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November 25, 1991



The opinion of the court was delivered by: ILANA DIAMOND ROVNER


 This case involves a diversity dispute between two insurance companies over coverage provided by their insurance policies written for the city of Birmingham, Michigan ("City"). Both sides have filed for summary judgment, addressing the same issue: whether the policy written by International Insurance Company ("International") covered a judgment entered against the City and several of its officials and police officers. For the reasons stated below, International's motion for summary judgment will be granted in part and denied in part. The motion filed by Guaranty National Insurance Company ("Guaranty") will likewise be granted in part and denied in part.


 In 1983, Richard Rosenbaum, his companies, and several others (collectively "Rosenbaum") filed suit in the United States District Court for the Eastern District of Michigan against the City and several of its police officers as well as several Oakland county prosecutors under 42 U.S.C. § 1983. Rosenbaum also raised several pendant state claims. The complaint alleged that a false criminal complaint and arrest warrant were issued charging Rosenbaum with conspiracy, kidnapping, extortion, and possession of stolen property.

 Both insurers were notified of the action in 1983. Guaranty defended the City. On December 13, 1988, a jury returned a verdict against the defendants for false arrest, malicious prosecution, intentional interference with the advantageous economic relationship, invasion of privacy, intentional infliction of emotional distress, violation of civil rights. The jury awarded $ 2,130,500 in compensatory damages and $ 1,000,000 in punitive damages.

 After the jury verdict, Guaranty made a written demand upon International to contribute to a settlement, including the costs of the City's defenses. Guaranty contended that it was responsible for three of the seven findings by the jury and that International was responsible for the remainder. International refused to indemnify the City. While the appeal was pending, Guaranty and the City settled the underlying action for $ 1,250,000, with the City paying $ 259,538 in punitive damages.

 On October 25, 1989, International filed this suit for declaratory judgment seeking clarification on whether it was required to contribute to the City's settlement. In a ten count complaint, International claimed that under its policy the following areas are excluded from coverage: false arrest, malicious prosecution, intentional infliction of mental and emotional distress, invasion of privacy, intentional interference with economic relationships, civil rights violations by the individual defendants as well as the City, and punitive damages. *fn1" International also claimed that Guaranty waived any defenses to covering all of the City's settlement by undertaking the defense of the City, failing to reserve the right to deny coverage, and failing to make reasonable efforts to settle the case before trial. Guaranty and the City filed a complaint against International on the same issues. Both parties have now moved for summary judgment regarding these issues. *fn2"


 On the question of choice of law, the parties in this case have stipulated that the Michigan law controls. Given this stipulation and the fact that the insured risk was in Michigan, the Court will apply Michigan law. Although Michigan substantive law controls the merits of the dispute, the question of whether to grant summary judgment is a matter of federal law. Koclanakis v. Merrimack Mut. Fire Ins. Co., 899 F.2d 673, 675 (7th Cir. 1990).

 The standards governing summary judgment motions are well settled. The task of the Court is to determine whether the record reveals that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c); Griffin v. Thomas, 929 F.2d 1210, 1212 (7th Cir. 1991). The Court's task in reviewing the motion for summary judgment is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 2511, 91 L. Ed. 2d 202 (1986). Moreover, the Court must view the facts and all reasonable inferences which may be drawn from them in a light most favorable to the nonmovant, and where there are doubts as to whether a genuine factual dispute exists, the Court must resolve them in favor of the nonmovant. New Burnham Prairie Homes, Inc. v. Burnham, 910 F.2d 1474, 1477 (7th Cir. 1990).

 In interpreting the International Policy, the Court will apply the following rules of construction. Under Michigan law, an ambiguous contract provision must be construed against the insurer and in favor of the insured, and exclusionary clauses in insurance policies are to be strictly construed against the insurer. Mays v. Ins. Co. of North America, 407 Mich. 165, 284 N.W.2d 256, 258-59 (Mich. 1979). This rule of strict construction is tempered by the principle that contracts are to be construed according to the sense and meaning of the terms which the parties have used, and if they are clear and unambiguous, their terms are to be taken and understood in their plain, ordinary, and popular sense. Farm Bureau Mut. Ins. v. Stark, 437 Mich. 175, 468 N.W.2d 498, 501 (Mich. 1991) (quoting Imperial Fire Ins. Co. v. Coos Co., 151 U.S. 452, 463, 14 S. Ct. 379, 381, 38 L. Ed. 231 (1894); Kingsley v. American Central Life Ins. Co., 259 Mich. 53, 242 N.W. 836 (Mich. 1932)). In Raska v. Farm Bureau Mut. Ins. Co., 412 Mich. 355, 314 N.W.2d 440, 444-45 (Mich. 1982), the Michigan Supreme Court explained:

 Any clause in an insurance policy is valid as long as it is clear, unambiguous and not in contravention of public policy.

 * * *

 The only pertinent question, therefore, is whether the exclusionary clause in this contract is ambiguous, for if it is not ambiguous we are constrained to enforce it.

 A contract is said to be ambiguous when its words may reasonably be understood in different ways.

 If a fair reading of the entire contract of insurance leads one to understand that there is coverage under particular circumstances and another fair reading of it leads one to understand there is no coverage under the same circumstances, the contract is ambiguous ...

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