In VHS of Michigan, Inc. v Michigan Auto Ins Placement Facility, et al, the Michigan Court of Appeals ruled that an insurer cannot deny claims solely based on a unilateral rescission. When an innocent third party is not involved in the fraud, withholding payment is not justified. An insurer’s belief that it could rescind a policy due to fraud did not eliminate its duty to make timely payments. The insurer could later determine which company was ultimately responsible for coverage.
Defendant Falls Lake National Insurance Company (“Falls Lake”) insured Elizabeth Lucas and her vehicle. Lucas’ vehicle was being operated by Kahari Benson, without permission, when it struck another vehicle injuring Juan Colon, Jr. Plaintiff VHS provided treatment to Colon. Both VHS and Colon made claims with Falls Lake for payment of PIP benefits. Falls Lake had already determined that its insured made a material misrepresentation in her application for insurance, however. The insurance company had unilaterally decided to rescind Lucas’ policy. Falls Lake denied Colon’s and VHS’s claims, informed Lucas of the rescission, and sent her a refund check for the premiums she had paid. This check was later endorsed and cashed by Lucas.
Both Colon and VHS brought suit. Falls Lake moved for summary disposition on the basis of the rescission, claiming it was applicable to Colon’s claims even though he was not associated with Lucas and did not know of her misrepresentation. The Circuit Court denied Falls Lake’s motion, concluding that, under a balancing of equities, rescission of the policy was not appropriate. Falls Lake was the insurer of highest priority and therefore liable for Colon’s medical bills.
Two years after the motor vehicle accident, Falls Lake finally tendered payment of the limits under the policy. However, VHS and Colon disagreed about how the payment should be disbursed. Falls Lake filed a motion to disperse the funds, styled as a motion for summary disposition. VHS also moved for summary disposition seeking penalty interest and attorney fees for the unreasonable delay of Falls Lake’s payments. The Circuit Court granted Falls Lake’s motion finding its delay in payment was reasonable.
On appeal, the Court of Appeals found that the statutory scheme adopted by the Legislature strongly incentivizes insurers to pay first and seek reimbursement later when it is clear that a claimant will be entitled to PIP benefits from an insurer, even if it is unclear which insurer must pay.
The Court affirmed that the rescission of a contract is a remedy reserved to the sound discretion of the court. It is not unilaterally chosen by an insurance company, particularly where an innocent third party is affected by the insurer’s decision. The Court indicated that just as in a priority dispute, Falls Lake could have paid the claims under a reservation that should the policy be rescinded. Another insurance company would eventually make it whole for those payments while the issue of rescission was determined. Because Falls Lake instead decided to withhold payment, VHS was entitled to penalty interest.
The Court also reaffirmed the Michigan Supreme Court’s holding in Moore v Secura Ins., 482 Mich 507 (2008), explaining that an insurer’s decision to withhold payment must be unreasonable, and must be the product of a legitimate question of statutory construction, constitutional law, or a bona fide factual uncertainty. The Court held that there was no question that Colon, an innocent third party, was entitled to PIP benefits from an insurer. The only question was which insurer would be ultimately responsible. Because Colon was innocent in the purported fraud by Lucas, Falls Lake should have known that it could not simply rescind the policy unilaterally to avoid its obligations to Colon under the policy. It was therefore unreasonable to withhold payment until the court made a decision, and VHS was entitled to an award of attorney fees.
