In the recently published decision of Meemic Insurance Company v. Louise Fortson and Richard Fortson, individually and as conservator for Justin Fortson, (Docket No. 337728)(May 29, 2018), the Michigan Court of Appeals, in a 2-1 decision, reversed the trial court’s granting of summary disposition to Meemic on the basis that the innocent third party rule still applies where fraud occurred after the procurement of the policy, and that the subject fraud provision was invalid to the extent it conflicts with MCL 500.3114(1) and inapplicable as the fraud occurred after Meemic cancelled the policy.
Justin Fortson was seriously injured in a motor vehicle accident in September 2009, and received PIP benefits under a Michigan no-fault policy issued to his parents, Richard and Louise Fortson, by Meemic Insurance Company. From 2009 through 2015, Richard and Louise Fortson submitted attendant care services payment requests to Meemic indicating they provided Justin with 24 hours of daily supervision; Meemic routinely paid those benefits. In 2014, Meemic initiated an investigation and discovered that Richard and Louise had not provided Justin with daily direct supervision. Rather, Justin had been periodically jailed and spent time at an inpatient substance-abuse rehabilitation facility during the times that his parents requested 24 hours of attendant care. Accordingly, Meemic terminated Justin’s no-fault benefits and filed suit against Louise and Richard. Louise and Richard then filed a counter-complaint arguing that Meemic breached the insurance contract by terminating Justin’s benefits and refusing to pay attendant care services. The parties filed cross-motions for summary disposition and the trial court granted summary disposition in Meemic’s favor, relying on the Court of Appeals’ decision in Bazzi v. Sentinel Ins Co, 315 Mich App 763 (2016).
On appeal, Louise and Richard argued that the trial court erred by granting summary disposition in Meemic’s favor by finding that there was no genuine issue of material fact that they committed fraud, and further, by applying the Bazzi decision. The Court of Appeals majority held that the trial court did not err in finding that Louis and Richard had committed fraud in connection with their request for payment for attendant care services, but that it did err by finding Bazzi dispositive.
In addressing the Fortsons’ second argument, the Court of Appeals majority agreed that Justin is properly considered an innocent third party, and further, because the fraud in this case arose after the policy was issued and not in the procurement of the policy, neither Titan Ins Co v Hyten, 491 Mich 547 (2012), nor Bazzi were dispositive. The majority reasoned that when a policy is rescinded on the basis of fraud in the procurement, it is as if no valid policy ever existed. In contrast, fraud arising after a claim was made has no bearing as to whether there was a valid policy in effect at the time. Essentially, the majority reasoned that because there was still a valid policy in force at the time of Justin’s accident, the statute controls the mandated coverages and Justin properly sought no-fault benefits from his parents’ policy under MCL 500.3114(1).
In discussing this opinion, the majority recognized that Bahri v IDS Property Casualty Ins Co, 308 Mich App 420 (2014), held that an insurer may use a fraud-exclusion clause to void the entire contract despite the fact that the fraud arose after the policy was procured, but the majority attempted to differentiate its decision from Bahri by stating that “equity appears to lean in favor of protecting the innocent third party who was statutorily mandated to seek coverage under a validly procured policy and was, unlike the claimant in Bahri, wholly uninvolved in the fraud committed after the policy was procured.”
The majority then went on to address whether or not the fraud exclusion clause, as it applied to Justin’s claim, was a valid contract provision. Relying upon Shelton v Auto-Owners Ins Co, 899 NW2d 744 (2017), the majority opined that if the Meemic policy did not define a resident relative as an “insured person”, then Meemic would be required by statute to pay benefits and would be unable to terminate coverage because of fraud committed by the policyholder. Accordingly, the majority determined that “because MCL 500.3114(1) mandates coverage for a resident relative domiciled with a policyholder, the fraud-exclusion provision, as applied to Justin’s claim, is invalid because it conflicts with his statutory right to receive benefits.”
The fraud-exclusion clause at issue provides:
This entire policy is void if any insured person has intentionally concealed or misrepresented any material fact or circumstance relating to:
A. This insurance;
B. The Application for it;
C. Or any claim made under it.
The policy defines the term “insured person” as a named insured or the “resident relative” of a named insured. In addressing contract interpretation, the majority went on to state that even if the fraud-exclusion clause were valid, Louise and Richard’s fraud was insufficient to trigger it because when they committed the fraud, they were no longer “insured persons” under the policy. The policy was cancelled by Meemic via a notice sent out on June 14, 2010, which indicated that as of July 29, 2010, the policy would no longer be in effect. “Accordingly, once the policy was cancelled on July 29, 2010, Louise and Richard were no longer named insureds under the policy, which means they were no longer ‘insured persons’ as defined in the policy.” Moreover, the majority reasoned that because the fraud was committed after the policy was cancelled, when Louise and Richard were no longer “insured persons,” their actions were irrelevant for triggering the fraud-exclusion clause.
The majority determined that Meemic’s cancellation of the policy did not have any effect on Justin’s claim, however, because his claim was made before the policy was cancelled and automobile no-fault insurance policies are “occurrence” policies as opposed to “claims made” policies; meaning, coverage is provided no matter when a claim is made (subject to contractual and statutory notice and limitations of actions provisions) as long as the act complained of occurred during the policy period. Thus, the majority held that because Louise and Richard were not “insured persons” under the policy when they committed the fraud, the fraud-exclusion clause is inapplicable and cannot be used to deny Justin’s claim.
Judge Cameron issued a dissenting opinion which challenges the majority’s resurrection, albeit in a different form, of the abolished innocent-third-party rule. The dissent also challenges the majority’s creation of a distinction between a named insured’s right to recover PIP under MCL 500.3114(1) and a resident relative’s right to recover PIP under MCL 500.3114(1). Finally, the dissent addresses the majority’s unsupported decision to find the named insureds are no longer “insured persons” under the policy because the policy had been cancelled by the time they submitted their fraudulent attendant care submissions.
This decision is sure to be interpreted and applied differently by different courts going forward, particularly in light of its treatment of (and attempt to distinguish itself from) two published, and therefore binding Court of Appeals decisions. It is also highly likely the decision will be appealed to the Michigan Supreme Court. If you have any questions or concerns about what this opinion will mean for your particular cases, please feel free to contact any of the experienced litigators at Garan Lucow Miller and we will be happy to discuss them with you.
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Sarah Nadeau, Editor of the Law Fax Publication, is a Shareholder in our Detroit Office. Sarah can be reached at 313.446.1530 or snadeau@garanlucow.com
