Viewpoint: Ambiguous Language Forces Insurer to Pay Losses It Didn’t Intend to Cover

Insurers often complain that their insureds do not read the insurance policy and compel them to fulfill all policy terms or receive nothing. In my experience almost no one reads an insurance policy until there is a dispute over a claim. In Michigan an insurer did not read the policy it issued.

In Village Of Kalkaska v. Michigan Municipal League Liability And Property Pool, No. 359267, Court of Appeals of Michigan (Aug. 31, 2023) a policy was issued to the Village that provided – by fairly clear language – coverage the insurer did not intend to provide and as a result found it obligated to pay claims for millions of dollars.

Michigan Municipal League Liability and Property Pool appealed the trial court’s order denying its motion for summary disposition claiming that its intent was to exclude coverage for the losses claimed by the Village.

In 1996, plaintiff, Village of Kalkaska, contracted with certain of its employees to provide lifetime retirement health benefits. In 2014, plaintiff determined that the obligation to provide lifetime retirement health benefits to the employees was prohibitively expensive. Plaintiff therefore adopted a resolution ending its agreement to pay the employees lifetime retirement health benefits.

Four of the affected employees sued plaintiff for breach of contract. In one of the lawsuits, a jury awarded the employee present and future damages. Plaintiff thereafter settled the lawsuits with the other three employees for present and future damages. Plaintiff asserts that thus far the cost of resolving the lawsuits is nearly $2 million.

Defendant is “a non-profit self-insurance pool owned and governed by its members” that provides liability insurance to numerous Michigan municipalities. The policy provided plaintiff with various types of coverage, including coverage for liability in the administration of its employee benefits program.

Defendant moved for summary disposition on the basis that the policy does not provide coverage for plaintiff’s intentional breach of its contract with its employees.

An insurance policy provision is valid if it is clear, unambiguous, and not in contravention of public policy. If a contract does not violate the law or a traditional defense to enforceability, a court is required to apply the unambiguous provisions of the contract as written because an unambiguous contract reflects the intent of the parties as a matter of law.

The trial court first determined that the policy provides coverage, but then concluded that ambiguity in the policy necessitated submitting the matter to the jury. The trial court concluded that because the question was a close one, a genuine issue of material fact existed whether the Village was engaged in the administration of a benefits program when it terminated the employees’ lifetime retirement health benefits. Since a decision to terminate an employee benefit plan may qualify as a negligent act, error, or omission which causes a termination or cancellation of an employee under an employee benefit plan the Court noted that defendant made a strong argument that the wholesale termination may not be as comparable to administering under the plan, nothing within the contract of insurance that has been drafted by the defendant appears to allow for the distinction, even if it’s a good argument because it simply says, “effecting enrollment, termination, or cancellation of employees.”

The trial court concluded that no exclusions from coverage applied, but because it was a close question it was therefore ambiguous.

Defendant contended that regardless of the policy language, defendant obviously did not intend to assume any and all contractual liabilities upon which plaintiff chooses to intentionally default.

Defendant argued that it did not agree to pay plaintiff’s contractual obligations, but only to pay damages arising from plaintiff’s wrongful acts in administrating its employee benefits program, i.e., damages arising from plaintiff’s breach of its contract obligations under its employee benefits program.

The claim in this case allows plaintiff intentionally to shift its contractual obligation to defendant. By so doing it provides an unreasonable result not intended by defendant. But the intent of the parties is determined by the unambiguous policy language as a matter of law and a court may not fail to enforce a contract on the basis of reasonableness.

Therefore, the trial court erred by finding an issue of material fact for the jury; the trial court should have found that the policy provides coverage and granted summary disposition for the plaintiff and the Court of Appeals reversed and remanded for entry of judgment for plaintiff.

The greatest sin that an insurer can commit is to write an insurance policy that is ambiguous and that, as a result, provides a coverage it did not intend. In this case, because of the weakness of the policy language the insurer finds itself obligated to pay for a run-of-the-mill breach of contract, something no insurance company would intentionally cover. Insurers who usually insist on its insureds reading the policy as issued should not complain when it failed to read the policy it delivered to the insured in a manner understandable and unambiguous.