No Fault Report

No-Fault Section

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

No-Fault Report

Killing the Goose That Laid the Golden Egg –Bahri Effectively Gutted by Court of Appeals

In our last article, we discussed at some length the import of the Court of Appeals’ decision in Bahri v IDS Property Casualty Ins Co, 308 Mich App 420; 864 NW2d 609 (2014), and why it provided insurance companies and their defense counsel with a powerful weapon to root out fraudulent claims, which, unfortunately, those of us who practice in this area see all too often. However, as with any powerful weapon, we cautioned that such weapons should be used judiciously.

In particular, we urged insurers and defense counsel to utilize Bahri only in cases where the insurance company had evidence that “directly and specifically contradicted” a particular claim presented by the plaintiff, whether at the claims stage or during the course of litigation. In the absence of admissible evidence that “directly and specifically contradicted” a claim for no‑fault benefits, plaintiffs may be able to survive a motion for summary disposition based on Bahri. Compare Thomas v Frankenmuth Mut Ins Co, unpublished opinion per curiam of the Court of Appeals, issued July 12, 2016 (Docket No. 326744); 2016 WL 3718352 (finding that insurer presented evidence that “directly and specifically contradicted” a specific claim, where the plaintiff was observed driving an automobile despite his use of non-emergency medical transportation earlier in the day, and despite doctor’s orders prohibiting him from driving) with Sampson v Jefferson, unpublished opinion per curiam of the Court of Appeals, issued July 14, 2016 (Docket No. 326561); 2016 WL 3855882 (same panel determining that the insurer failed to present evidence that “directly and specifically” contradicted a claim for no‑fault benefits because the insurer was unable to prove that household-service claims were false as calendars describing the services were not dated.)

The author certainly acknowledges the pressures facing defense counsel from clients who may have unrealistic expectations about what is or is not a “fraudulent” claim. However, we as defense counsel need to be cognizant of the fact that overly aggressive use of Bahri motions could lead to a backlash in the appellate courts, which could effectively “kill the goose that laid the golden egg.” In other words, we as defense counsel need to advise our clients that on occasion, “hard cases make bad law.” See Morales v Auto-Owners Ins Co, 458 Mich 288, 305; 582 NW2d 776 (1998) (Taylor, J. dissenting).

Unfortunately, the Court of Appeals recently issued its published opinion in Shelton v Auto-Owners Ins Co, __ Mich App __; __ NW2d __; 2017 WL 603591 (2017) (Docket No. 328473), which exemplifies this old adage. Shelton effectively wipes out the ability of an insurer to utilize its fraud exclusion in cases where the plaintiff is not the actual policyholder, his or her spouse, or a relative domiciled in the same household.

As shown below, it did not have to be this way. The Court of Appeals could have easily based its decision on the fact that the evidence presented by the insurer (which may not have been admissible anyway) simply did not “directly and specifically contradict” an actual claim that had been presented by the plaintiff. The panel could have even limited its decision to the wording of the actual fraud exclusion, which made no reference to a fraudulent-claim submission, but only to a fraud in the procurement of the policy, or fraud with regard to the actual occurrence. Unfortunately, the Court of Appeals’ holding is very broad and, because it is a published opinion, it remains the controlling legal authority on this issue until such time as it is modified or overruled by the Michigan Supreme Court.

In Shelton, the plaintiff was a passenger in an automobile owned and operated by Timothy Williams and insured with Auto-Owners Insurance Company. Shelton did not own a motor vehicle. She was not married and did not reside with a relative who owned an automobile. Therefore, Auto‑Owners Insurance Company occupied the highest order of priority for payment of her no‑fault benefits pursuant to MCL 500.3114(4)(a), as the insurer of the owner or registrant of the motor vehicle she was occupying at the time of the accident.

The accident itself occurred on January 22, 2013.The plaintiff submitted a claim for household-replacement-service expenses, which was denied by the insurer. The reasons behind the denial of the household-replacement-service-expense claim were not at all clear. The defendant claimed that it was because the claims were fraudulent. The plaintiff claimed that the claims were dismissed “based on a lack of proofs for the replacement services claim.” Unfortunately, the trial court made no specific finding as to whether or not those claims were fraudulent, and no appeal was taken from the dismissal of the household-service claim.

The defendant then moved for a dismissal of the medical-expense claims, based upon the purportedly false household-replacement-service claim. According to the Court of Appeals’ opinion, the insurer offered the following “evidence” as proof of a fraudulent claim:

¬ Investigative reports and “some photographs” that were taken by the investigator on June 1, 2013, where “many of the photographs are so blurred and distant that it is impossible to determine who is being photographed and what they were doing.”

¬ Investigator’s report of June 1, 2013, references the “Claimant” as being “Timothy Williams” and not the plaintiff (a female); pronouns used in the report reference “he,” not “she.”

¬ The investigator noted that the plaintiff “appears to be wringing it out,” referring to a shirt; however, “there is no reference to any photographs or videotape to confirm even this self-serving statement.”

¬ Plaintiff was observed walking without a visible brace and was observed to bend on two occasions, even though the plaintiff acknowledged, at deposition, that she was able to walk, and that even though she always wore a back brace, she sometimes wore it under her clothing and sometimes over.

Again, the circuit court ruled that this evidence was insufficient to support a motion for summary disposition under Bahri, presumably because it did not “directly and specifically contradict” a claim that had been presented by the plaintiff. The defendant filed an application for leave to appeal with the Court of Appeals, which the Court granted.

The Court of Appeals affirmed the lower court’s decision to deny the insurer’s motion for summary disposition under Bahri. The lead opinion was authored by Judge Douglas Shapiro, and he was joined by Judge Elizabeth Gleicher. (Judge Kirsten Frank Kelly concurred in the result, only.) In his opinion, Judge Shapiro compared the facts involved in Shelton with the facts involved in Bahri (which involved surveillance conducted periodically over the course of seven weeks) and noted:

While such repeated activities are sufficient to establish the elements of fraud beyond a question of fact, a single episode of wringing out a shirt does not; nor do isolated examples of an injured person participating in simple physical actions such as bending, modest lifting, or other basic physical movements that they testify are painful or difficult. These type of inconsistencies with a claimant’s statements are not sufficient to establish any of the elements of fraud beyond a question of fact. [Shelton, slip op at p 7.]

The Court of Appeals even noted some of the evidentiary problems with the proofs offered by the insurer:

While not raised in the briefing, based on the record before us, it appears that many of the documents on which defendant relies, including the three surveillance reports and the photographs do not meet the evidentiary requirements of MCR 2.116(G)(6) and should not have been considered. That rule provides that “affidavits, depositions, admissions and documentary evidence offered in support of or in opposition to a motion based on subrule (C)(1)-(7) or (10) shall only be considered to the extent that the content or substance would be admissible as evidence.” (emphasis added). The relied upon reports appear to be hearsay. Their ostensible author did not testify and has not provided an affidavit that the statements in his reports are true and that he will so testify at trial. The same is true of the photographs on which defendant relies. [Shelton, slip op at p 6, n 7.]

In the opinion of the author, if the Court of Appeals had simply stopped its analysis at this point, the Court of Appeals would have sent a message to insurers and the circuit courts of this state that in order to prevail on a Bahri motion, the insurer must present evidence which “directly and specifically contradicts” a claim that was made by the plaintiff, and in this case, just as in Sampson, supra, the insurer simply failed to do so.

The Court of Appeals then examined the actual fraud language that was at issue in Shelton and compared it to the fraud exclusion set forth in the Bahri policy. The exclusion at issue in Bahri provided:

We do not provide coverage for any insured who has made fraudulent statements or engaged in fraudulent conduct in connection with any accident or loss for which coverage is sought under this policy.

By contrast, the Auto-Owners exclusion at issue in Shelton provided:

We will not cover any person seeking coverage under this policy who has made fraudulent statements or engaged in fraudulent conduct with respect to procurement of this policy or to any OCCURRENCE for which coverage is sought. [Emphasis added].

The Court of Appeals noted that there was nothing in the fraud exclusion that referenced claims that were presented as the result of an “occurrence” and specifically noted the following:

Defendant has not provided us with the policy definition of “occurrence,” but in all cases dealing with that term, it has been defined as the accident or event during which the injury occurs. See e.g., Frankenmuth Mut Ins Co v Masters, 460 Mich 105, 112-113; 595 NW2d 832 (1999) (stating that the applicable insurance policy defined the term “occurrence” as “an accident, … which occurs during the policy period”), Group Ins Co v Czopek, 440 Mich 590, 597-598; 489 NW2d 444 (1992) (stating that the term “occurrence” was defined in the policy as “an accident, … which results, during the policy term, in bodily injury or property damage.”), and Michigan Basic Property Ins Ass’n v Wasarovich, 214 Mich App 319, 327-328; 5421 NW2d 367 (1995) (finding that the definition of “occurrence” in the policy included an accident that resulted in personal injury during the policy period). Defendant has not alleged any fraud “with respect to the procurement of the policy” nor with respect to the “occurrence.” The claimed fraud was in the reporting of services later provided, an event not referenced in the provision. [Shelton, slip op at p 5, n 6.]

However, because the issue of the wording of the fraud exclusion was not raised in the lower court, the Court of Appeals declined to base its ruling on this ground. Again, if the Court of Appeals had simply stopped its analysis at this point, a message would have been sent to insurers and their counsel that before you can rely on a fraud exclusion, the insurer needs to have language in the fraud exclusion that actually references fraudulent claims – not just fraud in the procurement of a policy or fraud regarding the actual accident that gives rise to a claim for no‑fault benefits.

However, the Court of Appeals went further and, as noted above, effectively limited the impact of fraud exclusions only to those claimants who are actually the named insured under the policy, their spouses, or relatives domiciled in the same household. In the Court’s view, this is because MCL 500.3114(1), which is the “general rule” regarding priority, provides that an insurance policy “applies to the person named in the policy, the person’s spouse and relatives of either domiciled in the same household.” Shelton, slip op at p 4 (emphasis in original). In this case, Shelton was neither the named insured, the spouse of the named insured, nor a relative of either the named insured or his spouse. Therefore, the Auto-Owners policy, issued to Timothy Williams, simply did not “apply” to the plaintiff. Id. Instead, Shelton’s ability to recover benefits from Auto-Owners Insurance Company derives from operation of law, i.e., MCL 500.3114(4)(a), which references “the insurer of the owner or registrant of the vehicle occupied.” The Court also noted that, in Rohlman v Hawkeye Security Ins Co, 442 Mich 520; 502 NW2d 310 (1993) and Harris v ACIA, 494 Mich 462; 835 NW2d 356 (2013), the ability of the plaintiffs in those cases to recover no‑fault benefits arose “solely by statute,” which is “the ‘rule book’ for deciding the issues involved in questions regarding” no‑fault insurance benefits. As noted by the Court of Appeals:

Defendant’s argument is directly contrary to the grounds for the holdings in both Rohlman and Harris. Here, as in those cases, plaintiff’s no‑fault benefits are governed ‘solely by statute.’ Thus, the exclusionary provision in defendant’s no‑fault policy does not apply to plaintiff and cannot operate to bar Plaintiff’s claim. [Shelton, slip op at p 3 (emphasis added).]

In other words, fraud exclusions do not apply to those individuals who are “strangers to the insurance contract,” such as motorcyclists who are injured as the result of the involvement of a motor vehicle (see MCL 500.3114(5)), employees who are occupying employer-furnished vehicles (see MCL 500.3114(3)), pedestrians who are injured in motor vehicle accidents and do not have policies of their own available in their household (see MCL 500.3115(1)) and those individuals, like the Plaintiff in Shelton, who are occupying another person’s motor vehicle and who do not have policies of their own available in their household (see MCL 500.3114(4)). Obviously, this is a rather large group of individuals who are no longer bound by the fraud exclusion under the policy under which they are claiming benefits.

In response to the insurer’s “public policy” arguments, the Court of Appeals threw out the following “bone” to insurers and their counsel:

Defendant argues that as a matter of public policy we should depart from the statute because if we do not, no‑fault insurers will lose the ability to deny fraudulent no‑fault claims. This argument is meritless. As always, if an insurer concludes that a claim is fraudulent, it may deny the claim. Should the Claimant then file suit, the burden is on the Claimant to prove that he is entitled to his claimed benefits, a burden that it is highly unlikely to be met if the factfinder concludes that the claim is fraudulent. And insurers can obtain attorney fees for having to litigate any claims that are determined to be fraudulent. MCL 500.3148. [Id., slip op at p 4.]

Obviously, it is far more expensive to litigate and try claims, even those that are potentially fraudulent, as opposed to securing an order granting a summary-disposition motion under Bahri. Because the insurer has now lost the ability to summarily dismiss fraudulent claims where the claimant is not the named insured, his or her spouse or a relative domiciled in the same household, an insurer will now be forced to make an economic decision to possibly settle a fraudulent claim, as opposed to taking the claim through trial.

At this point, it is unclear if the insurer will file an application for leave to appeal with the Michigan Supreme Court. A Legislative fix would also appear to be warranted. For example, expanding the scope of MCL 500.3173a(2) to all insurers, not just those insurers adjusting MACP claims, would go a long way toward curbing the number of potentially fraudulent claims that a no‑fault insurer is forced to defend while, at the same time, preserving the requirement that, in order to prevail on a fraud defense, the insurer would still need to present admissible evidence that “directly and specifically contradicts” a specific claim presented by the plaintiff. As matters now stand, however, a no‑fault insurer’s ability to utilize a fraud exclusion, contained in its policy, has been severely curtailed by the Court of Appeals’ decision in Shelton. In the author’s opinion, Shelton is another clear example of where “hard cases make bad law.”

Categories: Volume 7 #4

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