September 23, 2024
The recent published decision in Sherman v Progressive Michigan Insurance Company, et al. clarifies that when an insured makes innocent misrepresentations in an application for automobile insurance, and the insurer relies on those misrepresentations, rescission – not reformation of the policy – is the appropriate remedy.
In 2020, Janice Sherman applied for a no-fault insurance policy with Progressive for two of her vehicles. In the application, she identified her address as being in Clinton Township and confirmed that the two vehicles were garaged at that address. Sherman also disclosed that she was the sole resident of her home and sole driver of the vehicles. She did not change this information when she renewed her policy the following year.
In 2021, Sherman was injured in a motor vehicle accident as a passenger of one of her vehicles. After turning to Progressive for personal protection insurance (PIP) coverage, Progressive denied coverage and rescinded the policy ab initio because of misrepresentations in her application for insurance. According to Progressive, Sherman was garaging her vehicles in Detroit – not Clinton Township – and was residing with other individuals not listed on her application. Progressive estimated that had Sherman included this information in her application for insurance, it would have increased her premium by 83.2%. Progressive refunded the previously paid premium amounts to Sherman. Thereafter, Sherman filed a lawsuit seeking PIP benefits from Progressive, as well as a third-party claim against an unknown driver.
Progressive argued that Sherman was not entitled to recover PIP benefits because the policy of insurance was rescinded ab initio after Progressive learned of Sherman’s material misrepresentations, including the location where the vehicles were garaged and the identity of Sherman’s resident relatives. In response, Sherman argued that revocation is not an automatic remedy in cases involving alleged fraud. Rather, the remedy should reflect a “balance of the equities” analysis. The trial court denied Progressive’s motion and ordered that the policy be reformed to reflect the insurance premium that Progressive believed it would have been entitled to, had Sherman not made misrepresentations.
The Court of Appeals initially affirmed the Circuit Court’s decision. On reconsideration, the Court of Appeals rejected Progressive’s argument for fraudulent misrepresentation but found no genuine question of fact of innocent misrepresentation. Relying on Lash v Allstate Ins Co (1995) and M & D, Inc v W B McConkey (1998), the Court of Appeals confirmed that rescission is justified in cases of innocent misrepresentation if a party relies on the misstatement, in order to avoid unjust enrichment of the party responsible for the misstatement. Progressive was able to prove its reliance through an affidavit from its litigation underwriting specialist regarding the difference in premiums. Sherman did not dispute this reliance. The Court of Appeals also examined Progressive’s conduct in procuring the policy and found no misconduct in that process. Given this, the Court of Appeals found the trial court’s balance of the equities analysis should have revealed misconduct by Sherman, only.
The Court of Appeals also found that the trial court erred in ordering Progressive to reform the policy because, under United Security Ins Co v Comm’r of Ins (1984), Progressive should not have to bear the financial burden of having to pay PIP benefits when Sherman obtained those benefits by way of fraud.