                       NOT RECOMMENDED FOR PUBLICATION
                               File Name: 14a0443n.06

                                          No. 13-2376                                FILED
                                                                                 Jun 17, 2014
                                                                           DEBORAH S. HUNT, Clerk
                         UNITED STATES COURTS OF APPEALS
                              FOR THE SIXTH CIRCUIT

WHITEHOUSE CONDOMINIUM GROUP, LLC,                      )
                                                        )
       Plaintiff-Appellee,                              )
                                                               ON APPEAL FROM THE
                                                        )
                                                               UNITED STATES DISTRICT
v.                                                      )
                                                               COURT FOR THE EASTERN
                                                        )
                                                               DISTRICT OF MICHIGAN
THE CINCINNATI INSURANCE COMPANY,                       )
                                                        )
       Defendant-Appellant.                             )
                                                               OPINION
                                                        )
                                                        )



       BEFORE:        BATCHELDER, KEITH, and STRANCH, Circuit Judges.

       STRANCH, Circuit Judge. This is a single-issue appeal, requiring interpretation of an

insurance contract. The question is whether, in applying the agreed-upon method of calculating

fire loss coverage, the term “obsolescence” in the definition of “actual cash value” accounts for

external changes in market value through the concept of “economic obsolescence.” A survey of

the use of the relevant terms shows that the commonly understood meaning of the word

obsolescence does not include market value decline. To the extent that the term is ambiguous,

Michigan law requires that we construe it in favor of the insured. Accordingly, we AFFIRM the

grant of summary judgment for the Plaintiff.
No. 13-2376, Whitehouse v. Cincinnati Insurance


                                       I.      BACKGROUND

       The Cincinnati Insurance Company owes Whitehouse Condominium Group money to

cover losses from a fire-destroyed condominium building in Flint, Michigan. The question is

how much.

       According to the insurance policy purchased by Whitehouse, Cincinnati Insurance must

pay the “actual cash value” of the building at the time of the loss.      “Actual cash value” is

defined in the contract as the “replacement cost less a deduction that reflects depreciation, age,

condition and obsolescence.” The policy also included an option under which Whitehouse could

get the full replacement cost of the building, but it appears that Whitehouse waived this option

by declining to replace the building with one for the same general purpose and using the same

general construction method.

       The parties disagree on the meaning of the term “obsolescence.” Cincinnati Insurance

would define it broadly to include the term “economic obsolescence”—meaning a decrease in

market value—in which case Cincinnati Insurance claims the actual cash value would be only

$1,187,660.38. Whitehouse would interpret the term more narrowly to include only “functional

obsolescence,” in which case Whitehouse claims the actual cash value was $2,767,730.00. In

other words, the dispute is over whether Cincinnati Insurance gets the benefit of a decrease in

market values in Flint, Michigan.

       Whitehouse sued Cincinnati Insurance, requesting a declaratory judgment on the proper

construction of the term obsolescence. Both parties moved for summary judgment. The district

court held as a matter of law that the term was unambiguous and that it did not include economic

obsolescence.   The court began its analysis by determining that the competing dictionary

definitions offered by the parties did not resolve the question and that Michigan courts had never



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No. 13-2376, Whitehouse v. Cincinnati Insurance


squarely settled the issue. Taking cues from a Southern District of New York case involving

very similar policy language, the district court concluded that nothing in the contract indicated

that the parties intended to incorporate market value into the calculation of actual cash value.

The contract did not state that the calculation required consideration of all pertinent evidence, as

in the court-created broad evidence rule; the phrase “deduction” suggested that market value was

not included because markets can also increase; and the parties would have used the phrase

“market value” if they intended it to be considered.        As for unrelated caselaw in the tax

assessment and eminent domain contexts, the district court held that these cases were irrelevant

to the meaning of this policy.

       The district court granted summary judgment to Whitehouse, and Cincinnati Insurance

now appeals.

                                           II.     ANALYSIS

   A. Standard of Review and Applicable Law

       As Cincinnati Insurance has appealed a grant of summary judgment on a legal issue,

appellate review is de novo. V & M Star Steel v. Centimark Corp., 678 F.3d 459, 465 (6th Cir.

2012). Summary judgment is appropriate when there is no genuine issue as to any material fact

and the movant, here Whitehouse, is entitled to judgment as a matter of law. Fed. R. Civ. P.

56(c). This case involves no factual disputes.

       When interpreting a contract in a diversity case, the court applies the law, including the

choice of law rules, of the forum state—in this case, Michigan. Uhl v. Komatsu Forklift Co.,

512 F.3d 294, 302 (6th Cir. 2008). The insurance policy here has no choice-of-law provision, so

we must consider the following five factors, as instructed by the Michigan Supreme Court: place

of contracting, place of negotiation, place of performance, location of the subject-matter of the



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No. 13-2376, Whitehouse v. Cincinnati Insurance


contract, and place of incorporation of the parties. Id. (citing Chrysler Corp. v. Skyline Indus.

Servs., 528 N.W.2d 698, 702 (Mich. 1995); Restatement (Second) of Conflict of Laws § 188(2)

(1971)). Here, all five elements point toward Michigan law, and the parties agree that Michigan

law applies. In resolving questions of state law, this court looks first to final decisions of that

state; if no decision directly on-point exists, then we must make an Erie guess as to how that

court would resolve the issue. Conlin v. Mortg. Elec. Registration Sys., 714 F.3d 355, 358-59

(6th Cir. 2013).    In making this determination, intermediate state court decisions can be

persuasive. Id. at 359.

       In Michigan, an insurance contract is generally to be interpreted like any other contract,

according to Michigan contract interpretation principles. Stryker Corp. v. XL Ins. Am., 735 F.3d

349, 354 (6th Cir. 2012); Rory v. Continental Ins. Co., 703 N.W.2d 23, 26 (Mich. 2005). The

meaning of a contract is a question of law, as is the question of whether contract language is

ambiguous. Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776, 780 (Mich. 2003). The relevant

contract interpretation principles are simple enough—courts should enforce contract language in

accordance with its plain and commonly used meaning, being careful to enforce specific and

well-recognized terms.    Henderson v. State Farm, 596 N.W.2d 190, 193-94 (Mich. 1999);

Stryker, 735 F.3d at 354. A contract should be read as a whole instrument and with the goal of

enforcing the intent of the parties. Prestige Cas. Co. v. Mich. Mut. Ins. Co., 99 F.3d 1340, 1350

(6th Cir. 1996); see also Wilkie, 664 N.W.2d 781-82 (holding that a term ambiguous on its own

became unambiguous in context).

       If an insurance contract provision is ambiguous—meaning it is susceptible to two

different reasonable interpretations—it is strictly construed against the insurer. Henderson,

586 N.W.2d at 194; Stryker, 735 F.3d at 354. The parties incorrectly suggest that the district



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No. 13-2376, Whitehouse v. Cincinnati Insurance


court should consider extrinsic evidence to construe ambiguous terms. This might be correct in

the non-insurance context in which Michigan courts use extrinsic evidence to determine the

“meaning of an ambiguous contract” as a question of fact. See Klapp v. United Ins. Grp. Agency,

Inc., 663 N.W.2d 447, 469-70 (Mich. 2003). It might also be true where an insurance question

involves a question of fact as to the “application of the term or phrase” to the underlying events.

Henderson, 596 N.W.2d at 193. But where, as here, the issue only requires the court to construe

an ambiguous insurance policy term, the Michigan Supreme Court has stated unexceptionally

that “ambiguous policy provisions in an insurance contract ha[ve] to be construed against the

insurance company and in favor of the insured.” Wilkie, 664 N.W.2d at 784. Interpretation

techniques that look outside the insurance policy, such as the rule of reasonable expectations in

which courts rewrite contracts in light of the parties’ intent, “is just a surrogate for the rule of

construing against the drafter.” Wilkie, 664 N.W.2d at 782, 786-87. “[S]tating that ambiguous

language should be interpreted in favor of the policyholder’s reasonable expectations adds

nothing to the way in which Michigan courts construe contracts” because “it is already well

established that ambiguous language should be construed against the drafter, i.e., the insurer.”

Id. at 787; see also Raska v. Farm Bureau Mut. Ins. Co., 314 N.W.2d 440, 441 (Mich. 1982); see

also Stryker, 735 F.3d at 354.

       The mere fact that a term is undefined in an insurance contract does not render the term

ambiguous.    Henderson, 596 N.W.2d at 194.           Undefined terms, too, should be construed

according to their commonly used meaning unless it is apparent from the whole policy that a

special meaning was intended. Id. at 193-94; see also Prestige, 99 F.3d at 1350. And the words

should not be parsed in isolation because they may convey a different meaning in context when

used in conjunction with other words. Henderson, 596 N.W.2d at 194-95.



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No. 13-2376, Whitehouse v. Cincinnati Insurance


   B. Obsolescence

       The entire dispute in this case involves the precise meaning of the term “obsolescence,” a

term undefined in the insurance policy. The term appears within the contract definition of

“actual cash value,” which is “replacement cost less a deduction that reflects depreciation, age,

condition, and obsolescence.” More specifically, the question is whether the term obsolescence

includes a reduction in market value due to factors external to the property itself.

       Cincinnati Insurance would include in the term obsolescence two different components:

functional obsolescence and economic obsolescence. Generally, functional obsolescence means

a loss in value due to something inherent to the building itself such as old technology (think an

electrical panel that is no longer acceptable under current codes) or bad design (think a five

bedroom house that has only one bathroom). See SR Int’l Bus. Ins. Co. v. World Trade Ctr.

Props., 445 F. Supp. 2d 320, 348 (S.D.N.Y. 2006) [hereinafter WTC]; Black’s Law Dictionary

(9th ed. 2009). Economic obsolescence means a reduction in value due to market factors entirely

external to the building, such as neighborhood factors (this might occur if the neighborhood were

suddenly under a noisy flight path) or the general market (the real estate market crash appears to

be the factor in this case). See Dickler v. CIGNA Prop. & Cas. Co., 957 F.2d 1088, 1100 (3d

Cir. 1992); Black’s Law Dictionary (9th ed. 2009). Whitehouse calls Cincinnati Insurance’s

position “definitional high jinks” and argues that it is inconsistent with the common use of the

term obsolescence and is offered merely to remedy the insurer’s failure to include market value

in the actual cash value definition. According to Whitehouse, economic obsolescence is a

specialized concept used only in certain settings and does not fall within the generic meaning of

obsolescence.




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No. 13-2376, Whitehouse v. Cincinnati Insurance


        We must first attempt to discern the commonly used meaning of these terms.

Dictionaries support the position that economic obsolescence is a specialized concept not

included in the commonly used definition of obsolescence. See e.g., McNeel v. Farm Bureau

Gen. Ins. Co., 795 N.W.2d 205, 214 (Mich. 2010) (consulting a lay dictionary to attempt to

discern common meaning of undefined contract term); Twichel v. MIC Gen. Ins. Corp.,

676 N.W.2d 616, 622 (Mich. 2004) (citing to three different lay dictionaries to discern the

primary features of “ownership”). One dictionary defines obsolescence as “the condition of no

longer being used or useful: the condition of being obsolete” with “obsolete,” in turn, defined as

“a: no longer in use or no longer useful [as in] an obsolete word; b: of a kind or style no longer

current: old-fashioned [as in] an obsolete technology.” Merriam-Webster.com (last visited May

21, 2014). Another defines it as “becoming obsolete,” with obsolete defined as “no longer

produced or used; out of date: [as in] ‘the disposal of old and obsolete machinery,’ [and] ‘the

phrase was obsolete after 1625.’”        OxfordDictionaries.com (last visited May 21, 2014).

Webster’s, the source cited below by Whitehouse, defines obsolescence as “1. Becoming

obsolete; passing out of use as a word. 2. Intending to become out of date, as machinery, etc.”

Random House Webster’s College Dictionary (1997).            All of these definitions point to a

common understanding that something becomes obsolete when it becomes outdated due to some

feature inherent to the thing itself.

        Turning to Black’s Law Dictionary, as advocated by Cincinnati Insurance, complicates

matters slightly because it includes both the generic definition and more specific variations of the

term:

        obsolescence . . . 1. The process or state of falling into disuse or becoming obsolete. 2. A
        diminution in the value or usefulness of property, esp. as a result of technological
        advances. • For tax purposes, obsolescence is usu. distinguished from physical
        deterioration. . . .

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No. 13-2376, Whitehouse v. Cincinnati Insurance


       economic obsolescence. Obsolescence that results from external economic factors, such
       as decreased demand or changed governmental regulations. — Also termed external
       obsolescence. Cf. functional obsolescence. . . .

       functional obsolescence. Obsolescence that results either from inherent deficiencies in
       the property, such as inadequate equipment or design, or from technological
       improvements available after the use began. Cf. economic obsolescence.

Black’s Law Dictionary (9th ed. 2009). This definition gives some legitimacy to Cincinnati

Insurance’s position that economic obsolescence is a recognized subset of the generic term, but

the generic definition supports Whitehouse’s position because it indicates that technological

changes are the most commonly understood cause of obsolescence. As the district court pointed

out, this definition does not clarify whether economic obsolescence is commonly understood as

part of the generic term or whether it is a specialized term used in specialized contexts.

       A survey of caselaw suggests that the term economic obsolescence is more of a

specialized term. In Michigan Supreme Court opinions, the term economic obsolescence appears

only in the tax assessment context where it is used to determine the “true cash value” or “fair

market value” of a property for taxing purposes. See, e.g., Meadowlanes Ltd. Dividend Housing

Ass’n v. City of Holland, 473 N.W.2d 636, 643, 651 (Mich. 1991); see also Antisdale v. City of

Galesburg, 362 N.W.2d 632, 637 n.1 (Mich. 1984); C.A.F. Inv. Co. v. Twp. of Saginaw, 302

N.W.2d 164, 180-81 (Mich. 1981) (Levin, J., concurring). This is generally consistent with other

states, see, e.g., WTC, 445 F. Supp.2d at 348 (consulting New York tax cases to discern meaning

of the term), and with the federal courts of appeals, e.g., Helmsley v. City of Detroit, 380 F.2d

169, 173 (6th Cir. 1967) (considering economic obsolescence in valuation by tax assessor). In

the only federal court of appeals case using the term economic obsolescence in the context of

building insurance, the Third Circuit held that neither economic obsolescence nor functional

obsolescence were components of depreciation within a building insurance contract that defined

actual cash value as “replacement cost less depreciation.” Dickler, 957 F.2d at 1100.

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No. 13-2376, Whitehouse v. Cincinnati Insurance


       Cincinnati Insurance asks the court to simply adopt an “inclusive definition” that includes

all possible forms of obsolescence.      This is contrary to Michigan law, which instructs

employment of the commonly used meaning of the term, not a special meaning. See Henderson,

596 N.W.2d at 193-94 (noting that terms should be given their commonly used meaning even

though “dictionary publishers are obliged to define words differently to avoid plagiarism”).

Indeed, it is not necessary to adopt any particular definition; we merely have to discern whether

the common meaning includes market value decline. See, e.g., Citizens Ins. Co. v. Pro-Seal

Serv. Grp., 730 N.W.2d 682, 687 (Mich. 2007); Greenville Lafayette, LLC v. Elgin State Bank,

818 N.W.2d 460, 465 n.4 (Mich. Ct. App. 2012). On balance, it appears that the commonly

understood use of the term obsolescence does not include a decline in market values. At most

these sources might suggest that the term is ambiguous.

       Next, as Michigan law instructs, we look to the whole contract and interpret the term in

context. Prestige, 99 F.3d at 1350. The term obsolescence appears within the contract definition

of “actual cash value,” which is one of several methods insurers use to value a property in the

event of a loss. Other methods are market value, reproduction value, and replacement value.

See, e.g., Haley v. Farm Bur. Ins. Co., No. 302158, 2013 WL 4525924, at *10 (Mich. Ct. App.

Aug. 27, 2013) (explaining market value, reproduction value, and replacement value as

compared to actual cash value); Salesin v. State Farm, 581 N.W.2d 781, 790 (1998) (explaining

that replacement cost is additional coverage allowing the insured to replace a building without

deduction for depreciation and obsolescence). Many courts, including those in Michigan, have

adopted what is known as the “broad evidence” rule to determine the actual cash value when the




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No. 13-2376, Whitehouse v. Cincinnati Insurance


term is undefined in a contract.1 See Davis v. Nat’l Am. Ins. Co., 259 N.W.2d 433, 438 (Mich.

1977). Under the rule, factfinders or appraisers may consider “any evidence logically tending to

the formation of a correct estimate” of the value of the property, including “market or

reproduction or replacement values.” Id.; Evanston Ins. Co. v. Cogswell Props. LLC, 683 F.3d

684, 688 (6th Cir. 2012). Specific forms of evidence that may be relevant under the broad

evidence rule include:

       “the cost of restoration or replacement of the building less depreciation; the age of
       the property; the economic value of the property; the condition in which the
       property is maintained; the income derived from the building’s use; the property's
       location; the degree of obsolescence, both structural and functional; the profit
       likely to accrue on the property; the material of which the building is composed;
       the market value; the opinions regarding value given by qualified witnesses; the
       potential gainful uses to which the building might have been or may be put; the
       building’s value for purposes of rental; and any other facts disclosed by the
       evidence which may possibly throw light on the actual value of the building at the
       time of loss, including the property’s salvage value, if any.”

Dickler, 957 F.2d at 1097 (quoting Insuring Real Property § 24.04(2) at 24–30 (Stephen A.

Cozen, ed., 1989)) (emphasis added).

       While the broad evidence rule is not used when a policy defines actual cash value, like

the policy at issue here, its existence helps elucidate the fact that terms like obsolescence, market

value, and depreciation are all generally seen as different potentially relevant factors. Where a

contract incorporates some of the factors and not others, it is reasonable to think that the others

were left out intentionally.      E.g., Dickler, 957 F.2d at 1100 (“[A]lthough ‘economic


1
 Some lower Michigan courts have suggested that actual cash value means only replacement cost
less depreciation. Haley, 2013 WL 4525924, at *9 (affirming finding of actual cash value based
on expert’s opinion that it meant “‘the replacement cost less physical and economic depreciation
based on age and condition’”); GHD Operating, L.L.C. v. Emerson Prew, Inc., No. 278857, 2009
WL 249399, at *5-6 (Mich. Ct. App. Feb. 3, 2009) (discussing experts who both agreed that
actual cash value is generally replacement cost less depreciation); Salesin, 581 N.W.2d at 790
(Insured “agreed to pay the ‘actual cash value,’ which means ‘repair or replacement cost less
depreciation.’”).

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No. 13-2376, Whitehouse v. Cincinnati Insurance


obsolescence’ may play a part in determining actual cash value under the ‘broad evidence’ rule,

it should not be considered by a fact finder where, as here, the parties have precluded application

of the ‘broad evidence’ rule by defining actual cash value as replacement cost less

depreciation.”). In fact, it appears that Cincinnati Insurance used a similar argument in a case

where it fought the insured’s attempt to give actual cash value, as defined identically to the one

here, a meaning that included market value, potentially raising estoppel concerns. See Cincinnati

Ins. Co. v. Bluewood, Inc., No. 06-04127-CV-C-NKL, 2007 WL 4365738, at *3 (W.D. Mo. Dec.

12, 2007), aff’d, 560 F.3d 798 (8th Cir. 2009). More importantly for this court’s purposes, an

insured would be unlikely to think she was paying for insurance that accounted for a reduction in

market value where the insurance contract did not specifically list it.

       Another component of the relevant context is the full contract definition of actual cash

value: “replacement cost less a deduction that reflects depreciation, age, condition, and

obsolescence.” All three of the other terms listed—depreciation, age, and condition—reflect

something inherent to the building itself rather than an external market condition, suggesting that

obsolescence is similarly restricted. See Bloomfield Estates Improvement Ass’n, Inc. v. City of

Birmingham, 737 N.W.2d 670, 675 (Mich. 2007) (using doctrine of noscitur a sociis, meaning “a

word or phrase is given meaning by its context or setting,” to interpret contract language).

       Additionally, as the district court explained below, the contract definition only allows for

reductions for various purposes, not for additions, possibly suggesting that market values, which

can also increase, were not intended to be included. While Cincinnati Insurance rightly observes

that the term “obsolescence” necessarily means a reduction, this does not undermine the main

point. In light of the contract language, the insured would not likely believe, based solely on the

term obsolescence, that she was purchasing insurance that included a deduction for declines in



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No. 13-2376, Whitehouse v. Cincinnati Insurance


market value. See Wilkie, 664 N.W.2d at 787 (noting that the policyholder cannot be said to

have had an expectation not clear from the contract). This reasoning is consistent with the

analysis of the New York district court in the World Trade Center case. See WTC, 445 F. Supp.

2d at 349-50.2

        We conclude that the term obsolescence, as commonly understood, does not account for a

decline in market value. To the extent that the term obsolescence is ambiguous as to whether it

includes economic obsolescence, we strictly construe it against Cincinnati Insurance.          See

Henderson, 596 N.W.2d at 194; Stryker, 735 F.3d at 354. This result preserves the benefit of the

bargain of both parties. As other courts have noted, “[i]t can hardly be said that an insured reaps

a windfall by obtaining payment of actual cash value determined in a fair and reasonable manner

when that is precisely what the insurer has agreed to pay under its policy in advance.”

Gilderman v. State Farm, 649 A.2d 941, 946 (Penn. 1994).

                                        III.    CONCLUSION

        For the reasons explained above, we AFFIRM the grant of summary judgment to the

Plaintiff.




2
 Cincinnati Insurance argues that it was improper for the district court to consider WTC because
its underlying insurance contract is distinguishable from the contract at issue here and because
WTC is extrinsic evidence that the court could not consider when construing an unambiguous
contract term. The district court committed no error by considering persuasive authority from
another court that also had to discern the commonly understood meaning of the term
obsolescence. Moreover, caselaw does not amount to extrinsic evidence. See Black’s Law
Dictionary (9th ed. 2009).
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