SUPREME COURT REVERSES ITSELF AGAIN!! NO-FAULT INSURERS NO LONGER SUBJECT TO AUDITING ON REASONABLENESS OF PIP PAYMENTS
For the second time2 in this term, the Supreme Court has reversed itself on an important no-fault case. In a 4-3 decision, the Court rejected its earlier opinion in USF&G v MCCA, 482 Mich 414, 759 NW2d 154 (2008), now holding that the MCCA lacks statutory authority to audit member insurers regarding the reasonableness of its payment of no-fault benefits. USF&G v MCCA, No. 133466, Slip Opinion, Michigan Supreme Court, July 21, 2009.
In her majority opinion, Justice Weaver articulated the following crucial points :
1. Moreover, the MCCA is not a no-fault insurer of its member companies, and the member companies are not injured persons entitled to no-fault indemnification. Thus, the relationship between the MCCA and its members is not subject to the reasonableness requirements found in MCL 500.3107. Rather, the Legislature provided in § 3104(2) that the MCCA would “indemnify” the insuring members for PIP payments. The Legislature did not state that the MCCA would “insure” or “reinsure” the members for amounts greater than the threshold. Black’s Law Dictionary (5th ed) defines “indemnify” as “[t]o restore the victim of a loss, in whole or in part, by payment…; to secure against loss or damage….” Indemnification is not a contingent plan like an insurance plan. Instead, it is a set security meant to assist against certain circumstances. Here, those circumstances arise when the PIP amount contracted by the insurer exceeds the statutory threshold.
Id at 15.
2. Section 3104(1) states that the MCCA is “not subject to any laws…with respect to insurers.” Thus, the MCCA is not a no-fault insurer, and consequently it is also not a reinsurer. Because the MCCA is not a no-fault insurer, but, rather, an indemnitor of no-fault insurers for benefits in excess of the statutory threshold, § 3107 does not directly bind the MCCA; it only binds the insurer members and the insured. Section 3107 “makes both reasonableness and necessity explicit and necessary elements of a claimant’s [insured’s] recovery….” Nasser v Auto Club Ins Ass’n, 435 Mich 33, 49; 457 NW2d 637 (1990) (emphasis added). Specifically, it is the insurance company that has the right to deny a claim (or part of a claim) for unreasonableness under § 3107.
Id at 15-16.
3. In essence, under the MCCA’s preferred outcome, when a member insurer makes an agreement with an insured (often in a litigation setting, whether it be an arbitration hearing, consent judgment, or declaratory judgment), the member must then sue the MCCA if the MCCA finds that the payment is unreasonable. If this Court were to accept the MCCA’s argument, the logical consequence would be that member insurers would be reluctant to settle with the claimant. Member insurers might then force a jury trial with every catastrophically injured claimant in order to secure a verdict with a “reasonable” stamp on the result. This outcome goes against the legislative purpose of assuring efficient and quick recovery for claimants in the no-fault system. Shavers v Attorney General, 402 Mich 554, 578-579; 267 NW2d (1978) (“The goal of the no-fault insurance system was to provide victims of motor vehicle accidents assured, adequate, and prompt reparation for certain economic losses.”).
In summary, the MCCA must indemnify member insurers for no-fault benefits paid in excess of the applicable retention without regard to the reasonableness of those payments. This would apply to voluntarily paid benefits as well as settlement of disputed claims.
The Court made it clear, however, that the MCCA has certain procedural remedies to control excessive payments, including pre-approval of settlements:
Only then, not after the claimant and member insurer have reached a settlement, can the MCCA exercise control over the settlement process. Under MCL 500.3104(7)(g), the MCCA must
[e]stablish procedures for reviewing claims procedures and practices of members of the association. If the claims procedures or practices of a member are considered inadequate to properly service the liabilities of the association, the association may undertake or may contract with another person, including another member, to adjust or assist in the adjustment of claims for the member on claims that create a potential liability to the association and may charge the cost of the adjustment to the member. [Italics in original.]
Thus, when § 3104(7)(g) is read in conjunction with §3104(7)(b), the outcome is that the MCCA is required to review those reports by members that anticipate needing indemnification and to assess the adequacy of the procedures or practices of the member. Upon a finding of inadequacy, the MCCA can adjust the practices or procedures of the member. One of the key protections here is that the MCCA has the power and duty to adjust only “procedures and practices” of the member that produce an unreasonable payment amount; the power does not include the power to adjust the amount after a settlement has been reached. The MCCA has the power to step in before a settlement has been reached and adjust situations that it anticipates might otherwise expose it to unreasonable indemnification costs. By requiring submission of proposed settlement agreements for approval, the MCCA can protect itself against later having to pay unreasonable claims from member insurers. The exercise of these powers is the MCCA’s protection against a member’s neglect of its duties. (Emphasis added.)
Id at 19-20.
This decision leaves open the questions regarding the extent of the MCCA’s auditing authority. USF&G only eliminates issues of reasonableness, but does not suggest that the MCCA lacks the power to question other aspects of payments by member insurers. Moreover, the MCCA may now alter its long held position that places the entire burden of litigation (i.e., attorney fees and no-fault penalties) on the member insurer even where the retention had already been exceeded. The sharing of that risk by the MCCA would encourage member insurers to be more proactive in litigating difficult cases rather than agreeing to settlement which might be characterized as excessive or unreasonable. Absent same, this decision allows member insurers almost unfettered discretion to pay benefits and resolve disputes simply to avoid the risk of no- fault penalties.