Recently the Michigan Supreme Court issued its much-anticipated decision in Bazzi v Sentinel Ins Co, __ Mich __ (July 18, 2018)(Docket No. 154442), which involved the issue of whether an insurer may rescind a no-fault policy on the basis of fraud by the policyholder during the application process, where such rescission would defeat a claim for no-fault benefits by an innocent third-party.
Plaintiff Ali Bazzi was involved in an automobile accident while driving a vehicle owned by Hala Bazzi, his mother. Hala Bazzi had obtained a commercial automobile policy covering the car from Sentinel Insurance Company, and had listed Mimo Investments as the named insured. When Plaintiff sought PIP benefits, Sentinal sought rescission of the policy based on its assertion that Hala Bazzi had made material representations during the application process. Specifically, Sentinel claimed that Mimo Investments was a “shell company” that was not engaged in any actual business, that the vehicle was used for personal and family use by Plaintiff rather than commercial use by Mimo Investments, and that Hala Bazzi never disclosed to Sentinel that Plaintiff would be a regular driver of the vehicle. Sentinel asserted that Hala Bazzi made these material misrepresentations because Plaintiff had been involved in a previous accident, and thus it would have been more expensive to purchase a personal automobile policy listing Plaintiff as the named insured than it was to purchase the commercial policy listing Mimo Investments as the named insured.
The trial court denied Sentinel’s motion for summary disposition, agreeing with Plaintiff that the so-called “innocent third-party rule” precludes rescission of an insurance policy based on fraud in the application process where a claim under the policy has been made by a third party who was uninvolved in the fraud. A majority of the Court of Appeals disagreed, holding that the innocent third-party rule had been abrogated by the Michigan Supreme Court’s decision in Titan Ins Co v Hyten, 491 Mich 547 (2012). Thus, the Court of Appeals majority held that if Sentinel was able to establish that Hala Bazzi had made material misrepresentations in applying for the policy, then Sentinel was entitled to rescind the policy regardless of whether Plaintiff was an innocent third-party.
A five Justice majority[1] of the Michigan Supreme Court agreed with the Court of Appeals majority that nothing in the plain language of the no-fault act precludes an insurer from rescinding a policy on the basis of fraud in the application process. Moreover, the Supreme Court majority held that its prior decision in Titan had abrogated the innocent third-party rule, quoting Titan‘s statement that “‘there is simply no basis in the law to support the proposition that public policy requires a [no-fault insurer] in these circumstances [i.e., where the policy is procured by fraud] to maintain a source of funds for the benefit of a third party with whom it has no contractual relationship.'” Bazzi, supra, slip opn at 10, quoting Titan, supra at 568-569.
Nonetheless, despite holding that neither the no-fault act nor the innocent third-party rule precludes a no-fault insurer from rescinding a policy procured through fraud, the Supreme Court majority held that “fraud in the application for insurance does not imbue an insurer with an absolute right to rescission of the policy with respect to third parties.” Bazzi, supra, slip opn at 17 (emphasis added). Instead, the Supreme Court majority held that rescission is an equitable remedy, rather than a legal remedy, and thus whether the no-fault insurer may rescind the policy is a discretionary decision to be made by the trial court after “balanc[ing] the equities.” Bazzi, supra, slip opn at 16 (quotation omitted).
In addition to holding that rescission is a matter of grace to be granted by the trial court rather than a matter of right to be claimed by the no-fault insurer, the Supreme Court majority went on to delineate guidelines to be used by trial courts in determining whether to exercise their discretion to permit rescission. Specifically, the majority stated that: (1) rescission should not be granted where it would be “unjust or inequitable”, (2) rescission should not be granted where the circumstances make rescission “infeasible”, Bazzi, supra, slip opn at 16-17 (quotations and citations omitted), and (3) that in determining whether the innocent insurer or the innocent injured non-policy holder should suffer from the policyholder’s fraud, the loss should be suffered by the party “through whose act or neglect such [the policyholder] was enabled to commit the wrong.” Bazzi, supra, slip opn at 17, quoting Zucker v Karpeles, 88 Mich 413, 430 (1891).
Although the Supreme Court majority affirmed the Court of Appeals majority’s holding that the “innocent third-party rule” does not bar a no-fault insurer from seeking rescission of a policy procured through fraud, in this writer’s opinion the Supreme Court majority’s opinion in Bazzi is at most a Pyrrhic victory for no-fault insurers.
Indeed, this writer predicts that many plaintiff-friendly trial judges will mechanically hold that it would be “unjust or inequitable” to rescind the policy, or that rescission is for some reason “infeasible.” Moreover, this writer foresees plaintiff-friendly trial judges simply ignoring the Supreme Court majority’s statement that no-fault insurers are not required to “maintain a source of funds for the benefit of a third party with whom it has no contractual relationship.” Bazzi, supra, slip opn at 10, quoting Titan, supra at 568-569. Rather, most will likely focus solely on the majority’s statement that the loss should be suffered by the party “through whose act or neglect such [the policyholder] was enabled to commit the wrong,” Bazzi, supra, slip opn at 17, quoting Zucker, supra at 430, and then strain to find some reason to hold that neglect by the no-fault insurer enabled the policyholder to commit fraud during the application process.
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[1] The majority opinion was authored by Justice Kurtis Wilder, joined by Chief Justice Stephen Markman, Justice Brian Zahra, Justice Richard Bernstein, and Justice Elizabeth Clement. In a minority opinion joined by Justice David Viviano, Justice Bridget McCormack argued that because PIP benefits are mandated by statute, a no-fault insurer is not entitled to rescind a policy where a claim is made by an innocent third-party.
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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
