EQUITABLE SUBROGATION MAY ENABLE A NO-FAULT INSURER THAT RESCINDS ITS POLICY TO RECOUP PRE-RESCISSION PAYMENTS FROM THE MACP OR ANOTHER INSURER

Christian Huffman

Luana Edwards-White (“Luana”) purchased a policy of insurance from Esurance Property & Casualty Insurance Company (“Esurance”). The policy listed a Dodge Challenger as a covered vehicle. When she applied for the policy, Luana represented to Esurance that she was the owner and registrant of the Dodge Challenger. This was not true. The owner and registrant of the Dodge Challenger was actually Luana’s son, Anthony White (“Anthony”). Subsequently, Roshaun Edwards (“Edwards”) was driving the Dodge Challenger when he crashed into a telephone pole.

Edwards neither maintained his own no-fault policy nor resided with a relative who did. Thus, as directed by MCL 500.3114’s “priority rules”, Edwards sought PIP benefits from Esurance pursuant to former § 3114(4)(a), which at the time of Edwards’ accident rendered the “insurer of the owner or registrant” of the Dodge Challenger “first in priority” (i.e., primarily liable) to pay Edwards’ PIP benefits. Alternatively, Edwards applied for PIP benefits through Michigan’s Assigned Claims Plan (“MACP”) pursuant to MCL 500.3172(1)(a), which states that the MACP is liable to pay Edwards’ PIP benefits if “[n]o [PIP] insurance is applicable to the injury.” Based upon Luana’s misrepresentation that she was the “owner [and] registrant” of the Dodge Challenger, both Esurance and the MACP believed that former § 3114(4)(a) rendered Esurance, rather than the MACP, liable to pay Edwards’ PIP benefits. Thus, Esurance subsequently paid Edwards PIP benefits totaling nearly $600,000.

Esurance thereafter learned that Anthony, rather than Luana, was the real owner and registrant of the Dodge Challenger. Esurance thus filed a lawsuit seeking a judicial declaration that Luana’s material misrepresentations during the application process entitled Esurance to rescind its policy. This resulted in the entry of a judgment declaring the Esurance policy void ab initio, which means that the policy was annulled and declared to have never legally existed. In practical effect, this also meant that Esurance had never been liable to pay Edwards’ PIP benefits; rather, the MACP had always been liable.

Seeking to recoup the nearly $600,000 it had paid, Esurance then filed a lawsuit asserting an “equitable subrogation” claim against the MACP. The equitable doctrine of subrogation entitles a person that, in order to protect his or her own interests, has paid a debt for which another person bears primary liability to seek reimbursement from the person that was primarily liable. That is, the payor “stands in the shoes” of the payee and is entitled to bring whatever claim the payee would have had against the person that bears primary liability. The payor is thus treated as if they were the payee, and as though the payee were seeking recovery in the first instance from the person bearing primary liability.

The Court of Appeals held that, regardless of whether the policy had been rescinded, Esurance cannot maintain an equitable subrogation claim against the MACP.

The Court of Appeals reasoned that if Esurance’s payments are viewed as though the rescission had not occurred (since Esurance paid before the policy was declared void ab initio), then the MACP was never liable to pay Edwards’ PIP benefits pursuant to § 3172(1)(a) because Esurance’s policy had been applicable to Edwards’ injury. Thus, because Edwards himself could not have recovered PIP benefits from the MACP in the first instance, Esurance cannot now obtain recovery from the MACP because Esurance “stands in [Edwards’] shoes” and possesses no greater rights than Edwards.

Alternatively, the Court of Appeals reasoned that if Esurance’s payments are viewed in light of the rescission, meaning that Esurance was never legally obligated to pay Edwards’ PIP benefits, then Esurance cannot be viewed as having made the payments to protect Esurance’s interests. That is, Esurance has to be viewed as a “mere volunteer” that paid Edwards’ PIP benefits despite having no legal or moral obligation to do so.

But the Michigan Supreme Court disagreed with the Court of Appeals and held that – under the specific facts of that particular case – Esurance is not precluded from maintaining an equitable subrogation claim.

First, the Michigan Supreme Court held that, if Esurance’s payments were viewed as if Esurance’s policy had not been rescinded, then § 3114(4)(a) still would not have rendered Esurance responsible (i.e., “first in priority”) to pay Edwards’ PIP benefits. This is because, as it turned out, Luana was not the “owner or registrant” of the Dodge Challenger. Rather, the true “owner or registrant” of the Dodge Challenger was Anthony, who does not qualify as an insured under the Esurance policy. Thus, Esurance was not the “insurer of the owner or registrant” of the Dodge Challenger. Accordingly, the MACP has always been “first in priority” to pay Edwards’ PIP benefits, and therefore Esurance can “stand in [Edwards’] shoes” and seek them on Edwards’ behalf.[1]

Second, the Michigan Supreme Court held that even if Esurance’s payments were viewed in light of the rescission, then Esurance could not be viewed as a “mere volunteer” despite the fact that, as it turned out, Esurance was never legally obligated to pay Edwards’ PIP benefits. This is because, due to Luana’s material misrepresentations, Esurance thought that § 3114(4)(a) rendered Esurance “first in priority” to do so and, thus, believed that the no-fault act obligated Esurance to timely pay Edwards’ or face the potential imposition of the statutory sanctions set forth in the no-fault act.

It should be noted that the Supreme Court’s decision may not be interpreted as permitting every no-fault insurer that mistakenly pays PIP benefits and is later able to rescind its policy to maintain an equitable subrogation claim against the MACP or another no-fault insurer that is ultimately determined to be “first in priority.”

Specifically, the Supreme Court’s holding was premised upon the fact that even if Esurance’s policy had not been rescinded, Esurance was actually never “first in priority” to pay Edwards’ PIP benefits. Rather, Edwards was never entitled to recover PIP benefits from Esurance at all, and had always been legally entitled to recover them from the MACP. In most instances where a no-fault insurer is permitted to rescind its policy, however, that is not the case. Rather, most often the rescinding insurer would, in fact, be “first in priority” to pay the injured person’s PIP benefits but-for the rescission, and it is only the rescission that removes the rescinding insurer from the chain of priority. That means that, at the time the rescinding insurer pays the PIP benefits, the injured person does not have a valid claim against the MACP or another insurer that may happen to be within the chain of priority. Accordingly, the rescinding insurer would obtain no valid subrogation claim by “standing in the shoes” of the injured person, as the rescinding insurer would have no greater rights than the injured person.

For the full opinion, click here:   Esurance Property & Casualty Insurance Company v Michigan Assigned Claims Plan

[1] It should be noted that this is only because Edwards had both sought PIP benefits from Esurance and filed a timely application for PIP benefits through the MACP as required by MCL 500.3174. That statute provides that “[a] person claiming through the assigned claims plan shall notify the Michigan automobile insurance placement facility of his or her claim within 1 year after the date of the accident.” Had Edwards not timely applied for PIP benefits through the MACP this 1 year statute of limitations would have precluded any claim by Edwards and, derivatively, any equitable subrogation claim by Esurance.