Lawyers’ Corner: Innocent Third Party Rule in Southeast Michigan Surgical Hospital v Allstate

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A Michigan Court of Appeals decision earlier this year seemed to destroy the innocent third party rule protecting motorists from losing benefits because of another person’s fraud. But now, a second published case has given the issue new life, declaring a conflict that could set both matters up for a special panel decision.

In years past, the innocent third party rule was a shield used by auto accident attorneys to protect motorists from policy holders’ fraud. The rule, first described in 1976 in State Farm Mut Auto Ins Co v Kurylowicz, was based on the public policy supporting Michigan’s no-fault insurance law:

“It is the policy of this state that persons who suffer loss due to the tragedy of automobile accidents in this state shall have a source and a means of recovery.”

Earlier this year, it seemed the innocent third party rule was done for. In Bazzi v Sentinel Ins Co, decided on June 14, 2016, a panel of the Michigan Court of Appeals struck it down. According to the Bazzi court, there was no language in the statute to eliminate an insurance provider’s right to void a contract entered into based on fraud. In particular, the court said:

“[W]hat coverages are required by law are simply irrelevant where the insurer is entitled to declare the policy void ab initio.”

In other words, when a contract was void at the time it was created, the terms of coverage included in that contract don’t matter. The insurance provider won’t be held to any of them.

But another Court of Appeals panel begs to differ. In Southeast Michigan Surgical Hospital, LLC, v Allstate Ins Co, the court declared a conflict with Bazzi and objected to its decision striking down the innocent third party rule.

The Facts Behind Southeast Michigan Surgical Hospital V Allstate

Jamie Letkemann was injured as a passenger in a vehicle driven by his wife, Danielle Riordan. The 2010 Ford Escape was owned and insured by her brother-in-law, David Kreklau. The original insurance contract was signed before Letkemann began living with Riordan, and included representations that the vehicle would be primarily driven by Kreklau and garaged at his home. Letkemann knew Kreklau owned and insured the vehicle, but had no part in the insurance application or its renewal following his marriage to Riordan.

After his injury, Letkemann was treated by Southeast Michigan Surgical Hospital. Both Letkemann and Southeast filed no-fault insurance claims against Allstate, the insurer of the Ford Escape. Allstate filed a motion for summary disposition, claiming that Kreklau’s fraud in entering the insurance contract relieved Allstate of any obligation to pay Letkemann or Southeast any benefits.

The Southeast Court’s Take on the Innocent Third Party Rule

The Michigan Court of Appeals was forced to enter an order agreeing with Allstate’s position. While it disagreed with the legal argument, it was bound to apply the Bazzi decision once it had been made. The judges made clear that:

“Were we not bound, we would decline to continue the trend of eroding injured plaintiffs’ recovery options and conclude that the innocent third party doctrine remains a viable part of the law in Michigan.”

In support of its take on the law, the court cited MCL 257.520(f)(1), and an earlier court decision, Lake States Ins v Wilson, which states:

“‘Once an innocent third party is injured in an accident in which coverage was in effect with respect to the relevant vehicle’ the insurer cannot invoke the common law rule to avoid mandatory coverage, and ‘is estopped from asserting fraud to rescind the insurance contract.’”

The Southeast court found the statutory protection the Bazzi court refused to recognize. It distinguished an insurance provider’s right to avoid excess personal protection benefits from its statutory duty to provide mandatory personal protection insurance coverage. The Southeast court would preserve the innocent third party rule as to no-fault insurance benefits based on the statutory mandate.

What It Means to “Declare a Conflict”

In establishing its disagreement with the Bazzi court, the Southeast court called “for the convening of a special conflict panel purursuant to MCR 2.215(J)(2). That court rule allows differing panels on the Michigan Court of Appeals to request a poll. The rule states:

[W]ithin 28 days after release of the opinion indicating disagreement with a prior decision as provided in subrule (2), the chief judge must poll the judges of the Court of Appeals 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 that would have been created but for the provisions of subrule (1).

If a special panel is convened, it includes 7 judges not assigned to either case. After all the parties submit briefs and complete oral arguments, the panel will decide whether to overrule the conflicted opinion.

If a special panel is held in Southeast Michigan Surgical Hospital v Allstate, it could overturn Bazzi and reinstate the innocent third party rule. If not, Letkemann and Southeast may still apply to the Michigan Supreme Court for leave to appeal. Either way, it appears the fight for innocent passengers’ no-fault benefits isn’t done yet. Trial attorneys will simply have to wait and see whether the full Court of Appeals is behind them.

Update: Court Says No to Special Panel

On August 31, 2016 the Court of Appeals issued an order saying:

The Court orders that a special panel shall not be convened pursuant to MCR 7.215(1) to resolve a conflict between this case and Bazzi Sentinel Ins Co, _ Mich App _ ; _ NW2d _ (2016) (Docket No. 320518).

It is now up to the parties to appeal the decision to the Michigan Supreme Court to resolve the conflict.

David Christensen is an auto accident attorney at Christensen Law in Southfield, Michigan. He represents injured motorists against the auto insurance companies. If your client has a difficult no-fault issue, contact Christensen Law today for a referral.