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Farm Bureau required to fulfill its duties under insurance contract; State Farm allowed to skate

The owners of Aladdin's Carpet Cleaning purchased commercial liability from State Farm and an umbrella from Farm Bureau.  State Farm had the insight to exclude coverage for "mold claims" in the small print of its policy, but Farm Bureau's loop-hole generators weren't as effective.  Aladdin was hired to help clean water damage in a home and allegedly performed badly, negligently contributing to a mold problem throughout the house.  When Aladdin turned the claim over to its (two) insurers to defend, they both ran for the "back forty".  Aladdin defended the lawsuit with the homeowner and resolved it, before suing State Farm and Farm Bureau for the costs it incurred.

The lower court held that State Farm's "Guardian" policy really wasn't such a guardian, and ruled that it owed no duty to defend the homeowner's claims because of the small print.  It also held, however, that Farm Bureau's commercial umbrella  did obligate Farm Bureau to defend, because the incident was an "occurrence" under the policy, the facts as alleged "could" be within the risks covered, there was no exclusion for mold or fungus [unlike the State Farm policy] and therefore Farm Bureau AT LEAST owed a duty to defend. 

The Court noted that the duty to defend under standard insurance agreements is broader than the duty to indemnify (or pay damages).  If there could be coverage under any development in the liability claim, the insurer owes a duty to defend.  Even if the allegations in the suit are spurious, the insured has bought a duty to defend that will be enforced.  On that basis, since some of the allegations of the homeowner in this case could fall within the policy coverage, it was irrelevant that some of the allegations might not:  Farm Bureau owed a duty to defend if there was an "occurrence". 

Farm Bureau owed coverage for any occurrence, which was essentially defined in the policy as an "accident".  Under standard Michigan interpretation, an "accident" is an outcome not reasonably expected or intended by the insured.  On this basis, Farm Bureau owed a duty to defend Aladdin, as there was no genuine issue regarding Aladdin's intent.  The Court did hold that Farm Bureau was entitled to a trial on the amount of Aladdin's damages resulting from the failure to defend.

The Court did not decide whether the claim against State Farm's agent was properly dismissed.  Aladdin had alleged that the agent represented it would have coverage for this type of occurrence and that he was negligent in failing to procure it.  Since the insured's have coverage from Farm Bureau under the Court's ruling, it did not need to address the ruling involving the agent.  All-in-all, Aladdin's owner must wonder why he bought liability insurance in the first place:  sadly, many insureds in Michigan have asked that question since the "Engler majority" began redefining the rules governing insurance policies.

Thompson O’Neil, P.C.
309 East Front Street
Traverse City, Michigan 49684
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