By: Ronald M. Sangster Jr. Law Offices of Ronald M. Sangster PLLC
Death Knell for the "Innocent Third Party" Rule-- Insurer's Recission of Coverage Extends to PIP Benefits for Innocent Third Parties!
By way of background, the author was counsel for Titan Insurance Company in the seminal Michigan Supreme Court case of Titan Ins Co v Hyten, 491 Mich 547; 817 NW2d 562 (2012). In
Titan, the Michigan Supreme Court ruled that a no‑fault insurer could avail itself of the traditional-common-law remedies, including rescission and reformation, in cases involving misrepresentations in an insurance application.
In Titan, the insured misrepresented the status of her driver's license in an application for benefits. Due to the fraud that was perpetrated by the insured, Titan Insurance Company was allowed to reform its bodily-injury-liability limits down to the statutorily required minimum policy limits of $20,000/$40,000, notwithstanding the fact that the recovery of an "innocent third party" (in that case, the claimant who was injured as a result of the negligence of the insured) was affected. In ruling that Titan could reform or rescind coverage to the minimum $20,000/ $40,000 policy limits, the Supreme Court indicated that the insurer was free to utilize whatever common-law defenses were available, unless expressly prohibited by statute. The Supreme Court pointed out in a footnote that in the context of a bodily-injury claim, MCL 500.3009 requires that all policies sold in Michigan have liability limits of at least $20,000 per person or $40,000 per occurrence.
Titan was admittedly not a PIP case. Since
Titan was decided, though, the author has been asked by a number of prominent defense attorneys and clients as to whether the rationale expressed by the Supreme Court in
Titan could be extended to claims for first-party, no-fault insurance benefits involving "innocent third parties." Obviously, the stakes were substantial.
Imagine, for example, that the insured strikes a motorcyclist, resulting in serious injuries (or even death) to the motorcyclist. Under MCL 500.3114(5)(a), the insurer of the owner or registrant of the motor vehicle involved in the accident would occupy the highest order of priority for payment of the motorcyclist's no‑fault benefits, which could easily be in the catastrophic range. However, if the policy is rescinded, due to a fraud in the application, why should the insurance company still face the prospect of paying out millions of dollars on a claim for the injured motorcyclist under a policy that never should have been issued?
The countervailing argument, of course, is that the innocent third party would need to then resort to a lower priority insurer or the Michigan Assigned Claims Plan, as the insurer of last resort. If the claim ends up with the Michigan Assigned Claims Plan, it will necessarily result in a higher assessment being charged to all Michigan motorists (who, after all, pay for the MACP claims), due to the influx of PIP claims involving an "innocent third party."
The Michigan Supreme Court weighed in on this issue when it instructed the Court of Appeals to hear an interlocutory appeal, filed by Sentinel Insurance Company, in Bazzi v Sentinel Ins Co, 497 Mich 886; 854 NW2d 897 (2014). The Michigan Supreme Court subsequently vacated two decisions of the Court of Appeals that had reached opposite conclusions regarding this issue. See
Frost v Progressive Mich Ins Co, 497 Mich 980; 860 NW2d 636 (2015) (in which the Court of Appeals held that the carrier could rescind PIP coverage for an innocent third party) and
State Farm v Michigan Municipal Risk Mgmt Authority, 498 Mich 870; 868 NW2d 898 (2015) (in which the Court of Appeals held that the carrier could not rescind PIP coverage for the innocent third party). The Supreme Court instructed the Court of Appeals to hold its decision in those cases in abeyance, pending its decision in
Bazzi. Therefore, all eyes were on
Oral argument took place on December 9, 2015. Six months later, June 14, 2016, the Michigan Court of Appeals released its published opinion in Bazzi v Sentinel Ins Co, __ Mich App __; __ NW2d __; 2016 WL 3263905 (June 14, 2016) (Docket No. 320518). In a 2-1 decision, the Court of Appeals ruled that, in light of the broad holding in
Titan, a no‑fault insurer could rescind PIP coverage, even as to an "innocent third party," based upon the misrepresentations made by the insured. In other words, the innocent-third-party rule has now been abrogated.
The facts in Bazzi, as noted in the majority opinion authored by Judge David H. Sawyer, were as follows:
Plaintiff Ali Bazzi ("plaintiff") is seeking PIP benefits for injuries sustained in an automobile accident while driving a vehicle owned by third-party defendant Hala Bazzi (plaintiff's mother) …. The vehicle driven by Bazzi was insured under a commercial automobile policy issued by defendant Sentinel Insurance to Mimo Investments, LLC. Sentinel maintains that the policy was fraudulently procured by Hala Bazzi and Mariam Bazzi (plaintiff's sister and resident agent for Mimo Investments) in order to obtain a lower premium due to plaintiff's involvement in a prior accident. Sentinel maintains that the vehicle was actually leased to Hala Bazzi for personal and family use, not for commercial use by Mimo, and, in fact, that Mimo was essentially a shell company that had no assets or employees or was not otherwise engaged in actual business activity. Sentinel also alleges as fraud that it was not disclosed that plaintiff would be a regular driver of the vehicle. In fact, Sentinel successfully pursued a third-party complaint against Hala and Mariam Bazzi seeking to rescind the policy based upon fraud. [Bazzi, slip opinion at p. 1.]
For purposes of its decision, the Court of Appeals assumed that Ali Bazzi was truly an "innocent third party." Given these facts, the Court of Appeals then held as follows:
Resolution of this case begins and ultimately ends with our Supreme Court's decision in Titan. Although
Titan did not involve a no-fault insurance claim for PIP benefits, we nonetheless are convinced that
Titan compels the conclusion that there is no innocent third-party rule as to a claim for those benefits. That is, if an insurer is entitled to rescind a no-fault insurance policy based upon a claim of fraud, it is not obligated to pay benefits under that policy even for PIP benefits to a third party innocent of the fraud. [Bazzi, slip opinion at p. 3.]
The Court of Appeals' rationale for extending Titan into PIP claims is very interesting. First, the Court of Appeals had to address the issues raised by Judge Beckering's dissent. Judge Beckering argued that the innocent-third-party rule was separate and distinct from the "Easily Ascertainable" rule, which was abrogated by the Supreme Court in
Titan. The easily-ascertainable rule prevented an insurer from rescinding optional coverages as to innocent third parties where the misrepresentation was "easily ascertainable." This rule, in turn, had its origins in the Court of Appeals' decision in
State Farm v Kurylowicz, 67 Mich App 568; 242 NW2d 530 (1976). The Court of Appeals' majority concluded that, in fact, these "rules" were one and the same. The Court of Appeals noted that even if the easily-ascertainable rule and the "innocent-third-party rule were separate and distinct, they both had their origins in the
Kurylowicz decision, which was overruled by the Supreme Court in
Titan. The Court of Appeals noted that
Kurylowicz's progeny included
Ohio Farmers Ins Co v Michigan Mut'l Ins Co, 179 Mich App 355, 445; NW2d 228 (1989), which did rely on the innocent-third-party rule. Therefore, because
Kurylowicz was overruled, so too was
Ohio Farmers and, with it, the innocent-third-party rule was abrogated.
Having disposed of the claim that the innocent-third-party rule is separate and distinct from the easily-ascertainable rule, the Court of Appeals then addressed the "public policy" rationale for maintaining the innocent-third-party rule. In this regard, the Court of Appeals first quoted extensively from the Supreme Court's decision in Titan itself, regarding the proper role of the Judiciary
vis-à-vis the Legislature:
First, Kurylowicz justified the 'easily ascertainable' rule on the basis of its understanding of the 'public policy' of Michigan. In light of the Legislature's then recent passage of the no-fault act, MCL 500.3101 et seq.,
Kurylowicz reasoned that
'the policy of the State of Michigan regarding automobile liability insurance and compensation for accident victims emerges crystal clear. It is the policy of this state that persons who suffer loss due to the tragedy of automobile accidents in this state shall have a source and a means of recovery. Given this policy, it is questionable whether a policy of automobile liability insurance can ever be held void ab initio after injury covered by the policy occurs.' [Kurylowicz, 67 Mich App at 574.]
This 'public policy' rationale does not compel the adoption of the 'easily ascertainable' rule. In reaching its conclusion, Kurylowicz effectively replaced the actual provisions of the no-fault act with a generalized summation of the act's 'policy.' Where, for example, in
Kurylowicz's statement of public policy is there any recognition of the Legislature's explicit mandate that, with respect to insurance required by the act, 'no fraud, misrepresentation, . . . or other act of the insured in obtaining or retaining such policy . . . shall constitute a defense" to the payment of benefits? MCL 257.520(f)(1). We believe that the policy of the no‑fault act is better understood in terms of its actual provisions than in terms of a judicial effort to identify some overarching public policy and effectively subordinate the specific details, procedures, and requirements of the act to that public policy. In other words, it is the policy of this state that all the provisions of the no-fault act be respected, and
Kurylowicz's efforts to elevate
some of its provisions and
some of its goals above other provisions and other goals was simply a means of disregarding the stated intentions of the Legislature. The no‑fault act, as with most legislative enactments of its breadth, was the product of compromise, negotiation, and give-and-take bargaining, and to allow a court of this state to undo those processes by identifying an all-purpose public policy that supposedly summarizes the act and into which every provision must be subsumed, is to allow the court to act beyond its authority by exercising what is tantamount to legislative power. Third-party victims of automobile accidents have a variety of means of recourse under the no-fault act, and it is to those means that such persons must look, not to a judicial articulation of policy that has no specific foundation in the act itself and was designed to modify and supplant the details of what was actually enacted into law by the Legislature. [Bazzi, slip opinion at pp. 8-9.]
Given this observation, the Court of Appeals noted, in line with recent Michigan Supreme Court precedent, that public-policy decisions are left up to the Legislature, not the judiciary:
The policy concerns raised by Citizens [the insurer assigned by the Michigan Assigned Claims Plan to adjust Ali Bazzi's claim for no‑fault benefits] may well have merit. But it is for the Legislature, and not by this Court, to determine whether there is merit to those concerns and, if so, what is the appropriate remedy. While the Legislature might conclude that the appropriate response is to create an innocent third-party rule, it may choose to address the issue differently. While we can envision any number of policy issues, as well as solutions to those issues, we are judges, not legislators. It is for the Legislature, not this Court, to consider these issues and determine what, if any, response represents the best public policy. We decline the invitation to legislate into existence an innocent third-party rule that, thus far, the Legislature has chosen not to adopt. [Bazzi, slip opinion at p. 9.]
Accordingly, the Court of Appeals remanded the matter back to the Wayne County Circuit Court for a determination as to whether or not the misrepresentations made by Hala and Mariam Bazzi conclusively established fraud, or whether there were genuine issues of material fact regarding the fraud issue.
The Court of Appeals majority again summarized its holding as follows:
In sum, regardless whether there is one rule or two, and whether we consider a case involving liability coverage or PIP benefits, it all leads back to Kurylowicz, and the Supreme Court in
Kurylowicz ignored the Supreme Court's decision in
Keys v Pace, 358 Mich 74; 99 NW2d 547 (1959), which had itself involved arguably easily ascertainable fraud and an innocent third party. Accordingly, we conclude that: (1) there is no distinction between an "easily ascertainable rule" and an "innocent third-party rule," (2) the Supreme Court in
Titan clearly held that fraud is an available defense to an insurance contract except to the extent that the Legislature has restricted that defense by statute, (3) the Legislature has not done so with respect to PIP benefits under the no-fault act, and, therefore (4) the judicially created innocent third party rule has not survived the Supreme Court's decision in
Titan. Therefore, if an insurer is able to establish that a no-fault policy was obtained through fraud, it is entitled to declare the policy void
ab initio and rescind it, including denying the payment of benefits to innocent third parties. [Bazzi, slip opinion at p. 10.]
Given the Court of Appeals' extensive reliance on Titan in the majority opinion, including the majority's express deferral of "public policy" concerns to the Legislature, it seems unlikely that the Michigan Supreme Court would entertain an application for leave to appeal, although one never knows.
Judge Boonstra issued an interesting concurring opinion. Judge Boonstra was on the panel of the Court of Appeals that decided State Farm v Michigan Municipal Risk Mgmt Authority, unpublished opinion per curiam of the Court of Appeal, issued February 19, 2015 (Docket No. 319710); 2015 WL 728652, which held that a no‑fault insurer could not rescind PIP coverage even as to an "innocent third party." Judge Boonstra went to great lengths to explain his change of opinion. He explained that, after examining the briefs submitted by the parties on appeal (including the
amicus briefs) and closely examining the Michigan Supreme Court's decision in
Titan, he became convinced "that the judicially-created doctrine that has become known as the 'innocent third party rule' is indeed part and parcel of the 'easily ascertainable rule' that the Supreme Court abrogated in [Titan]." Judge Boonstra explained that an insurer is only obligated to pay benefits pursuant to a contract, and it makes no sense to enforce contractual liabilities against an insurance company in a case where, simply put, no contract exists! As stated by Judge Boonstra:
Said differently, if, as Titan says, we must construe the insurance policy and the statute (here, the no-fault statute) together as though the statute is part of the contract,
id., and there is nothing in the statute to the contrary, the common-law fraud defense remains available to effect a rescission of the policy, and with it, the applicability of the statutory provisions that are otherwise incorporated into the contract. After all, if an insurer only has PIP obligations because it entered into a contract with its insured, and if it is entitled to rescind the contract because of the insured's fraud, then there is no basis for enforcing against this contracting insurer the statutory PIP liabilities that only derive (as to that insurer) from the contract that has been rescinded. [Bazzi, slip opinion at p. 4 (Boonstra, J. concurring).]
Lastly, Judge Boonstra pointed out that the innocent-third-party rule was based, in part, on a now-repealed statutory provision that used to be incorporated into fire insurance policies regarding the defense of fraud by the insured. See Morgan v Cincinnati Ins Co, 411 Mich 267; 307 NW2d 53 (1981). Simply put, Judge Boonstra, like Judge Sawyer, found no basis to continue to apply the innocent-third-party rule in the context of a claim for PIP benefits.
Judge Beckering authored a 19-page dissent. In her opinion, she expressed concerns over the timeliness of any given insurer's decision to rescind coverage even as to "innocent third parties," and alluded to the possibility that many individuals who would otherwise be entitled to no‑fault benefits could be left without a claim for no‑fault benefits, should the insurer rescind after the one-year notice provision set forth in MCL 500.3145(1). As noted by Judge Beckering:
Furthermore, I am not convinced that it is equitable to require the innocent third-party otherwise covered by a policy to seek PIP benefits through the assigned claims plan in the event the insurance carrier claims fraud by the procurer and seeks rescission, as Sentinel contends should occur in this case. As Sentinel impliedly concedes in its briefing, the payment of benefits through the assigned claims plan might be unavailable for certain innocent third parties. And I note that statutory deadlines for giving notice of claimed PIP benefits could prevent an innocent third party, through no fault of his or her own, from receiving mandatory PIP benefits. Notably, a person claiming benefits through the assigned claims plan "shall notify" the assigned claims plan of his or her claim within one year. See MCL 500.3174; MCL 500.3145(1). See also Bronson Methodist Hosp v Allstate Ins Co, 286 Mich App 219, 225-226; 779 NW2d 304 (2009) (examining MCL 500.3145(1) and MCL 500.3174). I pose the question of: what happens when an innocent third party tries to obtain PIP benefits through the insurer listed on the policy, only to have that insurer subsequently rescind the policy based on fraud in which the innocent third party did not participate, and the innocent third party then misses the one-year deadline for notifying the assigned claims plan? At least one panel on this Court has held that, unless notice is given to the assigned claims plan within one year of the accident, the claim is barred, even when the injured person first sought benefits from what she thought was the correct insurer. See
Visner v Harris, unpublished opinion per curiam of the Court of Appeals, issued December 6, 2012, (Docket No. 307507). This bolsters the position that permitting the remedy of rescission with regard to PIP benefits payable to innocent third parties has the potential to work an inequitable result. Moreover, allowing insurance companies to rescind their contracts with respect to PIP benefits owed to innocent third parties could encourage gamesmanship and delay tactics on the part of an insurer; insurance companies are the recipients of claims under the assigned claims plan, and waiting to rescind an insurance policy until after the assigned claims plan claim deadline passes means fewer claims filed under the assigned claims plan. This also runs afoul of the no-fault act's purpose of ensuring prompt and adequate payment for the types of injuries and losses encompassed under the category of PIP benefits. [Citation omitted]. Put simply, I do not agree that the equitable remedy of rescission trumps the equitable remedy of the innocent third-party rule such that it is appropriate to apply to first-party statutorily mandated PIP benefits, and I decline to extent
Titan in such a fashion. [Bazzi, slip opinion at pp. 18-19 (Beckering, J. dissenting).]
Instead, Judge Beckering would reaffirm case law dating back 30 years and maintain the innocent-third-party rule as is.
So Now What?
First, it is unknown at this time whether the claimants or the MACP-assigned insurer will file an application for leave to appeal with the Michigan Supreme Court. For our part, we will be monitoring further filings on this case in the next few weeks. Claimants and/or the MACP-assigned insurer have until July 26, 2016 to file an application for leave to appeal with the Michigan Supreme Court.
Second, the insurer is still obligated to prove that it has a valid basis for rescinding coverage. Generally speaking, an insurer must demonstrate some type of fraud or misrepresentation (and these are not necessarily one and the same) in the application, and show that if the true state of affairs had been made known, the insurance company either would not have accepted the risk, or would have charged a higher premium. See, e.g., 21st Century Ins Co v Zufelt, __ Mich App __; __ NW2d __; 2016 WL 2992523 (May 24, 2016) (Docket No. 325657) (holding that a failure to disclose moving violations in an application for insurance justified rescission of the policy, even though the policy had been subsequently renewed).
Third, the timing of the insurer's decision to rescind coverage should be carefully examined. For those claims that are less than a year old, an insurer is now free to rescind coverage as to "innocent third parties." In the rescission letter sent to the "innocent third party," the no‑fault insurer should, as a matter of good business practice, provide the "innocent third party" with the contact information for the Michigan Assigned Claims Plan. If a lower priority insurer is known to the rescinding insurer, it would probably be a good idea to point out that information to the claimant as well.
Fourth, what about claims that are over one-year old? This remains an open question. At this point, it is too early to tell whether the Michigan Assigned Claims Plan will agree to accept claims that are over one-year old from rescinding insurers. After all, MCL 500.3174 makes it clear that the Michigan Assigned Claims Plan must be placed on notice of a claim for no‑fault benefits within one year from the date of accident. If the Michigan Assigned Claims Plan were to agree to accept these claims notwithstanding the one-year notice provision (referenced above), so much the better. If, however, the MACP declines to accept such claims, would Judge Beckering's predictions about "innocent third parties" suddenly having no coverage become true? What about the argument that because rescission is an equitable remedy, the rescinding insurer cannot have "unclean hands"? The author recommends that an insurance company faced with this decision should be on the watch for a counter-argument to the effect that it is acting "inequitably" when it rescinds coverage, and it is too late for the injured Claimant to obtain his or her benefits from another source.
Perhaps the middle ground in cases where the insurer attempts to rescind more than one year post-accident is for the MACP or the next higher priority insurer to pick up the claim, so that a legitimately injured "innocent third party" is not left without benefits. The MACP or next highest priority insurer would have to agree to waive application of the one-year notice provision set forth in MCL 500.3145(1) (as to policy insurers) and MCL 500.3174 (as to MACP insurers). At that point, the lower priority insurer or the MACP would file a subrogation action against the rescinding insurer, challenging its ability to rescind more than one year post-accident. Given the scope of the Bazzi decision, it will be interesting to see how these issues work themselves out.
Finally, we can expect to see more claims being filed with the Michigan Assigned Claims Plan. Contrary to Judge Beckering's opinion, not all insurers participate in the Michigan Assigned Claims Plan system. Currently, there are only seven insurers who participate as assigned insurers for the MACP. Those insurers can certainly expect to see an increase in the claims being handled by the MACP and, of course, more litigation.
In conclusion, what had been accepted as settled law for 30 years (according to Judge Beckering's dissent) has now been abrogated by the Michigan Court of Appeals. As noted above, there are certainly competing public policy perspectives from the points of view of the rescinding insurer, the MACP, and the injured "innocent third party." For rescinding insurers, they are no longer "on the hook" to pay potentially millions of dollars in claims to "innocent third parties" under a policy that either never should have been issued in the first place, or would have been issued only in exchange for payment of a higher premium. From the standpoint of the MACP and its assigned insurers, we can expect to see higher claims payouts, as the responsibility for handling claims of "innocent third parties" are shifted away from rescinding insurers and on to either a lower priority insurer or, more likely, the MACP as the insurer of last resort. To the extent that the MACP assumes handling of these claims, we can expect to see an increase in the statutory assessments that are utilized to fund the operation of the MACP and its claims payments. From the standpoint of the injured "innocent third party," it remains to be seen whether or not the insurer will actually rescind coverage on a claim that has been paid for more than one year and, if so, how the MACP or a lower priority insurer will react to such a move. It will be interesting to see how matters shake out in the next few years. Whatever perspective the reader may have, perhaps the following quote from Joseph Chamberlain says it all:
I think that you will all agree that we are living in most interesting times. I never remember myself a time in which our history was so full, and which day by day brought us new objects of interest, and let me say also, new objects for anxiety.