The Fate Of Michigan’s Innocent Third-Party Rule

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The innocent third-party rule in cases of insurance fraud was abolished by the Michigan Court of Appeals nearly two years ago. Now, the rule’s fate rests with the seven justices of the Michigan Supreme Court.

The innocent third-party rule has been part of Michigan no-fault jurisprudence for more than four decades. The rule says that innocent third parties – car accident victims and the medical providers who treat them – are entitled to personal injury protection (PIP) benefits, even if the insured engaged in fraud when purchasing the no-fault policy.

In June 2016, the Court of Appeals struck down the innocent third-party rule in Bazzi v Sentinel Ins Co. In doing so, the Court of Appeals relied on the Michigan Supreme Court’s decision in Titan Ins Co v Hyten, 491 Mich 547 (2012), and concluded:

“[I]f an insurer is entitled to rescind a no-fault insurance policy based upon a claim of fraud, it is not obligated to pay benefits under that policy even for PIP benefits to a third party innocent of the fraud.”

The Bazzi panel also rejected the argument that the innocent third-party rule should stand as a matter of public policy. According to the Court of Appeals, keeping the rule would ignore case precedent and establishing an innocent third-party rule is up to the legislature, and not the judiciary.

Bazzi is currently the law in Michigan, meaning that innocent third parties are not entitled to PIP coverage when the insurer claims the policy was obtained through fraud.

The Court of Appeals ruling inBazzi was appealed to the Michigan Supreme Court. The justices heard oral arguments in Bazzi on January 11, 2018.

Bazzi Facts

Plaintiff-Bazzi sought PIP benefits for injuries he suffered while driving a vehicle owned by his mother, Hala Bazzi. The insurer, defendant-Sentinel Insurance, claimed that Hala Bazzi had fraudulently obtained the policy.

After defendant-Sentinel rescinded the policy based on fraud, it filed a motion to dismiss plaintiff-Bazzi’s claim for PIP benefits. The trial court denied the motion, finding that plaintiff-Bazzi had a no-fault claim under the innocent third-party rule.

The Bazzicase then wound its way through the appellate court system. On June 14, 2016, the Court of Appeals issued its published decision in Bazzi, striking down the innocent third-party rule. The Bazzi panel wrote:

“[W]e conclude that: (1) there is no distinction between an easily ascertainable fraud rule and an innocent-third-party rule, (2) the Supreme Court in Titan clearly held that fraud is an available defense to an insurance contract except to the extent that the Legislature has restricted that defense by statute, (3) the Legislature has not done so with respect to PIP benefits under the no-fault act, and (4) the judicially created innocent-third-party rule has not survived the Supreme Court’s decision in Titan. Therefore, if an insurer is able to establish that a no-fault policy was obtained through fraud, it is entitled to declare the policy void ab initio and rescind it, including denying the payment of PIP benefits to innocent-third-parties.”

Michigan Supreme Court Arguments

At arguments before the Michigan Supreme Court in January, counsel for plaintiff-Bazzi asserted the Court of Appeals misinterpreted Titan. It was argued that Titan stands for the proposition that, when an innocent third party is involved, an insurer remains responsible for statutorily mandated no-fault benefits pursuant to a policy it issued, regardless of whether the policy was obtained through fraud.

It was also emphasized to the justices that plaintiff-Bazzi did not engage in any fraudulent conduct and, therefore, he was not “benefitting” by receiving PIP benefits. It was further pointed out that defendant-Sentinel has a legal remedy against Hala Bazzi for reimbursement of the benefits it pays, while plaintiff-Bazzi does not have similar recourse.

Addressing the argument that innocent third parties can collect PIP benefits through the Michigan Assigned Claims Plan (MACP), counsel for plaintiff-Bazzi explained this argument has been oversimplified, particularly because of the time limits for filing a PIP claim under the one-year-back rule (see MCL 500.3145).

Meanwhile, counsel for defendant-Sentinel told the justices that the Court of Appeals correctly decided Bazzi, because an insurance company may rescind a policy that’s procured through fraud. It was argued that, under Titan, an insurer’s right to rescind based on fraud should be upheld unless there is a legislative dictate otherwise – and in Bazzi, there was no such dictate. It was further maintained that if the Michigan Supreme Court found otherwise, jurisprudence regarding contract law and statutory interpretation will become unsettled.

Counsel for defendant-Sentinel also emphasized that insurance policies are contracts and should not be issued based on misrepresentations. Counsel further noted that the MACP already provides a remedy for innocent third parties, in that they have one year from the date they incurred an expense to make a claim for PIP benefits.

Will the Innocent Third-party Rule Stand?

The decision in Bazzi – and the fate of the innocent third-party rule – depends on how the Michigan Supreme Court interprets its 2012 ruling in Titan.

Notably, Titan did not involve a PIP claim. Rather, the insurer in Titan was seeking a declaratory judgment that, because of fraud on the insurance application, it did not have a duty to indemnify its insureds in a claim brought by third parties injured in an accident with Titan’s insureds.

In Titan, it was asserted the insurer could not avoid liability to the innocent third parties based on fraud. The Michigan Supreme Court disagreed, overruling State Farm Mut Auto Ins Co v Kurylowicz, 67 Mich App 568 (1976) – the decision that first established the innocent third-party rule.

The Court of Appeals’ rationale in Bazzi for eliminating the innocent third-party rule was that the rule did not survive Titan. Will the Michigan Supreme Court agree? We’ll soon find out, as a decision in Bazzi is expected soon. Stay with Christensen Law for updates on this important no-fault case.

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