Fraud, Perjury, and Trial: Two New Michigan Published Opinions Make Fraudulent Insurance Claims More Likely to Proceed to Trial

Since 2014, Bahri v IDS Prop Casualty Ins Co has given insurance companies the ability to seek dismissal of fraudulent claims based on a claimant’s false deposition testimony.

But two recent published Michigan Court of Appeals opinions now severely limit both Bahri and an alternate fraud defense that insurers could use to defend against fraudulent claims.

In Haydaw v Farm Bureau Ins Co, the Court of Appeals held that “false statements made during discovery do not provide grounds to void the policy.” The plaintiff made false statements during his deposition regarding his pre-accident medical conditions. Although the trial court granted Farm Bureau’s motion for summary disposition, the Court of Appeals reversed.  The court relied on case law from other jurisdictions to adopt a “general rule” differentiating statements made before litigation and statements made during litigation, such as at a deposition or through written discovery responses.

Under Bahri, an insurer could seek dismissal based on a claimant’s material misrepresentation that was made with “the intention that the insurer would act upon it.” However, the Haydaw court held that statements made during litigation are made with the intention that the trier of fact (typically a jury) will act upon them – not an insurer. The court declared that “[o]nce suit is brought, what is truth and what is false is a matter for a jury or a judge acting as factfinder.”

Haydaw also decried that an opposite holding would incentivize insurers to bait or lead plaintiffs during a deposition into making false statements while having full knowledge of their medical history. Instead, Haydaw recommends that a defendant impeach a plaintiff at trial by using false statements made during litigation.

Curiously, the Haydaw court still insinuated that misrepresentations during litigation could result in dismissal of an action under the Michigan Court Rules. Yet in support of this proposition, Haydaw cited another recently published Court of Appeals opinion that effectively nullified the same defense.

In Swain v Morse, the Court of Appeals held that the trial court abused its discretion when it dismissed a lawsuit when the plaintiff perjured herself at her deposition. The court reasoned that dismissal was improper for three main reasons:

• the perjury did not violate any court rule or order;
• the perjury did not undermine the judicial process because contradictory evidence was obtained during discovery through alternate means; and
• while the false statements were relevant to the case, they were not dispositive in the matter and the defendant was not substantially prejudiced by the perjury.

Interpreting the Michigan Court Rules, Swain held that the discovery sanction rules do not permit sanctions based on the “substance” of a deponent’s testimony. Prior cases that were dismissed for discovery violations instead involved threats to the judicial system itself – such as witness tampering.  But Swain held that false testimony was only a threat to the deponent’s claim – one that could be remedied at trial through impeachment of the witness in front of the jury.  Although Swain does not preclude dismissal for a deponent’s perjury under a trial court’s inherent authority to dismiss a case for discovery violations, that authority should only be employed in the most egregious situations, such as a pattern of actions that threaten the system of justice itself. And Swain makes it clear that even intentionally false testimony is likely insufficient on its own to dismiss a case as a discovery sanction.

Both Haydaw and Swain are now binding opinions for Michigan litigants. As such, material misrepresentations made during litigation can no longer serve as a basis for dismissal under a fraud provision in an insurance policy. And Swain essentially prevents a trial court from dismissing cases based on false testimony before trial. Instead, only the most egregious litigants who threaten the sanctity of the judicial process should have their cases dismissed.

On the other hand, these new cases were factually specific and their holdings may be limited.  For example, Haydaw assumes that claims in litigation are necessarily denied by the insurer pre-suit by failing to timely pay claims or issuing an improper denial. Thus, the court held that an insurer cannot rely on a contractual fraud provision after a claimant files suit because the insurer has already substantially breached the insurance policy contract. But an insurer is often unable to obtain the necessary information to make a claims decision until a claimant is forced to provide that information via discovery.  In that case, the claim is not necessarily denied before suit is filed.

Whether Michigan trial courts follow the restrictive analyses of Haydaw and Swain will ultimately depend on whether the assumptions and circumstances of those cases can be identified and successfully distinguished by insurers.  Success in this regard will ensure unnecessary trial costs are not expended on fraud cases that are more appropriately dismissed earlier in litigation. Nevertheless, an insurer would be wise to perform intense pre-litigation (and pre-denial) investigations of a potentially fraudulent claim, including obtaining thorough recorded statements from a claimant to protect a potential Bahri defense.