JURIST Guest Columnist David Christensen of Christensen Law discusses recent developments in Michigan auto law that affect third-party benefits…
For the past 40 years, plaintiffs’ attorneys seeking no-fault benefits for their clients have relied on the innocent third-party rule. This rule protected uninsured drivers, passengers and other claimants from fraud by the policy holder. But a recent published case from the Michigan Court of Appeals has stripped plaintiffs of this protection and left them vulnerable to dismissal based on no fault of their own.
Bazzi v Sentinel Insurance Company [PDF] asks one question: whether the innocent third-party rule survives the 2012 Michigan Supreme Court decision, Titan Ins Co v Hyten[PDF]. Titan in turn addressed “easily ascertainable” rule, first created in State Farm Mut Auto Ins Co v Kurylowicz in 1976.
Kurylowicz and the Easily Ascertainable Rule
Kurylowicz interpreted the then newly created Michigan No-Fault Act to seek to protect Michigan motorists. It prevented auto insurance companies from avoiding the claims of innocent third-party plaintiffs by canceling or rescinding the policy on which the claim was based. In essence, it kept insurers from pulling the rug out from under innocent motorists’ feet. According to Kurylowicz:
“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.”
Because of this, the court of appeals ruled that an insurance company couldn’t declare a policy void at inception because of fraud when that fraud was easily ascertainable and the plaintiff is a third party not involved in the fraud. Those third parties would continue to be entitled to no-fault benefits, even if the policy holder’s own recovery was cut off. The case required insurance companies to comply with the Michigan No-Fault Statute’s 55 day limit on canceling a contract because of risk.
Titan Changes the Rules
This was the law in Michigan for nearly 40 years. Then in 2012, in Titan, the Michigan Supreme Court overturned Kurylowicz. The court ruled that there was no public policy protection built into the No-Fault Act that wasn’t explicitly included in its terms. The court struck down the “easily ascertainable” rule and gave insurance companies access to traditional legal and equitable remedies including cancellation, rescission, and reformation, except as expressly limited by the statute.
But even after the “easily ascertainable” rule fell, plaintiffs’ attorneys were able to protect some of their clients using the innocent third-party rule. Because occasional drivers, passengers, and other claimants had no knowledge or participation in the fraud, it was thought they would still be covered. That is, until Bazzi was published on June 14, 2016.
Bazzi Eliminates the Innocent Third-Party Rule
In Bazzi, the plaintiff was seeking PIP benefits for injuries resulting from his use of his mother’s car. That car was insured through a commercial automobile policy held by his mother and his aunt. Sentinel Insurance Company had successfully rescinded the commercial policy in a separate third-party complaint against the plaintiff’s mother and aunt based on fraud in the way that commercial policy was obtained= —specifically that there was no business entity connected with the policy and that the plaintiff was not named as a regular driver of the vehicle. Sentinel then used that rescission as a basis for summary disposition in the plaintiff’s case. The trial court denied the request based on the “innocent third party” rule.
The court of appeals ruled that the “easily ascertainable” rule and the “innocent third-party rule” were one and the same. In doing so, it relied on the Titan summary of the rule stated in Kurylowicz:
“The principal question presented in this case is whether an insurer may avail itself of traditional legal and equitable remedies to avoid liability under an insurance policy on the ground of fraud in the application for insurance, when the fraud was easily ascertainable and the claimant is a third party.”
Since both conditions were required for the “easily ascertainable” rule to apply, it didn’t make sense, the court wrote, for insurance companies to be on the hook to third parties for easily ascertainable fraud, but not those cases more difficult to prove.
Nor was the court convinced that any statutory provision prevented the insurance company from rescinding mandatory no-fault benefits. The court ignored the limitations on cancellation outlined in Kurylowicz entirely, instead stating, “what coverages are required by law are simply irrelevant where the insurer is entitled to declare the policy void ab initio.” For there to be any protection, the court held that the legislature would have needed to expressly limit the availability of fraud defenses. Because it did not, the insurance company was allowed to rescind the policy and cut off benefits to the innocent third party.
Litigating Third-Party Claims Post-Bazzi
Bazzi lands a major blow to plaintiffs’ attorneys trying to protect third parties. Insurance companies now have no obligation to investigate possible fraud until they are faced with a claim. By the time a defendant company goes through its investigation and gets its summary disposition on the basis of fraud, it may be too late for third-party plaintiffs to refile against a different insurance company or the Michigan Assigned Claims Plan[PDF]. This could leave injured motorists in the undesirable position of needing to bring their claims against the policy holders directly, many of whom will be simply uncollectible.
To defend against these devastating summary disposition motions, trial attorneys should consider filing claims against every insurance company with a policy related to the accident. The Michigan No-Fault Act provides insurance companies a process to address priority among themselves while still protecting the injured motorist’s claims, and ensuring his or her relief isn’t delayed by industry jockeying. If the insurance company with first priority is able to rescind its plan based on fraud, the case will already be underway as to the next insurer, and no benefits will be lost due to untimely filing.
At the same time, plaintiffs’ lawyers should closely examine the cancellation terms of the underlying policy. Scrutinize whether the appropriate notices went out according to the statute. Look for differences in the way the policy defines legal terms of art like cancellation and rescission. This may allow protections contained elsewhere in the Michigan No-Fault Act to preserve a client’s claim.
Bazzi undoubtedly made it harder to be a plaintiffs’ auto accident attorney in Michigan. It canceled out an important protection for innocent third-party motorists, and eliminated the insurance companies’ duty to investigate their own policies. But that will not stop high-quality lawyers from going to bat for their clients and their families. It simply means trial attorneys will need to become more meticulous in how they do their work.
David Christensen is the founder of Christensen Law. He has over 25 years of experience dealing with auto accident and brain injury cases. He testifies before the Michigan legislature, and his expertise has led to appointments to key positions that affect the development of Michigan’s no-fault law.
Suggested citation: David Chrsitensen, Undisclosed Fraud Sinks Third-Party benefits Lawsuit, JURIST – Professional Commentary, June 26, 2016, http://jurist.org/professional/2016/06/David-Christensen-Third-Party.php.
This article was prepared for publication by Marisa Pereira Rodrigues, an Editor for JURIST Commentary. Please direct any questions or comments to her at email@example.com
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