In Bazzi v Sentinel Ins Co, a published decision, the Michigan Court of Appeals recently confirmed that the so-called “innocent third-party” rule did not survive the Michigan Supreme Court’s decision in Titan Ins Co v Hyten, which held that insurers can rescind policies due to fraud in the insurance application, even where the fraud is easily ascertainable.
In Bazzi, the plaintiff sought PIP benefits from Sentinel under a commercial automobile policy. Sentinel maintained that the policy 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 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 further maintained that the insured did not disclose that the plaintiff would be a regular driver of the vehicle.
Sentinel moved for summary disposition in the trial court, arguing that it was entitled to a dismissal of the case because the insurance policy was rescinded due to the material misrepresentations made in the policy application. The trial court denied the motion, finding that the plaintiff’s claim was viable because of the “innocent third-party” rule, a common law doctrine that has previously precluded insurers from denying claims – even where a policy was rescinded – from third parties that were not involved in the fraud.
On appeal, the Court of Appeals first held that Titan compelled the conclusion that there “is no innocent third-party rule” as to a claim for PIP benefits. This is because, the Bazzi court held, there is no distinction between the “easily ascertainable rule” discussed in Titan and the “innocent third party” rule at issue in Bazzi. By rejecting the “easily ascertainable” rule, the Titan court also necessarily rejected the “innocent third party” rule because they are the same rule.
The Bazzi opinion notes that the “question is not whether PIP benefits are mandated by statute, but whether the statute [the No-Fault Act] prohibits the insurer from availing itself of the defense of fraud.” In finding that there is no provision in the No-Fault Act that restricts the use of the fraud defense as it relates to PIP benefits, the court held that an insurer entitled to rescind a no-fault insurance policy based upon fraud in the application process is not obligated to pay benefits under that policy, including to a third party innocent of the fraud.
The Court of Appeals ultimately remanded the case to the trial court to decide several procedural and factual issues, but the thrust of the holding remains: insurers are entitled to rescind no-fault policies where there is fraud in the insurance application, and trial courts may, where warranted, grant summary disposition if there is no genuine issue of material fact regarding a fraud issue.
The dissent in Bazzi argues that the innocent third-party rule survived Titan in the context of statutorily mandated no-fault benefits and has continued validity. In particular, the dissent asserts 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.” The dissent also speculates that insurers may delay their decision to rescind for various perverse reasons, which in turn may prejudice a claimant from timely making a claim for benefits to the Michigan Assigned Claims Plan.
Given the numerous constituencies interested in the outcome of the Bazzi case, as well as the sea change in no-fault jurisprudence that Bazzi represents, it seems likely that the plaintiff will file an application for appeal to the Michigan Supreme Court. In the interim, if you have any questions regarding this case and its impact, please feel free to contact any of our insurance defense attorneys.