The age old legal requirement, based upon public policy, that a named insured have “an insurable interest” to support a valid insurance agreement, including an automobile no-fault liability policy, has come under review in several recent Michigan appellate decisions, the most recent being the published Michigan Court of Appeals decision in MemberSelect Insurance Company vs. Kenneth Flesher, et al. released for publication on April 23, 2020. The Court of Appeals panel wrestled with the concept of whether an insurable interest should be applicable to a Michigan no-fault automobile liability policy from a public policy basis. While finding an insurable interest on a very attenuated basis for the named insured and that the policy was not void, the Court of Appeals explicitly invited the Michigan Supreme Court to review its decision and to “clarify” the insurable interest requirement.
The facts in MemberSelect were that Kenneth Flesher was operating his motorcycle when he was struck by a motor vehicle in a hit and run accident with a GMC Yukon operated by Nicholas Fetzer. An automobile negligence suit was brought by Flesher against Fetzer. MemberSelect, which insured the Yukon under an insurance policy identifying Nicholas’s mother, Kelly Fetzer, as the principal named insured, filed a separate declaratory judgment action claiming that Kelly had no insurable interest in the Yukon, making the policy void.
The following facts were undisputed at the time the policy was issued:
On first impression it would seem that this case presents a textbook example of an individual, in particular Kelly Fetzer, having no insurable interest who was doing nothing more than accommodating her son’s desire to have a lower insurance premium.
The trial court felt otherwise, finding the insurable interest consisted of the “familial relationship” between Ms. Fetzer and her son. More specifically, the trial court stated “Kelly Fetzer has an interest in her son’s well-being both physically and financially”, and therefore denied MemberSelect’s motion for summary disposition.
The Court of Appeals, expressing its distaste for the requirement of an insurable interest in the context of automobile liability insurance agreements, but feeling constrained by both Supreme Court and Court of Appeals precedent, agreed with the trial court’s rationale of an insurable interest of familial relationship.
The Court of Appeals began its analysis with the public policy foundation of the requirement. Succinctly, the requirement of an insurable interest is based on a desire to avoid a situation in which an insured can receive a payout under a policy despite not having lost anything, and possibly with an incentive to act wrongfully to cause a payout, otherwise known as “wager policies”. (The excellent film noir “Double Indemnity” is an entertaining example of the public policy concerns behind the requirement.) The Court of Appeals did not feel the public policy rationale for requiring an insurable interest was implicated in an automobile liability policy because those policies are for indemnification and not compensation. Nevertheless, faced with precedent from the Michigan Supreme Court by way of Clevenger v Allstate Insurance Company, 443 Mich 646 (1993), and prior Court of Appeals’ decisions, such as Morrison v Secura Insurance, 286 Mich App 569 (2009), the MemberSelect Court reluctantly agreed that Kelly Fetzer needed an insurable interest or the policy would be void. (Notably, there is no statutory authority mandating that a named insured have an insurable interest to support a valid automobile liability policy.)
Accordingly, the next task for the Court of Appeals was to ascertain what may comprise an insurable interest and to do so, the Court surveyed case law which revealed the following:
In light of these decisions, the Court of Appeals in MemberSelect concluded, reluctantly, that the insurable interest requirement does apply in the automobile liability insurance context and held that under the circumstances of the case before it, Kelly Fetzer had a sufficient insurable interest in Nicholas’ well-being such that “we should not declare the policy void on public policy grounds.”
The Court concluded “that the interest of a parent in an adult child’s welfare, including such aspects as being covered for potential injury, being protected from financial ruin from injuring another, even the avoidance of civil infraction or other legal penalties for driving while uninsured, is sufficient to avoid temptations and social ills of ‘wager policies’.” The Court’s rationale of the insurable interest of a parent’s psychological well-being for an adult child’s welfare would suggest limitless possibilities of what constitutes an insurable interest. Moreover, the Court’s rationale to reach its holding ignores the fact that Kelly’s son was not faced with a situation of no option but to operate an uninsured vehicle. Rather, he wanted to engage in a subterfuge to obtain less expensive insurance.
The Court of Appeals concluded its opinion with the following request: “We would, however, be delighted if our Supreme Court would take the opportunity in this or some other case to clarify the insurable interest requirement, its applicability in a context of automobile liability insurance, and the continued viability of Clevenger in that regard.”
This paragraph concluded with a citation to footnote 15, in which the Court made what would appear to be a contradictory observation given the Court’s reluctance to impose an insurable interest requirement. The footnote stated: “Nothing in this opinion should be read as eliminating an insured from asserting appropriate contract-based or other traditional defenses to coverage such as fraud in the procurement of a contract-based policy, see, e.g., Titan Insurance v Hyten, 491 Mich 547 (2012), or from seeking rescission, and we offer no opinion about the applicability of any such claims or defenses in this case.”
Those very contract-based defenses to coverage referenced by the Court would generally be coextensive with the necessity of an insurable interest in many contexts.
The MemberSelect Court’s request for Michigan Supreme Court clarification may be granted in another case presently pending on application for leave to appeal in the Supreme Court, Farmers Insurance Exchange v Geico Indemnity Company, case number 160664, where Farmers is appealing the Court of Appeals decision holding that an insured son has no insurable interest in a vehicle owned, registered, operated and garaged by his mother. Garan Lucow Miller is representing Geico in that matter, and it is expected that the Court will rule on the application in the next three (3) months.
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Sarah Nadeau, Editor of The Garan Report Publication, is a Shareholder in our Detroit Office. Sarah can be reached at 313.446.1530 or snadeau@garanlucow.com