisure also seeks a declaration that it has no duty to defend Carey in the underlying action, and that it is therefore entitled to recoup the expenses it has incurred defending Carey in the underlying action. Amerisure and Carey have cross-moved for summary judgment on the entire amended complaint. For the reasons that follow, the court will grant summary judgment to Amerisure.

Carey first contends that Amerisure’s March 2006 letter to Carey, although entitled “Reservation of Rights”, constituted a final denial of coverage, and Carey was obligated to raise all potential grounds for denial of coverage at that time. Therefore, Carey contends, Amerisure waived or is estopped from invoking Exclusion 2, because its March 2006 letter failed to mention it as a basis for denying coverage. The court rejects Carey’s arguments on this score: the court determines that Amerisure’s March 2006 letter was not a final or conclusive denial of coverage and could not reasonably have been perceived as such. Therefore, Amerisure’s invocation of Exclusion 2 in its November 2006 letter was sufficient to permit Amerisure to rely on Exclusion 2 now as a basis for denying coverage. As a matter of law, the court also holds that, under these circumstances, the Michigan Supreme Court would adhere to the general rule announced in Ruddock (Mich.1920) that waiver or estoppel will not operate against an insurer where doing so would require coverage that is not-provided by the policy or is expressly excluded by the policy. Based on the Michigan Court of Appeals decisions in Lee (1995) and Smits (1995) and the decisions discussed therein, the Michigan Supreme Court might recognize the Lee-Smits exceptions to the Ruddock rule, but the exceptions would not apply here.

As for Exclusion 6, the court determines that it is not so broad or ambiguous as to violate federal or Michigan public policy as suggested by Carey. Nor is exclusion 6’s phrase “care, custody or control” ambiguous so as to require a jury to decide, as a matter of fact, what Amerisure and Carey intended those words to mean. Rather, exclusion 6 is sufficiently clear that its interpretation is a question of law for the court, aided greatly by Arrigos (Mich.App.1974)’s detailed explanation of what the phrase means and when it should be found to apply. The court then determines that Exclusion 6 applies and excludes coverage for all the damages at issue. The facts of this case satisfy both independent criteria for application of Exclusion 6. First, the tractor, the attached trailer, and the cargo were all being “transported” by the insured (Carey); the tractor is doubly excluded under the first part of Exclusion 6 because it was “owned” by the insured (Carey). Second, the tractor, the attached trailer, and the cargo were all within “the care, custody, or control” of the insured (Carey).

The court next considers Exclusion 2, which excludes coverage for “liability assumed by the insured (Carey) ] under any contract or agreement.”Exception “a” provides that Exclusion 2 does not apply to liability for damages that the insured (Carey) “[a]ssumed in a contract or agreement that is an ‘insured contract’ [as defined elsewhere in the policy,] provided that the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement.”Exception “b” provides that Exclusion 2 does not apply to liability for damages “[t]hat the ‘insured’ would have in the absence of the contract or agreement.”The court determines that Exception 2 applies, as Great West’s complaint in the underlying action seeks to impose liability on Carey independent of any contract or agreement, namely liability for negligence under Michigan common law (count one in the underlying action) and strict liability under federal statute (count two in the underlying action). Because Exception “b” applies, Exclusion 2 does not apply. There is no need to determine whether Exception “a” might also apply.

Finally, Carey contends that Amerisure has a duty to defend it in the underlying action. Following Michigan authority that the duty to defend is broader than the duty to indemnify, the court holds that Amerisure does have a duty to defend Carey in the underlying action.

BACKGROUND

The Amerisure-Carey Policy and Carey’s Loss

Amerisure issued a commercial automobile insurance policy # CA-1307-5620-30004, to Carey effective July 20, 2004 through July 20, 2005. See Am Comp ¶ 8 and Ex. G; Carey Ans ¶ 8; Great West Ans ¶ 8. In May 2005, FFI hired Carey to transport goods from Michigan to three Walgreen’s retail stores in Florida. Carey made the first two deliveries without incident. While Carey was transporting the remaining goods to the third and final destination, the vehicle’s front steer bearings failed, causing a fire that spread and destroyed Carey’s tractor (referred to in the policy as a “power unit”), FFI’s attached trailer, and FFI’s cargo were destroyed. Deposition of Carey truck driver Derek Fowler (“Fowler Dep”), P’s MSJ Ex D 74:20-25 and 75:1-10. Great West paid FFI $74,392.63 (the value of the entire cargo minus FFI’s deductible).See Amerisure MSJ, Ex (Deposition of Steven Carey (“Carey Dep”)) 86:2-7. (Carey has filed a third-party complaint contending that the cargo loss is covered by its policy with Adriatic, but Adriatic refuses coverage and has moved for summary judgment on the third-party complaint.)

The Underlying Action: Great West (subrogee of FFI) v. Carey (Amerisure’s Insured)

Great West, as subrogee of FFI, sued Carey in this court, alleging that the fire was caused by Carey’s negligent failure to maintain its tractor. See Am Comp., Ex. F (Great West’s Comp. filed Feb. 10, 2006 in underlying action) ¶¶ 7-15.

Amerisure first learned of the underlying action-Great West v. Carey Transportation, No. 1:2006-cv-106 (W.D.Mich.)-on February 15, 2006, when it received a copy of the complaint from Great West.On March 10, 2006, Amerisure received another copy of the complaint in the underlying action, this time from its insured, Carey.On March 22, 2006, Amerisure received a letter advising that Great West had effected service on Carey in the underlying action.

Amerisure’s First Letter to Carey Entitled  “Reservation of Rights  ”, March 2006

On March 22, 2006, Amerisure sent Carey a letter entitled “Reservation of Rights.” Amerisure’s letter read, in pertinent part,

[Page 1, ¶ 3] Because information available to us at this point is limited, we will proceed to investigate this claim subject to a full reservation of all of our rights and defenses.

[Page 1, ¶ 4] Amerisure’s conduct in handling this matter is subject to all of the terms, provisions and conditions of its policy. Your attention is specifically drawn to the following, which precludes coverage of this claim.

* * *

[Page 3] B. Exclusions

This insurance does not apply to any of the following:

6. Care, Custody Or Control

“Property damage” to or “covered pollution cost or expense” involving property owned or transported by the “insured” or in the “insured’s “ care, custody or control. But this exclusion does not apply to liability assumed under a sidetrack agreement.

* * *

[Page 4] * * * The Plaintiff [Great West]’s complaint alleges that the trailer owned by February Fourteen, Inc. [FFI] and its cargo was under the care, custody and control of Carey Transportation, Inc. Similarly, our investigation also has shown that the trailer and cargo were in Carey Transportation, Inc.’s care, custody and control. Therefore because of the above cited exclusion, there may not be coverage for this loss.

We will complete our coverage review process[,] and should it be determined that the Amerisure policy provides coverage on any part or all of this complaint, Carey Transportation, Inc. will be reimbursed for any legal costs that are reasonable and necessary.

* * *

[Page 5] Amerisure Insurance Company specifically reserves all rights and defenses under the policy and applicable law.

Additionally, if information is subsequently discovered that would support additional defenses to coverage, Amerisure Insurance Company expressly reserves the right to supplement its coverage defenses.

Amerisure’s Opp to Carey’s MSJ, Ex C (Letter of Mar. 22, 2006 from Amerisure counsel to Carey) at 1, 3, 4 and 5 (boldface in original, italics added). The court finds that this letter serves as an effective, timely reservation of rights, but not as a denial of coverage. The letter is not a clear, definitive, or final “denial” of coverage, and Carey could not reasonably perceive it as such. The letter is arguably internally inconsistent as to whether it is warning of the possible application of an exclusion or stating a firm position that an exclusion applies. Amerisure’s letter first says unequivocally that “Your attention is specifically drawn to the following, which precludes coverage of this claim,”see Page 1 ¶ 4 (emphasis added), going on to quote Exclusion 6, see Page 3. But then Amerisure backtracks, telling Carey on page 4, “[B]ecause of the above cited exclusion, there may not be coverage for this loss.”Emphasis added.

Amerisure’s March 22, 2006 reservation-of-rights letter also “strongly recommend[ed] that Carey Transportation, Inc. secure their own defense counsel at this time to provide a defense for Carey Transportation, Inc. in this lawsuit.”Amerisure’s Opp to Carey’s MSJ, Ex C (Letter of Mar. 22, 2006 from Amerisure counsel to Carey) at 4.

Amerisure’s Second Letter to Carey Entitled “Reservation of Rights”, November 2006

Over half a year later, on November 13, 2006, Amerisure sent a second letter to Carey entitled Reservation of Rights. This letter for the first time called Carey’s attention to Exclusion 2 (certain liabilities contractually assumed by the insured), stating that it precludes coverage-a provision that Amerisure had not mentioned in the first reservation-of-rights letter. See Amerisure’s Opp to Carey’s MSJ, Ex D (Letter of Nov. 13, 2006 from Amerisure counsel to Carey) at 1 & 3.

Amerisure’s November 2006 letter again called Carey’s attention to Exclusion 6 (property owned or transported by the Insured or in the “care, custody or control” of the Insured). This time, however, Amerisure stated only that its investigation found that the trailer was in Carey’s “care, custody, or control”-not, as stated in the first letter, “the trailer and cargo.”  Contrast Amerisure’s Opp to Carey’s MSJ, Ex C at 4 with id., Ex D at 4.

Amerisure agreed to defend Carey, but explained its revised position regarding coverage:

[T]he cargo may not be covered because it was being “transported by” the insured when it was damaged.

We will provide a defense for the entire action, however the only area where there is potential for indemnity is for the Cargo inside the [FFI] Trailer. It is our position that there is no coverage for the trailer owned by February Fourteen, Inc. because it was within your driver’s care, custody and control at the time of the loss.

Finally, the breach of contract claims are not covered by the policy because they are excluded by the contractual exclusion. The allegations by [FFI] are not for tort claims, but for Carey Transportation’s failure to maintain its equipment. This does not fall within the definition of an insured contract and therefore, the contractual exclusion [Exclusion 2] applies.

Amerisure’s Opp to Carey’s MSJ, Ex D (Nov. 13, 2006 letter from Amerisure to Carey) at 4.

Amerisure Files this Declaratory Judgment Action Against Its Insured, Carey

Amerisure filed the instant action in December 2006, seeking, inter alia, a declaration that it does not have a duty to defend or indemnify Carey in the underlying coverage action (count one). In counts two and three, Amerisure asserts Michigan common-law claims for restitution and relief from unjust enrichment. Amerisure alleges that any attorney fees and other defense costs that it has paid in the underlying coverage action have benefitted and unjustly enriched Carey, and thus that Carey should disgorge said amounts to Amerisure. See Comp. ¶¶ 15-21.

Defendants Carey and Great West timely filed answers in March 2007. Carey’s answer counterclaimed for a declaration that Amerisure has a duty to defend and indemnify Carey in the underlying coverage action, and an order requiring Amerisure to pay Carey both the costs it has incurred in this action and the costs it has incurred in the underlying coverage action. See Carey Ans at 3-5. Great West’s answer sought a declaration that Amerisure has a duty to indemnify it for the damages sought by Great West in the underlying coverage action. See Great West Ans. at 4.

In May 2007, with leave granted by Magistrate Judge Carmody, defendant Carey filed a third-party complaint against Adriatic Insurance Company, Inc. (“Adriatic”), which timely answered that same month. Between July and November 2007, three parties-plaintiff Amerisure, defendant Carey, and third-party-defendant Adriatic-filed motions for summary judgment [document numbers 36, 56 and 58]. However, the court determined that Amerisure had not satisfied its burden of pleading facts sufficient to establish federal jurisdiction. Accordingly, by order issued October 29, 2007, the court dismissed the complaint without prejudice and authorized Amerisure to file an amended complaint to correct the deficiency within a certain period of time. The order denied the pending motions without prejudice.

On November 6, 2007, Amerisure timely filed an amended complaint. According to the amended complaint, plaintiff Amerisure is incorporated in Michigan and maintains its principal place of business in Michigan; defendant Carey is both incorporated in Florida and maintains its principal place of business there ; and defendant Great West is both incorporated in Nebraska and maintains its principal place of business there. See Am, Comp, ¶¶ 4-6 (citing Exs. A-E). The defendants have either “admitted” or “not contested” Amerisure’s revised citizenship allegations, see Carey’s Ans, to Am. Comp. ¶¶ 4-6 and Great West’s Ans, to Am, Comp. ¶¶ 4-6, and the court determines that Amerisure has met its burden of establishing complete diversity of citizenship.

In November 2007, plaintiff Amerisure and defendant Carey cross-moved for summary judgment on the amended complaint [documents # 73 and # 75]. Defendants Great West and Carey filed separate opposition briefs [documents # 80 and # 83/84]; and Amerisure filed an opposition brief [document # 79] and two reply briefs [document # 82 and # 85].

Also in November 2007, third-party defendant Adriatic moved for summary judgment on Carey’s third-party complaint [document # 70], which involves a cargo-insurance policy that Adriatic issued to Carey. Third-party plaintiffs Carey and Great West filed opposition briefs [documents # 72 and # 77], but Adriatric did not file a reply brief.

DIVERSITY JURISDICTION

When sitting in diversity jurisdiction, this court must apply the choice-of-law rules and, if applicable, the substantive law of the forum State, Michigan. CenTra, Inc. v. Estrin, 538 F.3d 402, —-, 2008 WL 3540081,(6th Cir.2008) (citing Himmel v. Ford Motor Co., 342 F.3d 593, 598 (6th Cir.2003)); see also  Savedoff v. Access Group, Inc., 524 F.3d 754, 762 (6th Cir.2008) (“We generally apply the substantive law of the forum state to actions brought pursuant to our diversity jurisdiction.”) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938)). This rule applies in insurance-coverage actions brought in diversity. See Scottsdale Ins. Co. v. Flowers, 513 F.3d 536, 563 (6th Cir.2008) (citing Talley v. State Farm Cas. & Fire Co., 223 F.3d 323, 326 (6th Cir.2000)).

When interpreting contracts in a diversity action, the federal courts also “generally enforce the parties’ contractual choice of governing law.”  Savedoff, 524 F.3d at 762 (citing Carnival Cruise Lines, Inc. v. Schute, 499 U.S. 585, 596, 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991) and M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972)). As the parties do not dispute that the Amerisure-Carey policy is governed by Michigan substantive law, the court applies Michigan law to this dispute. See  Savedoff, 524 F.3d at 762 (“As the parties do not dispute that the student loan contracts at issue are governed by Ohio law, we apply Ohio law to the par