Suit for penalty interest under Michigan statute did not arise under insurance policy so was not subject to policy’s limitations

The Sixth District held in Palmer Park Square, LLC v. Scottsdale Ins. Co., 878 F.3d 530 (6th Cir. Dec. 22, 2017) that an insured’s suit for statutory penalty interest for the insurer’s late payment of the insurance claim did not arise under the policy and was therefore not subject to policy’s limitations.

In this case, the owner of a vacant apartment complex brought suit against its insurer after the property was burglarized and vandalized. The owner sent the insurer an itemized Proof of Loss, to which the insurer did not object. Instead, it paid the owner $150,000 almost seven months after the Proof of Loss was submitted. The payment was made well outside of the period permitted for “timely” payment under § 500.2836(2) of the Michigan Compiled Laws (“MCL”), which provides that “losses under any fire insurance policy shall be paid within 30 days after receipt of proof of the amount of loss.”

The owner subsequently asked for an appraisal which revealed the loss exceeded the $1,000,000 policy limits. The insurer paid the owner the difference, but the owner also requested “penalty interest” for late payment of the claim under MCL § 500.2006(4). Section 500.2006(4) states that “[i]f benefits are not paid on a timely basis, the benefits paid bear simple interest from a date 60 days after satisfactory proof of loss was received by the insurer at the rate of 12% per annum….” The penalty interest “must be paid in addition to and at the time of payment of the loss.” When the insurer refused to pay penalty interest, the owner sued.

The district court granted summary judgment for the insurer agreeing with its argument that the claim for penalty interest “arose under the policy” and was therefore subject to the policy’s two year limitations. The Sixth Circuit reversed. It held that the owner was not asserting a claim associated with the nonpayment of a loss under the terms of the policy. It was asserting a claim associated with the payment of the claim. The owner alleged the insurer breached a separate statutory obligation to pay losses owed under the Policy in a timely manner. It rejected the insurer’s argument that the statutory duty to pay penalty interest does not arise unless there is a contractual obligation to pay a loss covered by the policy. The court said that argument rendered the words in the statute “on the policy” superfluous. The obligation to pay the loss is simply a precondition necessary for the penalty-interest claim.

Because there is no statutory provision that specifically provides a limitations period for bringing a claim for penalty interest under MCL § 500.2006(4), Michigan’s catch-all, six-year period of limitations for personal actions set forth in MCL § 600.5813 applies. A claim for “penalty interest” is a “personal action” under the statute.

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