MATERIAL MISREPRESENTATION, EXAMINED

Peter B. Worden

To rescind a policy “ab initio” means to cancel it “from the beginning,” and restore the parties’ relationship to what it was before the contract – as if the contract never existed:

To rescind a contract is not merely to terminate it, but to abrogate and undo it from the beginning; that is, not merely to release the parties from further obligation to each other in respect to the subject of the contract, but to annul the contract and restore the parties to the relative positions which they would have occupied if no such contract had ever been made.

Cunningham v Citizens Ins Co of America, 133 Mich App 471, 479 (1984).

In an unpublished decision issued by the Michigan Court of Appeals on October 14, 2021, Munson Medical Center, et al v Falls Lake National Insurance Company, Docket No. 356702, the Court recognized and reinforced several key principles of an insurer’s right to rescind a policy of insurance and declare it void ab initio if there have been material misrepresentations in the application. Although an unpublished decision, it references several key published decisions and provides a thorough discussion of the concepts involved.

Dawn Drum was involved in a serious motor vehicle accident. Prior to the accident she had applied for no-fault insurance with Falls Lake. The application specifically asked her to list all household members age 14 and older as well as any vehicles garaged at her address, regardless of the registrant. She did not disclose any, and she was issued a policy of insurance.

It turned out that Ms. Drum lived with two other adults, who between them owned several vehicles that were garaged at the home. Ms. Drum had failed to identify either the individuals or their vehicles in her application. When Falls Lake learned of this, it declared it was rescinding her policy.

Plaintiffs, who are all medical providers based in northern Michigan, had treated Ms. Drum for her accident injuries and had generated billings of $187,190.10. They commenced a direct action against Falls Lake under MCL §500.3112. The Grand Traverse County Circuit Court granted summary disposition to Falls Lake, upholding its ability to rescind the policy. The Court of Appeals affirmed.

The Court of Appeals noted that “[A]n insurer has a reasonable right to expect honesty in the application for insurance . . . “, citing Bazzi v Sentinel Ins Co, 502 Mich 390, 399 (2018). Further the Court confirmed: “It is the well-settled law of this state that where an insured makes a material misrepresentation in the application for insurance, including no-fault insurance, the insurer is entitled to rescind the policy and declare it void ab initio”; citing Lake States Ins Co v Wilson, 231 Mich App 327, 331 (1998).

A key element the Court focused on is what constitutes a material misrepresentation:

“The generally accepted test for determining the materiality of a fact or matter as to which a representation is made to the insurer by an applicant for insurance is to be found in the answer to the question whether reasonably careful and intelligent underwriters would have regarded the fact or matter, communicated at the time of effecting the insurance, as substantially increasing the chances of loss insured against so as to bring about a rejection of the risk or the charging of an increased premium.” [Keys v Pace, 358 Mich 74, 82; 99 NW 2d 547 (1959), quoting with emphasis 29 Am Jur, Insurance, § 525.]

The Court noted that Falls Lake’s underwriter testified that had Ms. Drum provided the correct information on her application the policy never would have been issued under the company’s guidelines. This met the material misrepresentation requirement.

The Court also reiterated that even an innocent misrepresentation can support rescission if the other party relies upon it, because otherwise the party responsible for the misstatement would be unjustly enriched; referencing Lash v Allstate In Co, 210 Mich App 98, 102-104 (1995).

The Court emphasized that Ms. Drum testified she had in fact failed to answer the application questions accurately, and she did not offer any excuse or explanation for her failure to do so. It also noted, several times, that the application had specifically warned Ms. Drum that inaccurate or incomplete answers could lead to rescission of the policy.

Accordingly, the Court of Appeals upheld the trial court’s granting of summary disposition to the insurance carrier. Munson Medical Center, et al v Falls Lake National Insurance Company serves as a useful reminder of the principles of rescission of a policy ab initio, and illustrates when a misrepresentation rises to the level where an insurer can rescind the policy outright.