In the published Court of Appeals decision of Pioneer State Mut. Ins. Co. v Wright,the Court gives some clarification as to when an insurance company can rescind a policy because of a material misrepresentation made in the application, even when the claimant is an innocent third party. For some context, the Supreme Court in Bazzi v Sentinel Ins. Co.,502 Mich 390 (2018)(Bazzi, II), held that an individual’s claim for no-fault benefits as an innocent third party does not preclude an insurer from seeking rescission for fraud, but that fraud did not give the insurer the absolute right to rescission. Rather, when an insurance company is seeking rescission, the trial court must balance the equities to determine if the insurance company is entitled to rescind. The Supreme Court failed to provide specific criteria by which to make such a determination, however.
In Pioneer, Vanetta Wright submitted an insurance application to Pioneer which did not identify Dana Harris, her adult son, as a driver or resident in her household. Harris was injured in a motor vehicle accident while traveling as a passenger in a vehicle owned by Laurie Francen. Francen’s car was covered by a policy of insurance issued by State Farm. Harris did not own a vehicle or carry no-fault insurance of his own.
Harris pursued a claim for PIP benefits from Pioneer through the policy issued to Wright. Eventually, Harris filed suit against Pioneer and the driver of the other vehicle involved in the accident. Harris then amended his complaint to include State Farm as a defendant. Pioneer filed a separate action for declaratory relief requesting rescission of the insurance policy issued to Wright. The trial court found the underlying facts not in dispute and held Harris resided with Wright such that Pioneer was the insurer of highest priority. The trial court further found Pioneer could not rescind its policy as to Harris because he was an innocent third party. The trial court summarily dismissed Pioneer’s complaint on the basis of laches which applies when another party suffers prejudice because of an unreasonable delay.
While the case was on appeal, the Michigan Supreme Court decided Bazzi, II. The Court of Appeals affirmed the determination that Harris resided with Wright, but reversed the order applying the innocent third-party rule to Harris and reversed the decision to apply the doctrine of laches to Pioneer’s action for declaratory relief. The trial court remanded for further proceedings and a determination whether Pioneer could rescind Wright’s policy.
After remand, the Michigan Supreme Court decided Bazzi II. The trial court, on remand, found Harris and Pioneer were innocent parties and applied a balancing of the equities to determine if Pioneer could rescind the policy as to Harris. The trial court held it would be inequitable to permit Pioneer to rescind Wright’s insurance policy because, although Pioneer’s delay was “reasonable,” it waited two years to file its declaratory action and to permit rescission would preclude Harris from recovering most of his claim for no-fault benefits from any other insurer because of the one year back rule. From that ruling, Pioneer appealed.
In the published decision of Pioneer, the Court of Appeals found that the trial court properly balanced the equities as required by Bazzi, II, rather than applying the doctrine of laches, and concluded that Pioneer should bear the loss because a rescission would not be equitable to Harris. The Court of Appeals noted that Bazzi, II did not provide trial courts with a clear-cut framework for balancing the equities, but found the trial court considered Pioneer’s delay in filing its action seeking rescission, Pioneer’s knowledge that Harris resided with Wright as early as 2013, and that the one year back rule would bar Harris from recovering a majority of his claim.
The Court of Appeals also considered Justice Markman’s concurrence in Farm Bureau General Ins. Co., v Ace American Ins. Co.,503 Mich 903 (2018), in which he described a “nonexclusive list of factors” which a trial court should consider when resolving the issue of rescission. Noting the trial court did not have the benefit of the Farm Bureaudecision when it reached its conclusions, the Court of Appeals found the trial court’s analysis to be consistent with those factors. The Farm Bureau factors include:
(1) The extent to which the insurer could have uncovered the subject matter of the fraud before the innocent third party was injured; (2) the relationship between the fraudulent insured and the innocent third party to determine if the third party had some knowledge of a fraud; (3) the nature of the innocent third party’s conduct, whether reckless or negligent, injury causing event; (4) the availability of alternate avenue for recovery if the insurance policy is not enforced; and (5) a determination of whether enforcement only serves to relieve fraudulent insured of what would otherwise be a fraudulent insured’s personal liability to the innocent third party.
As to the first factor – the extent to which Pioneer could have discovered Wright’s representations before the accident – the Court found it did not truly weigh in either party’s favor. The second factor – the innocent third party’s knowledge of the fraud – weighed against rescission because there was no evidence that Harris was ever aware Wright’s representations. The third factor – the innocent third party’s conduct in the event that caused the injury – also weighed against rescission because Harris was simply a passenger in Francen’s car. The fourth factor – whether the innocent third party has alternate avenue for recovery – also weighed against rescission because the one year back rule would bar Harris from recovering a majority of his claim for PIP benefits. Finally, the fifth factor – whether enforcing the insurance policy would subject the insured to coverage for tort liability for an at-fault insured – did not apply because the only apparent wrongdoer in the case was Wright. Accordingly, the Court of Appeals determined that the trial court properly denied Pioneer’s request to rescind the policy.
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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