Michigan Court of Appeals Foregoes Special Panel to Resolve Bazzi “Innocent Third-Party” Conflict

A recent order from the Michigan Court of Appeals declares that, for now, insurers are entitled to rescind no-fault policies where there is fraud in the insurance application and trial courts may grant summary disposition of third-party claims if no genuine issue of material fact exists regarding a fraud issue.

The order is an apparent affirmation of Bazzi v Sentinel Ins Co, a published decision in which the Court of Appeals found that the so-called “innocent third-party” rule did not survive the Michigan Supreme Court’s ruling in Titan Ins Co v Hyten. In Titan, the Supreme Court held that the presence of fraud in an insurance application allows the insurer to rescind a policy, even where the fraud is “easily ascertainable.”

In Bazzi, the plaintiff sought PIP benefits under a commercial automobile policy that was fraudulently procured on behalf of a shell business entity by the plaintiff’s mother and sister to obtain a lower premium due to the plaintiff’s involvement in a prior accident. Sentinel Insurance Company also argued that the insurance application failed to disclose that the vehicle was leased to the plaintiff’s mother for personal and family use, as opposed to commercial use. Sentinel moved to dismiss the plaintiff’s claim, but the trial court denied the motion for summary disposition, finding that the “innocent third party” rule (a common law doctrine invoked to preclude insurers from denying claims from third parties who did not participate in the fraud) saved the plaintiff’s claim, even if the policy in question was rescinded. Sentinel then appealed.

As discussed in an earlier Newsroom post, in its June 14, 2016 opinion, the Court of Appeals held that there was no difference between the “easily ascertainable” rule reviewed in Titan and the “innocent third party” rule at issue in Bazzi, and by rejecting the former, the Supreme Court necessarily rejected the latter. The dissenting opinion, however, posited that the innocent third-party rule survived Titan, and that allowing retroactive rescission of a policy as to an innocent individual “thwarts the mandatory nature of [no-fault] benefits and the purposes of the no-fault act.”

At the same time Bazzi was proceeding through the courts, another case – Southeast Michigan Surgical Hospital, LLC v. Allstate Insurance – was making its way to the Court of Appeals. In Southeast, the insurance company denied benefits to a passenger injured in a rear-end collision. When it was determined that the vehicle’s owner and primary driver committed fraud in the application process, Allstate rescinded the policy and denied the plaintiff’s claim. In response to the parties’ cross-motions for summary disposition, the trial court concluded that though the policy was fraudulently procured, the plaintiff was an innocent third party entitled to protection against rescission of the policy.

On appeal, the appellate panel in Southeast acknowledged in its published decision that, although it was bound by the precedent set by Bazzi to reverse the lower court and remand the case for further proceedings, it was in complete agreement with the Bazzi dissent and called “for the convening of a special conflict panel.”

A call for a special conflict panel does not mean that one will automatically take place. In response to the Southeast panel’s request and pursuant to MCR 7.215(J)(3)(a), Court of Appeals Chief Judge Michael Talbot polled all of the appellate judges “to determine whether the particular question is both outcome determinative and warrants convening a special panel to rehear the case for the purpose of resolving the conflict,” then issued his order on August 31, 2016, declining to convene a panel.

We previously predicted that disagreement regarding the “innocent third party” rule and changes in Michigan No-Fault laws would prompt an application for appeal by the Michigan Supreme Court, and the effect of Southeast increases that likelihood even more. For the time-being, Bazzi remains the law in Michigan, providing insurers with a powerful defense.


April E. Moore

April Moore is an aggressive and dedicated litigator who leaves no stone unturned. Her practice focuses on the defense of complex tort matters, insurance fraud, health care subrogation, ERISA, and first-party no-fault and third-party automobile negligence cases.