FRANKENMUTH MUT INS CO v. MASTERS

KELLY, J.

This is an action for declaratory judgment. Frankenmuth Mutual Insurance Company seeks a determination of its obligation to indemnify its insureds for collateral property damage resulting from the insureds' intentional destruction of their inventory by fire.

We hold that the collateral damage was not "accidental" as defined in the insurance policies at issue. Consequently, no "occurrence" triggered Frankenmuth's liability under the policies. Therefore, we reverse the decision of the Court of Appeals and reinstate the trial court's grant of summary disposition in favor of Frankenmuth.

This case arises out of a fire that began on the premises of the Masters Son Men's Clothing Store in Alpena, Michigan. George Edwin Masters (George Sr.) and his son, George Enger Masters (George Jr.), intentionally set the fire. The fire occurred at the Masters Son Men's Clothing Store during the early morning hours of August 17, 1993. Both confessed to police that their plan had been to start a small smokey fire that would damage their clothing inventory and allow them to collect casualty insurance. They denied intending to destroy their building or any of the neighboring buildings. The resulting fire extensively damaged the clothing store and spread to nearby businesses, causing collateral damage from both the fire and the efforts to extinguish it.

The clothing store was owned by George Sr. It was insured by a casualty and comprehensive general liability policy written by Frankenmuth Mutual (commercial policy). George Sr. and his wife also owned a home, insured under a homeowners policy also written by Frankenmuth.

Certain of the other businesses damaged by the fire had full casualty insurance coverage, while others were only partially covered. They, along with their insurers, sought to impose liability against the Masters. The Masters in turn asked Frankenmuth to defend and indemnify pursuant to the commercial and homeowners policies. Frankenmuth then filed the instant declaratory judgment action, seeking a determination whether there was coverage for the property damage.

Frankenmuth sought summary disposition, arguing two theories. First, it asserted that neither policy provided coverage because the policies define "occurrence" as an "accident" and this intentionally set fire cannot be construed as an accident. Second, even if the fire and resulting damage could be construed as an occurrence, the policies' intentional-acts exclusion clauses negate coverage.

The trial court granted summary disposition in favor of Frankenmuth, pursuant to MCR 2.116(C)(10). It held that, to find whether there had been an "occurrence," it must examine the events from the standpoint of the insureds and subjectively evaluate their intent. It reasoned that our recent decisions in Arco Industries v. American Motorists Ins. Co. and Frankenmuth Mut Ins. Co. v. Piccard provided guidance in this area. The trial court concluded that Arco and Piccard weredistinguishable from the instant case, stating:

Turning to the case at bar, it is necessary for this Court to ascertain whether or not the Masterses [sic] had the subjective intent for the "occurrence" in question. It is undisputed that setting the initial fire was not an accident, i.e., no occurrence under the policy. It is clear that the Masterses intended to burn property; the crime they were convicted of required a finding by the jury of the specific intent to burn property, a subjective standard.

The Masterses had the specific intent to burn property — the questions of whose or how much are wholly irrelevant. What is relevant is that the character of the resulting harm is consistent with the harm intended by the Masterses. To the contrary, in Piccard and Arco, the character of the resulting harm was inconsistent with that intended by the insured.

[W]e 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. Further, the [ Arco] Court stated: "Mere knowledge of potential danger does not equal knowledge of actual, intentional, expected harm."

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.

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. [ 225 Mich. App. 59-60 (citations omitted).]

The Court of Appeals then went on to examine the intentional-acts exclusion provisions. It concluded that, since the homeowners policy's exclusion used objective language, there was no coverage under this policy. However, because the commercial policy's exclusion used subjective language, there is a question of fact about whether the Masters intended or expected to damage property other than their own store.

Both Frankenmuth and the subrogee insurers sought leave to appeal in two separate applications. This Court granted leave in both on October 12, 1998. 459 Mich. 878.

In determining whether Frankenmuth must indemnify the Masters, we examine the language of the insurance policies and interpret their terms in accordance with well established Michigan principles of construction. Arco, supra at 402; Michigan Millers Mutual Ins. Co. v. Bronson Plating Co., 445 Mich. 558, 567; 519 N.W.2d 864 (1994).

An insurance policy must be enforced in accordance with its terms. Upjohn Co. v. New Hampshire Ins. Co., 438 Mich. 197, 207; 476 N.W.2d 392 (1991). We will not hold an insurance company liable for a risk it did not assume. Arco supra; Auto-Owners Ins. Co. v. Churchman, 440 Mich. 560, 567; 489 N.W.2d 431 (1992).

In interpreting ambiguous terms of an insurance policy, this Court will construe the policy in favor of the insured. Auto Club Ins. Ass'n v. DeLaGarza, 433 Mich. 208, 214; 444 N.W.2d 803 (1989); Powers v. DAIIE, 427 Mich. 602, 624; 398 N.W.2d 411 (1986). However, we will not create ambiguity where the terms of the contract are clear. Churchman, supra at 567; Patek v. Aetna Life Ins. Co., 362 Mich. 292; 106 N.W.2d 828 (1961). Where there is no ambiguity, we will enforce the terms of the contract as written. Arco, supra at 402; Stine v. Continental Casualty Co., 419 Mich. 89, 114; 349 N.W.2d 127 (1984).

Furthermore, this Court will interpret the terms of an insurance contract in accordance with their "commonly used meaning." Arco, supra at 403; Group Ins. Co. of Michigan v. Czopek, 440 Mich. 590, 596; 489 N.W.2d 444 (1992); Fireman's Fund Ins. Cos v. Ex-Cell-O Corp., 702 F. Supp. 1317, 1323, n. 7 (ED Mich., 1988). We take into account the reasonable expectations of the parties. Vanguard Ins. Co. v. Clarke, 438 Mich. 463, 472; 475 N.W.2d 48 (1991).

According to the plain meaning of both the Frankenmuth homeowners and commercial policies, coverage exists only where an "occurrence" has taken place. The relevant portion of the homeowners policy provides:

If a claim is made or a suit is brought against an insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies, [Frankenmuth] will:

1. pay up to our limit of liability for the damages for which the insured is legally liable. Damages include prejudgment interest awarded against the insured; and

2. provide a defense at our expense by counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate. Our duty to settle or defend ends when the amount we pay for damages resulting from the occurrence equals our limit of liability.

The term "occurrence" is defined in the homeowners policy as

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.

The relevant portion of the commercial policy provides:

a. [Frankenmuth] will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" and settle any claim or "suit" that may result. But:

* * *

b. 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.

The term "occurrence" is defined in the commercial policy as an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

The question we must answer, then, is whether the case before us involved an "accident" as defined under the policies.

In recent times, there has been controversy over interpreting the term "accident" in cases such as the instant case, particularly where it is not defined in the insurance policy. See, e.g., Auto Club Group Ins. Co. v. Marzonie, 447 Mich. 624; 527 N.W.2d 760 (1994). When the meaning of a term is not obvious from the policy language, the "commonly used meaning" controls. Arco, supra at 404; Czopek, supra at 596.

In the instant case, the term "accident" is not defined by the Frankenmuth policies. However, using the common meaning of the term, we have repeatedly stated that "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." Arco, supra at 404-405; Metropolitan Property Liability Ins. Co. v. DiCicco, 432 Mich. 656, 670; 443 N.W.2d 734 (1989); Marzonie, supra at 631. After some debate concerning the issue, we have also held that the definition of accident should be framed from the standpoint of the insured, not the injured party. Thus, in the instant case, we hold that the accident must be evaluated from the standpoint of the Masters, not those harmed by their actions.

We also hold that the appropriate focus of the term "accident" must be on both "the injury-causing act or event and its relation to the resulting property damage or personal injury." Marzonie, supra at 648 (Griffin, J., with Cavanagh, C.J., and Brickley, J., concurring); see also Piccard, supra 556-557 (Cavanagh, C.J., with Boyle and Griffin, JJ., concurring). In so doing, we specifically adopt the persuasive analyses contained in Justice Griffin's plurality opinion in Marzonie and ChiefJustice Cavanagh's dissent in Piccard. Of course, "an insured need not act unintentionally" in order for the act to constitute an "accident" and therefore an "occurrence." Marzonie, supra (Griffin, J., with Cavanagh, C.J., and Brickley, J., concurring); see also Piccard, supra (Cavanagh, C.J., with Boyle and Griffin, JJ., concurring).

However, where an insured does act intentionally, a problem arises "in attempting to distinguish between intentional acts that can be classified as `accidents' and those that cannot." Marzonie, supra (Griffin, J., with Cavanagh, C.J., and Brickley, J., concurring). In such cases, a determination must be made whether the consequences of the insured's intentional act

either were intended by the insured or reasonably should have been expected because of the direct risk of harm intentionally created by the insured's actions. When an insured acts intending to cause property damage or personal injury, liability coverage should be denied, irrespective of whether the resulting injury is different from the injury intended. Similarly, . . . when an insured's intentional actions create a direct risk of harm, there can be no liability coverage for any resulting damage or injury, despite the lack of an actual intent to damage or injure. [ Marzonie, supra at 648-649 (Griffin, J., with Cavanagh, C.J., and Brickley, J., concurring).]

We find useful the hypothetical example posed by Chief Justice Cavanagh in Piccard, supra at 558:

Suppose the fire had been started by a faulty electric cord on the insured's coffeemaker. Examining the insured's act for "intent," there is no doubt that he purposely plugged in the coffeemaker and turned on the switch. In that sense he acted intentionally. The fire remains an accident and the act constitutes an occurrence, however, because at the time of the insured's purposeful act he had no intent to cause harm. The act of plugging in the coffeepot is not a sufficiently direct cause of the harm, and the fire in this example is an accident.

Applying these principles to the case before us, viewed from the standpoint of the Masters, the fire, which was the underlying event, was caused by the Masters' intentional act. Also, there is no question that, in perpetrating the intentional act, the Masters intended to do property damage. Thus, the Masters' act cannot be characterized as an "accident," and there was no "occurrence" for purposes of coverage under either policy. It is irrelevant whether the harm that resulted, damage to the clothing store and surrounding businesses, was different from or exceeded the harm intended, minor damage to the clothing inventory. Id. at 557 (Cavanagh, C.J., with Boyle and Griffin, JJ., concurring). In light of our conclusion, we need not determine whether the policies' intentional-acts exclusions would preclude recovery.

Because the policies at issue do not provide coverage in this case, we reverse the judgment of the Court of Appeals and reinstate the trial court's grant of summary disposition in favor of Frankenmuth.

Weaver, C.J., and Brickley, Cavanagh, Taylor, Corrigan, and Young, JJ., concurred with Kelly, J.