Rory v. Continental Insurance

Michigan Supreme Court

Lansing, Michigan

Chief Justice: Justices:

Opinion Clifford W. Taylor Michael F. Cavanagh

Elizabeth A. Weaver

Marilyn Kelly

Maura D. Corrigan

Robert P. Young, Jr.

Stephen J. Markman

JULY 28, 2005

SHIRLEY RORY and ETHEL WOODS,

Plaintiffs-Appellees,

v No. 126747

CONTINENTAL INSURANCE COMPANY,

a/k/a CNA INSURANCE COMPANY

Defendant-Appellant.

_______________________________

BEFORE THE ENTIRE BENCH

YOUNG, J.

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 clause. The Court of Appeals affirmed, and

defendant Continental Insurance Company (Continental)

appeals.

This case raises two fundamental questions of contract

law: (1) are insurance contracts subject to a standard of

enforcement different from that applicable to other

contracts, and (2) under what conditions may a court

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 and apply unambiguous contract provisions as

written. We reiterate that the judiciary is without

authority to modify unambiguous contracts or rebalance the

contractual equities struck by the contracting parties

because fundamental principles of contract law preclude

such subjective post hoc judicial determinations of

“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. More than a year later, in

September 1999, plaintiffs filed a first-party no-fault

suit against defendant and a third-party suit for

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 submitted a claim for uninsured motorist

benefits to Continental. Defendant denied the claim

because it was not filed within one year after the

accident, as required by the insurance policy.

3

In August 2000, plaintiffs filed the present action,

contesting Continental’s denial of uninsured motorist

benefits. Defendant filed a motion for summary

disposition, relying on a limitations provision in the

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 trial court denied defendant’s motion, holding

that the one-year limitations period contained in the

contract was unreasonable. After the Court of 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, and constituted a

“significant reduction” in the time plaintiffs would

otherwise have to file suit against defendant, the trial

1

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.

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 The Court of Appeals agreed with the trial

court that 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).

5

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 three-

year 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 686-

687 (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

3

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

471 Mich 904 (2004).

5

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

6

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).

7

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

9

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.

10

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

Twichel v MIC Gen Ins Corp, 469 Mich 524, 533; 676

NW2d 616 (2004).

12

Id.

8

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).

14

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.

15

Id. at 592 (emphasis added). In support of the

“general 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).

10

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

17

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

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.

11

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 Courts enforce contracts

according to their unambiguous 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 a court abrogates unambiguous contractual

provisions based on its own independent assessment of

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).

12

“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 common-

law 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, § 10, cl 1. Our own

state constitutions over the years of statehood

have similarly echoed this limitation on

government power. It is, in short, an

unmistakable and ineradicable part of the legal

fabric of our society. Few have expressed the

force of this venerable axiom better than the

late Professor Arthur Corbin, of Yale Law School,

21

Justice Kelly maintains that reviewing contract

provisions for “reasonableness” is “essential in order to

accurately implement the intent of the contracting

parties.” Post at 6. However, it is difficult to

rationalize implementing the intent of the parties by

imposing contractual provisions that are completely

antithetic to the provisions contained in the contract.

Rather, the intent of the contracting parties is best

discerned by the language actually used in the contract. As

this Court noted in Quality Products & Concepts Co v Nagel

Precision, Inc, 469 Mich 362, 375; 666 NW2d 251 (2003), “an

unambiguous contractual provision is reflective of the

parties’ intent as a matter of law.”

13

who wrote on this topic in his definitive study

of contract law, Corbin on Contracts, as follows:

“One does not have ‘liberty of contract’

unless organized society both forbears and

enforces, forbears to penalize him for making his

bargain and enforces it for him after it is made.

[15 Corbin, Contracts (Interim ed), ch 79, §

1376, p 17.]”[22]

Accordingly, we hold that an unambiguous contractual

provision providing for a shortened period of limitations

is to be enforced as written unless the provision would

violate law or public policy. A mere judicial assessment of

“reasonableness” is an invalid basis upon which to refuse

to enforce contractual provisions. Only recognized

traditional contract defenses may be used to avoid the

enforcement of the contract provision.23 To the degree that

Tom Thomas, Camelot, and their progeny abrogate unambiguous

contractual terms on the basis of reasonableness

determinations, they are overruled.24

22

Wilkie, supra at 51-52.

23

Examples of traditional defenses include duress,

waiver, estoppel, fraud, or unconscionability. See Quality

Products & Concepts Co, supra (waiver); Beloskursky v

Jozwiak, 221 Mich 316; 191 NW 16 (1922) (estoppel); Hackley

v Headley, 45 Mich 569; 8 NW 511 (1881) (duress); Witham v

Walsh, 156 Mich 582; 121 NW 309 (1909) (fraud); Gillam v

Michigan Mortgage-Investment Corp, 224 Mich 405; 194 NW 981

(1923) (unconscionability).

24

Justice Kelly maintains that the Camelot Court

“applied a very old and well tested legal rule” when it

(continued…)

14

B. THE PROVISION IS NOT CONTRARY TO LAW OR PUBLIC POLICY

We next consider whether the contractually shortened

period of limitations violates law or public policy. As

noted by this Court, the determination of Michigan’s public

policy “is not merely the equivalent of the personal

preferences of a majority of this Court; rather, such a

policy must ultimately be clearly rooted in the law.”25 In

ascertaining the parameters of our public policy, we must

look to “policies that, in fact, have been adopted by the

public through our various legal processes, and are

reflected in our state and federal constitutions, our

statutes, and the common law.”26

As an initial matter, we note that this Court has

previously held that Michigan has “no general policy or

statutory enactment . . . which would prohibit private

(…continued)

adopted the so-called “reasonableness doctrine.” Post at 7.

However, as even the Tom Thomas Court recognized, Michigan

jurisprudence enforced contractually shortened limitations

provisions without regard to the “reasonableness” of the

provisions. See n 15 of this opinion. Citation of case law

from other jurisdictions simply does not alter the fact

that the “very old and well tested legal rule” of Michigan

eschewed using “reasonableness” as a basis for abrogating

contractually shortened limitations provisions.

25

Terrien, supra at 67.

26

Id. at 66-67.

15

parties from contracting for shorter limitations periods

than those specified by general statutes.”27 This is

consistent with our case law, which had held that

contractually shortened periods of limitations were valid,

and were to be disregarded only where the insured could

establish estoppel or prove that the insurer waived the

contractual provision.28

27

Camelot, supra at 139.

28

See n 15 of this opinion. Amicus cites Price v

Hopkin, 13 Mich 318 (1865), and Lukazewski v Sovereign Camp

of the Woodmen of the World, 270 Mich 415; 259 NW 307

(1935), in support of the claim that Michigan case law has

a “long-standing policy” of disregarding “unreasonable”

contractual limitations periods. However, both cases are

distinguishable.

In Price, the Legislature shortened a statute of

limitations from twenty to fifteen years, giving the

amendment retroactive effect. The plaintiff’s grantor “was

entitled by the existing statutes to bring her action

within twenty years,” but the statutory amendment

immediately severed her cause of action. Price, supra at

323-324. Justice Cooley held that the retroactive

statutory amendment was unconstitutional as violative of

due process because it annihilated a vested right without

permitting a “reasonable time” to bring the lawsuit. Id.

at 324-328.

Likewise, Lukazewski is also distinguishable. There,

the plaintiff was the beneficiary of a life insurance

policy that required “proof of the insured’s actual death.”

The policy also required that all lawsuits be commenced

within one year from the date of death. The insured

disappeared in 1925, but proof of his death was not

established until 1932. The defendant “denied liability on

the ground that both the contractual and statutory

limitations” had expired. Lukazewski, supra at 417-418.

(continued…)

16

Likewise, there is no Michigan statute explicitly

prohibiting contractual provisions that reduce the

limitations period in uninsured motorist policies. The

Legislature has proscribed shortened limitations periods in

only one specific context: life insurance policies. MCL

500.4046(2).29

(…continued)

The Lukazewski Court held that, because the policy

required affirmative proof of the decedent’s death, the

one-year limitations period would not begin to run until

the death was discovered. The Lukazewski Court utilized the

doctrine of judicial tolling, which is not at issue in the

present case, to suspend the running of the contractual

limitations period. However, it is unclear why the

contractual limitations period was considered at all, as

the contract provision violated the law. 1917 PA 256 was

enacted four years before the issuance of the life

insurance policy. 1917 PA 256, part 3, ch 2, § 4, contains

a provision that is substantively identical to our current

MCL 500.4046(2), see n 29 of this opinion. Thus, because

the policy required actual proof of death, the cause of

action did not accrue until death could be proven. The

plain language of the statute provided the plaintiff six

years from the time the cause of action accrued to file

suit.

29

MCL 500.4046 states in pertinent part:

No policy of life insurance other than

industrial life insurance shall be issued or

delivered in this state if it contain [sic] any

of the following provisions:

* * *

(2) A provision limiting the time within

which any action at law or in equity may be

commenced to less than 6 years after the cause of

action shall accrue[.]

17

Notwithstanding the fact that the Commissioner

approved for use the contract at issue in this case, the

Commissioner now argues to this Court that MCL 500.2254

precludes contractual periods of limitations that are less

than six years. The statute provides in part:

No article, bylaw, resolution or policy

provision adopted by any life, disability,

surety, or casualty insurance company doing

business in this state prohibiting a member or

beneficiary from commencing and maintaining suits

at law or in equity against such company shall be

valid and no such article, bylaw, provision or

resolution shall hereafter be a bar to any suit

in any court in this state: Provided, however,

That any reasonable remedy for adjudicating

claims established by such company or companies

shall first be exhausted by the claimant before

commencing suit: Provided further, however, That

the company shall finally pass upon any claim

submitted to it within a period of 6 months from

and after final proofs of loss or death shall

have been furnished any such company by the

claimant.

The plain language of the statute states that “[n]o

. . . policy provision . . . prohibiting a member or

beneficiary from commencing and maintaining [a lawsuit]

against [the insurer] . . . shall be valid . . . .”

(Emphasis added.) The common definition of “prohibit” is

“to forbid by authority or command.”30 Clearly, the statute

proscribes contractual provisions that forbid or preclude

30

New International Dictionary of the English Language

(1954), p 1978.

18

the commencement or maintenance of a lawsuit. The statute

does not, however, bar the imposition of conditions that

may be placed on the commencement and maintenance of a

lawsuit.31

While nothing in our statutes explicitly addresses

contractually shortened limitations periods outside the

context of life insurance policies, we note that the

Legislature has provided a mechanism to ensure the

reasonableness of insurance policies issued in the state of

Michigan.

MCL 500.2236(1) requires that all “basic insurance

policy” forms be filed with the Commissioner's office and

be approved by the Commissioner before a policy may be

issued by an insurance company. If the Commissioner fails

to act within thirty days after the policy form is

submitted, the form is deemed approved. MCL 500.2236(1).

One of the factors that the Commissioner may consider in

determining whether to approve an insurance policy is the

reasonableness of the conditions and exceptions contained

therein. MCL 500.2236(5) and (6) provide:

31

We note that Justice Kelly’s construction of this

provision would render invalid any contractual limitations

provision in an insurance contract, even one that

paralleled the applicable statutory limitations period.

Post at 15-16.

19

(5) Upon written notice to the insurer, the

commissioner may disapprove, withdraw approval or

prohibit the issuance, advertising, or delivery

of any form to any person in this state if it

violates any provisions of this act, or contains

inconsistent, ambiguous, or misleading clauses,

or contains exceptions and conditions that

unreasonably or deceptively affect the risk

purported to be assumed in the general coverage

of the policy. The notice shall specify the

objectionable provisions or conditions and state

the reasons for the commissioner’s decision. If

the form is legally in use by the insurer in this

state, the notice shall give the effective date

of the commissioner’s disapproval, which shall

not be less than 30 days subsequent to the

mailing or delivery of the notice to the insurer.

If the form is not legally in use, then

disapproval shall be effective immediately.

(6) If a form is disapproved or approval is

withdrawn under the provisions of this act, the

insurer is entitled upon demand to a hearing

before the commissioner or a deputy commissioner

within 30 days after the notice of disapproval or

of withdrawal of approval. After the hearing, the

commissioner shall make findings of fact and law,

and either affirm, modify, or withdraw his or her

original order or decision. [Emphasis added.]

Clearly, the Legislature has assigned the

responsibility of evaluating the “reasonableness” of an

insurance contract to the person within the executive

branch charged with reviewing and approving insurance

policies: the Commissioner of Insurance.32 The statute

32

In other contexts, the Legislature has explicitly

assigned the responsibility of assessing the reasonableness

of private contracts to the judiciary. See, for example,

MCL 445.774a, which governs noncompetition covenants

between an employer and an employee.

(continued…)

20

permits, but does not require, the Commissioner to

disapprove or withdraw an insurance contract if the

Commissioner determines that a condition or exception is

unreasonable or deceptive. The decision to approve,

disapprove, or withdraw an insurance policy form is within

the sound discretion of the Commissioner. In this instance,

the Commissioner has approved the Continental policy form

containing the shortened limitations provision for issuance

and use in the state of Michigan.33

Our courts have a very limited scope of review

concerning the decisions made by the Commissioner. MCL

500.244(1) provides that an aggrieved person may seek

judicial review of an “order, decision, finding, ruling,

opinion, rule, action, or inaction” of the Commissioner as

provided by the Administrative Procedures Act, MCL 24.201

et seq. MCL 24.306 provides:

(1) Except when a statute or the

constitution provides for a different scope of

review, the court shall hold unlawful and set

aside a decision or order of an agency if

substantial rights of the petitioner have been

(…continued)

33

Justice Kelly erroneously reads MCL 500.2236(5) as

rendering the Commissioner’s review of a policy form

discretionary. Post at 18-19. However, under that

statutory subsection, the Commissioner’s discretion extends

only to the ability to “disapprove, withdraw approval or

prohibit the issuance” of a policy form.

21

prejudiced because the decision or order is any

of the following:

(a) In violation of the constitution or a

statute.

(b) In excess of the statutory authority or

jurisdiction of the agency.

(c) Made upon unlawful procedure resulting

in material prejudice to a party.

(d) Not supported by competent, material and

substantial evidence on the whole record.

(e) Arbitrary, capricious or clearly an

abuse or unwarranted exercise of discretion.

(f) Affected by other substantial and

material error of law.

Here, plaintiffs have not challenged the decision of

the Commissioner to allow issuance of the Continental

policy, much less shown that the Commissioner’s decision

was arbitrary, capricious, or a clear abuse of discretion.34

Accordingly, the explicit “public policy” of Michigan is

that the reasonableness of insurance contracts is a matter

for the executive, not judicial, branch of government. As

such, the lower courts were not free to invade the

34

Certainly, if the Commissioner were to determine

subsequently that the provision at issue unreasonably

affected the risk assumed in the policy, MCL 500.2236(5)

and (6) provide the appropriate mechanism for withdrawing

approval of the policy condition.

22

jurisdiction of the Commissioner and determine de novo

whether Continental’s policy was reasonable.

C. ADHESION CONTRACTS

We turn finally to the trial court’s conclusion that

the policy was an “adhesion contract” and was therefore

unenforceable. The trial court’s ruling rested on the

assumption that “adhesion contracts” are subject to a

greater level of judicial scrutiny than other contracts—

and, indeed, that so-called adhesion contracts need not be

enforced if the court views them as unfair. The Court of

Appeals reached a similar conclusion:

We further note that the concern the Court

expressed in Herweyer is present here as well.

The insured had the option of accepting uninsured

motorist coverage or rejecting it, but could not

have bargained for a longer limitations period.

Accordingly, the policy should receive close

judicial scrutiny. [262 Mich App at 687][35]

35

Justice Kelly charges that, in addressing the Herweyer

adhesion contract issue, we are “engag[ing] in judicial

activism”. Post at 28. This is a strange accusation given

that both the trial court and the Court of Appeals relied

on the adhesion contract principles announced in Herweyer

as a basis for invalidating the contractual limitations

provision at issue. We think it unremarkable for this Court

to address an issue that all the lower courts addressed.

Moreover, because it was Herweyer that literally ignored

nearly a century of contrary precedent in adopting a new

rule of contractual construction (see n 15 of this

(continued…)

23

The contract construction approach of the lower courts

is inconsistent with traditional contract principles. An

“adhesion contract” is simply that: a contract.36 It must

be enforced according to its plain terms unless one of the

traditional contract defenses applies.

Indeed, a careful examination of our contract

jurisprudence reveals that the “adhesion contract doctrine”

existed in Michigan solely in dicta until it was implicitly

adopted by this Court in Herweyer v Clark Hwy Services,

Inc. Moreover, it was adopted in Herweyer without

substantive analysis, and without reference to and in

contravention of more than one hundred years of contrary

case law from this Court.

Before turning to the state of the “adhesion contract

doctrine” in our jurisprudence, it is important to begin

(…continued)

opinion), the claim of “judicial activism” would seem most

accurately applied to the Herweyer majority.

36

There are many descriptive labels that are used to

categorize species of contracts: “unilateral,” see, e.g.,

Sniecinski v Blue Cross & Blue Shield of Michigan, 469 Mich

124, 138 n 9; 666 NW2d 186 (2003), “executory,” see, e.g.,

Kolton v Nassar, 358 Mich 154, 156; 99 NW2d 362 (1959),

“installment,” Twichel v MIC Gen Ins Corp, 469 Mich 524,

532 n 5; 676 NW2d 616 (2004), etc. The fact that a

particular label is attached to a contract does not exempt

the contract from the application of standard contract law

principles.

24

with a sense of how the notion of an “adhesive” contract

arose in the first place. The term “adhesion contract” was

originally coined simply as a descriptive label for a

common contract practice in the insurance industry. The

term was introduced in a 1919 law review article by

University of Colorado Law School professor Edwin W.

Patterson to describe a life insurance policy term

requiring “delivery of the policy to the applicant” before

the policy became effective.37 Professor Patterson made the

observation that “[l]ife-insurance contracts are contracts

of ‘adhesion.’ The contract is drawn up by the insurer and

the insured, who merely ‘adheres’ to it, has little choice

as to its terms.”38 Patterson noted that “a majority of the

courts have strictly enforced” such contractual

stipulations, although some courts had “executed successful

flanking movements” to find either that the insurer had

waived the requirement, or that the policy had been

delivered.39 Thus, the original designation of “adhesion

contract” described a type of contract, but did not suggest

37

Patterson, The delivery of a life-insurance policy, 33

Harv L R 198 (1919).

38

Id. at 222.

39

Id. at 221.

25

that such a description rendered the contract or its

provisions unenforceable.

It was not until a quarter-century later that

Patterson’s label for life insurance contracts evolved into

something resembling a “doctrine.” In 1943, Yale Law

School Professor Friedrich Kessler expanded on Patterson’s

description of practices in the life insurance industry to

argue that courts should simply refuse to enforce unfair

provisions of “adhesion contracts” rather than utilize

traditional contract law principles.40 While conceding that

“society as a whole ultimately benefits from the use of

standard contracts,” Professor Kessler nonetheless

maintained that such contracts were typically used by

enterprises with “strong bargaining power,” and that the

“weaker party” frequently could not “shop around for better

terms, either because the author of the standard contract

[had] a monopoly” or because all competitors used the same

clauses.41 Kessler expressed concern that “powerful

industrial and commercial overlords” would impose “a new

40

Kessler, Contracts of adhesion—some thoughts about

freedom of contract, 43 Colum L R 629 (1943). Kessler

advocated that the “task of adjusting” contract law as it

applied to adhesion contracts had to “be faced squarely and

not indirectly.” Id. at 637.

41

Id. at 632.

26

feudal order of their own making upon a vast host of

vassals.”42

While noting that “freedom of contract has remained

one of the firmest axioms in the whole fabric of the social

philosophy of our culture,”43 Kessler asserted that the

meaning of “freedom of contract” varied with “the social

importance of the type of contract and with the degree of

monopoly enjoyed by the author of the standardized

contract.”44 Thus, Kessler advocated nonenforcement of

clauses contained in standardized contracts, but only where

the type of contract was of sufficient “social importance”

and where the author of the contract enjoyed a monopoly

over the socially important good or service.

The groundwork for the “adhesion contract doctrine”

was thus laid in academia, first in Patterson’s positive

analysis and then in Kessler’s normative article. In

Michigan, the notion was first imported into our case law

in 1970. In Zurich Ins Co v Rombough,45 the issue to be

determined was whether an insurer had a duty to defend when

42

Id. at 640.

43

Id. at 641.

44

Id. at 642.

45

384 Mich 228; 180 NW2d 775 (1970).

27

its policy contained two apparently conflicting

provisions.46 The opinion noted that “[i]t is elemental

insurance law that ambiguous policy provisions must be

construed against the insurance company and most favorably

to the premium-paying insured.”47 After noting this legal

principle, the Rombough Court cited the following language

from a California Supreme Court case to further support its

rule of construction:

Justice Tobriner, writing for the California

Supreme Court in the case of Gray v. Zurich

Insurance Company (1966), 65 Cal 2d 263 (54 Cal

Rptr 104, 419 P2d 168), construing similar

provisions, said:

“In interpreting an insurance policy we

apply the general principle that doubts as to

meaning must be resolved against the insurer and

that any exception to the performance of the

basic underlying obligation must be so stated as

clearly to apprise the insured of its effect.

“These principles of interpretation of

insurance contracts have found new and vivid

restatement in the doctrine of the adhesion

contract. As this court has held, a contract

entered into between two parties of unequal

bargaining strength, expressed in the language of

a standardized contract, written by the more

46

The policy contained an exclusion clause, indicating

that the policy did not apply if insured vehicles were

“used to carry property in any business.” Id. at 230. The

policy also contained a provision indicating that the

company would provide a defense for any lawsuit even if the

suit was “groundless, false or fraudulent.” Id. at 231.

47

Id. at 232.

28

powerful bargainer to meet its own needs, and

offered to the weaker party on a ‘take it or

leave it basis’ carries some consequences that

extend beyond orthodox implications. Obligations

arising from such a contract inure not alone from

the consensual transaction but from the

relationship of the parties.

“Although courts have long followed the

basic precept that they would look to the words

of the contract to find the meaning which the

parties expected from them, they have also

applied the doctrine of the adhesion contract to

insurance policies, holding that in view of the

disparate bargaining status of the parties we

must ascertain that meaning of the contract which

the insured would reasonably expect.”[48]

The Rombough Court concluded by purporting to “adopt” the

reasoning of Gray v Zurich, holding that the policy

language was “sufficiently ambiguous” to require plaintiff

to provide a defense.49

Thus, the term “adhesion contract” was first

introduced in Michigan jurisprudence in support of the rule

of contra proferentem,50 wherein contract terms are

48

Id. at 232-233. The practice of interpreting contracts

on the basis of reasonable expectations rather that the

plain language of the contract was repudiated by this Court

in Wilkie, supra at 63.

49

Rombough, supra at 234.

50

See also Klapp v United Ins Group Agency, Inc, 468

Mich 459; 663 NW2d 447 (2003) (discussing contra

proferentem as a rule of legal effect, to be utilized only

after all conventional means of contract interpretation

have been applied).

29

construed against the drafter in the event of an ambiguity

to meet the “reasonable expectations” of the insured.

However, because Rombough was decided on the basis of

contra proferentem—a rule of interpretation providing that

truly ambiguous contractual language is to be construed

against the drafter51—its language regarding adhesion

contracts is, as we stated in Wilkie,52 properly classified

as obiter dicta.

Subsequently, in Cree Coaches, Inc v Panel Suppliers,

Inc,53 this Court referred again to the “adhesion contract”

concept. The defendant in Cree Coaches had constructed a

building for the plaintiff pursuant to a contract that

limited the warranty to one year after the contract was

completed. Six years later, the building collapsed from the

weight of snow. In upholding the provisions limiting the

plaintiff’s warranty claims and the warranty period, the

Court noted in dicta—and without analysis—that the Court

did not regard the construction contract “as a contract of

adhesion from which public policy would grant relief.”54

51

See, e.g., Twichel, supra at 535 n 6.

52

Wilkie, supra at 55-56.

53

384 Mich 646; 186 NW2d 335 (1971).

54

Id. at 649.

(continued…)

30

This digression was cryptic at best, because this Court had

never before declined to enforce an “adhesion contract.”

The term “adhesion contract” was discussed again a

decade later in Camelot Excavating Co, Inc v St Paul Fire &

Marine Ins Co.55 In his concurring opinion, Justice Levin

agreed with the majority that a clause in a construction

insurance bond limiting the time within which the insured

could bring suit to one year was enforceable. He stated,

however, that “[a]n adhesion contract–such as most

contracts of insurance–in which the shortened period has

not actually been bargained for, or which operates to

defeat the claim of an intended beneficiary not involved in

the bargaining process,” would “present a different case.”56

Again, the basis for Justice Levin’s assertion is unclear,

because characterization of an agreement as an adhesive

contract had never before been pivotal in the Court’s

analysis or enforcement of a contract.

The development of the notion that adhesion contracts

were subject to different standards of enforcement was

dealt a significant blow in Raska v Farm Bureau Mut Ins Co

(…continued)

55

410 Mich 118; 301 NW2d 275 (1981).

56

Id. at 142-143.

31

of Michigan.57 There, the plaintiff brought suit for breach

of an automobile policy and for a declaratory judgment that

an “owned automobile” exclusion was ambiguous and should be

construed against the insurer, and was void as contrary to

public policy. This Court not only enforced the contractual

policy exclusion, but held that “[a]ny clause in an

insurance policy is valid as long as it is clear,

unambiguous and not in contravention of public policy.”58 In

dissent, Justice Williams stated that he would have

declined to enforce the contractual exclusion because “an

insurance contract, as a contract of adhesion, is construed

in favor of the insured,” as well as because of the

“reasonable expectations” of the insured.59 Raska,

therefore, stands for the proposition that an insurance

contract must be interpreted like any other contract:

according to its plain unambiguous terms.

This Court’s first attempt at describing the elements

of the adhesion contract doctrine—a doctrine the Court had

yet to adopt—was the plurality opinion in Morris v

57

412 Mich 355; 314 NW2d 440 (1982).

58

Id. at 361-362 (emphasis added).

59

Id. at 364.

32

Metriyakool.60 There, the plaintiff signed an arbitration

agreement upon admission to the hospital for medical

treatment. The hospital presented the arbitration agreement

pursuant to the former medical malpractice arbitration act

(MMAA).61 At issue was the question whether the MMAA was

unconstitutional as violative of the plaintiff’s due

process rights. After determining that the act did not

implicate due process concerns, Justice Kavanagh, joined by

Justice Levin, rejected the plaintiff’s assertion that the

contract was one of adhesion, holding:

Contracts of adhesion are characterized by

standardized forms prepared by one party which

are offered for rejection or acceptance without

opportunity for bargaining and under the

circumstances that the second party cannot obtain

the desired product or service except by

acquiescing in the form agreement. Regardless of

any possible perception among patients that the

provision of optimal medical care is conditioned

on their signing the arbitration agreement, we

believe that the sixty-day rescission period, of

which patients must be informed, fully protects

those who sign the agreement. The patients’

ability to rescind the agreement after leaving

the hospital allows them to obtain the desired

service without binding them to its terms. As a

result, the agreement cannot be considered a

contract of adhesion. [62]

60

418 Mich 423; 344 NW2d 736 (1984).

61

Former MCL 600.5040 et seq.

62

Id. at 440 (citations omitted; emphasis added).

Justices Kavanagh and Levin further determined that the

arbitration agreement was not “unconscionable” because it

(continued…)

33

Writing separately, Justice Ryan, joined by Justice

Brickley, held that the MMAA did not violate due process

concerns because there was no state action. In addressing

the plaintiff’s claim that the arbitration agreement was an

adhesion contract, Justice Ryan stated:

A contract of adhesion is a contract which

has some or all of the following characteristics:

the parties to the contract were of unequal

bargaining strength; the contract is expressed in

standardized language prepared by the stronger

party to meet his needs; and the contract is

offered by the stronger party to the weaker party

on a “take it or leave it” basis. Therefore, the

essence of a contract of adhesion is a

nonconsensual agreement forced upon a party

against his will. [63]

Justice Ryan agreed with the majority, however, that the

contracts at issue in Morris were not adhesion contracts.

Thus, while a majority of the Morris Court agreed that the

contracts at issue were not contracts of adhesion, a

majority could not agree on what, in fact, made a contract

one of adhesion.64

(…continued)

was “not a long contract” and because arbitration was “the

essential and singular nature of the agreement.” Id. at

441.

63

Id. at 471-473 (citation omitted).

64

Justice Williams concurred with Justice Kavanagh on

the ground of constitutionality only, while Justice

(continued…)

34

The plurality opinion of Powers v Detroit Automobile

Inter-Ins Exch65 asserted that all insurance contracts are

adhesion contracts: nonnegotiated, take-it-or-leave-it,

standardized forms, drafted by “insurance and legal experts

of a state, national, or international organization,

hundreds and maybe thousands of miles away.”66 The

plurality opinion utilized the now-repudiated doctrine of

reasonable expectations to resolve the case,67 noting that

an ambiguity was not a necessary precondition for invoking

that doctrine. Thus, rather than assessing whether the

contract was indeed adhesive, the Powers plurality opinion

decreed that all insurance contracts were contracts of

adhesion, applying the reasonable expectations doctrine

without regard to ambiguity.

(…continued)

Cavanagh issued a dissent addressing only the

constitutional issue. Justice Boyle did not participate in

the resolution of the case.

65

427 Mich 602; 398 NW2d 411 (1986), overruled by

Wilkie, supra at 63.

66

Id. at 608. Only Justice Archer joined Justice

Willams’s opinion. Justices Brickley and Cavanagh concurred

in the result only.

67

See Wilkie, supra.

35

The concept of “adhesion contracts” took yet another

turn in Auto Club Ins Ass’n v DeLaGarza.68 The DeLaGarza

majority concluded that the insurance policy at issue was

ambiguous and was therefore to be construed “against the

drafter of the provision and in favor of coverage.”69

Again, in dicta, the Court endorsed the notion that certain

contracts are adhesive and are therefore to be construed in

favor of the insured.70

68

433 Mich 208; 444 NW2d 803 (1989).

69

Id. at 218.

70

Id. at 215 n 7, noting the “judicial predisposition

toward the insured,” and quoting 7 Williston, Contracts (3d

ed), § 900, pp 19-20:

“The fundamental reason which explains this

and other examples of judicial predisposition

toward the insured is the deep-seated, often

unconscious but justified feeling or belief that

the powerful underwriter, having drafted its

several types of insurance ‘contracts of

adhesion’ with the aid of skillful and highly

paid legal talent, from which no deviation

desired by an applicant will be permitted, is

almost certain to overreach the other party to

the contract. The established underwriter is

magnificently qualified to understand and protect

its own selfish interests. In contrast, the

applicant is a shorn lamb driven to accept

whatever contract may be offered on a ‘take-it-

or-leave-it’ basis if he wishes insurance

protection.”

36

Finally, in Herweyer v Clark Hwy Services, Inc,71 this

Court declined to enforce the plain language of a contract

arguably because the contract at issue was adhesive.

Herweyer concerned the validity of a shortened limitations

provision in an employment contract and the application of

a saving clause that required enforcement of the contract

“as far as legally possible.” In concluding that the six-

month limitations period in the contract at issue was

unenforceable, Herweyer cited Justice Levin’s concurring

opinion in Camelot:

In Camelot, Justice Levin expressed concerns

about the development of a rule authorizing

contractually shortened periods of limitation. He

reasoned:

“The rationale of the rule allowing parties

to contractually shorten statutory periods of

limitation is that the shortened period is a

bargained-for term of the contract. Allowing such

bargained-for terms may in some cases be a useful

and proper means of allowing parties to structure

their business dealings.

“In the case of an adhesion contract,

however, where the party ostensibly agreeing to

the shortened period has no real alternative,

this rationale is inapplicable.”[72]

Solely on the basis of Justice Levin’s concurring opinion

in Camelot, the Herweyer Court indicated—for the first time

71

455 Mich 14; 564 NW2d 857 (1997).

72

Herweyer, supra at 20-21 (citation omitted).

37

in this Court’s history—that a so-called “adhesion

contract” was unenforceable simply because of the disparity

in the contracting parties’ “bargaining power”:

We share Justice Levin's concerns.

Employment contracts differ from bond contracts.

An employer and employee often do not deal at

arms length when negotiating contract terms. An

employee in the position of plaintiff has only

two options: (1) sign the employment contract as

drafted by the employer or (2) lose the job.

Therefore, unlike in Camelot where two businesses

negotiated the contract’s terms essentially on

equal footing, here plaintiff had little or no

negotiating leverage. Where one party has less

bargaining power than another, the contract

agreed upon might be, but is not necessarily, one

of adhesion, and at the least deserves close

judicial scrutiny.[73]

The Herweyer Court did not cite a single majority opinion

of this Court to support its conclusion. More

astonishingly, the majority failed to recognize—much less

distinguish or overrule—more than a century of contrary

case law belying its conclusion that a shortened

limitations period was unenforceable.74

The preceding analysis shares many similarities with

our decision in Wilkie, in which we also sought to clarify

this state’s contract jurisprudence. As in Wilkie,

73

Id. at 21 (emphasis added).

74

See n 15 of this opinion; see also Tom Thomas, supra

at 592 n 4.

38

analyzing the concept of adhesive contracts in our

jurisprudence requires that we confront “a confused jumble

of ignored precedent, silently acquiesced to plurality

opinions, and dicta, all of which, with little scrutiny,

have been piled on each other to establish authority.”75

Here, this “confused jumble” is exemplified by

Herweyer, which held for the first time in our contract

jurisprudence that an adhesion contract is subject to

“close judicial scrutiny” and may be voided if the contract

fails to meet the court’s satisfaction. This holding was

inconsistent not only with a century of case law to the

contrary,76 but with the very principles upon which that

jurisprudence is based—namely, freedom of contract and the

liberty of each person to order his or her own affairs by

agreement.

Today we are faced with a choice. We may follow

Herweyer and its summary conclusion that “[w]here one party

has less bargaining power than another, the contract agreed

upon might be, but is not necessarily, one of adhesion, and

at the least deserves close judicial scrutiny.”77 Or we

75

Wilkie, supra at 60.

76

See n 15 of this opinion.

77

Herweyer, supra at 21.

(continued…)

39

may, consistently with the many cases that Herweyer

presumptively displaced without overruling them, hold that

an adhesion contract is simply a type of contract and is to

be enforced according to its plain terms just as any other

contract. We choose the latter course because it is most

consonant with traditional contract principles our state

has historically honored.

As with any contract, the “rights and duties” of a

party to an adhesion contract are “derived from the terms

of the agreement.”78 A party may avoid enforcement of an

“adhesive” contract only by establishing one of the

traditional contract defenses, such as fraud, duress,

unconscionability, or waiver.79 As we stated in Raska,80 and

reaffirmed in Wilkie:81

The expectation that a contract will be

enforceable other than according to its terms

surely may not be said to be reasonable. If a

person signs a contract without reading all of it

or without understanding it, under some

circumstances that person can avoid its

obligations on the theory that there was no

(…continued)

78

Wilkie, supra at 62.

79

See n 23 of this opinion.

80

Raska, supra at 362-363.

81

Wilkie, supra at 63.

40

contract at all for there was no meeting of the

minds.

But to allow such a person to bind another

to an obligation not covered by the contract as

written because the first person thought the

other was bound to such an obligation is neither

reasonable nor just.

Therefore, we hold that it is of no legal relevance

that a contract is or is not described as “adhesive.” In

either case, the contract is to be enforced according to

its plain language. Regardless of whether a contract is

adhesive, a court may not revise or void the unambiguous

language of the agreement to achieve a result that it views

as fairer or more reasonable.82

82

In dissent, Justice Kelly opines that adhesion

contracts should be viewed “with skepticism” because

“[m]ost people simply do not have the opportunity, time, or

special ability to read the policy before agreeing to it.”

Post at 23, 25. However, an insured’s failure to read his

or her insurance contract has never been considered a valid

defense. This Court has historically held an insured to

have knowledge of the contents of the policy, in the

absence of fraud, even though the insured did not read it.

See Cleaver v Traders' Ins Co, 65 Mich 527; 32 NW 660

(1887); Wierengo v American Fire Ins Co, 98 Mich 621; 57 NW

833 (1894); Snyder v Wolverine Mut Motor Ins Co, 231 Mich

692; 204 NW 706 (1925); Serbinoff v Wolverine Mut Motor Ins

Co, 242 Mich 394; 218 NW 776 (1928); House v Billman, 340

Mich 621; 66 NW2d 213 (1954). Additionally, the

Commissioner is precluded from approving an insurance

policy that fails to obtain a prescribed “readability

score” as set forth in MCL 500.2236(3).

41

The term “adhesion contract” may, as Professor

Patterson originally intended, be used to describe a

contract for goods or services offered on a take-it-or-

leave-it basis. But it may not be used as a justification

for creating any adverse presumptions or for failing to

enforce a contract as written. To the extent that Herweyer

held to the contrary, it is overruled.83

In this case, plaintiffs do not argue that they were

fraudulently induced to sign their agreement with

defendant, that they entered into the contract under

duress, or that any other traditional contract defense

applies.84 Therefore, irrespective of whether their

contract is labeled “adhesive” under Kessler’s standard,

the competing Morris standards, or any other definition of

83

Justice Kelly believes that overruling Herweyer

represents a “radical change of the law,” and that this

Court should continue to “right the wrongs of adhesion

contracts.” Post at 27. However, as stated previously, the

dissent overlooks the fact that Herweyer created a “radical

change of the law” in Michigan.

84

Justice Kelly suggests that there is never a meeting

of the minds with a standardized form contract “[i]f the

consumer does not read and comprehend the individual

clauses of the contract . . . .” Post at 23. If this is

indeed the case, then no contract exists at all. See

Quality Products, supra at 372 (“Where mutual assent does

not exist, a contract does not exist.”) If the contract

does not exist, there is nothing for a court to “revise.”

42

the term, we must enforce the plain language of that

agreement.85

IV. CONCLUSION

Consistent with our prior jurisprudence, unambiguous

contracts, including insurance policies, are to be enforced

as written unless a contractual provision violates law or

public policy. Judicial determinations of “reasonableness”

are an invalid basis upon which to refuse to enforce

unambiguous contractual provisions. Traditional defenses to

enforcement of the contract at issue, such as waiver,

fraud, or unconscionability, have neither been pled nor

proven. Moreover, nothing in our law or public policy

precludes the enforcement of the contractual provision at

issue. Finally, in the specific arena of insurance

contracts, the Legislature has enacted a mechanism whereby

policy provisions may be scrutinized and rejected on the

basis of reasonableness. This responsibility, however, has

been explicitly assigned to the Commissioner. The

Commissioner has approved the policy form at issue.

85

We are at a loss to understand Justice Weaver’s

dissent. Nothing in this opinion breaks new ground. Justice

Weaver’s objection to the proposition that an insurance

contract be enforced in accordance with its plain terms,

just as any other contract, is a proposition found in

Raska, Wilkie, and Klapp, supra. We do not purport to

address the laundry list of issues raised in her dissent.

43

Plaintiffs have not challenged in the appropriate forum

that this action was an abuse of discretion.

Accordingly, we reverse the Court of Appeals decision

and remand for entry of summary disposition in favor of

defendant.

Robert P. Young, Jr.

Clifford W. Taylor

Maura D. Corrigan

Stephen J. Markman

44

S T A T E O F M I C H I G A N

SUPREME COURT

SHIRLEY RORY and ETHEL WOODS,

Plaintiffs-Appellees,

v No. 126747

CONTINENTAL INSURANCE COMPANY,

also known as CNA INSURANCE COMPANY,

Defendant-Appellant.

_______________________________

KELLY, J. (dissenting).

I dissent today because the majority has come to what

I believe to be the incorrect conclusion on nearly every

count. Not only does it reach the wrong result in this

case, it takes a drastic step in the wrong direction with

respect to contract law in general. The majority’s

decision constitutes a serious regression in Michigan law,

and it gives new meaning to the term “judicial activism.”

Therefore, I cannot let it pass without comment.

It is a legitimate exercise for courts to review the

reasonableness of contractual clauses that limit the period

during which legal actions can be brought. Courts have

conducted reviews of this type for well over a century.

These reviews constitute a necessary step in ensuring

accurate enforcement of the intent of parties to a

contract.

Moreover, in deciding this case, it is unnecessary to

reach the issue of adhesion contracts. Yet the majority

does so, apparently using this dispute as a vehicle to

reshape the law on adhesion contracts more closely to its

own desires. I believe that the scrutiny and protections

offered by traditional adhesion contract law offer

appropriate safeguards for the people of this state.

Therefore, I would leave that law unmolested and would

affirm the decision of the Court of Appeals.

I. THE LONG HISTORY OF JUDGING LIMITATIONS PERIODS FOR

REASONABLENESS

The majority opinion includes an extensive discussion

of what its author believes to be the history of the

“reasonableness doctrine” in Michigan. It effectively

concludes that this Court created new law when it evaluated

a shortened limitations period for reasonableness in

Herweyer v Clark Hwy Services, 455 Mich 14, 20; 564 NW2d

857 (1997), Armand v Territorial Constr, Inc, 414 Mich 21,

27-28; 322 NW2d 924 (1982), Camelot Excavating Co, Inc v St

Paul Fire & Marine Ins Co, 410 Mich 118; 301 NW2d 275

(1981), and Tom Thomas Org, Inc v Reliance Ins Co, 396 Mich

588, 592; 242 NW2d 396 (1976). This is not accurate.

2

It has long been the law that all limitations periods

are subject to judicial review for reasonableness.

Statutes of limitations enacted by the Legislature must be

subject to such review. “Generally speaking, the time

determined by the legislature within which an action may be

brought is constitutional where it is reasonable.” 54 CJS,

Limitations of Actions, § 5, p 23. (Emphasis added.) This

Court recognized and applied this rule more than 140 years

ago when it wrote:

[T]he legislative authority is not so

entirely unlimited that, under the name of a

statute limiting the time within which a party

shall resort to his legal remedy, all remedy

whatsoever may be taken away. . . . It is of the

essence of a law of limitation that it shall

afford a reasonable time within which suit may be

brought[,] and a statute that fails to do this

cannot possibly be sustained as a law of

limitations . . . . [Price v Hopkin, 13 Mich 318,

324-325 (1865) (citations omitted).]

The essential reasoning behind this rule is that an

unreasonable limitations period offers an aggrieved party

no recourse to the courts. And it unfairly divests that

party of a right that it supposedly provided. 54 CJS,

Limitations of Actions, § 5, p 24.

For almost 140 years, this same rule and reasoning

were applied to limitations periods created both by a

contract and by a statute.

3

[P]arties to a contract may, by an express

provision therein, provide another and different

period of limitation from the provided statute,

and . . . such limitation, if reasonable, will be

binding and obligatory upon the parties. [1

Wood, Limitation of Actions (4th ed, 1916), § 42,

p 145.]

This rule of law was generally accepted and widely cited by

courts throughout the country. See Longhurst v Star Ins

Co, 19 Iowa 364, 370-371 (1865), Gulf, C & S F R Co v

Trawick, 68 Tex 314, 319-320; 4 SW 567 (1887), Gulf, C & S

F R Co v Gatewood, 79 Tex 89, 94; 14 SW 913 (1890), Sheard

v United States Fidelity & Guaranty Co, 58 Wash 29, 33-34;

107 P 1024 (1910), Pacific Mut Life Ins Co v Adams, 27 Okla

496, 503; 112 P 1026 (1910), Fitger Brewing Co v American

Bonding Co of Baltimore, 127 Minn 330; 149 NW 539 (1914),

Gintjee v Knieling, 35 Cal App 563, 565-566; 170 P 641

(1917), Columbia Security Co v Aetna Accident & Liability

Co, 108 Wash 116, 120; 183 P 137 (1919), and Page Co v

Fidelity & Deposit Co of Maryland, 205 Iowa 798; 216 NW 957

(1927).

The United States Supreme Court discussed a similar

topic well over a century ago. In Express Co v Caldwell,1

the Court considered a common carrier’s right to enter into

1

88 US (21 Wall) 264; 22 L Ed 556 (1875).

4

a contract to limit its liability.2 It held that, while a

common carrier could enter into such a contract, courts

could review the contract provision for reasonableness.

This review was deemed essential because carriers were in a

position of advantage over members of the public requiring

their service. Express Co, supra at 267.

In 1865, the Iowa Supreme Court used similar reasoning

when it subjected contractual limitations periods to a

reasonableness review. The court was asked to enforce a

twelve-month limitations period under circumstances in

which the necessary facts to bring a claim could not

reasonably have been ascertained in twelve months. It

refused, saying that to do so would impute a dishonest

purpose to the company. Longhurst, supra at 371.

By putting this construction upon the

contract of insurance, you preserve the upright

intent of the company intact. Whereas if you put

the other construction upon it, you, by

implication, charge, or perhaps it would be

better to say, judicially determine, that the

company granted a policy for a valuable

consideration paid, which at the time, they had

reason to believe, would be no risk to them and

no protection to the insured, and thereby

obtained money for themselves under false

pretenses. True charity thinketh no evil. It is

therefore right for us to presume, that it was

the honest intent of the company, to insure the

2

Under common law, a common carrier would act as an

insurer against all loss or damage except that stemming

from an act of God or “the public enemy.” Id. at 266.

5

plaintiff’s mechanic’s lien upon the premises

specified, against loss by fire, and, upon the

other hand, that it was the expectation of the

insured, in paying the required premium, that his

policy would cover the loss and give him the

requisite protection. [Id.]

From these cases, one can see that the reasonableness

doctrine is far from a novel legal idea. It has a solid

foundation well recognized by the courts of this country,

most notably the United States Supreme Court.

Also from these cases, the necessity of having such a

review becomes apparent. Courts have recognized that

insurers are in a position of power and control over the

people purchasing their product. Careful judicial review

is imperative so that the power is not abused. Express Co,

supra; Longhurst, supra. Moreover, this review is

essential in order to accurately implement the intent of

the contracting parties. Because the overriding intent of

a contract of insurance is to provide protection, the

contract should not be read so as to eliminate that

protection unreasonably.3 Id.; Spaulding v Morse, 322 Mass

3

The majority argues that the best way to discern the

intent of the parties is by using the language contained in

the contract. But in truth, the majority’s decision today

indicates that this is the only way to discern their

intent. I simply disagree, as does the majority of modern

courts. As the great Learned Hand stated, “There is no

more likely way to misapprehend the meaning of language—be

it in a constitution, a statute, a will or a contract—than

(continued…)

6

149, 152-153; 76 NE2d 137 (1947). Otherwise, the insurer

would collect money without providing coverage.

Hence, application of the reasonableness rule of

contractual construction is well founded and reasoned. And

Michigan courts following this rule have wisely joined the

general trend of all courts in this country. Rather than

creating new law or diverting from established contractual

interpretation principles, our Court in Camelot applied a

very old and well tested legal rule.4

II. MODERN COURTS DISCUSSION OF THE ISSUE AT HAND

The long-established rule that courts review

contractual limitations periods for their reasonableness

has not been abandoned in modern times. In fact, several

state courts have faced the very issue presented in this

(…continued)

to read the words literally, forgetting the object which

the document as a whole is meant to secure.” Central

Hanover Bank & Trust Co v Comm’r of Internal Revenue, 159

F2d 167, 169 (CA 2, 1947). I believe that courts should

give effect to the actual intent of the parties as

expressed through the document as a whole. The protections

contracted for should not be unreasonably eliminated.

4

It is true that cases decided before Tom Thomas and

Camelot upheld contractual limitations periods without

discussing reasonableness. But this does not mean that

Michigan courts “eschewed” the principle. Likely, the

issue was not raised in those cases. When Michigan courts

had the issue actually before them, they followed the well-

tested legal rule established by courts throughout the

United States legal system, including by the Supreme Court.

7

case. Nearly every court that has considered an uninsured

motorist insurance contract that limits the applicable

statutory period of limitations has found the limitation

unreasonable.

For example, in Elkins v Kentucky Farm Bureau Mut Ins

Co,5 the insurance contract limited an uninsured motorist

claim to one year following the accident. This conflicted

with the two-year statutory period of limitations for

claims against a motorist. Id. The Kentucky court found

the one-year limitations period unreasonable and refused to

enforce it. It stated:

[I]t makes no sense to allow two years (or

more) to file a suit against an uninsured or

underinsured tort-feasor and yet permit the

insurer to escape liability if the suit involving

it is not filed within one year. Such would not

only be an unreasonably short time, but it would

completely frustrate the no-fault insurance

scheme. [Id. at 424.]

The Kentucky court noted that it was following the

majority of courts that have ruled on the issue. See Scalf

v Globe American Cas Co, 442 NE2d 8 (Ind App, 1982);

Sandoval v Valdez, 91 NM 705; 580 P2d 131 (1978); Signal

Ins Co v Walden, 10 Wash App 350; 517 P2d 611 (1973); Burgo

v Illinois Farmers Ins Co, 8 Ill App 3d 259; 290 NE2d 371

5

844 SW2d 423 (Ky App, 1992).

8

(1972); Nixon v Farmers Ins Exch, 56 Wis 2d 1; 201 NW2d 543

(1972).

Therefore, the majority today has not only rejected

the long-established rule regarding review for

reasonableness, but it has also broken company with the

majority of courts addressing the issue. This fact

strongly suggests that the majority is not on the firm

legal ground it claims. Rather, it is pushing Michigan law

out on a tenuous ledge, distancing it from the law of our

sister states.

III. THE LIMITATIONS PROVISION UNDER REVIEW WAS UNREASONABLE

Given that the “reasonableness doctrine” has been so

well established, it should be applied without hesitation

to the facts of this case. A review of the facts

demonstrates the shocking inequity of the one-year

limitations provision in defendant’s uninsured motorist

insurances contract.

The section of the contract in question provides:

We will pay compensatory damages which any

covered person is legally entitled to recover

from the owner or operator of an uninsured motor

vehicle because of bodily injury:

1. Sustained by any covered person; and

2. Caused by an accident arising out of the

ownership, maintenance or use of an uninsured

motor vehicle;

9

Claim or suit must be brought within 1 year

from the date of the accident. [Emphasis in

original.]

This Court in Herweyer articulated the three-pronged

test for determining if a limitations clause is reasonable:

It 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. [Herweyer, supra at

20, citing Camelot, supra.]

All prongs of the test outlined in Camelot and Herweyer

weigh against allowing a shortened limitations period in

this case.

Plaintiffs did not have sufficient time to investigate

and file an action. Under the contract, the liability for

uninsured motorist coverage is triggered only once an

uninsured motorist becomes liable for noneconomic loss

pursuant to MCL 500.3135(1). Liability for noneconomic

loss occurs only if the plaintiffs suffered “death, serious

impairment of body function, or permanent serious

disfigurement.” MCL 500.3135(1). While death may be

ascertainable at the time of the accident, the other two

injuries are less readily identifiable.

A party may not know that his injury is permanent

until considerable time elapses. During this time, he

attends physical therapy and attempts to heal. This may

10

well take longer than a year. Quite often, an injured

individual will do everything in his power to escape the

label “permanently impaired.” I believe that most

individuals are willing to work for a living and will exert

considerable effort to recover from an injury in order to

return to work. The contractual limitation contained in

defendant’s insurance form discourages attempts at

recovery. For these reasons, it is unreasonable and should

be held to be against public policy.

Also, a party may not learn that he has a serious

impairment until after one year has passed. Some injuries,

especially soft tissue injuries, are difficult to diagnose.

And proper diagnosis and determination of permanency may

take a long time. The Legislature seems to have recognized

this fact by enacting a three-year statutory period of

limitations for bringing suits for noneconomic damages.

Given these considerations, the first prong of the Herweyer

test weighs against finding this limitation reasonable.

The one-year limitation also works as a practical

abrogation of the right created by the insurance agreement.

This is the second consideration under the Herweyer test.

Herweyer, supra at 20. The best way that a plaintiff can

find out if a party is uninsured is to sue him. If an

insurance company presents a defense, then the party is

11

insured. However, the time required to reach this point

can easily exceed one year.

Under a one-year period of limitations, an insured

injured in an automobile accident would be forced to

immediately ascertain whether a serious impairment exists.

He then would be obliged to file suit against the other

motorist well before one year has elapsed. This is because

the case might have to progress through at least part of

the discovery process for the injured person to determine

if the other motorist is uninsured. Then, the insured

would have to make a claim with his insurance company. In

many instances, all this cannot be accomplished within one

year.

The clause providing the one-year limitations period

mandates that injured insureds bring suit immediately after

their automobile accident. This might be even before they

determine if they have a permanent impairment. In effect,

the clause requires that baseless lawsuits be filed.

Filing such a lawsuit might be the only way a party could

claim the uninsured motorist coverage that he paid for.

But this early filing still might not move the case along

quickly enough to satisfy the one-year limitation.

This is exactly what happened to plaintiffs, Shirley

Rory and Ethel Woods. They did not know that the other

12

party to the accident was uninsured until suit had been

brought and discovery was underway. They did not delay in

the least in making their claim with defendant. They filed

well within the limitations period for claims of

noneconomic damages. But the majority would still leave

them without the uninsured motorist coverage they paid for.

Clearly, this is a practical abrogation of plaintiffs’

rights.

That the one-year limitations clause abrogates

plaintiffs’ rights becomes even clearer when one

contemplates that an insurer for the third party might deny

coverage well into the suit. That insurer could determine

that its insured should not receive coverage only after

defending him for many months. This delayed notice would

be outside the control of the injured motorist. But it

could deny him the uninsured motorist coverage he paid for

from his own insurer. If a third-party insurer waits for a

year to deny coverage, the clause would absolutely bar the

injured motorist from the benefit of his insurance. The

majority simply ignores this inequity.6

Also, after one year, the injured party may still be

receiving medical treatment. A permanent injury may not

6

Some would see this ruling as an open invitation for

insurance company gamesmanship.

13

yet have been diagnosed. A third-party insurance company

could deny coverage at that point. The injured motorist

would have done everything in his power to bring suit

against the third party. But he would not be able to

sustain a claim under his uninsured motorist insurance

policy because the third-party insurer did not deny

coverage until too late. The contractual limitations

clause simply fails to give an adequate period in which to

ascertain the loss or damage. Id.

Given that the clause providing a one-year limitations

period is found wanting under all three prongs of the

Herweyer test, it must be adjudged to be unreasonable. Id.

Therefore, the trial court correctly denied summary

disposition in this case and the Court of Appeals

appropriately affirmed that decision.

IV. THE ONE-YEAR LIMITATIONS PERIOD AND MCL 500.2254

The majority concludes that the one-year limitations

clause is not contrary to the law or to public policy. But

to reach this conclusion, it relies on a strained reading

of MCL 500.2254. I agree with the Commissioner of the

Office of Financial and Insurance Services who filed an

amicus curiae brief concluding that MCL 500.2254 forbids a

one-year limitations clause.

14

MCL 500.2254 provides:

Suits at law may be prosecuted and

maintained by any member against a domestic

insurance corporation for claims which may have

accrued if payments are withheld more than 60

days after such claims shall have become due. No

article, bylaw, resolution or policy provision

adopted by any life, disability, surety, or

casualty insurance company doing business in this

state prohibiting a member or beneficiary from

commencing and maintaining suits at law or in

equity against such company shall be valid and no

such article, bylaw, provision or resolution

shall hereafter be a bar to any suit in any court

in this state: Provided, however, That any

reasonable remedy for adjudicating claims

established by such company or companies shall

first be exhausted by the claimant before

commencing suit: Provided further, however, That

the company shall finally pass upon any claim

submitted to it within a period of 6 months from

and after final proofs of loss or death shall

have been furnished any such company by the

claimant. [Emphasis added.]

Under the language of this statute, a policy provision

may not prohibit a beneficiary from commencing and

maintaining a suit. MCL 500.2254. But this is exactly

what the one-year limitations clause does. After

expiration of the one-year period, the beneficiary no

longer is entitled to maintain a suit for uninsured

motorist coverage, even though his claim is allowable by

statute for another two years. The limitations clause

contravenes the statute. This means it is contrary to

Michigan law and Michigan public policy.

15

In order to support its position, the majority argues

that nothing in the statute forbids conditions being placed

on the commencement and maintenance of a lawsuit. But such

conditions are exactly what the statute speaks of. It

forbids a policy provision “prohibiting a member or

beneficiary from commencing and maintaining suits[.]” MCL

500.2254. Any “condition” in a policy would be a policy

provision. Changing its label does not change what it is.

Therefore, any condition prohibiting a beneficiary from

commencing and maintaining a suit would equally violate the

statute.7

In addition, the Legislature explicitly lists two

“conditions” that are exceptions to the general rule in MCL

500.2254. Insurance companies may include in their policy

provisions these two “conditions”: (1) the claimant must

exhaust any alternative remedies mandated by the policy,

such as arbitration, and (2) the claimant must give the

insurer six months to decide whether to honor the claim

before the claimant may bring suit. MCL 500.2254. The

7

The majority claims that my interpretation would

render invalid a contractual limitations period that

paralleled the applicable statutory limitations period.

This is not true. In such a situation, the contractual

provision would not limit the commencement and maintenance

of a lawsuit, but instead, the statute of limitations

would.

16

inclusion of these two conditions indicates that the

Legislature did not intend to allow any others.

This Court has long relied on the legal maxim

expressio unius est exlusio alterius.8 The maxim is a rule

of construction that is a product of logic and common

sense. Feld v Robert & Charles Beauty Salon, 435 Mich 352,

362; 459 NW2d 279 (1990), quoting 2A Sands, Sutherland

Statutory Construction (4th ed), § 47.24, p 203. In fact,

this Court long ago stated that no maxim is more uniformly

used to properly construe statutes. Taylor v Michigan Pub

Utilities Comm, 217 Mich 400, 403; 186 NW 485 (1922).

If exceptions such as the one-year limitations clause

were permissible, it would be pointless for the Legislature

to have listed only two exceptions in the statute. It

would contravene the well established maxim of expressio

unius est exlusio alterius. And it would write into the

statute what the Legislature chose to omit. Therefore, I

cannot agree with the majority’s interpretation of MCL

500.2254.

V. APPROVAL OF INSURANCE FORMS BY THE COMMISSIONER

The majority argues that the Legislature assigned the

task of evaluating an insurance provision’s reasonableness

8

This translates as “the expression of one thing is

the exclusion of another.”

17

to the Commissioner of the Office of Financial and

Insurance Services. It relies on MCL 500.2236(5), which

provides:

Upon written notice to the insurer, the

commissioner may disapprove, withdraw approval or

prohibit the issuance, advertising, or delivery

of any form to any person in this state if it

violates any provisions of this act, or contains

inconsistent, ambiguous, or misleading clauses,

or contains exceptions and conditions that

unreasonably or deceptively affect the risk

purported to be assumed in the general coverage

of the policy. The notice shall specify the

objectionable provisions or conditions and state

the reasons for the commissioner’s decision. If

the form is legally in use by the insurer in this

state, the notice shall give the effective date

of the commissioner’s disapproval, which shall

not be less than 30 days subsequent to the

mailing or delivery of the notice to the insurer.

If the form is not legally in use, then

disapproval shall be effective immediately.

[Emphasis added.]

By using the term “may,” the Legislature has signaled

that what follows “may” is a discretionary act. This

contrasts with the use of the term “shall,” which signals a

mandatory act. Murphy v Michigan Bell Tel Co, 447 Mich 93,

100; 523 NW2d 310 (1994). Nothing in this statute

indicates that, in granting this discretion to the

commissioner, the Legislature intended to rob the courts of

review of the same matter.9 Moreover, it could be argued

9

The majority accuses me of reading the review of

policy forms as discretionary. That is not my argument.

(continued…)

18

that, by not making the commissioner’s review mandatory,

the Legislature acknowledged that a court’s exercise of

similar review is well-founded and appropriate.

The majority ignores the discretionary nature of the

commissioner’s review when it concludes that plaintiffs can

challenge the one-year limitations clause only by

challenging the approval of the insurance form. But the

commissioner is not required to review “conditions that

unreasonably or deceptively affect the risk purported to be

assumed in the general coverage of the policy.” MCL

500.2236(5).

The majority’s argument amounts to little more than a

red herring. It is an attempt to distract from the patent

inequity of its ruling today. Because the commissioner’s

review is discretionary, reference to MCL 500.2236(5) adds

little to this discussion. And it does not justify the

majority’s decision to radically change existing law.

(…continued)

While the commissioner is required to review all forms, the

discretionary nature of his disapproval means that his

review for reasonableness is also discretionary. The

statute would allow the commissioner to let a form enter

into use even if he found terms within it to be

unreasonable. The statute does not mandate disapproval

when a portion of the form is unreasonable. Therefore, the

review for reasonableness is discretionary.

19

VI. ADHESION CONTRACTS

Not content with overturning just one line of

precedent used to protect the people of Michigan, the

majority goes on to discuss the tangentially related topic

of adhesion contracts. It overrules the line of cases

offering protection to Michiganians from such contracts and

departs from well-established precedent and from the

majority of other courts that have addressed the issue.

Its decision also defies common sense.

A. THE HISTORY OF ADHESION CONTRACTS AND BALANCING THE INEQUITIES

OF THESE CONTRACTS

In discussing the history of adhesion contracts, the

majority misses one important point. Before courts applied

protections from adhesion contracts, they struggled to deal

with the problems presented by form contracts.10 Although

they did not always explicitly state what they were doing,

they often acted in a way to balance out the inequities

presented by such contracts.

10

I would note that form contracts came into use only

toward the end of the eighteenth century. Meyerson, The

reunification of contract law: The objective theory of

consumer form contracts, 47 U Miami L R 1263 (1993).

Relatively speaking, it was a short time before there was

discussion of treating them as contracts of adhesion.

During the intervening time, courts found other ways to

counterbalance the inequities of these one-sided contracts.

20

In his early work in the field, Professor Karl N.

Llewellyn noted:

[W]e have developed a whole series of semi-

covert techniques for somewhat balancing these

[form-contract] bargains. A court can “construe”

language into patently not meaning what the

language is patently trying to say. It can find

inconsistencies between clauses and throw out the

troublesome one. It can even reject a clause as

counter to the whole purpose of the transaction.

It can reject enforcement by one side for want of

“mutuality,” though allowing enforcement by the

weaker side because “consideration” in some other

sense is present. [Book review, The

standardization of commercial contracts in

English and Continental Law, by O. Prausnitz, 52

Harv L R 700, 702 (1939).][11]

Courts have long recognized the inherent problems of

form contracts and attempted through various methods to

compensate for their inequities. The great legal minds of

the early twentieth century began to see the drawbacks of

this “semi-covert” action, and they called for uniformity

in the field. From this developed the concept and

protections of the adhesion contract theory. Meyerson, The

reunification of contract law: The objective theory of

consumer form contracts, 47 U Miami L R 1263, 1277-1278

(1993).

Despite the majority’s argument, the idea of balancing

the inequities of form contracts (or what are now more

11

See also Keeton, Insurance law rights at variance

with policy provisions, 83 Harv L R 961, 968-973 (1970).

21

commonly known as “adhesion contracts”) has been long

recognized. And there is good reason for this longstanding

recognition. Namely, the bargained-for exchange

fundamental to traditional contracts simply does not exist

in adhesion contracts.

As the Pennsylvania Supreme Court noted when

abandoning the strict construction approach to which the

majority regresses today:

The rationale underlying the strict

contractual approach reflected in our past

decisions is that courts should not presume to

interfere with the freedom of private contracts

and redraft insurance policy provisions where the

intent of the parties is expressed by clear and

unambiguous language. We are of the opinion,

however, that this argument, based on the view

that insurance policies are private contracts in

the traditional sense, is no longer persuasive.

Such a position fails to recognize the true

nature of the relationship between insurance

companies and their insureds. An insurance

contract is not a negotiated agreement; rather

its conditions are by and large dictated by the

insurance company to the insured. The only aspect

of the contract over which the insured can

“bargain” is the monetary amount of coverage.

[Brakeman v Potomac Ins Co, 472 Pa 66, 72; 371

A2d 193 (1977).]

The average person does not sit down and bargain for

each of the terms in his insurance contract. Quite the

opposite is true. He may never read his insurance

policies. Most are long and contain nuanced subclauses

virtually indecipherable to people not experienced in

22

contractual interpretation or insurance law. This is true

despite the increased use of plain English in such

policies. In most situations, the individual pays his

insurance premiums and then receives the contract in the

mail days or weeks later. Most people simply do not have

the opportunity, time, or special ability to read the

policy before agreeing to it.

And what incentive does the insurance industry have to

assure that their insureds read their polices? If people

were to read all the language in their insurance contracts,

the insurance providers would be flooded with questions and

requests to change clauses. It has been observed that

“[i]f it is both unreasonable and undesirable to have

consumers read these terms, courts should not fashion legal

rules in a futile attempt to force consumers to read these

terms[.]” Meyerson, supra at 1270-1271.

If the consumer does not read and comprehend the

individual clauses of the contract, there can be no

agreement on the particular terms in them. There can be no

meeting of the minds. Moreover, when one side presents a

contract on a take-it-or-leave-it basis and is in a place

of considerable power over the other, there can be no

bargained-for exchange. Hence, an outdated strict

23

construction policy of construing these agreements is

utterly unworkable.12

It is for that reason that the majority of the courts

in this country has disavowed the strict construction

policy in construing contracts of adhesion.13 Instead, they

12

The majority contends that consumers should be

assumed to know all the contents of their insurance

policies. But it notes that without a meeting of the minds

no contract exists. The purpose of modern judicial review

of adhesion contracts is to balance the inequity that they

present. Instead of either forcing a consumer to abide by

a term that he never knew of or rejecting the entire

contract, the court balances the inequities of the contract

to enforce its overriding intent. Therefore, what was

fairly bargained for is enforced and what the parties minds

truly met on remains. But the majority, instead of

continuing to balance these inequities, returns to the

generally unworkable strict construction approach. In

doing so, it ignores the true nature of adhesion contracts.

Brakeman, supra.

13

For but a few examples, see Lechmere Tire & Sales Co

v Burwick, 360 Mass 718; 277 NE2d 503 (1972), State Farm

Mut Automobile Ins Co v Johnson, 320 A2d 345 (Del, 1974),

Dairy Farm Leasing Co, Inc v Hartley, 395 A2d 1135 (Me,

1978), Jarvis v Aetna Cas & Surety Co, 633 P2d 1359 (Alas,

1981), State Farm Mut Automobile Ins Co v Khoe, 884 F2d 401

(CA 9, 1989), Jones v Bituminous Cas Corp, 821 SW2d 798

(Ky, 1991), Nieves v Intercontinental Life Ins Co, 964 F2d

60 (CA 1, 1992), Broemmer v Abortion Services of Phoenix,

Ltd, 173 Ariz 148; 840 P2d 1013 (1992), Grimes v Swaim, 971

F2d 622 (CA 10, 1992), United States Fidelity & Guaranty Co

v Sandt, 854 P2d 519 (Utah, 1993), Buraczynski v Eyring,

919 SW2d 314 (Tenn, 1996), Coop Fire Ins Ass’n v White

Caps, Inc, 166 Vt 355; 694 A2d 34 (1997), Alcazar v Hayes,

982 SW2d 845 (Tenn, 1998), Andry v New Orleans Saints, 820

So 2d 602 (La App, 2002), Parilla v IAP Worldwide Services

VI, Inc, 368 F3d 269 (CA 3, 2004), and Iberia Credit

Bureau, Inc v Cingular Wireless LLC, 379 F3d 159 (CA 5,

2004).

24

follow the more equitable and balanced modern trend of

viewing adhesion contracts with skepticism. I believe it

is a serious mistake for the majority to regress Michigan

law away from this well-accepted modern trend that has been

created to protect individuals.14

The majority contends that it bases its decision on

the “freedom of contract and the liberty of each person to

order his or her own affairs by agreement.” Ante at 39.

It also states that contracts “voluntarily and fairly made”

should be enforced. Ante at 12. In making these

statements, the majority either ignores or intentionally

obfuscates the fact that adhesion contracts are not fairly

made or bargained for by individuals managing their own

affairs.

Instead, the majority is creating a rule that permits

insurance companies to bargain unfairly so that they can

maximize their financial profit. The burden of this rule

14

The majority accuses the Herweyer Court of being the

true judicial activists. It claims that Herweyer rejected

“a century” of precedent. As noted, earlier in this

opinion, this truly is not the case. Courts had been

balancing the inequities of form contracts nearly since

their inception. This Court in Herweyer merely followed

that trend. It is only this majority that is reshaping

Michigan law and clearly reversing longstanding precedent.

In doing so, it is ignoring the current state of contract

law and breaking away from the well-established modern

trend of adhesion contract interpretation recognized

throughout this country.

25

is carried by the average individual who has little, if

any, bargaining power when purchasing insurance. The

choice made by the majority regresses our judicial system

by decades, if not centuries. It places the state back

into the era when courts either used covert means of

interpreting contracts or ignored equity altogether.

B. THE CONTINUED ATTACK ON INSURANCE CONTRACT PROTECTIONS

Today, the majority continues its attack on the well-

developed protections created in insurance law that it

started in Wilkie v Auto-Owners Ins Co 469 Mich 41; 664

NW2d 776 (2003). In Wilkie, the majority struck down,

erroneously I believe, the doctrine of reasonable

expectations. Adding this decision to Wilkie, the majority

has now struck down all reasonable means of objectively

interpreting insurance contracts. Without objective

standards, courts cannot be expected to accurately discern

the intent of the parties.

An objective standard produces an essential

degree of certainty and predictability about

legal rights, as well as a method of achieving

equity not only between insurer and insured but

also among different insureds whose contributions

through premiums create the funds that are tapped

to pay judgments against insurers. [Keeton,

Insurance law rights at variance with policy

provisions, 83 Harv L R 961, 968 (1970).]

The abandonment of these important equitable

considerations destabilizes the system. The only ones

26

benefited are the insurance companies. Those that are

unscrupulous can now more easily create deliberately

confusing insurance forms with hidden clauses that change

the meaning of the policy. They may thereby collect

payments for coverage that is wholly illusory without worry

of interference from Michigan courts. I cannot agree with

this position. As Justice Cavanagh once wisely stated:

I object to [the majority’s] attempt to

distance itself from the policy choices inherent

in its decision today. Simply put, the majority

and I differ with regard to the policies that

should guide the interpretation of insurance law.

I would prefer not to disregard the manner in

which the insurance industry operates. Though an

adhesion contract may be a necessary ingredient

in the trade, I cannot condone a doctrine of

interpretation that all but ignores the

potentially precarious effect on the bound party.

[Wilkie, supra at 70 (Cavanagh, J., dissenting).]

This Court should not abandon the protections created

to right the wrongs of adhesion contracts. I must dissent

from its radical change of the law.

VII. CONCLUSION

The reasonableness doctrine is well-established in the

law. Judicial review constitutes a necessary step to

ensure that the actual intent of parties to a contract is

enforced. Therefore, it is inappropriate to overturn the

various decisions that support the ability of courts to

27

review for reasonableness the shortening of limitations

periods.

In this case, the one-year time limit was so short

that it acted as a practical abrogation of the right to

bring a lawsuit. Therefore, plaintiffs paid for coverage

from which they could never benefit. In such a situation,

the only proper action by the Court is to find the

limitations period unreasonable.

In deciding this case, it is unnecessary to reach the

issue of adhesion contracts. The majority, by venturing

into this area of the law and using this case as a vehicle,

subjects itself to claims that it engages in judicial

activism. The scrutiny and protections offered by

traditional adhesion contract law offer a necessary aegis

for the people of this state. I see no reason to attack

this fundamental tenet of our law.

Therefore, I would affirm the decision of the Court of

Appeals.

Marilyn Kelly

28

S T A T E O F M I C H I G A N

SUPREME COURT

SHIRLEY RORY AND ETHEL WOODS,

Plaintiffs-Appellees,

v No. 126747

CONTINENTAL INSURANCE COMPANY,

also known as CNA INSURANCE COMPANY,

Defendant-Appellant.

_______________________________

CAVANAGH, J. (dissenting).

As the majority accurately observes, this Court is

faced with a choice today. See ante at 39. This Court

could continue to acknowledge the unique character of

insurance agreements and follow well-reasoned precedent

examining contractually shortened limitations periods for

reasonableness. Or this Court could disregard the manner

in which insurance agreements come into existence and

abrogate the “reasonableness doctrine.” Because the

majority makes the wrong choice, I must respectfully

dissent from today’s decision and concur in the result

reached by Justice Kelly’s dissent.

As a general proposition, “[a]n insurance policy is

much the same as any other contract.” Auto-Owners Ins Co v

Churchman, 440 Mich 560, 566; 489 NW2d 431 (1992).

Accordingly, a clear and unambiguous insurance policy is

usually applied as written. New Amsterdam Cas Co v

Sokolowski, 374 Mich 340, 342; 132 NW2d 66 (1965);

Frankenmuth Mut Ins Co v Masters, 460 Mich 105, 111; 595

NW2d 832 (1999). This general principle, however, is

subject to numerous caveats that are deeply rooted in our

jurisprudence, including the following: where a contractual

limitations provision shortens the otherwise applicable

period of limitations, the provision must be reasonable to

be enforceable. Herweyer v Clark Hwy Services, Inc, 455

Mich 14, 20; 564 NW2d 857 (1997). See also 44A Am Jur 2d,

Insurance, § 1909, p 370; anno: Validity of contractual

time period, shorter than statute of limitations, for

bringing action, 6 ALR3d 1197.

As noted by the majority, there is little doubt that

parties may generally contract for shorter periods of

limitations, and this Court has enforced such provisions

where they have been reasonable. To this end, this Court

in Herweyer, supra at 20, rearticulated the following

factors to assist our courts in determining whether a

contractual limitations provision is reasonable:

It 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

2

(3) the action is not barred before the loss or

damage can be ascertained.

In my view, this reasonableness inquiry is

particularly fitting when insurance policies purport to

shorten the otherwise applicable period of limitations. As

Justice Levin once observed:

The rationale of the rule allowing parties

to contractually shorten statutory periods of

limitation is that the shortened period is a

bargained-for term of the contract. Allowing

such bargained-for terms may in some cases be a

useful and proper means of allowing parties to

structure their business dealings.

In the case of an adhesion contract,

however, where the party ostensibly agreeing to

the shortened period has no real alternative,

this rationale is inapplicable. [Camelot

Excavating Co, Inc v St Paul Fire & Marine Ins

Co, 410 Mich 118, 141; 301 NW2d 275 (1981)

(Levin, J., concurring).]

Nonetheless, the majority posits that the

reasonableness inquiry no longer has any place in our

jurisprudence because this inquiry undermines the parties’

freedom of contract. In my view, however, such an approach

ignores the manner in which the insurance industry

operates. In this regard, I believe that the majority’s

approach is based on the fiction that the shortened

3

limitations period was a truly bargained-for term.1 In

other words, I believe that the majority’s entire premise

must fail because it ignores the unique character of

insurance agreements and disregards the notion that

adhesion contracts inherently tend to “be a necessary

ingredient in the trade . . . .” Wilkie v Auto-Owners Ins

Co, 469 Mich 41, 70; 664 NW2d 776 (2003) (Cavanagh, J.,

1

In the typical insurance agreement, Justice Levin

prudently noted,

[t]here is no meeting of the minds except

regarding the broad outlines of the transaction,

the insurer’s desire to sell a policy and the

insured’s desire to buy a policy of insurance for

a designated price and period of insurance to

cover loss arising from particular perils (death,

illness, fire, theft, auto accident,

“comprehensive”). The details (definitions,

exceptions, exclusions, conditions) are generally

not discussed and rarely negotiated.

The policyholder can, of course, be said to

have agreed to whatever the policy says—in that

sense his mind met with that of the insurer. Such

an analysis may not violate the letter of the

concept that a written contract expresses the

substance of a meeting of minds, but it does

violate the spirit of that concept.

To be sure, contract law principles are not

confined by the concept of a “meeting of the

minds.” Nevertheless, a point is reached when

the label “contract” ceases to fully and

accurately describe the relationship of the

parties and the nature of the transaction between

insurer and insured. [Lotoszinski v State Farm

Mut Automobile Ins Co, 417 Mich 1, 14 n 1; 331

NW2d 467 (1982) (Levin, J., dissenting).]

4

dissenting).2 Accordingly, I would not torture the term

“adhesion contract” and turn a blind eye to the manner in

which these adhesion contracts are made simply to bolster

what is perceived as a preferred result. Instead, I would

embrace, rather than divorce, reality and acknowledge how

insurance policies typically come into existence.

Therefore, I would affirm the decision of the Court of

2

I must additionally note that, contrary to the

majority’s rationale, decisions such as Camelot Excavating,

Herweyer, and Tom Thomas Org, Inc v Reliance Ins Co, 396

Mich 588, 592; 242 NW2d 396 (1976), were not

groundbreaking. For example, 44A Am Jur 2d, Insurance, §

1909, pp 370-371 provides:

In the absence of statutory regulation to

the contrary, an insurance contract may validly

provide for a limitation period shorter than that

provided in the general statute of limitations,

provided that the interval allowed is not

unreasonably short. [Emphasis added.]

Section 1909 cites the following cases in support of this

view: Thomas v Allstate Ins Co, 974 F2d 706 (CA 6, 1992)

(applying Ohio law); Doe v Blue Cross & Blue Shield United

of Wisconsin, 112 F3d 869 (CA 7, 1997); Wesselman v

Travelers Indemnity Co, 345 A2d 423 (Del, 1975); Phoenix

Ins Co v Aetna Cas & Surety Co, 120 Ga App 122; 169 SE2d

645 (1969); Nicodemus v Milwaukee Mut Ins Co, 612 NW2d 785

(Iowa, 2000) (contractual limitations provision in an

insurance policy is enforceable if it is reasonable); Webb

v Kentucky Farm Bureau Ins Co, 577 SW2d 17 (Ky App, 1978);

Suire v Combined Ins Co of America, 290 So 2d 271 (La,

1974); L & A United Grocers, Inc v Safeguard Ins Co, 460

A2d 587 (Me, 1983) (in property insurance, a limit of one

year from the time of loss is not unreasonably short);

O'Reilly v Allstate Ins Co, 474 NW2d 221 (Minn App, 1991);

Commonwealth v Transamerica Ins Co, 462 Pa 268; 341 A2d 74

(1975); Donahue v Hartford Fire Ins Co, 110 RI 603; 295 A2d

693 (1972); Hebert v Jarvis & Rice & White Ins, Inc, 134 Vt

472; 365 A2d 271 (1976).

5

Appeals and conclude that the shortened limitations period

in this insurance policy is unreasonable and, thus,

unenforceable.

I must also observe that my disagreement with the

current majority with respect to the principles governing

the interpretation of insurance policies is nothing new.

See Wilkie, supra. I recognize that the majority’s view in

this case and others is theoretically consistent with the

notion of freedom of contract. In the abstract, the

majority’s approach could arguably have some appeal.

Nonetheless, while today’s decision may placate the

majority’s own desire to demonstrate its self-described

fidelity, I believe that the majority’s position ignores

how the insurance industry functions and discounts the

effects today’s decision will have on this state’s

citizens. Therefore, I must respectfully dissent from

today’s decision and concur in the result reached by

Justice Kelly’s dissent.

Michael F. Cavanagh

6

S T A T E O F M I C H I G A N

SUPREME COURT

SHIRLEY RORY and ETHEL WOODS,

Plaintiffs-Appellees,

v No. 126747

CONTINENTAL INSURANCE COMPANY,

also known as CNA INSURANCE COMPANY,

Defendant-Appellant.

_______________________________

WEAVER, J. (dissenting).

I respectfully dissent from the majority opinion’s

holdings that the “insurance policies are subject to the

same contract construction principles that apply to any

other species of contract,” and that “unless a contract

provision violates law or one of the traditional defenses

to the enforceability of a contract applies, a court must

construe and apply unambiguous contract provisions as

written.” Ante at 2.

In so holding, the majority is eliminating over five

decades’ worth of precedent that created specialized rules

of interpretation and enforcement for insurance contracts.

These specialized rules recognize that an insured is not

able to bargain over the terms of an insurance policy;

indeed, it is common practice for the insured to receive

the actual terms of the contract, the insurance policy

itself, only after having purchased the insurance.

Further, in most cases the average consumer will not read

the policy; the consumer will rely on the agent’s

representations of what is covered in the policy. Even if

the insured were to read the policy, insurance policies are

not easy to understand and contain obscure provisions, the

meaning of which requires legal education to grasp.

The longstanding rules that the majority does away

with by stating that insurance contracts are to be

interpreted in the same way as any other contract include:

●Courts must interpret insurance policies from the

perspective of an average consumer. The contract must be

read using the ordinary language of the layperson, not

using technical medical, legal, or insurance terms.1 By

contrast, the usual rule of contract interpretation is that

“technical terms and words of art are given their technical

meaning when used in a transaction within their technical

field.” 2 Restatement Contracts, 2d, ch 9, § 202, p 86.

See also Moraine Products, Inc v Parke, Davis & Co, 43 Mich

App 210, 213; 203 NW2d 917 (1972).

1

“Insurance policies should be read with the meaning

which ordinary layman would give their words.” Bowman v

Preferred Risk Mut Ins Co, 348 Mich 531, 547; 83 NW2d 434

(1957).

2

●If reading the contract one way provides that there

is coverage, but reading it another way provides that there

is not coverage under the same circumstances, then the

contract is ambiguous and must be construed against its

drafter and in favor of coverage.2 This is different from

general contract law, which finds a contract ambiguous “if

its provisions may reasonably be understood in different

ways.” Universal Underwriters Ins Co v Kneeland, 464 Mich

491, 496; 628 NW2d 491 (2001). (Emphasis added.) The

“reasonableness” requirement can be a severe limitation on

finding an ambiguity.

●If a limitation on coverage is not expressed clearly

enough to inform the insured of the extent of coverage

2

An ambiguity in an insurance policy is broadly

defined to include contract provisions capable of

conflicting interpretations. Auto Club Ins Ass’n v

DeLaGarza, 433 Mich 208, 214; 444 NW2d 803 (1989).

“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 and should be

construed against its drafter and in favor of coverage.”

Raska v Farm Bureau Mut Ins Co of Michigan, 412 Mich 355,

362; 314 NW2d 440 (1982).

3

purchased, the provision is construed against the drafter,

the insurance company.3

●In interpreting a policy, exceptions to general

liability are to be strictly construed against the insurer.4

●The contract of insurance may include not only the

written policy, but also the advertising and the

application.5 The general rule of contract interpretation,

3

When an insurer “has failed to clearly express a

limitation on coverage so as to fairly apprise the insured

of the extent of the coverage purchased, it is appropriate

to construe the provision under consideration against its

drafter.” Auto Club Ins Ass’n v DeLaGarza, 433 Mich 208,

214-215; 444 NW2d 803 (1989).

4

Technical constructions of insurance policies are not

favored and exceptions to the general liability provided

for in an insurance policy are to be strictly construed

against the insurer. Francis v Scheper, 326 Mich 441, 448;

40 NW2d 214 (1949). Exclusion clauses in insurance policies

are construed strictly against the insurer. Century

Indemnity Co v Schmick, 351 Mich 622, 626-627; 88 NW2d 622

(1958).

5

Where the advertising and the application stated that

the policy would be in force as soon as the application and

$1 for the first month’s premium was received, but the

policy was not issued until 18 days later, the Court held

that the advertising and the application created an

ambiguity about when the policy should go into effect. The

Court construed this ambiguity in favor of the insured,

stating:

If there is any doubt or ambiguity with

reference to a contract of insurance which has

been drafted by the insurer, it should be

construed most favorably to the insured. Under

that rule the application and advertising in the

case before us must be construed most favorably

(continued…)

4

in contrast, is that “[a]bsent an ambiguity or internal

inconsistency, contractual interpretation begins and ends

with the actual words of a written agreement.” Universal

Underwriters, supra at 496.

These specialized rules of interpretation protect the

consumer buying insurance, especially no-fault insurance,

which every automobile owner is required by law to

purchase; they should not be so lightly swept aside with no

discussion and without regard for five decades of

precedent. For these reasons, I dissent and concur in the

result of Justice Kelly’s dissent.

Elizabeth A. Weaver

(…continued)

to the insured. We construe this to mean the

policy would be in effect without delay. [Gorham

v Peerless Life Ins Co, 368 Mich 335, 343-344;

118 NW2d 306 (1962) (citation omitted).]

5