In Royal Property Group, LLC v. Prime Ins. Co., No. 249043, 2005 WL 2030918 (Mich. App. Aug. 23, 2005), a Michigan appeals court held that a coinsurance clause was not ambiguous and did not violate public policy.

 

An apartment building owned by Royal Property Group was destroyed by fire. The building was insured under a commercial property policy issued by Prime Insurance Company with a $600,000 policy limit. The building's actual cash value (ACV) was between $814,270 and $1,280,769 and its replacement cost value (RCV) was $3,659,396. Prime paid Royal $372,270.16 for the loss. Royal claimed that the coinsurance clause was improperly applied.

 

Royal believed that language in the policy declarations and application required the coinsurance clause to apply to ACV instead of RCV. Prime countered that it had properly applied the clause according to its wording: “We will not pay the full amount of any loss if the replacement cost value of Covered Loss at the time of loss multiplied by the 80% Coinsurance percentage shown for it in the Declarations is greater than the limit of insurance for the property.”

 

The trial court found the policy to be ambiguous because the coinsurance clause did not coincide with the declarations page. The appeals court, though, stated that “nowhere on the declarations page does it state that the eighty percent coinsurance requirement would be based on the ACV of the property.”

 

The court concluded that there was no basis for assuming that the parties intended the coinsurance to be calculated using the ACV, stating, “Neither the policy application nor the declarations page of the policy address the operation of coinsurance, except to indicate a percentage that would be integrated in the coinsurance clause.”

 

Royal further argued that the coinsurance clause violated public policy in Michigan . Again, the court disagreed, pointing out that Royal may have thought that basing the coinsurance liability on RCV might be unfair, but that subjective view did not establish public policy in Michigan .

 

The court said, ” Michigan 's public policy does not prohibit an insurer from issuing a policy of insurance that measures an insured's coinsurance liability using the RCV of the property while limiting its liability to the ACV of the loss.”

 

Royal finally contended that Prime violated the Uniform Trade Policy Act, but the court noted that, because Prime was a surplus lines carrier, it was not subject to the act. And, because Prime paid Royal, the nature of the policy was not misrepresented, and therefore did not violate the surplus lines insurance act.