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When you are a representing a third party your case rises and falls based on a policy your client had no part in. Now the Michigan Court of Appeals has struck down the Innocent Third Party Rule that protected clients from policy fraud committed by other people.
For 40 years, under the Innocent Third Party Rule, an insurance company could not terminate benefits against a third party for fraud committed by the policy holder. That rule, first created in State Farm Mut Auto Ins Co v Kurylowicz in 1976, was based on the public policy behind Michigan’s no-fault act:
“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.”
Court-mandated protections like the Innocent Third Party Rule have been under attack for years. In 2012, in Titan Ins Co v Hyten, the Michigan Supreme Court struck down a similar rule, the Easily Ascertainable Rule, which protected third parties from rescission when policy fraud was easily discovered by insurance providers.
Now the Michigan Court of Appeals has put another nail in the coffin of innocent third party protections. In Bazzi v Sentinel Ins Co, decided on June 14, 2016, the court eliminated the Innocent Third Party Rule, saying that Kurylowicz improperly allowed public policy to overrule the language of the Michigan No-Fault Act.
Ali Bazzi was driving his mother’s car when he was in an auto accident. The vehicle was insured under a commercial policy issued to his mother and aunt. However, in a separate lawsuit Sentinel Insurance Company had successfully rescinded the policy base because of fraud. Sentinel asked the court to dismiss Bazzi’s claims as well, based on that policy fraud.
The court ruled that there was no difference between the Easily Ascertainable Rule struck down in Titan and the Independent Third Party Rule at issue here. Both required the plaintiff to be an innocent third party, and it seemed illogical to the court to hold insurance companies liable for easily discovered fraud but not cases where the policy fraud was harder to prove.
According to the court, the Michigan No-Fault Act contained no limits on rescission of mandatory no-fault benefits. Overruling Kurylowicz, the court ruled:
“[W]hat coverages are required by law are simply irrelevant where the insurer is entitled to declare the policy void ab initio.”
Bazzi makes it harder for auto accident attorneys to defend the rights of their third party plaintiffs. Future cases will need to involve every possible insurer to protect against possible fraud defenses and comply with the statute of limitations. Lack of care could cause third parties to miss out on important no-fault benefits.
David Christensen is an auto accident attorney with over 25 years’ experience at Christensen Law in Southfield, Michigan. If your clients are facing a difficult no-fault issue, contact Christensen Law for a referral today.