Author(s): Karen Libertiny Ludden


In a highly-anticipated decision, the Michigan Supreme Court just decided the case of McDonald v Farm Bureau, enforcing a contractual limitations period in a UIM policy. The Court did suggest, however, that new UIM policies invalidated by the state Office of Financial and Insurance Services (“OFIS”) since December 16, 2005 for maintaining limitations periods shorter than three years would not be enforceable policies. Existing before that date with shorter limitations periods would be safe. Importantly, the Court did not substantively address the criteria for a claim of equitable tolling and/or estoppel, which the Court recognized could influence whether a contractual limitations period could be enforced. This analysis must await another decision by the High Court.

In McDonald v Farm Bureau, the plaintiff argued that the one year statutory limitations period in the UIM policy issued by Farm Bureau was not enforceable because the parties had communicated regarding settlement prior to the running of the limitations period. Specifically, the plaintiff’s attorney had asked Farm Bureau for a decision on the UIM coverage “so that I can determine if I need to sue Farm Bureau or not”. He then sent another letter threatening to commence litigation. There was no other correspondence until the one year period of limitations had expired. Shortly thereafter, the defendant sent plaintiff a letter indicating that the one year limitations period had expired and that it would no longer consider the UIM claim. The lower court denied defendant’s motion for summary disposition and granted same to plaintiff holding that 1) the one year period was unreasonable and thus unenforceable as a matter of law; 2) defendant was estopped from asserting the limitation because of its dilatory conduct; 3) pursuant to Tom Thomas Org, Inc v Reliance Ins Co, the limitations period was tolled by plaintiff’s letter making the UIM claim; and 4) the limitations period was too ambiguous to enforce.

The Michigan Supreme Court reversed, declining to find the one year contractual limitations period unreasonable, refusing to estop the application of the limitations period, reiterating that it had overruled Tom Thomas, and finding that the limitations period was not ambiguous.

In reaching its conclusion, the Supreme Court severely criticized the Court of Appeals for declining to apply its recent decisions in Rory v Continental Ins and DeVilles v Auto Club. By way of background, Rory was a UIM case where the Court upheld and applied the contractual limitations period and declined to toll same, but made its decision prospective in application only. In Devillers, the Supreme Court upheld the statutory one year limitations period found in the No Fault Act and specifically overruled prior precedent to the contrary.

The Supreme Court in McDonald found the Court of Appeals almost willful in its refusal to apply the Rory and Devillers decision to the facts in McDonald, suggesting that “rather than blindly following West’s questionable disregard for Devillers’ clear statement, the Court of Appeals should have, at least, sought conflict-panel resolution of the question”. In West, the Court of Appeals refused to apply Devillers because Devillers pertained to a statutory limitations period and West pertained to a contractual limitations period.

To clarify its position, the Supreme Court in McDonald explicitly stated that “Rory overruled Tom Thomas and its progeny” and “express limitations periods in optional insurance contracts are not automatically tolled as a matter of law by filing a claim”.

In reaching this conclusion, the Supreme Court addressed the December 16, 2005 Notice and Order of Prohibition issued by the Office of Financial and Insurance Services (“OFIS”) prohibiting UIM policies with limitation periods of less than three years. The Supreme Court indicated, however, that the Notice and Order expressly states that it does not prohibit insurers from continuing to use policies that were legally in use before December 16, 2005 and, therefore, the limitations periods in these policies will still be enforced. The Court explained that “OFIS determines whether an insurance contract is valid. If it is, it is then the responsibility of this Court to enforce the valid contract as written. The OFIS Order expressly left in force contracts already in effect. While the Court is, of course, free to adopt a policy that would apply a blanket invalidation to countless existing insurance contracts, the majority of this Court is of the view that we follow the law established by the law giver. That is, when a statute is at issue, the law is established by the Legislature and we are compelled to follow it as written”.

Importantly, the Court only briefly addressed the issue of equitable estoppel and waiver. The Court confirmed that equitable estoppel/waiver still applies if the insured can establish that (1) defendant’s acts or representations induced plaintiff to believe that the limitations period clause would not be enforced, (2) plaintiff justifiably relied on this belief, and (3) plaintiff was prejudiced as a result of reliance on the belief that the clause would not be enforced. The Court did not, however, substantively address what actions on the part of an insurer would constitute a representation sufficient enough to induce a plaintiff to believe that the limitations period would not be enforced. This is a crucial issue, but one the Court did not address because it found that the parties did not dispute that waiver was inapplicable in the McDonald case.

Insurers must thus await a decision on West v Farm Bureau General Ins Co, which was held in abeyance pending this McDonald decision. In West, the insurer arguably participated in settlement negotiations after the limitations cut-off, therefore leading the plaintiff to argue that the insurer had knowingly waived its right to enforce the limitations period. While the McDonald Court briefly addresses the West decision with condemnation for its failure to apply Devillers, the Supreme Court in McDonald did not address the equitable issues in West. It thus remains to be seen whether the West case will proceed to the Supreme Court and then substantively address what constitutes estoppel or waiver. We will continue to keep you apprised of this important issue.