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Michigan Supreme Court Lansing, Michigan

Opinion
SHIRLEY RORY and ETHEL WOODS, Plaintiffs-Appellees, v CONTINENTAL INSURANCE COMPANY, a/k/a CNA INSURANCE COMPANY Defendant-Appellant. _______________________________ BEFORE THE ENTIRE BENCH YOUNG, J.

Chief Justice:

Justices:

Clifford W. Taylor

Michael F. Cavanagh Elizabeth A. Weaver Marilyn Kelly Maura D. Corrigan Robert P. Young, Jr. Stephen J. Markman

JULY 28, 2005

No. 126747

In this case, the trial court refused to enforce the one-year contractual limitations period contained in the insurance policy issued to plaintiffs. The trial court did so because it concluded that the one-year limitations

provision was "unfair," unreasonable, and an unenforceable adhesion defendant appeals. This case raises two fundamental questions of contract law: (1) are insurance contracts subject to a standard of clause. The Court of Appeals Company affirmed, and

Continental

Insurance

(Continental)

enforcement contracts,

different and (2)

from

that what

applicable may

to a

other court

under

conditions

disregard and refuse to enforce unambiguous contract terms? We hold, first, that insurance policies are subject to the same contract construction principles that apply to any other species of contract. Second, unless a contract

provision violates law or one of the traditional defenses to the enforceability of a contract applies, a court must construe written. and We apply unambiguous that the contract provisions is as

reiterate

judiciary

without

authority to modify unambiguous contracts or rebalance the contractual because such equities struck by the of contracting law parties preclude of

fundamental

principles hoc

contract

subjective

post

judicial

determinations

"reasonableness" as a basis upon which courts may refuse to enforce unambiguous contractual provisions. Finally, in addition to these traditional contract

principles, in this case involving an insurance contract, the Legislature has enacted a statute that permits

insurance contract provisions to be evaluated and rejected on the basis of "reasonableness." The Legislature has

explicitly assigned this task to the Commissioner of the Office of Financial and Insurance Services (Commissioner) rather than the judiciary. The Commissioner has allowed the

2


Continental insurance policy form to be issued and used in Michigan. No party here has challenged the Commissioner's action to allow the Continental policy to be issued or used in this state. Accordingly, we reverse the Court of Appeals decision and remand the case to the circuit court for entry of an order of summary disposition in favor of defendant. I. Facts and Procedural History

Plaintiffs maintained an automobile insurance policy with defendant, which included optional coverage for

uninsured motorist benefits.

On May 15, 1998, plaintiffs

were injured in an automobile accident. The police report filed at the time of the collision did not indicate whether either party was insured. September suit 1999, plaintiffs defendant More than a year later, in filed and a a first-party no-fault suit for

against

third-party

noneconomic damages against Charlene Haynes, the driver of the other vehicle. Only after the suit was commenced was it discovered that Haynes was uninsured. On March 14, 2000, plaintiffs benefits because to it submitted a claim for uninsured denied year motorist the after claim the

Continental. was not filed

Defendant within one

accident, as required by the insurance policy.

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In August 2000, plaintiffs filed the present action, contesting benefits. disposition, Continental's Defendant relying on denial filed a a of uninsured motion for motorist summary in the

limitations

provision

insurance contract that required that a claim or suit for uninsured motorist coverage "must be brought within 1 year from the date of the accident." The that the trial court denied defendant's period the motion, holding in the

one-year was

limitations

contained Court of

contract

unreasonable.

After

Appeals

issued an opinion in an unrelated case,1 defendant renewed its motion for summary disposition. The trial court again denied defendant's motion for summary disposition, holding that the one-year limitation was an unenforceable adhesion clause. Because the

limitation was not highlighted in the contract, was not bargained for by the purchaser, in the and constituted a

"significant

reduction"

time

plaintiffs

would

otherwise have to file suit against defendant, the trial Williams v Continental Ins Co, unpublished opinion per curiam of the Court of Appeals, issued April 23, 2002 (Docket No. 229183). In Williams, the panel considered identical policy language and concluded that the one-year limitation was "not so unreasonable as to be unenforceable" because the policy required that a claim be filed within a year, rather than a lawsuit.
1

4


court held that it would be "totally and patently unfair" to enforce the limitation contained in the policy. On appeal, the Court of Appeals affirmed the trial court's decision to deny defendant's motion for summary

disposition.2 court that

The Court of Appeals agreed with the trial a one-year period of limitations was

unreasonable. The panel instead imposed a three-year period of limitations, holding: An insured may not have sufficient time to ascertain whether an impairment will affect his ability to lead a normal life within one year of an accident. Indeed, three of the factors to be considered in determining whether a serious impairment exists are the duration of the disability, the extent of residual impairment, and the prognosis for eventual recovery. Further, unless the police report indicates otherwise, the insured will not know that the other driver is uninsured until suit is filed, and the other driver fails to tender the defense to an insurance company. The insured, thus, must file suit well before the one-year period in order to assure that the information is known in time to make a claim or file suit against the insurance company within one year of the accident. Applying the standard set forth in Camelot, . . . we conclude that the limitation here is not reasonable because, in most instances, the insured (1) does not have "sufficient opportunity to investigate and file an action," where the insured may not have sufficient information about his own physical condition to warrant filing a claim, and will likely not know if the other driver is insured until legal process is commenced, (2) under these circumstances, the time will often be "so short as to work a
2

262 Mich App 679; 687 NW2d 304 (2004).

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practical abrogation of the right of action," and (3) the action may be barred before the loss can be ascertained.
* * *
Here, the Legislature has provided a threeyear limitations period for personal injury claims. The insured must sue the other driver within three years of the injury, whether or not the insured has sufficient information to know if a serious impairment has been sustained, and whether or not the other driver is insured. Application of the three-year period would not deprive the insured of a sufficient opportunity to investigate and file a claim and does not work a practical abrogation of the right. [Id. at 686687 (internal citations omitted).][3] Subsequently, we granted defendant's application for leave to appeal.4 II. Standard of Review This Court reviews de novo the trial court's decision to grant or deny summary disposition.5 In reviewing the

motion, the pleadings, affidavits, depositions, admissions, and any other admissible evidence are viewed in the light

Relying on Herweyer v Clark Hwy Services, Inc, 455 Mich 14; 564 NW2d 857 (1997), the Court of Appeals agreed with the trial court that the insurance policy was adhesive and "should receive close judicial scrutiny." 262 Mich App at 687.
4

3

471 Mich 904 (2004). Van v Zahorik, 460 Mich 320; 597 NW2d 15 (1999).

5

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most favorable to the nonmoving party.6 Moreover, questions involving the proper interpretation of a contract or the legal effect of a contractual clause are also reviewed de novo.7 In ascertaining the meaning of a contract, we give the words used in the contract their plain and ordinary meaning that would be apparent to a reader of the

instrument.8 III. Analysis A. THE "REASONABLENESS DOCTRINE" IN MICHIGAN Under the language of the insurance policy at issue, an insured is required to file a claim or lawsuit for

uninsured motorist benefits "within 1 year from the date of the accident." Plaintiff asks this Court to refuse to

enforce that provision of the insurance contract because the limitations period is not "reasonable." This action, being a claim arising under the insurance policy, is a first-party claim against the insurer. Therefore, contrary

to the Court of Appeals conclusion that a three-year period
6

Radtke v Everett, 442 Mich 368, 374; 501 NW2d 155 (1993).
7

Archambo v Lawyers Title Ins Corp, 466 Mich 402, 408; 646 NW2d 170 (2002); Bandit Industries, Inc v Hobbs Int'l, Inc (After Remand), 463 Mich 504, 511; 620 NW2d 531 (2001).
8

Wilkie v Auto-Owners Ins Co, 469 Mich 41, 47; 664 NW2d 776 (2003).

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of limitations applies to this lawsuit, plaintiff's suit against Continental--in the absence of the limitations

provision contained in the policy--would be governed by the general six-year period of limitations applicable to

contract actions.9 Uninsured motorist insurance permits an injured

motorist to obtain coverage from his

own insurance company

to the extent that a third-party claim would be permitted against the uninsured at-fault driver.10 Uninsured motorist coverage is optional--it is not compulsory coverage mandated by the no-fault act.11 Accordingly, the rights and

limitations of such coverage are purely contractual and are construed without reference to the no-fault act.12

MCL 600.5807(8). If plaintiffs brought suit against the at-fault driver instead of their own insurance carrier, such a third-party claim would be limited to being brought within three years pursuant to former MCL 600.5805(9), now MCL 600.5805(10), which governs claims for injury to person or property. The owner or operator of a vehicle is subject to tort liability for noneconomic loss only if the injured motorist has suffered death, serious impairment of a body function, or permanent serious disfigurement. MCL 500.3135(1); Kreiner v Fischer, 471 Mich 109; 683 NW2d 611 (2004); Auto Club Ins Ass'n v Hill, 431 Mich 449; 430 NW2d 636 (1988).
11 10

9

Twichel v MIC Gen Ins Corp, 469 Mich 524, 533; 676 NW2d 616 (2004).
12

Id.

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In

support

of

their

claim

that

a

contractual

limitations provision may be disregarded on the basis of an assessment of "reasonableness," plaintiffs rely on Tom

Thomas Org, Inc v Reliance Ins Co.13 In Tom Thomas, the plaintiff filed suit fifteen months after the loss to

recover for property damage under an insurance policy. The policy contained a one-year limitation on filing suit. Even a cursory reading of Tom Thomas reveals that the holding of the case was premised on "judicial tolling"

rather than reasonableness. In fact, the majority in Tom Thomas specifically declined to address the reasonableness of the one-year limitation; instead, it predicated its

holding on "reconciliation of the provisions of the policy" by the imposition of judicial tolling.14 In dicta, the

Court noted the "general rule" that a shortened contractual period of limitations was "valid if reasonable even though the period is less than that prescribed by otherwise

applicable statutes of limitation."15

13

396 Mich 588; 242 NW2d 396 (1976).

The Tom Thomas Court held that the contractual period of limitations was judicially tolled "from the time the insured gives notice until the insurer formally denied liability." Id. at 597. Id. "general
15

14

at 592 (emphasis added). In support of the rule," the Tom Thomas Court cited a secondary (continued...) 9


In Camelot Excavating Co, Inc v St Paul Fire & Marine Ins Co,16 this Court expanded upon the "reasonableness"

dicta articulated in Tom Thomas. In Camelot, the plaintiff sought payment on a labor and material bond from the

defendant. The defendant moved for summary disposition on the basis of the one-year limitations period contained in the bond contract. Citing Tom Thomas for the proposition

(...continued) source rather than Michigan authority. However, the opinion subsequently noted that prior Michigan case law had enforced shortened contractual limitations periods without resort to a "reasonableness" analysis. Id. at 592 n 4. In fact, prior case law had consistently upheld the validity of contractually shortened limitations periods; such provisions could be avoided only where the insured could establish waiver on the part of the insurer or estoppel. See McIntyre v Michigan State Ins Co, 52 Mich 188; 17 NW 781 (1883); Law v New England Mut Accident Ass'n, 94 Mich 266; 53 NW 1104 (1892); Turner v Fidelity & Cas Co, 112 Mich 425; 70 NW 898 (1897) (insurance company waived one-year limitation by conduct); Harris v Phoenix Accident & Sick Benefit Ass'n, 149 Mich 285; 112 NW 935 (1907)(failure of the insured to sue within six months was not waived); Friedberg v Ins Co of North America, 257 Mich 291; 241 NW 183 (1932)(where settlement negotiations are broken off by the insurer near the end of the contractual limitations period, the provision was deemed waived); Hall v Metro Life Ins Co, 274 Mich 196; 264 NW 340 (1936); Barza v Metro Life Ins Co, 281 Mich 532; 275 NW 238 (1937)(the plaintiff was bound by two-year limitations clause where there was no evidence of waiver or estoppel); Bashans v Metro Mut Ins Co, 369 Mich 141; 119 NW2d 622 (1963) (insurer did not waive two-year "binding" limitations clause); Better Valu Homes, Inc v Preferred Mut Ins Co, 60 Mich App 315; 230 NW2d 412 (1975).
16

410 Mich 118; 301 NW2d 275 (1981).

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that a shortened period of limitations is acceptable "where the limitation is reasonable,"17 Camelot relied on case law from foreign jurisdictions in articulating a three-part

test for evaluating the reasonableness of a contractually shortened limitations period.18 Ultimately, the Court held

that the one-year period of limitations was reasonable, and that no public policy considerations precluded enforcement of the contractual provision. In the end, Camelot enforced the contractually

shortened limitations period at issue. However, rather than simply enforcing the contract as written, the decision in Camelot was premised upon the adoption of a

"reasonableness" test found in the dicta of Tom Thomas. In

Camelot also cited Barza v Metro Life and Turner v Fidelity, n 15 supra, in support of the "rule" that a contractual limitations provision may be upheld if reasonable. Camelot, supra at 126. However, neither Barza nor Turner may be properly read as requiring reasonableness before a contractual provision may be deemed valid. In both cases, the analysis focused on whether the insurer waived the otherwise binding limitations provision.
18

17

Camelot held that a contractually shortened limitations period is reasonable if (1) the claimant has sufficient opportunity to investigate and file an action, (2) the time is not so short as to work a practical abrogation of the right of action, and (3) the action is not barred before the loss or damage can be ascertained. Id. at 127.

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failing to employ the plain language of the contract, the Camelot Court erred. A fundamental tenet of our jurisprudence is that

unambiguous contracts are not open to judicial construction and must be enforced as written.19 according to their unambiguous Courts enforce contracts terms because doing so

respects the freedom of individuals freely to arrange their affairs via contract. This Court has previously noted that "`[t]he general rule [of contracts] is that competent

persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts.'"20 When provisions a court on abrogates its own unambiguous independent contractual of

based

assessment

19

Harrington v Inter-State Business Men's Accident Ass'n, 210 Mich 327; 178 NW 19 (1920); Indemnity Ins Co of North America v Geist, 270 Mich 510; 259 NW 143 (1935); Cottrill v Michigan Hosp Service, 359 Mich 472; 102 NW2d 179 (1960); Henderson v State Farm Fire & Cas Co, 460 Mich 348; 596 NW2d 190 (1999); Cruz v State Farm Mut Automobile Ins Co, 466 Mich 588; 648 NW2d 591 (2002).
20

Terrien v Zwit, 467 Mich 56, 71; 648 NW2d 602 (2002), quoting Twin City Pipe Line Co v Harding Glass Co, 283 US 353, 356; 51 S Ct 476; 75 L Ed 1112 (1931).

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"reasonableness," the court undermines the parties' freedom of contract.21 As this Court previously observed: This approach, where judges . . . rewrite the contract . . . is contrary to the bedrock principle of American contract law that parties are free to contract as they see fit, and the courts are to enforce the agreement as written absent some highly unusual circumstance such as a contract in violation of law or public policy. This Court has recently discussed, and reinforced, its fidelity to this understanding of contract law in Terrien v Zwit, 467 Mich 56, 71; 648 NW2d 602 (2002). The notion, that free men and women may reach agreements regarding their affairs without government interference and that courts will enforce those agreements, is ancient and irrefutable. It draws strength from commonlaw roots and can be seen in our fundamental charter, the United States Constitution, where government is forbidden from impairing the contracts of citizens, art I,

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