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The Michigan Court of Appeals has issued yet another published case on the Innocent Third Party doctrine. In the months since Bazzi v Sentinel Ins Co, two more published opinions show that the viability of the Innocent Third Party rule is likely headed to the Michigan Supreme Court, and soon.
Debates about law and public policy happen in appellate courts all the time. One need only read a handful of dissents to know that the court is seldom of one mind on issues of statutory interpretation. But rarely do such debates happen in the context of published opinions.
Followers of this blog have been seeing the words “Innocent Third Party” a lot lately. That’s because the doctrine has been at the heart of no less than 3 published court opinions in the last 3 months. In June, the Michigan Court of Appeals published Bazzi v Sentinel Ins Co. This opinion struck down the Independent Third Party doctrine, based on reasoning in an earlier Michigan Supreme Court case Titan Ins Co v Hyten.
At their core, Titan and Bazzi stand for the position that, except where explicitly prohibited by statute, an insurance company is allowed to rescind an auto insurance policy based on allegations of fraud. Once that rescission happens, it applies to anyone covered under the policy, even innocent third parties.
The effect of this decision was to cut off access to insurance benefits for people who themselves had committed no wrongdoing. Because the Bazzi court refused to require insurance companies to review their policies in a timely manner, many people are under the mistaken impression that they are driving with valid insurance. When a claim is filed, the insurance company performs a review, discovers fraud, and rescinds the contract. Because this review does not happen until after the First Party lawsuit has been filed, it is often too late for innocent third parties to re-file against other alternative insurers.
In August 2016, another panel of the Michigan Court of Appeals responded to Bazzi. In Southeast Michigan Surgical Hospital v Allstate Ins Co, the court followed the Bazzi precedent and dismissed an innocent third party’s case, but under protest. The opinion called for a special panel to resolve the conflict and reinstate the innocent third party doctrine. However, on August 31, 2016, an order came down that no such special panel would be held.
On August 30, while the Michigan Court of Appeals as a whole was still debating the need for a special panel, a third Innocent Third Party case was published. State Farm Mut Auto Ins Co v Michigan Municipal Risk Management Authority, provided yet more evidence that the doctrine isn’t going away without intervention by the Michigan Supreme Court.
In State Farm, an insurance company, QBE, asked the court to dismiss the case because fraud entitled the company to rescind its policy. According to QBE, the named insurer, Gray provided false information on her original application for insurance. She stated the insured vehicle, a Cutlass, was registered in her name, when in fact it was registered to her mother, Tina Poole. QBE’s insurance policies require that the named insured be the registered owner of the vehicle. So it took the position that, had Gray provided true information about the registration of the vehicle, it would never have issued insurance in the first place.
The trial court found “as a matter of law I do not believe QBE would be entitled to claim a rescission for those mandatory benefits set forth in the No-Fault Act by statute as they relate to innocent third-parties.” On remand following the Bazzi decision, the Michigan Court of Appeals disagreed. Two judges signed an opinion reversing the trial court’s decision for precisely the reasons stated in Bazzi. Those judges stated:
“Further, we agree 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.
But Judge William B. Murphy wrote separately to side with the panel in Southeast, stating that the Michigan No-Fault Act did prohibit insurance companies from using fraud defenses against innocent third parties. Judge Murphy noted that Bazzi relied on Titan, which itself expressly restricts the ability of auto insurers to rescind contracts “in relation to statutorily-mandated insurance coverage and benefits.”
The court in Titan stated:
“Should Titan prevail on its assertion of actionable fraud, it may avail itself of a traditional legal or equitable remedy to avoid liability under the insurance policy, notwithstanding that the fraud may have been easily ascertainable.
However, as discussed earlier in this opinion, the remedies available to Titan may be limited by statute.”
Immediately thereafter, the Titan decision included a footnote:
“For example, MCL 500.3009(1) provides the policy coverage minimums for all motor vehicle liability insurance policies.”
Judge Murphy wrote:
“[F]ootnote 17 in Titan makes abundantly clear that the mandatory liability minimums are to be paid by the insurer under the policy despite any fraud.”
That includes First Party benefits under the Innocent Third Party doctrine. Since these claims pertain to mandatory coverage, fraud by the policy holder does not, in Judge Murphy’s mind, open the door from a common law fraud defense by the insurance company.
With judges writing and publishing so aggressively on both sides of the Innocent Third Party debate, it is only a matter of time before the Michigan Supreme Court takes up the issue. In the meantime, auto accident attorneys representing innocent third parties are going to have to keep a close eye on the courts, and do a bit of extra work to protect their clients’ claims.