                          STATE OF MICHIGAN

                            COURT OF APPEALS



MICHAEL SCHWARTZ and ROCHELLE                                        UNPUBLISHED
SCHWARTZ,                                                            March 15, 2016

               Plaintiffs-Appellants,

v                                                                    No. 322702
                                                                     Grand Traverse Circuit Court
ENCOMPASS INDEMNITY COMPANY,                                         LC No. 2013-029886-NZ

               Defendant-Appellee.


Before: MARKEY, P.J., and STEPHENS and RIORDAN, JJ.

PER CURIAM.

In this insurance-policy dispute, plaintiffs appeal as of right the trial court’s order granting
summary disposition in favor of defendant under MCR 2.116(C)(10). We affirm.

                                        I. BACKGROUND

        Plaintiffs insured the subject residential property through a homeowners’ policy with
defendant, Encompass Indemnity Company. The subject claim arose in connection with a
renovation project that began in January 2012. Plaintiffs’ architect and contractor presented
plans for additions to the home and the garage and a reconfiguration of the deck.

        Almost immediately after the Township’s approval of their plans on March 13, 2012,
complications ensued. A survey revealed that the south wall of the house before renovation
violated the 10-foot setback requirement of the Township’s zoning ordinance. This necessitated
adjusting the home’s layout to conform to the ordinance. During the demolition phase the
contractor discovered water damage and what he believed to be mold. The contractor attributed
this damage to improper roof installation and leaks around the windows. The contractor
executed an extensive demolition of what he said were the water-damaged portions of the home.

        According to the contractor, after all of the demolition, the “whole center structure,” “the
foundation,” and “the footings” were left standing. When interviewed by defendant’s agent, the
contractor summarized that the demolition consisted of “30% teardown, 40% because of the
issues, and 30% because of the county. That’s about 100%.”

       Plaintiff filed a claim with defendant for both mold and “over–demolition.” When
defendant's adjuster inspected the home on April 16, none of the alleged mold affected material


                                                -1-
was on-site. There remains a dispute concerning the specifics of the processing of the
construction debris and the communication between the owner and the contractor. However, it is
undisputed that the contractor managed the material and that it was disposed of after the claim
was filed.

          In denying plaintiffs’ claims, defendant relied on the following provisions within the
policy:

          REAL PROPERTY-COVERED PERILS

          We cover direct physical loss to property described in Real Property-Insuring
          Agreement, unless the loss is not covered under Property Coverage Losses We Do
          Not Cover.

                                               *    * *

          LOSSES WE DO NOT COVER

          We do not insure for loss caused directly or indirectly by any of the following.
          Such loss is excluded regardless of any other cause or event contributing
          concurrently or in any sequence to the loss.

          1.     Real Property and Tangible Personal Property. We do not insure for
                 loss:

                                               *    * *

                 c.     Or damage due to neglect, meaning neglect of a covered person to
                        use all reasonable means to save and preserve property at and after
                        the time of a loss.

                 d.     Involving intentional or criminal acts of or at the direction of one
                        or more covered persons, if the loss that occurs:

                        (1)    May reasonably be expected to result from such acts; or

                        (2)    Is the intended result of such acts.

                                               *    * *

          2.     Real Property. We do not insure for loss:

                                               *    * *

                 d.     Caused by the following:

                                               *    * *




                                                   -2-
                    (3)    Rust or other corrosion, mold, fungi, wet or dry rot;[]1

                                              ***

             g.     To covered real property caused by any of the following.
                    However, any ensuing loss not excluded or excepted in this policy
                    is covered.

                                          *    * *

                    (3)    Faulty, inadequate or defective:

                           (a)     Planning, zoning, development, surveying, siting;

                           (b)     Design, specifications, workmanship, repair,
                                   construction, renovation, remodeling, grading,
                                   compaction;

                           (c)     Materials used in repair, construction, renovation,
                                   or remodeling; or

                           (d)     Maintenance;

                                   of part or all of any property whether on or off your
                                   residence premises.

                                          *    * *

      4.     Your Duties After Loss.

             You agree to see that the following things are done after a loss. We have
             no duty to provide coverage under this policy unless there has been full
             compliance with these duties:

             a.     Give prompt notice to us or our agent.

                                          *    * *

             d.     Protect the property from further damage. If repairs to the property
                    are required, you must:

                    (1)    Make reasonable and necessary repairs to protect the
                           property; and


1
 The policy excluded all loss caused by mold. However, an amendment to the “deluxe” policy
provided up to $10,000 for the “remediation” of a biological irritant, including mold.



                                              -3-
                      (2)     Keep an accurate record of repair expenses.

                                            *    * *

               f.     As often as we reasonably require:

                      (1)    Show the damaged property before its repair or disposal,
                      except as provided in 4.d., above;

                                            *    * *

               g.     Allow us to take samples of damaged and undamaged property for
                      inspection, testing, and analysis.

        Plaintiffs filed a complaint on July 26, 2013, alleging that defendant breached the policy
by “denying coverage for the loss.” On May 14, 2014, defendant filed a motion for summary
disposition under MCR 2.116(C)(10). The trial court granted defendant’s motion. The trial
court found that both the claim for mold and over-demolition were covered losses. However, the
court found that plaintiffs could not recover on the mold because of spoliation of evidence, and
were precluded from recovery on the demolition claim due to the faulty workmanship policy
exclusion.

                                         II. ANALYSIS

        Plaintiffs first argue that a covered loss occurred as a result of their contractor’s
unauthorized removal of water-damaged material and that such a peril was not excluded by the
faulty workmanship exclusion. We disagree.

        This Court reviews a trial court’s decision on a motion for summary disposition de novo.
Moser v Detroit, 284 Mich App 536, 538; 772 NW2d 823 (2009). Summary disposition is
proper under MCR 2.116(C)(10) if “there is no genuine issue as to any material fact, and the
moving party is entitled to judgment . . . as a matter of law.” The affidavits, pleadings,
depositions, admissions, and other documentary evidence are to be considered in a light most
favorable to the nonmoving party. Liparoto Constr, Inc v Gen Shale Brick, Inc, 284 Mich App
25, 29; 772 NW2d 801 (2009). Further, “[t]his case involves the interpretation and application
of an insurance policy, which is a question of law reviewed de novo.” Hunt v Drielick, 496 Mich
366, 372; 852 NW2d 562 (2014).

       Our Supreme Court recently set forth the general principles governing a court’s review of
an insurance contract as follows:

               An insurance policy is similar to any other contractual agreement, and,
       thus, the court’s role is to “determine what the agreement was and effectuate the
       intent of the parties.” Auto-Owners Ins Co v Churchman, 440 Mich 560, 566; 489
       NW2d 431 (1992). “[W]e employ a two-part analysis” to determine the parties’
       intent. Heniser v Frankenmuth Mut Ins Co, 449 Mich 155, 172; 534 NW2d 502
       (1995). First, it must be determined whether “the policy provides coverage to the
       insured,” and, second, the court must “ascertain whether that coverage is negated


                                                -4-
       by an exclusion.” Id. (citation and quotation marks omitted). While “[i]t is the
       insured’s burden to establish that his claim falls within the terms of the policy,”
       id., “[t]he insurer should bear the burden of proving an absence of coverage,”
       Fresard v Mich Millers Mut Ins Co, 414 Mich 686, 694; 327 NW2d 286 (1982)
       (opinion by Fitzgerald, C.J.). See, also, Ramon v Farm Bureau Ins Co, 184 Mich
       App 54, 61; 457 NW2d 90 (1990). Additionally, “[e]xclusionary clauses in
       insurance policies are strictly construed in favor of the insured.” Churchman, 440
       Mich at 567; 489 NW2d 431. See, also, Group Ins Co of Mich v Czopek, 440
       Mich 590, 597; 489 NW2d 444 (1992) (stating that “the exclusions to the general
       liability in a policy of insurance are to be strictly construed against the insurer”).
       However, “[i]t is impossible to hold an insurance company liable for a risk it did
       not assume,” Churchman, 440 Mich at 567, 489 NW2d 431, and, thus, “[c]lear
       and specific exclusions must be enforced,” Czopek, 440 Mich at 597, 489 NW2d
       444. [Hunt, 496 Mich at 372-373.]

        In this case, the policy states that it covers perils that cause “direct physical loss to
property,” absent an applicable exclusion. It has been recognized that where the policy, as in this
case, does not define the phrase “direct physical loss,” it would be consistent with Michigan law
to define the phrase as indicating an “immediate or proximate cause, as distinct from one that is
remote or incidental.” Universal Image Productions, Inc v Chubb Corp, 703 F Supp 2d 705, 709
(ED Mich, 2010) quoting Acorn Inv Co v Michigan Basic Property Ins Assn, unpublished
opinion per curiam of the Court of Appeals, issued September 15, 2009 (Docket No. 284234), p.
2. Plaintiffs sought to recover the costs associated with the contractor’s extensive demolition.
That demolition was done either due to the contractor’s error or his faulty workmanship, or due
to the contractor correctly addressing faulty workmanship of the persons responsible for the roof
and window installation. The contractor was not an unknown interloper. He was plaintiffs’
agent. Plaintiffs did present evidence that he acted in error and without their permission but even
if that is true such action equates to faulty workmanship on his part and is excluded from
recovery under the homeowners policy.

         Plaintiffs ask this court to extrapolate from the holding in Radenbaugh v Farm Bureau
Gen Ins Co, 240 Mich App 134; 610 NW2d 272 (2000), that to the extent the contractor’s
actions were not authorized by them, damages arising from the unauthorized conduct are covered
occurrences. Radenbaugh addressed a commercial general liability (CGL) policy. The policy in
Radenbaugh stated: “ ‘bodily injury’ or ‘property damage’ is covered if caused by an
‘occurrence.’ ‘Occurrence’ is defined by the policy as . . . an accident, including continuous or
repeated exposure to substantially the same general harmful conditions.” 240 Mich App at 140.
Radenbaugh concluded that, “when an insured’s defective workmanship results in damage to the
property of others, an ‘accident’ exists within the meaning of the standard comprehensive
liability policy.” Id. at 147. Radenbaugh further considered the defendant’s argument “that
there was no duty to defend or indemnify by operation of the ‘business risks’ exclusion in the
policy,” which stated that the policy does not apply to “ ‘Property damage’ to ‘your product’
arising out of it or any part of it.” Id. at 150. That exclusion has been called a “faulty
workmanship exclusion,” which this Court held “ ‘unambiguously excludes coverage as to
damage to the particular part of property with regard to which the workmanship was faulty. But
it does not exclude coverage as to damages to property other than the particular part of the
property with regard to which the workmanship was faulty.’ ” Id. at 150, quoting Underwriters


                                                -5-
at Interest v SCI Steelcon, 905 F Supp 441, 444 (WD Mich, 1995). See also Fresard v Michigan
Millers Mut Ins Co, 414 Mich 686, 702; 327 NW2d 286 (1982) (holding that “[t]he insured only
is required to absorb the cost of replacement or repair of its own work where the damage arises
out of the work”). We are not persuaded that Radenbaugh affords plaintiffs any relief. Initially,
we note that the policy in this case excludes damages arising from “faulty workmanship” without
the qualifier “your.” An insurer can only be liable for risks assumed in the policy. Churchman,
440 Mich at 567. While plaintiffs correctly state that policy exclusions are to be narrowly
construed, even a narrow construction of the plain language of this policy excludes recovery for
the contractor’s demolition efforts.

        Plaintiffs offer no Michigan authority to support their argument to limit the exclusion to
authorized actions and the foreign authority is not persuasive. The lack of authorization in
Husband v Lafayette In Co, 635 So 2d 309, 310-311 (La App, 1994), concerned work done in
violation of the lease between the tenant and the insured landlord. Another case relied upon by
plaintiff, Home Savings of America v Continental Ins Co, 87 Cal App 4th 835, 854; 104 Cal Rptr
2d 790 (2001), also based it’s holding on the absence of legal authority for repairs made at the
behest of a third-party without the named insured mortgagee’s permission or knowledge. The
case before this Court is factually dissimilar. At best, the contractor failed to meet obligations
owed to the insured under the contract for services.

        Plaintiffs also argue that the trial court erred in dismissing this case on the basis that they
failed to preserve evidence of the mold.2 Again, we disagree. As set forth above, this Court
reviews a trial court’s decision on a motion for summary disposition de novo, considering the
evidence in a light most favorable to plaintiffs. Moser, 284 Mich App at 538; Liparoto Constr,
Inc, 284 Mich App at 29. We also review de novo issues relating to the application and
interpretation of contractual language. Hunt, 496 Mich at 372.

         To the extent that this case involves the inherent power of the trial court to sanction a
party for failing to preserve evidence that the party knew or should have known was relevant to
the litigation, the trial court’s exercise of such power “may be disturbed only on a finding that
there has been a clear abuse of discretion.” Bloemendaal v Town & Country Sports Ctr, Inc, 255
Mich App 207, 211; 659 NW2d 684 (2002). A clear abuse of discretion occurs where “the result
is so palpably and grossly violative of fact and logic that it evidences not the exercise of will but
perversity of will, not the exercise of judgment but defiance thereof, not the exercise of reason
but rather of passion or bias.” Citizens Ins Co of Am v Juno Lighting, Inc, 247 Mich App 236,
244-245; 635 NW2d 379 (2001) (citations and quotations omitted).

       On appeal, plaintiffs only argue that the trial court erred in attributing their contractor’s
disposal of the evidence of mold to plaintiffs and insinuate that defendant’s adjuster had a duty to
recover the disposed evidence. On that basis, plaintiffs argue that they did not breach any duty
owed to defendant to preserve evidence. As an initial matter, defendant persuasively explains
2
  As mentioned, the trial court perceived this issue as relating only to plaintiffs’ claim for mold
remediation, which plaintiffs do not dispute, and noted that the parties do not dispute that when
defendant’s adjuster inspected the property, the alleged moldy materials were already in
dumpsters.



                                                 -6-
that express language in the policy made preserving samples of the mold for defendant’s testing
a condition precedent to recovery for the remediation of the mold. See generally, Tenneco Inc v
Amerisure Mut Ins Co, 281 Mich App 429, 467-468; 761 NW2d 846 (2008) (stating that unless
this condition precedent is contrary to public policy or defendant waived its application,
plaintiff’s breach has relieved defendant of liability). See also Seaport Park Condo v Greater
New York Mut Ins Co, 39 AD3d 51, 55; 828 NYS2d 381 (2007) (stating that because compliance
with the requirement to preserve evidence is “a condition precedent to coverage, the insurer need
not show prejudice”).

        However, “[c]ourts are not inclined to construe stipulations of a contract as conditions
precedent unless compelled by the language of the contract.” Yeo v State Farm Ins Co, 219
Mich App 254, 257; 555 NW2d 893 (1996). See also Vergote v K Mart Corp, 158 Mich App 96,
107; 404 NW2d 711 (1987). The policy in this case states that defendant has “no duty to provide
coverage under this policy unless there has been full compliance” with the enumerated duties of
the insured. One of those duties states that plaintiffs must “allow” defendant “to take samples of
damaged and undamaged property for inspection, testing, and analysis.” While plaintiffs argue
that the contractor’s conduct should not be imputed to plaintiffs, the clear intention of this duty is
to make certain that defendant would have the opportunity to determine whether there is, in fact,
mold damage and the extent of any damage. Contrary to plaintiffs’ argument, defendant was not
allowed this opportunity because the record reveals that the allegedly moldy material was thrown
into dumpsters, mixing with other construction debris and was not protected from the weather.

        While there is an arguable question of fact regarding plaintiffs’ attempt in preserving the
evidence and knowledge or authorization of their contractor’s actions, see Couch on Ins 10A §
148:69 (stating that “[w]hether the insured failed to preserve and protect the insured property is
generally a question of fact for the jury”), given the circumstances of this case, there was no
genuine issue of material fact. The demolition began on March 13, 2012, and was scheduled to
be completed by March 23, 2012. Plaintiffs met with an attorney on March 26, 2012, to discuss
filing an insurance claim, and specific to the mold issue, the text message log provided by
defendant below reveals that plaintiff Rochelle told her contractor that he should not lose
pictures because an attorney she met with stated that they would be needed for an insurance
claim. Plaintiffs did not file their claim of insurance however, until April 10. Accordingly, at
least from the time when plaintiffs met with an attorney, plaintiffs were aware that they needed
to preserve some evidence of the mold, and they should have known that they needed to preserve
evidence for sampling, as their policy required. See Cooper v Auto Club Ins Ass’n, 481 Mich
399, 415; 751 NW2d 443 (2008) (“One is presumed to have read the terms of his or her
insurance policy”). Yet, even after this date, plaintiffs do not allege that they at least attempted
to preserve the mold themselves or asked the contractor whether it was possible and directed him
to do so or to try. Instead, it remained in dumpsters, further mingling with other construction
materials until defendant’s adjuster arrived on April 16, 2012, and the allegedly moldy materials
were apparently no longer recoverable for testing. It is plaintiffs’ burden to show compliance
with and the right to recover under the policy. See Heniser, 449 Mich at 172; Helmer v
Dearborn Nat Ins Co, 319 Mich 696, 700; 30 NW2d 399 (1948). Absent even an assertion that
plaintiffs did anything other than ask the contractor to save pictures, plaintiffs failed to establish
a genuine issue of material fact that they met their duty to allow defendant to sample the alleged
moldy material.



                                                 -7-
         The trial court also based its decision on general spoliation principles, reasoning that
defendant was prevented from “having a fair opportunity to investigate and then defend the claim
or to grant the claim if it’s appropriate.” In sanctioning a party for failing to preserve evidence,
“a trial court properly exercises its discretion when it carefully fashions a sanction that denies the
party the fruits of the party’s misconduct, but that does not interfere with the party’s right to
produce other relevant evidence.” Brenner v Kolk, 226 Mich App 149, 161; 573 NW2d 65
(1997). See also Citizens Ins Co of Am v Juno Lighting, Inc, 247 Mich App 236, 242; 635
NW2d 379 (2001). However, “dismissal is a harsh remedy to be invoked cautiously[,]” North v
Dept of Mental Health, 427 Mich 659, 662; 397 NW2d 793 (1986), and the trial court did not
consider alternatives. See Brenner, 226 Mich App at 160. Under the circumstances of this case,
however, the entire mold remediation claim depended on the presence of mold, and thus, while
dismissal may seem harsh where plaintiffs apparently lacked some degree of knowledge or
control over the initial methods in which the materials were removed and disposed of, it is of
greater prejudice to defendant who had absolutely no control over the evidence.

       Affirmed.

                                                              /s/ Jane E. Markey
                                                              /s/ Cynthia Diane Stephens
                                                              /s/ Michael J. Riordan




                                                 -8-
