No-Fault Report

No-Fault Section

By: Ronald M. Sangster Jr., Law Offices of Ronald M. Sangster PLLC

No-Fault Report

Not Dead Yet - The Current Status of the "Innocent Third Party Doctrine"

In our last article, we discussed at some length the Court of Appeals’ long-awaited decision in Bazzi v Sentinel Ins Co, __ Mich App __; __ NW2d __ (June 14, 2016) (Docket No. 320518). In that case, the Court of Appeals, in a controversial 2-1 decision, determined that the “Innocent Third-Party” doctrine did not survive the Michigan Supreme Court’s ruling in Titan Ins Co v Hyten, 491 Mich 547; 817 NW2d 562 (2012). As a result, no-fault insurers were free to rescind coverage, even as it may have affected the rights of “innocent third parties” and their claims for first-party, no-fault insurance benefits, arising out of any given loss.

Over the summer, there has been a flurry of activity at the Michigan appellate court level regarding the rights of “innocent third parties” under policies of insurance that are subject to rescission, based upon a fraud perpetrated by the policyholder. This article shall bring the reader up to date as to where matters stand on various cases that have been decided since Bazzi was released on June 14, 2016.

The Bazzi Case Itself

Following the release of the Court’s opinion on June 14, 2016, plaintiff Ali Bazzi and intervening-plaintiff Citizens Insurance Company filed motions for reconsideration. In an order dated August 5, 2016, the Court of Appeals, in a 2-1 decision, denied both motions for reconsideration. Judge Beckering would have granted both motions for the reasons set forth in her dissenting opinion in Bazzi. As a result, the Court’s decision in Bazzi remains the final word but, in mid-September, the plaintiff filed an application for leave to appeal with the Michigan Supreme Court.

Cases Held in Abeyance Pending Bazzi – Frost v Progressive Michigan Ins Co, and State Farm v Michigan Municipal Risk

Readers of this column will recall that in September 2014, the Court of Appeals, in Frost v Progressive Michigan Ins Co (Court of Appeals Docket No. 316157) ruled that a no-fault insurer could rescind coverage, even as to an “innocent third party,” based upon the Supreme Court’s decision in Hyten. The Court’s previous opinion was subsequently vacated by the Michigan Supreme Court and remanded back to the Court of Appeals for reconsideration following its decision in Bazzi. See Frost v Progressive Michigan Ins Co, 497 Mich 980; 860 NW2d 636 (2015).

On July 28, 2016, the Court of Appeals issued its decision on remand. In a unanimous unpublished decision, the Court of Appeals (Judges Owens, Jansen, and O’Connell) reaffirmed its earlier decision allowing the no-fault insurer to rescind coverage even as to an “innocent third party.” In doing so, the Court recognized that it was bound by its earlier decision in Bazzi. Accordingly, the matter was remanded back to the Wayne County Circuit Court in order for Progressive Michigan Insurance Company to “establish proper grounds for rescission.” As of the date that this article is being prepared, the plaintiff has not filed an application for leave to appeal with the Michigan Supreme Court.

With regard to the State Farm v Michigan Municipal Risk decision (Court of Appeals Docket No. 319710), readers will recall that in that case, the Court of Appeals had earlier determined that the no-fault insurer

could not rescind coverage even as to an “innocent third party.” Judge Boonstra was on the Court of Appeals’ panel in State Farm, and was also on the panel that decided Bazzi. In fact, in Bazzi, Judge Boonstra issued a concurring opinion in which he explained how he had changed his mind on this issue, given the extensive briefing submitted by both parties in Bazzi. Readers will recall that the Supreme Court likewise vacated the Court of Appeals’ earlier decision and remanded this matter back to the Michigan Court of Appeals for reconsideration, once Bazzi had been decided. See State Farm Mut’l Ins Co v Michigan Municipal Risk Mgmt Authority, 498 Mich 870; 868 NW2d 898 (2015).

The Court of Appeals issued its published decision, on remand, on August 30, 2016. In its decision, the Court of Appeals affirmed the ability of the no-fault insurer to rescind coverage even as to the “innocent third party” and remanded the matter back to the circuit court in order to allow QBE Insurance Company to establish proper grounds for rescinding coverage, based upon its insured’s failure to disclose the actual ownership of the vehicle being insured under the QBE policy.

Of more interest is Judge Murphy’s concurring opinion, which reads almost like a dissent. In his concurring opinion, Judge Murphy points out that in Hyten, the Michigan Supreme Court expressly recognized that an insurer’s ability to rescind coverage may be “limited in relation to statutorily-mandated insurance coverage and benefits.” Specifically, Judge Murphy pointed out that at the end of the Court’s opinion in Hyten, the Supreme Court stated:

Should Titan prevail on its assertion of actionable fraud, it may avail itself of a traditional legal or equitable remedy to avoid liability under the insurance policy, notwithstanding that the fraud may have been easily ascertainable. However, as discussed earlier in this opinion, the remedies available to Titan may be limited by statute. Titan Ins Co v Hyten, 491 Mich 547, 572; 817 NW2d 562 (2012).

Judge Murphy then made note of the footnote that was attached to the end of this sentence, “For example, MCL 500.3009(1) provides the policy coverage minimums for all motor vehicle liability insurance policies.”

The minimum insurance policy limits specified in the cited statute, of course, are $20,000/$40,000. As noted by Judge Murphy:

When footnote 17 is read in conjunction with the sentence to which it was appended, it necessarily signified the Supreme Court’s stance that the $20,000.00/$40,000.00 residual liability coverage mandated by MCL 500.3009(1) cannot be diminished or limited by legal or equitable remedies generally available to an insurer for actionable fraud. There can be no other reasonable construction of the sentence and corresponding footnote. Optional insurance coverage above the minimum liability limits contained in a policy procured by fraud might not be reached by an injured third party seeking damages arising out of a motor vehicle accident, but footnote 17 in Titan makes abundantly clear that the mandatory liability minimums are to be paid by the insurer under the policy despite any fraud. [State Farm, slip op at pp 1-2 (Murphy, J., concurring).]

Judge Murphy then observed that like the minimum policy limits set forth in MCL 500.3009, PIP benefits are likewise mandated under MCL 500.3101(1). Therefore, according to Judge Murphy:

Given the mandatory nature of PIP coverage under the No-Fault Act, and considering the logic gleaned from examining footnote 17 of Titan, one can reasonably extrapolate that MCL 500.3101(1) (requiring PIP coverage) would be another example, along with MCL 500.3009(1), of a statute that limits the availability of remedies for actionable fraud.

In sum, Bazzi’s construction of Titan must be honored, and thus I concur in the majority’s holding. It is my belief, however, that the opinion in Titan cannot be interpreted as abolishing the ‘innocent third-party’ rule in the context of statutorily-mandated automobile insurance coverage, as to reach such a conclusion would require a wholesale disregard of Titan’s footnote 17. [State Farm, slip op at pp 2-3 (Murphy, J., concurring).]

Like the plaintiff in Bazzi, the Michigan Municipal League has filed an application for leave to appeal with the Michigan Supreme Court.

As counsel for Titan Insurance Company in Titan Ins Co v Hyten, I would like to offer the following thoughts on the issue raised by Judge Murphy. First, there is a fundamental difference between recovery on a tort claim and recovery on a PIP claim. On a tort claim, unless the injured person has purchased uninsured or underinsured motorist coverage, there are no other sources of recovery for non-economic damages (or excess economic losses) from a tortfeasor, other than whatever insurance policy limits the tortfeasor may have carried on his or her insurance policy. The “innocent third party” doctrine was designed to prevent an injured party from being “left out in the cold” completely, with no source of recovery for the damages suffered as the result of another’s negligence. Therefore, it only makes sense that if the tortfeasor was insured (no matter how much fraud may have been involved in the procurement of the policy), limiting the injured party’s recovery to the minimum policy limits of $20,000/$40,000 at least provided a modicum of recovery for the injured party.

By contrast, an injured “innocent third party” always has other sources of recovery for payment of his or her PIP benefits – lower priority insurers or the Michigan Assigned Claims Plan, as “the insurer of last resort.” An injured “innocent third party” should never be “left out in the cold” when it comes to payment of PIP benefits. Thus, a no-fault insurance carrier should be permitted to rescind coverage even as to an “innocent third party,” as the injured party should be able to obtain benefits from lower-priority insurers or the Michigan Assigned Claims Plan.

Southeast Michigan Surgical Hosp v Allstate Ins Co, __ Mich App __; __ NW2d __ (Aug. 9, 2016 (Docket No. 323425)

The divisions in the Court of Appeals regarding the current status of the “Innocent Third-Party” doctrine are exemplified in the Court of Appeals’ 2-1 decision in Southeast Michigan Surgical Hosp LLC v Allstate Ins Co, __ Mich App __; __ NW2d __ (Aug. 9, 2016) (Docket No. 323435). In Southeast Michigan Surgical Hosp, Judges Ronayne Krause and Stephens issued an opinion, indicating that but for the binding nature of the Court of Appeals’ earlier decision in Bazzi, they would have held that the “Innocent Third Party” doctrine remains viable in Michigan, and that a no-fault insurer cannot be permitted to rescind coverage as to “innocent third parties.” In this regard, Judges Ronayne Krause and Stephens adopted Judge Beckering’s dissent in Bazzi, and concurred in her reasoning. Therefore, the Court of Appeals majority requested that a conflict panel be convened, pursuant to MCR 7.215(J) to resolve the conflict.

In addition to its arguments regarding the continuing viability of the “Innocent Third-Party” doctrine, the plaintiffs also raised an estoppel argument. The accident itself occurred on December 12, 2010. The plaintiffs did not file suit against Allstate until December 18, 2011, more than one year post accident. However, the plaintiff claimed that it gave notice to Allstate in a timely manner, and because the fraud perpetrated by Allstate’s insured was not discovered until discovery was well under way, Allstate should be estopped from denying coverage. However, the Court of Appeals noted that the plaintiff’s claims against any other insurers were already time barred by the time suit was filed against Allstate. Therefore, the plaintiffs were not prejudiced by Allstate’s decision to rescind coverage more than one year post accident:

Other than Allstate, there is no evidence that any no-fault insurer in the chain of priority to pay Plaintiffs’ claims was ever identified, or that such insurer made a payment of PIP benefits or received written notice of Letkemann’s injuries. Likewise, there is no evidence that Allstate ever made a payment of PIP benefits for Letkemann’s injuries (LCF), but it was, within a year of the accident, evidently provided with notice of the injuries. The accident at issue occurred on December 12, 2010, and Plaintiffs did not file suit against Allstate until December 18, 2011. Because this was more than one year after the accident causing Letkemann’s injuries, they evidently relied on the notice exception in MCL 500.3145(1).

As a consequence, Plaintiffs were already time-barred by the time Allstate became a priority. Had Allstate asserted a valid affirmative defense immediately, the result would have been the same: it would have been too late for Plaintiffs to file a new claim against a different insurer, MCL 500.3145(1), and also too late to file the requisite notice for an ACF claim, MCL 500.3174, Spencer [v Citizens Ins Co, 239 Mich App 291, 608 NW2d 113 (2000)]. Accordingly, whether or not Allstate’s delay in asserting the claim could be considered good practice, it did not have a practically prejudicial effect . . . .

Plaintiffs also assert that Allstate is equitably estopped from rescinding the policy. Plaintiffs argue that Allstate’s initial representations that it insured the vehicle induced Plaintiffs to believe that it was in fact insured, Plaintiffs justifiably relied on that belief, and if Allstate could not deny that it insured the vehicle, Plaintiffs would be prejudiced because it was too late for them to file a claim seeking payment of no-fault benefits for the accident from the ACF. As discussed, Plaintiffs were already time-barred from pursuing an ACF claim before the Complaint was filed in this action. Prejudice is an essential element of establishing an equitable estoppel. [Citation omitted]. The party seeking equitable estoppel bears ‘a heavy burden’ of proving its applicability. [Citation omitted]. Because Plaintiffs cannot establish prejudice, they cannot establish an equitable estoppel. [Southeast Michigan Surgical Hosp, slip op at p 4 (italics in original).]

Having decided that estoppel did not apply under the facts of this case, the Court of Appeals then addressed the “Innocent Third-Party” doctrine, and how it should not apply under the facts of this case, notwithstanding the Court of Appeals’ earlier decision in Bazzi. Ironically, Judge David Sawyer, who authored the lead opinion in Bazzi, was also on the panel in Southeast Michigan Surgical Hosp. Judge Sawyer dissented from the majority’s opinion, and stated that because Bazzi was correctly decided, there was no need to convene a conflict panel at all.

On August 30, 2016, the plaintiff filed a motion for reconsideration, which has not yet been addressed by the Court of Appeals. On August 31, 2016, the Court of Appeals declined to convene a conflict panel. Absent a change in the Court’s ruling on reconsideration, it appears that this matter may be headed to the Michigan Supreme Court.

Concluding Remarks

Given the opinion of Judge Ronayne Krause and Judge Stephens in Southeast Michigan Surgical Hosp, requesting that a conflict panel be convened pursuant to MCR 7.215(J), and the concurring opinion by Judge Murphy in State Farm, it certainly appears that this issue may very well end up being addressed by the Michigan Supreme Court. In the meantime, smart practitioners will place every conceivable no-fault insurer, in any order of priority, on notice of any claim for no-fault benefits. The MACP and its assigned insurers will undoubtedly be seeing an increase in the number of filings, as injured claimants and their attorneys scramble to protect the “innocent third party” claimants from being “shut out” of a claim for no-fault benefits if the insurer subsequently determines, more than one year post-accident, that the policy of insurance was procured by fraud. It is imperative that practitioners in this area, on both sides of the aisle, keep a careful eye on any developments that occur on this issue at the appellate court level.

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