Michigan's Fire Policy, Appraisal, Special Provisions and Terrorism Coverage

Every fire insurance contract on property in Michigan is treated as made in Michigan (MCL 500.2804), and no insurer or agent may issue one that does not conform to chapter 28 of the Insurance Code (MCL 500.2806). The chapter does not print a standard policy. It lists provisions every fire policy must contain, and it sets a floor of coverage. Homeowners and dwelling policies fall inside it, because the Code treats a home policy as a fire policy with nonbusiness coverages added (MCL 500.2103(3)(a) and (b)). Insurers meet these requirements in the forms they file, and a state amendatory endorsement is the usual way a national form is brought into line.

The Mandatory Provisions

MCL 500.2833(1) says each fire policy issued or delivered in Michigan “shall contain” nineteen listed provisions, and subsection (2) adds that the policy must give at least the coverage of the standard fire policy under former section 2832. The form itself was repealed, but its coverage floor remains.

Group	What Michigan requires	MCL 500.2833(1)
Coverage floor	At least actual cash value at the time of loss, and direct loss by fire and lightning. Property moved to save it from a covered peril keeps pro rata coverage for 5 days	(a), (b)
Defenses	The policy may be void for misrepresentation, fraud or concealment	(c)
Scope	The policy must say what property and perils are not covered and what conditions suspend or restrict coverage, and how a provision may be waived or changed	(d) to (g)
Cancellation	The insured may cancel at any time. The insurer may cancel on at least 10 days’ mailed notice. A mortgagee gets at least 10 days’ written notice	(h), (i), (j)
Sharing	The insurer pays no more than its pro rata share with other insurance on the peril	(k)
Loss procedure	Notice of loss, appraisal, repair-or-replace option, no abandonment, payment in 30 days, suit limits, subrogation	(l) to (r)
Timing	Coverage takes effect at 12:01 a.m. standard time at the property	(s)

One other section limits what an insurer may do with a breach of condition. An insurer may not defend on a breach of warranty or condition that occurred before the loss unless the breach exists at the time of the loss or contributes to the loss or its amount (MCL 500.2836(1)). A tenant who let a smoke detector battery lapse in March and had it replaced in April has not given the insurer a defense to a May fire.

Cancellation and Return Premium

Under MCL 500.2833(1)(h) the earned premium on an insured-requested cancellation cannot be less than the pro rata premium for the expired time or $25, whichever is greater. Suppose a homeowner pays $1,200 for a year and cancels after 100 days. The pro rata earned premium is $1,200 x 100 / 365 = $328.77, which exceeds $25, so the return is $1,200 - $328.77 = $871.23. Now suppose a tenant pays $72 and cancels after 30 days. The pro rata earned premium is $72 x 30 / 365 = $5.92, so the $25 floor governs, and the return is $72 - $25 = $47.00. The statute sets a floor on what the insurer keeps. It does not make the insurer refund every dollar above pro rata.

When the insurer cancels, subsection (1)(i) lets it mail a written notice with or without returning the excess premium. If the excess is not returned with the notice, the notice must say it will be refunded on demand. For a home policy, the Essential Insurance Act’s cancellation rules govern to the extent they are inconsistent (MCL 500.2106(4), 500.2123).

The mortgage clause in subsection (1)(j) has three parts. The mortgagee’s interest may be canceled only on 10 days’ written notice to the mortgagee. If the owner fails to file a proof of loss, the mortgagee must file within 60 days after notice. If the insurer denies liability to the owner but pays the mortgagee, it is subrogated to the mortgagee’s rights, including contract rights, to the extent of the payment, or it may pay off the debt and take an assignment of the debt and the mortgage.

Appraisal

Subsection (1)(m) applies when the insured and insurer fail to agree on the actual cash value or the amount of the loss. Either may make a written demand for appraisal, and the steps follow a fixed order.

1. Within 20 days after receiving the written demand, each party selects “a competent, independent appraiser” and tells the other who it is.
2. The two appraisers select “a competent, impartial umpire.”
3. If they cannot agree on an umpire within 15 days, either party may ask a judge of the circuit court for the county where the loss occurred or the property is located to select one. The statute does not say what event starts the 15 days.
4. The appraisers set the amount of loss and the actual cash value of each item. If they submit a written agreement to the insurer, that amount is the loss. If they cannot agree within a reasonable time they submit their differences to the umpire, and a written agreement signed by any two of the three sets the amount.
5. Each side pays its own appraiser. The umpire and the other expenses are split equally.

Consider a kitchen fire. The insurer values the loss at $20,000 and the owner’s contractor says $24,000. The owner’s appraiser holds to $24,000 and the insurer’s to $20,000. The umpire and the insurer’s appraiser sign a written agreement at $22,500. Two of the three have signed, so the loss is $22,500. If the umpire charges $1,500, each side pays $750 of it, and each pays its own appraiser separately. The appraisal sets the number. It is not the place to decide whether the policy covers the peril.

Paying the Loss

A fire loss is payable within 30 days after the insurer receives proof of the amount of the loss, and this holds “notwithstanding the provisions of any contract or statute to the contrary” (MCL 500.2833(1)(p), 500.2836(2)). Section 2845 is the exception. It exists so that proceeds of a burned building can be held for repair or demolition.

Withholding after a building loss

When a fire or explosion damages insured real property and a final settlement is reached, the insurer must withhold the lesser of 25% of actual cash value at the time of the loss or 25% of the final settlement (MCL 500.2845(1)). For residential property the withheld amount is subject to a statutory cap that is adjusted each January 1 for the consumer price index. The rule applies only if the settlement exceeds 49% of the insurance on the real property (MCL 500.2845(15)). It applies only in a city, village or township that has resolved to apply it, set up a trust or escrow account and notified the Director, who circulates the list of those places (MCL 500.2845(9), (12)).

Take a house insured for $90,000 with actual cash value of $80,000 at the time of the fire, and a final settlement of $46,000. The settlement is 51.1% of the insurance, above the 49% line of $44,100, so the rule applies. Twenty-five percent of the actual cash value is $20,000 and 25% of the settlement is $11,500. Assume the residential cap does not bind here. The lesser figure is $11,500, so the insurer pays $46,000 - $11,500 = $34,500 within the 30 days and withholds $11,500. It notifies the municipal treasurer, the insured and any mortgagee named on the policy. If the municipality does not ask within 15 days after the mailing to have the money escrowed, the insurer pays it to the insured 15 days after mailing (MCL 500.2845(1)(f)). The withholding does not apply if the insured files evidence of a contract to repair within 15 days after the settlement and consents to direct payment to the contractor, and the insurer notifies the municipality (MCL 500.2845(13)).

In a participating municipality, an insurer must stop further payments on a fire claim of $2,000 or more if the fire or law enforcement authority notifies it that the insured did not file the required fire report within 21 days after a written demand. Payments resume when the report is filed (MCL 500.3011(1)). And a replacement cost policy may pay the difference between actual cash value and the amount needed to repair or replace to a similar condition and appearance, but the insured may always take a cash settlement at actual cash value, and the policy may withhold anything beyond actual cash value until the property is actually repaired or replaced, unless the loss exceeds the policy’s limit (MCL 500.2827(1) to (3)). On a $14,000 actual cash value loss that costs $20,000 to repair, under a higher limit, the insured can take $14,000 now and collect the remaining $6,000 on completing repairs.

Suing on the Policy

Subsection (1)(q) requires the policy to say that suit may follow only after compliance with its terms. The action must be brought within 1 year after the loss or within the policy’s period, whichever is longer. The time is tolled from the day the insured notifies the insurer of the loss until the insurer formally denies liability.

A policy with a two-year suit period shows how this works. The loss is March 1. The insured gives notice March 10, 9 days into the period, and the insurer formally denies on August 10. The 153 days between notice and denial do not count, so the deadline, March 1 two years after the loss, moves 153 days later to August 1 of that same year.

Terrorism Coverage

The federal program

The Terrorism Risk Insurance Act of 2002 (Pub. L. 107-297), as extended, has a termination date of December 31, 2027 (Pub. L. 116-94, title V, section 502(a)). The program ends on that date unless Congress extends it. Treasury may keep paying and recouping for acts that occur while the program is in effect.

The program covers only commercial lines. “Property and casualty insurance” means commercial property and casualty lines, including excess, workers’ compensation and directors and officers liability (TRIA sec. 102(11)). It excludes, among others, commercial auto, burglary and theft, surety, professional liability, farm owners multiple peril, NFIP flood insurance and health and life insurance. A homeowners policy is outside it.

A loss reaches the program only after an act of terrorism is certified by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security, and the Attorney General. The act must be violent or dangerous to people, property or infrastructure, must cause damage in the United States or to certain U.S. carriers, vessels or missions, and must be part of an effort to coerce the U.S. civilian population or to influence the policy or affect the conduct of the U.S. government by coercion. Congress removed the foreign-actor requirement in 2007 (Pub. L. 110-160, section 2). No act is certified if the aggregate property and casualty losses are $5,000,000 or less.

How the loss is shared

Every insurer in the program must make coverage available for insured losses in its policies, on terms that do not differ materially from the coverage for other events (TRIA sec. 103(c)). To qualify for federal payment it must disclose to the policyholder, clearly and conspicuously, the premium charged for terrorism losses and the federal share, and the existence of the $100,000,000,000 annual cap (TRIA sec. 103(b)(2), (3)).

1. Trigger. No federal payment is made unless industry insured losses from certified acts exceed $200,000,000 for the calendar year (Pub. L. 114-1, section 103).
2. Insurer deductible. Each insurer first absorbs 20% of its direct earned premium for the preceding year (Pub. L. 114-1, section 106).
3. Federal share. Above the deductible, Treasury pays 80% of the insurer’s insured losses, a share that fell 1 point a year from 85% until it reached 80% (Pub. L. 114-1, section 102). The insurer keeps 20%.
4. Cap. Above $100,000,000,000 of aggregate insured losses in a calendar year, Treasury pays nothing further, and no insurer that has met its deductible owes anything further (TRIA sec. 103(e)(2)).

Take an insurer with $50,000,000 in direct earned premium. Its deductible is $50,000,000 x 20% = $10,000,000. Suppose a certified act produces $2,000,000,000 of industry losses, well above the trigger, and $14,000,000 of this insurer’s insured losses. Treasury pays 80% of the $4,000,000 above the deductible, or $3,200,000, and the insurer bears $10,000,000 + $800,000 = $10,800,000. If industry losses had been $190,000,000, the trigger would not have been met, Treasury would pay nothing, and the insurer would bear all $14,000,000.

Treasury recoups part of what it pays through surcharges on commercial policies. A surcharge collected at Treasury’s discretion may not exceed 3% of the policy premium a year (TRIA sec. 103(e)(8)(C), as amended by Pub. L. 110-160, section 4(e)), so a $20,000 policy carries at most $600 a year of it.

Michigan’s rule

Notwithstanding the fire policy requirements, a commercial fire policy in Michigan may exclude loss by fire or other perils caused directly or indirectly by terrorism (MCL 500.2834(1)). The statute defines terrorism three ways: a certified act under the federal Act, a violent act, or an act dangerous to human life, property or infrastructure, committed by one or more individuals that appears to be part of an effort to coerce a civilian population or to influence the policy or affect the conduct of any government by coercion, or terrorism as defined in a form filed under MCL 500.2236 and properly in use (MCL 500.2834(2)). Section 2834 gives the permission to commercial fire policies only. The federal duty to make coverage available applies alongside it, so a producer quoting a commercial account looks for the separate disclosure of the terrorism premium and the federal share.

Lesson summary

• Michigan fire policies must contain the provisions in MCL 500.2833(1), at least the coverage of the former standard fire policy, and may not be issued unless they conform to chapter 28.
• On an insured’s cancellation, earned premium is at least the pro rata amount or $25, whichever is greater. The insurer’s cancellation notice must say excess premium not tendered will be refunded on demand.
• Appraisal runs in a fixed order: a written demand, appraisers named in 20 days, an umpire, and an award signed by any two of three. Each side pays its own appraiser and splits the rest.
• A fire loss is payable within 30 days after proof of the amount of the loss, subject to the 25% withholding for building losses over 49% of the insurance in covered municipalities.
• Suit must be filed within 1 year after the loss or the policy’s period, whichever is longer, and the time stops running from notice of loss until formal denial.
• Federal terrorism reinsurance covers commercial lines only, after certification, a $200,000,000 trigger and a 20% insurer deductible, with Treasury paying 80% above it, and it ends December 31, 2027 unless extended.
• Michigan lets a commercial fire policy exclude terrorism, and the federal duty to make coverage available applies alongside that permission.