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Pre-Litigation Investigations Prove More Crucial Than Ever When Denying Fraudulent Claims

In a recent published opinion, the Michigan Court of Appeals affirmed summary disposition for an insurer after it denied a claim due to pre-litigation misrepresentations by its insured, which were reaffirmed by the insured in deposition testimony.

In Fashho v Liberty Mutual Insurance Company, Butross Fashho sought personal protection insurance benefits, including wage loss benefits, from his insurer after being injured in an automobile accident. Initially, the insurer paid Fashho’s wage loss benefits, but after surveillance depicted Fashho, the owner of an automobile repair shop, working at his business without any apparent restrictions, including loading and unloading tires, carrying heavy tools, pushing vehicles, and driving to customers’ homes to perform repairs, the insurer terminated Fasho’s PIP benefits.

After Fashho filed suit, he testified at his deposition that he was unable to perform his regular duties at his business for several months after the accident and continued to be unable to perform most of those duties at the time of his deposition.

As a result of the contradictory surveillance evidence and Fashho’s deposition testimony, the insurer moved for summary disposition pursuant to the fraud exclusion in the insurance contract. The trial court granted the motion for summary disposition, concluding that Fashho’s statements were material and knowingly false, as demonstrated by the previously obtained surveillance and reaffirmed by Fashho’s deposition testimony.  

On appeal, the court ordered the parties to provide supplemental briefing to address its recent holding in Haydaw v Farm Bureau. In Haydaw, the court held that an insurer cannot utilize a contractual fraud provision to deny a claim based on fraud that occurred after litigation began.  The court reasoned that an insurer does not rely on representations made during litigation to deny a claim, as insureds generally only file suit after their claim has been denied.

The Fashho court determined that the Haydaw decision was inapplicable to the facts before it. Specifically, the court noted that Fashho’s representations as to his inability to work and his need for wage loss were made before litigation commenced, and the insurer denied the claim on the basis of contradictory surveillance evidence obtained before litigation. Unlike the insurer in Haydaw, which solely relied on evidence obtained during litigation, Fashho’s deposition testimony merely reaffirmed and bolstered the insurer’s determination that misrepresentations were made before the lawsuit was filed.  As such, the insurer had the contractual right to deny Fashho’s claim pursuant to the fraud exclusion in his policy.

While Michigan’s appellate courts appear to be trending away from favoring fraud defenses, Fashho gives insurers some recourse by continuing to allow fraud defenses based on misrepresentations before a lawsuit is filed.  It also illustrates the importance of insurer’s thorough pre-litigation investigation, including surveillance, social media searches, and examinations under oath.

Author: Samantha L Singer

Samantha L Singer

Samantha Singer brings a unique perspective to defending clients because of her prior litigation experience working with plaintiffs. Now focusing her practice on insurance defense cases involving fraud, Samantha appreciates the many facets involved in each case and carefully examines all the pieces of the puzzle. Upon completing her Bachelor of Arts Degree in Political Science with a concentration in Criminal Justice, Samantha went on to The John Marshall Law School in Chicago. After law school, Samantha quickly gained valuable experience in first-party PIP, third-party no-fault, negligence, and premises liability matters. She has handled negotiations, facilitations, arbitrations, and mediations with the utmost care and consideration.

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