Rescission of PIP Policy Available for Fraud

The “Innocent Third Party Rule” Does Not Eliminate Right to Rescind

When an insured obtains a policy of insurance by misrepresentation of a material fact or fraud, the insurer may rescind the policy in Michigan. However, when an innocent person is injured by the insured before the policy is rescinded, statutes and courts attempt to protect the innocent and require the defrauded insurer to indemnify its insured and cannot assert its rights as the victim of a fraud. In Michigan, the right to rescind in such a situation was resolved on August 30, 2016 in State Farm Mut. Auto. Ins. Co. v. Michigan Mun. Risk, Court of Appeals of Michigan, — N.W.2d —-, 2016 WL 4533622 (Aug. 30, 2016). The Supreme Court of Michigan sent the case back to the Court of Appeals because in its original opinion, it affirmed the trial court’s denial of summary disposition to QBE Insurance Corporation (QBE) on the ground that the “innocent third-party rule” barred rescission of the policy of insurance at issue. The Supreme Court, in lieu of granting QBE’s application for leave to appeal, vacated the court of appeals opinion with respect to QBE and remanded the case, instructing us to hold this case pending the outcome of Bazzi v. Sentinel Ins. Co., ––– Mich.App ––––; –– – NW2d –––– (2016). As Bazzi has now been decided, the Court of Appeals concluded that the “innocent third-party rule” did not bar QBE’s claim of fraud as a defense to an insurance contract, and that the trial court therefore erred in denying QBE’s claim of summary disposition.

PERTINENT FACTS

QBE moved for summary disposition. QBE asserted, inter alia, that it was entitled to rescind its policy of insurance provided to Gray because Gray had procured her policy by defrauding QBE. According to QBE, Gray had supplied false information on her application for insurance by affirmatively indicating that the Cutlass was registered to her, when in fact it was registered to Tina Poole, Gray’s mother. Had Gray truthfully completed the application, QBE would never have issued the policy. Under such circumstances, QBE argued that it was entitled to rescind the insurance policy issued to Gray, and thus was entitled to be dismissed from the suit.

In support of its argument, QBE provided the application for insurance that had been submitted by Gray, which stated that the named insured “must be the registered owner” of the insured vehicle (the Cutlass). Gray had indicated on the application that she was the registered owner of the vehicle, when in fact the vehicle was registered to Poole. Gray testified at her deposition that she did not own the Cutlass.

Insurance coverage required by statute, such as that of the No-Fault Act, MCL 500.3101, et seq., cannot be rescinded after an innocent third party has sustained injury which is the subject of the coverage required by statute.

ANALYSIS

However, because the “innocent thirdparty rule” did not survive our Supreme Court’s decision in Titan Ins. Co. v. Hyten, 491 Mich. 547; 817 NW2d 562 (2012), the trial court erred in denying summary disposition to QBE on this basis. Bazzi, ––– Mich.App at ––––, slip op at 1. We see no reason to reiterate in full the holding of Bazzi. Suffice it to say that it is precisely on point with respect to the issue presented in the instant case, and is precedentially binding. Further, the Court of Appeals agreed with the Bazzi panel that the public policy concerns engendered by the abrogation of the “innocent third-party rule” are more appropriately considered by the Legislature, not this Court.

Having concluded that the trial court erred in its denial of summary disposition on the basis of the “innocent third-party rule,” we vacate the trial court’s order in that respect. However, this Court must further consider the posture of this case relative to the underlying issue of fraud. It further opined that while it was inclined to believe that there was fraud in obtaining the insurance just from what’s before me, there at least could be some triable issues in that regard. Based on the Court of Appeals review of the record, it could see no reason to disturb that finding. Because this Court in Bazzi v. Sentinel Ins. Co., ––– Mich.App ––––; ––– NW2d –––– (2016), held that the “innocent thirdparty rule” was implicitly and effectively abolished in Titan Ins. Co. v. Hyten, 491 Mich. 547; 817 NW2d 562 (2012), for purposes of mandatory personal protection insurance benefits, commonly referred to as PIP benefits, under the no-fault act, the Court of Appeals had no right to apply the rule and required the trial court to order the QBE policy rescinded.

ZALMA OPINION

In every state, including Michigan, fraud is a basis for rescission of an insurance policy because there is no meeting of the minds between the insurer and the putative insured. Gray lied on the application concerning a material fact, the registered owner of the vehicle. QBE was defrauded and never was allowed to agree to the risk it thought it was taking. The policy was void from its inception. The innocent victim was not without a remedy.