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STATE OF MICHIGAN

IN THE SUPREME COURT

ALI BAZZI,

Plaintiff-Appellant,

and

Supreme Court No. 154442 Court of Appeals No. 320518 Wayne Circuit No. 13-000659-NF

GENEX PHYSICAL THERAPY, INC, ELITE CHIROPRACTIC CENTER, PC and TRANSMEDIC, LLC (Ali Bazzi),

Intervening Plaintiffs v

SENTINEL INSURANCE COMPANY,

Defendant-Appellant,

and

CITIZENS INSURANCE COMPANY,

Defendant,

and

SENTINEL INSURANCE COMPANY,

Third-Party Plaintiff-Appellee,

and

HALA BA YDOUN BAZZI and MARIAM BAZZI,

Third-Party Defendants.

AMICUS CURIAE BRIEF OF THE INSURANCE ALLIANCE OF MICHIGAN

Respectfully submitted,

WILLINGHAM & COTE, P.C. · Attorneys for Amicus Curiae

BY: John A. Yeager(P26756) Kimberlee A. Hillock (P65647) 333 Albert Avenue, Suite 500 East Lansing, MI 48823 517-351-6200

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TABLE OF CONTENTS

INDEX OF AUTHORITIES ................................................................................................. ii, iii, iv

STATEMENT OF INTEREST OF AMICUS CURIA£ ................................................................... 1

INTRODUCTION AND REASONS SUPPORTING APPEAL .................................................... .2

STATEMENT OF FACTS ............................................................................................................. .3

STANDARD OF REVIEW ............................................................................................................. 3

LEGAL ARGUMENT ..................................................................................................................... 4

I. There is No Reason to Inflict Losses on a Defrauded Insurer: The Michigan Assigned Claims Plan is Expressly Intended by the Legislature and Uniquely Designed to Provide No-Fault Personal Protection Insurance Benefits to Truly Innocent Uninsured Injured Persons ................................................. : ................................................................... 4

II. No binding authority holds that a PIP policy may not be rescinded on the basis that the PIP claimant is an innocent third party, and the reasoning in Titan clarifies that public policy is not a sufficient basis .......................................................................................................................... 9

III. The "Mandatory Coverage" Argument is a Red Herring. Coverage notwithstanding fraud is legislatively mandated elsewhere but not in the no-fault act ............................................................................................................. 15

IV. If the Equities are Weighed, They Favor Rescission ............................................. 20

CONCLUSION AND RELIEF REQUESTED ............................................................................. 21

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INDEX OF AUTHORITIES

Cases

Auto-Owners Ins Co v Michigan Ins Comm 'r, 141 Mich App 776; 369 NW2d 896 (1985) ............................................................................................. II, 14

Borman v State Farm Fire & Cas Co, 446 Mich 482; 521 NW2d 266 (1994) ................ 15

Bradley v Mid-Century Ins Co, 409 Mich I; 294 NW2d 141 (1980) ............................. 4, 5

Celina Mut Ins Co v Lake States Ins Co, 452 Mich 84; 549 NW2d 834 (1996) ................ 6

Citizens Ins Co of America v Federated Mut Ins Co, 448 Mich 225; 531 NW2d 138 (1995) ..................................................................................................... 9

Coburn v Progressive Cas Ins Co, 425 Mich 300; 389 NW2d 424 (1986) ...................... 15

Cruz v State Farm Mut Auto Ins Co, 466 Mich 588; 648 NW2d 591 (2002) ............. 15,20

Cunningham v Citizens Ins Co, 133 Mich App 471; 350 NW2d 283 (1984) ............ passim

Darnell v Auto-Owners Ins Co, 142 Mich App I; 369 NW2d 243 (1985) ....................... II

Detroit Automobile Inter-Insurance Exchange v Ayvazian, 62 Mich App 94; 233 NW2d 200 (1975) ........................................................................................... 8, 9, 10

Farm Bureau Gen Ins Co v Ace American Ins Co, unpublished opinion per curiam of the Court of Appeals, issued January 19, 2017 (Docket Nos. 329585, 329614) ................. 19

Farmers Ins Exch v Farm Bureau Gen Ins Co, 272 Mich App 106; 724 NW2d 485 (2006) ..................................................................................................... 9

Frankenmuth Mutual Ins Co v Latham, 103 Mich App 66; 302 NW2d 329 (1981) ........ 10

Gregory v Kurtis, I 08 Mich App 44 3; 31 0 NW2d 415 (1981) .......................................... 5

Griffith v State Farm Mut Auto Ins Co, 472 Mich 521; 697 NW2d 895 (2005) ................ 6

Hammoud v Metropolitan Prop and Cas Ins Co, 222 Mich App 485; 563 NW2d 716 (1997) ............................................................................................. 14, 19

Hunt v Citizens Ins Co, 183 Mich App 660; 455 NW2d 384 (1990) .................................. 3

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Keys v Pace, 358 Mich 74; 99 NW2d 547 (1959) ............................................................ 11

Lafayette Transfer & Storage Co v Michigan Public Utilities Comm 'n, 287 Mich 488; 283 NW2d 659 (1938) ............................................................................. 5

Morgan v Cincinnati Ins Co, 411 Mich 267; 307 NW2d 53 (1981 ) ................................. 15

Osborne v Travelers Ins Co, 109 Mich App 43; 311 NW2d 304, 305 (1981) ................... 5

Podbielski v Argyle Bowl, Inc, 392 Mich 380; 220 NW2d 397 (1974) ............................ 11

Rohlman v Hawkeye-Security Ins, 442 Mich 520; 502 NW2d 310 (1993) ................ 15, 18

Rory v Continental Ins Co, 473 Mich 457; 703 NW2d 23 (2005) ........................ 12, 13, 18

Southeast Michigan Surgical Hasp v Allstate Ins Co, 316 Mich App 657; 892 NW2d 434 (20 16) (Court of Appeals Docket No. 323425) ........................................... 19

Spectrum Health Hasps v Farm Bureau Mut Ins Co of Michigan, 492 Mich 503; 821 NW2d 117 (2012) ....................................................................... 9, 12

Spencer v Citizens Ins Co, 239 Mich App 291; 608 NW2d 113 (2000) ............................. 3

State Farm Mutual Automobile Ins Co v Kurylowicz, 67 Mich App 568; 242 NW2d 530 (1976) ................................................................................... 9, 10, 12, 13

Titan v Hyten, 491 Mich 547; 817 NW2d 562 (2012) ............................................... passim

United Security Ins Co v Commissioner of Ins, 133 Mich App 38; 348 NW2d 34 (1984) ..................................................................................................... 14

United Security Ins Co v Michigan Ins Comm 'r, 133 Mich App 38; 348 NW2d 34 (1984) ..................................................................................................... 11

Wilkie v Auto-Owners Ins Co, 469 Mich 41; 664 NW2d 776 (2003) ................................. 4

Williams v Auto Club Group Ins Co, 224 Mich App 313; 569 NW2d 403 (1997) .......... 15

Statutes

42 usc 1395 ....................................................................................................................... 8 MCL 257.518 .................................................................................................................... 16 MCL 257.519 .................................................................................................................... 16 MCL 257.520 .................................................................................................................... 16 MCL 257.520(f)(l) ....................................................................................................... 9, 18 MCL 500.2101 .................................................................................................................. 17 MCL 500.2103 .................................................................................................................. 17

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MCL 500.2103(l)(c) ......................................................................................................... 17 MCL 500.21 03(1 )(h) ......................................................................................................... 17 MCL 500.2118 .................................................................................................................. 17 MCL 500.2120 .................................................................................................................. 17 MCL 500.2832 .................................................................................................................. 15 MCL 500.2833 .................................................................................................................. 15 MCL 500.3101 ...................................................................................................... 14, 15, 16 MCL 500.3103 .................................................................................................................. 16 MCL 500.3105 .................................................................................................................... 6 MCL 500.3106 .................................................................................................................... 7 MCL 500.3107 ................................................................................................................ 7, 8 MCL 500.3107b .................................................................................................................. 7 MCL 500.3108 .................................................................................................................... 7

· MCL500.3109 .................................................................................................................... 7 MCL 500.3111 .................................................................................................................... 7 MCL 500.3113(a) ......................................................................................................... 7, 12 MCL 500.3113(b) ............................................................................................................... 7 MCL 500.3113(d) ............................................................................................................... 7 MCL 500.3171 ................................................................................................................ 3, 5 MCL 500.3172 .................................................................................................................. 13 MCL 500.3172(1) ............................................................................................................... 4 MCL 500.3172(2) ............................................................................................................... 8 MCL 500.3173 .................................................................................................................... 6 MCL 500.3408 .................................................................................................................. 16 MCL 500.4014 .................................................................................................................. 16 MCL 500.4208 .................................................................................................................. 16 MCL 500.4432 .................................................................................................................. 16 MCL 500.4503 .................................................................................................................. 17 MCL 500.4511(1) ............................................................................................................. 17

Other Authorities

Essential Insurance Act ..................................................................................................... 17 The Law of Liability Insurance, § 3.25 ............................................................................... 8

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STATEMENT OF INTEREST OF AMICUS CURIAE

Major insurance companies representing thousands of Michigan employees and millions

of customers statewide have joined forces to create the Insurance Alliance of Michigan, with a

goal of speaking with a single, unified voice on insurance industry issues. Comprised of two

major statewide organizations, the Insurance Institute of Michigan and the Michigan Insurance

Coalition, the Insurance Alliance of Michigan (IAM) is a government affairs and public

information association representing more than 90 property/casualty insurance companies/groups

and related organizations operating in Michigan.

Insurers are ultimately proxies for consumers. lAM's purpose is to serve the Michigan

insurance industry and the insurance consumer as a central focal point for educational, media,

legislative and public information on insurance issues. It has been invited by this Court to

submit an amicus brief in the instant case.

This Court should affirm. The instant case presents several issues important to the no-

fault insurance industry statewide, to wit:

a. May a defrauded insurer rescind no-fault insurance coverage on the basis of material misrepresentations in a policy application when such misrepresentations render the applicant ineligible for coverage? lAM would answer this question "yes."

b. If an insurer may rescind its policy in general, is it precluded from doing so pursuant to the judicially created "innocent third party" doctrine, which in the PIP context is based solely on misapplication of public policy and disregards the legislative remedy for truly innocent third parties in the Assigned Claims Plan? lAM would answer this question "no."

c. Is the Michigan Assigned Claims Plan expressly created and uniquely designed to pay the claims of those truly innocent persons entitled to no­fault coverage but who have no coverage of their own? lAM would answer this question "yes."

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INTRODUCTION AND REASONS SUPPORTING APPELLEE

The instant case involves the fraudulent acts and misrepresentations of an owner of a

vehicle in order to obtain coverage on a vehicle driven by her adult son, who had previously been

involved in a serious motor vehicle accident that was concealed in the application. An insurer is

entitled to rescind coverage under such circumstances, notwithstanding the mandate that owners

and registrants obtain no-fault coverage. There is a legislative remedy for truly innocent third

parties in the Assigned Claims Plan; thus, there is no need to judicially inflict losses on a

defrauded insurer.

The "innocent third party" doctrine has no statutory basis in the first-party benefit context

and is based solely on a misapplication of public policy. It has never been applied in the PIP

context in a binding published case that withstood additional appellate scrutiny. In specifically

renouncing the practice of relying on public policy in derogation of the no-fault act, this Court in

Titan Ins Co v Hyten, irifra, both reaffirmed that public policy must have a statutory basis or it is

not the public policy of this State and that common law remedies for fraud are applicable unless

statutorily prohibited. The Legislature has restricted rescission in other insurance contexts but

not in the no-fault act. Because there is no statutory basis in the context of first-party benefits for

an innocent third party doctrine to preclude rescission, this doctrine must be renounced.

The entity best suited to provide first-party benefits to truly innocent third parties without

coverage of their own is the Michigan Assigned Claims Plan. The Plan is designed to distribute

the costs of providing benefits to those without insurance across the insurance spectrum, thus

minimizing the effect on an individual insurer. The Legislature equipped the Plan with statutory

tools to minimize these costs. It is clear from the statutory provisions that the Legislature

intended the Plan to pay claims in situations where there is a liuly innocent claimant. That

statutorily established plan should be the exclusive remedy for truly innocent third parties.

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STATEMENT OF FACTS

Insurance Alliance of Michigan adopts the statement of facts contained in the brief on

appeal filed by Sentinel Insurance Company and the Hartford.

STANDARD OF REVIEW

The Insurance Alliance of Michigan agrees with the standard of review stated in the brief

on appeal filed by Sentinel Insurance Company and the Hartford.

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LEGAL ARGUMENT

I. There is No Reason to Inflict Losses on a Defrauded Insurer: The Michigan Assigned Claims Plan is Expressly Intended by the Legislature and Uniquely Designed to Provide No-Fault Personal Protection Insurance Benefits to Truly Innocent Uninsured Injured Persons.

There is no good reason to make defi·auded insurers absorb PIP losses. The risk of truly

innocent claimaots is an industry risk with a legislative remedy which should be the exclusive

remedy. Allocating the fraud risk for innocent third parties to the Assigoed Claims Plan

promotes system wide cost containment, which is a valid consideration.

Before no-fault, ao accident victim seeking compensation could proceed only in tort.

"Enactment of the Michigan no-fault insurance act sigoaled a major departure from prior

methods of obtaining reparation for injuries suffered in motor vehicle accidents .... Under this

system, losses are recovered without regard to the injured person's fault or negligence." Spencer

v Citizens Ins Co, 239 Mich App 291, 300; 608 NW2d 113 (2000). Under the no-fault act, ao

accident victim proceeds against his own insurer. If he is not insured, he may claim benefits from

a priority insurer such as the insurer of the vehicle or driver involved in the accident. When a

liable insurer caonot be immediately identified or in some circumstances when an injured party

does not have insuraoce, the claim for benefits is placed before the Michigan Assigned Claims

Plan (MACP). Spencer, supra at 301; Hunt v Citizens Ins Co, 183 Mich App 660, 665; 455

NW2d 384 (1990).

With the enactment of the assigned claims provisions, the Legislature clearly addressed

the situation in which ao insurer could not be identified to pay a claim, and created a legislative

remedy under MCL 500.3171, et seq, whereby ao injured person could promptly receive

benefits.

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A person entitled to claim because of accidental bodily injury arising out of the ownership, operation, maintenance, or use of a motor vehicle as a motor vehicle in this state may obtain personal protection insurance benefits through the assigned claims plan if no personal protection insurance is applicable to the injury, no personal protection insurance applicable to the injury can be identified, the personal protection insurance applicable to the injury cannot be ascertained because of a dispute between 2 or more automobile insurers concerning their obligation to provide coverage or the equitable distribution of the loss, or the only identifiable personal protection insurance applicable to the injury is, because of financial inability of I or more insmers to fulfill their obligations, inadequate to provide benefits up to the maximum prescribed .... [MCL 500.3172(1).)

In Bradley v Mid-Century Ins Co, 409 Mich I, 52; 294 NW2d 141 (1980), 1 this Court

recognized that the Assigned Claims Plan was the proper venue for recovery when the accident

victim, the vehicle owner, and the vehicle driver are all uninsured:

The concerns which led to enactment of the uninsured motorist amendment and the Motor Vehicle Accident Claims Act are no longer as pressing. This is not due to any elimination of the uninsured motorist, but, rather, to the no:fault act's providing other forms of protection against his negligence. Before no fault, an accident victim seeking compensation could proceed only in tort. If the negligent driver was uninsured the victim would ordinarily receive no compensation for his injuries other than that recovered from the Motor Vehicle Accident Claims Fund. Under the no-fault act, an accident victim proceeds against his own insurer. If he is not insmed, he claims benefits from the insurer of the vehicle or driver involved in the accident. If the owner and driver are uninsured motorists, he proceeds against the assigned claims [plan] which provides no:fault benefits where there is no insurance applicable to the accident. Thus, victims of uninsured motorists now have insurance compensation without regard to whether there is uninsured motorist coverage. [)

This likewise has been recognized by the Court of Appeals:

In Bradley, supra, 50-5!, 294 NW2d 141, the Court observed that the Blakeslee and Boettner decisions were based upon a perceived legislative statement of public policy, namely the policy of compensating otherwise unprotected accident victims. The Court concluded that the repeal signified that public policy no longer demanded mandatory uninsured motorist coverage. Although uninsured motorists still exist after the passage of the no-fault act,

. accident victims are protected either by their own no-fault policies (as in the present case) or, in the absence of an applicable policy, by the assigned claims facility. M.C.L. § 500.3101 et seq., M.C.L. § 500.3172. Moreover, with the

1 Bradley was overruled on other grounds (reasonable expectations) in Wilkie v Auto-Owners Ins Co, 469 Mich 41; 664 NW2d 776 (2003).

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advent of the assigned claims [plan], uninsured motorist protection need not be mandated to protect the fiscal integrity of the now defunct Motor Vehicle Accident Claims Fund. Bradley, supra, 5!-53, 294 NW2d 141. [Osborne v Travelers Ins Co, 109 Mich App 43, 46; 311 NW2d 304, 305 (1981).]

Thus, the Legislature has already considered the possibility of innocent third parties and

created a remedy in the form of the Assigned Claims Plan. Such a statutory remedy should be

the exclusive remedy. See, eg, Gregory v Kurtis, 108 Mich App 443, 449; 310 NW2d 415

(1981 ): "It is the general rule in Michigan that where a new right is created or a new duty

imposed by statute the remedy provided for enforcement of that right by the statute for its

violation and nonperformance is exclusive; however a statutory remedy for enforcement of a

common-law right is deemed only cumulative." Accord, Lafayette Transfer & Storage Co v

Michigan Public Utilities Comm 'n, 287 Mich 488, 491-492; 283 NW2d 659 (1938). It is

therefore unnecessary and incorrect to create a judicial common law remedy for innocent third

parties to provide a remedy for PIP for the uninsured.

The assigned claims provisions were designed to minimize and diffuse the costs of

providing benefits to the injured uninsured, thereby distributing the financial impact of providing

these benefits across the insurer spectrum. Participation in the plan by Michigan insurers is

mandatory, and the costs incurred by the MACP are allocated amongst participants:

... A self-insurer and insmer writing insurance as provided by this chapter in this state shall participate in the assigned claims plan. Costs incurred in the operation of the facility and the plan shall be allocated fairly among insurers and self-insurers ... [MCL 500.3171.]

Thus, a defrauded insurer has already contributed to the system to care for truly innocent

persons without their own insurance. And, claims are also assigned in a manner designed to

allocate the burden, and these costs are reimbursed:

The assignment of claims . . . shall be made . . . to . . . assure fair allocation of the burden of assigned claims among insurers . . . . An insurer to

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whom claims have been assigned shall make prompt payment .... An insnrer is entitled to reimbursement ....

lnsnrers may then use the costs associated with the assigned claims plan to calculate

rates, thereby passing the costs onto the consumers:

Reasonable costs incurred in the handling and disposition of assigned claims, including amounts paid pursuant to assessments under section 3171, shall be taken into account in making and regulating rates for automobile liability and personal protection insnrance.

The Legislature not only enacted provisions to distribute the costs, it provided several

vehicles for minimizing costs. System-wide cost containment is an important consideration in

construing the act. See Griffith v State Farm Mut Auto Ins Co, 472 Mich 521, 539 & n15; 697

NW2d 895 (2005), including citation and quotation of Celina Mut Ins Co v Lake States Ins Co,

452 Mich 84, 89; 549 NW2d 834 (1996): "'[T]he no-fault insnrance system ... is designed to

provide victims with assnred, adequate, and prompt reparations at the lowest cost to both the

individuals and the no-fault system. '" (Emphasis in Grijjith. ).

There is less cost to the system to allocate insnrance fraud affecting innocent third

persons without their own insnrance to the Assigned Claims PlfD instead of penalizing defrauded

insnrers because the Assigned Claims Plan will never pay more but may pay less. First, there are

no enhanced benefit levels to the plan because the assigned claims plan is entitled to the same

limitations on recovery of no-fault benefits that are available to private insurers:

A person who because of a limitation or exclusion in sections 3105 to 3116 is disqualified from receiving personal protection insnrance benefits under a policy otherwise applying to his accidental bodily injnry is also disqualified from receiving benefits under the assigned claims plan. [MCL 500.3173.]

Thus, before they are compensable by the plan, the injuries must be accidental, and must

arise out of the ownership, operation, maintenance, or use of a motor vehicle as a motor vehicle.

MCL 500.3105. If the injuries occur as a result of a parked vehicle, they are covered only if they

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fall within one of the three parked motor vehicle exceptions. MCL 500.3106. Only reasonable

charges for reasonably necessary services provided for an injured person's care, recovery, and

rehabilitation are allowed. MCL 500.3107. Certain optometric, chiropractic, and physical

therapeutic services are not covered. MCL 500.3107b. Survivor's loss benefits have caps.

MCL 500.3108. Government benefits are subtracted from no-fault recovery. MCL 500.3109.

Benefits for out-of-state accidents are limited. MCL 500.3111. No benefits are owed to persons

who willingly use a vehicle or motorcycle that they should have known was taken unlawfully.

MCL 500.3113(a). No benefits are owed to owners or registrants of uninsured vehicles involved

in accidents. MCL 500.3113(b). No benefits are owed to non-residents in non-Michigan-

registered vehicles insured by non-Michigan-admitted insurers. MCL 500.3113(c). No benefits

are owed to named excluded drivers. MCL 500.3113(d). No benefits are owed to a person who

is disqualified by being the uninsured owner whose policy is rescinded. Cunningham v Citizens

Ins Co, 133 Mich App 471, 481; 350 NW2d 283 (1984). Thus, there is no circumstance where

the Assigned Claims Plan pays more.

Most importantly, allocating the fraud risk affecting innocent third parties to the plan

promotes cost containment in the no-fault system because the plan may pay less. The plan has a

significant advantage over private no-fault insurers in holding down system wide costs where

truly innocent third parties are claimants. The plan provides only coordinated benefits and is

thus second in priority to all other sources except Medicare and Medicaid:

Except as otherwise provided ... personal protection insurance benefits .. . payable through the assigned claims plan shall be reduced to the extent that benefits covering the same loss are available from other sources, regardless of the nature or number of benefit sources available and regardless of the nature or fonn of the benefits .... As used in this subsection, "sources" and "benefit sources" do not include the program for medical assistance for the medically indigent under the social welfare act, 1939 PA 280, MCL 400.1 to 400.119b, or insurance under

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the health insurance for the aged act, title XVIII of the social security act, 42 USC 1395 to 1395kkk-1. [MCL 500.3172(2).]

Unlike private insurers who may be subjected to elevated duplicative benefits when no

coordination is available, the Assigned Claims Plan offsets all other benefits except payments by

Medicaid and Medicare. It holds down costs to the system because, in essence, the plan pays

excess benefits. And these excess charges are still subject to a reasonableness standard under

MCL 500.3107. By requiring the plan to pay the costs of treatment to injured persons with no

auto coverage, but limiting the payment obligation to excess costs that must also be reasonable,

and then distributing these costs across the no-fault spectrum, the Legislature designed the

system to contain costs and minimize impact on individual insurers who did not contract to cover

such losses.

Thus, in picking between inflicting the risk of truly innocent third parties on a defrauded

insurer versus the Assigned Claims Plan, the act should be construed to have this be an industry

risk and spread through the Assigned Claims Plan to promote system wide cost containment.

II. No binding authority holds that a PIP policy may not be rescinded on the basis that the PIP claimant is an innocent third party, and the reasoning in Titan clarifies that public policy is not a sufficient basis.

No Supreme Court decision has held that the "innocent third party" doctrine precludes a

defrauded insurer from voiding a no-fault policy. The doctrine as it pertains to insurance appears

to have originated in a pre-no-fault Court of Appeals case pertaining to liability, Detroit

Automobile Inter-Insurance Exchange v Ayvazian, 62 Mich App 94, 100; 233 NW2d 200 (1975).

The Ayvazian Court, quoting a treatise on liability insurance, stated:

The liability of the insurer with respect to insurance required by the act becomes absolute whenever injury or damage covered by such policy occurs * * * no statement made by the insured or on his behalf and no violation of the policy provisions may be used to defeat or avoid the policy. [!d. quoting I Long, The Law of Liability Insurance,§ 3.25, pp 3-83-84.]

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This statement pertaining to liability coverage in Ayvazian was further advanced in a case

applying pre-no-fault liability law, State Farm Mutual Automobile Ins Co v Kurylowicz, 67 Mich

App 568, 574; 242 NW2d 530 (1976), but Kurylowicz was expressly overruled by this Court in

Titan v Hyten, 491 Mich 547, 550-551; 817 NW2d 562 (2012). The language of the liability

treatise quoted in these early cases is nearly identical to MCL 257.520(f)(l) of the financial

responsibility act, which provides only that mandatory liability insurance may not be canceled

after an injury occurs:

(1) The liability of the insurance carrier with respect to the insurance required by this chapter shall become absolute whenever injury or damage covered by said motor vehicle liability policy occurs; said policy may not be cancelled or armulled as to such liability by any agreement between the insurance carrier and the insured after the occurrence of the injury or damage; no statement made by the insured or on his behalf and no violation of said policy shall defeat or void said policy, and except as hereinafter provided, no fraud, misrepresentation, assumption of liability or other act of the insured in obtaining or retaining such policy, or in adjusting a claim under such policy, and no failure of the insured to give any notice, forward any paper or otherwise cooperate with the insurance carrier, shall constitute a defense as against such judgment creditor.

This statute does not preclude PIP rescission for multiple reasons. First, the Financial

Responsibility Act is not controlling. Recently, this Court clarified that this act does not apply to

policies lacking the special certification under MCL 257.518 or MCL 257.519. Titan Ins Co v

Hyten, 491 Mich at 559-560. There is no showing that the Sentinel policy is of that type. Even

before Titan, this Court had held more generally that because the no-fault act was later decided it

takes precedence over the Financial Responsibility Act. Farmers Ins Exch v Farm Bureau Gen

Ins Co, 272 Mich App 106, 119; 724 NW2d 485 (2006), citing Citizens Ins Co of America v

Federated Mut Ins Co, 448 Mich 225, 232; 531 NW2d 138 (1995). And this Court has held that

it is error to import provisions of another statutory scheme into the no-fault act. Spectrum Health

Hasps v Farm Bureau Mut Ins Co of Michigan, 492 Mich 503, 521; 821 NW2d 117 (2012).

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Second, this Court in Titan v Hyten made clear that "common-law defenses may be

invoked to avoid enforcement of an insurance policy, unless those defenses are prohibited by

statute." 491 Mich at 554. The no-fault act contains no such constraint on rescission in either

the liability or the PIP provisions.

Third, despite the clear liability origins of the "innocent third party" doctrine (that have

now been overruled), the statement in Ayvazian and Kurylowicz was adopted without analysis in

Frankenmuth Mutual Ins Co v Latham, 103 Mich App 66, 68; 302 NW2d 329 (1981), a case

decided before November 1, 1990 and therefore not binding even if its underpinnings were not

overruled, in light ofMCR 7.215(1)(1).

Fourth, in Cunningham, 133 Mich App at 477, the Court of Appeals, (while stating in

dicta that public policy would compel coverage if innocent third parties were injured based on

the now overruled Kurylowicz principle), in its holding rejected the contention that first-party

benefits become absolute after an injury occurs and thereupon recognized the validity of

rescissions in the PIP context:

To the extent that Kurylowicz, supra p 574, can be read as standing for the premise that after injury or damage an automobile insurance policy becomes absolute, we specifically disagree with it. Both pre-no-fault decisions from this state and decisions from jurisdictions which do not mandate compulsory insurance coverage allow an insurer to rescind ab initio an automobile insurance liability policy even where this affects the rights of third parties.

If true that no-fault coverage is mandatory and not subject to rescissions, it could not be

rescinded as to any party, even if non-innocent. In reaching the actual holding in Cunningham v

Citizens that rescission was available and precluded coverage for PIP, the Court of Appeals

implicitly adopted the controlling position this Court crystalized in Titan, that in the absence of a

statutory prohibition on common law remedies, rescission may be applied to preclude PIP

coverage to the party who defrauds and later claims PIP. Cunningham cited the very same

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Supreme Court opinion later cited by this Court in Titan: Keys v Pace, 358 Mich 74; 99 NW2d

54 7 (1959), which had squarely held that an insurer was entitled to rescind a liability policy

based on misrepresentations in the application despite injury to a third party. While several

published2 Court of Appeals opinions have cited the innocent third party doctrine in the context

of PIP benefits, most have distinguished the doctrine and held that the policies could be

rescinded, or otherwise cited the proposition as dicta. 3 Of those cases citing the doctrine in dicta

or contradistinction, most referred only to "public policy" as the basis for applying the innocent

2 Because unpublished opinions are not precedentially binding, MCR 7.215(C)(l), and neither are overruled or reversed opinions, Podbielski v Argyle Bowl, Inc, 392 Mich 380, 383; 220 NW2d 397 (1974), they will not be discussed. 3 United Security Ins Co v Michigan Ins Comm 'r, 133 Mich App 38, 43; 348 NW2d 34 (1984) ("this is not a case in which the claimants are innocent third parties"); Auto-Owners Ins Co v Michigan Ins Comm 'r, 141 Mich App 776, 780; 369 NW2d 896 (1985) ("the person seeking to collect no-fault benefits is the same person who procured the policy of insurance through fraud"); Darnell v Auto-Owners Ins Co, 142 Mich App 1, 9-10; 369 NW2d 243 (1985) (the misrepresentation was not material as a matter of law because the insurer issued the policy with knowledge of the husband's driving record and rescinded the policy before learning of the wife's driving record, so the misrepresentation did not void the policy regardless whether the injured person was innocent or guilty of making it); Katinsky v Auto Club Ins Ass'n, 201 Mich App 167, 170-171; 505 NW2d 895 (1993) (stated in dicta, but decided on other grounds, to wit, an insured's failure to pay premiums is insufficient to excuse the insurer from performing its obligations); Auto-Owners Ins Co v Johnson, 209 Mich App 61, 64-65; 530 NW2d 485 (1995) (declined to apply the innocent third-party doctrine where the misrepresentation regarded a loss that had already occurred in order to purchase overage for that loss); Hammoud v Metropolitan Property & Cas Ins Co, 222 Mich App 485, 488-489; 563 NW2d 716 (1997) (plaintiff was not an innocent third party where he was the owner with responsibility to maintain insurance, and he allowed his brother to obtain the insurance by misrepresenting plaintiff's status as a driver); Auto-Owners Ins Co v Michigan Mut Ins Co, 223 Mich App 205, 214-216; 565 N.W.2d 907 (1997) (distinguishing on the basis that the policy was not yet in effect); Lake States Ins Co v Wilson, 231 Mich App 327, 331-332; 586 NW2d 113 (1998) (insurer may rescind optional coverage)(Although the Court of Appeals in the instant case stated that if Titan did not apply, there was binding precedent that applied the innocent third-party rule to no-fault PIP cases, and cited Wilson as an example, this was incorrect because the insurer in Wilson sought only to reform the policy to provide coordinated benefits, arguing that non-coordinated benefits and duplicative recovery was optional; thus, whether the innocent third party doctrine barred "mandatory" PIP was not at issue, and any pronouncements were dicta); Amerisure Ins Co v Auto-Owners Ins Co, 262 Mich App 10, 18 n 6; 684 NW2d 391 (2004) ("The 'public policy' and 'innocent third party' arguments raised by Amerisure on appeal are without merit in light of the clear inapplicability of the Auto-Owners policy to the injuries in question").

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third party exception in the PIP context.4 Those cases that did not cite public policy, cited cases

that did.5 Even those pmiially overruled cases applying the doctrine to PIP cite either public

policy or authority that relies on public policy.6

Fifth, none of these cases citing "public policy" are valid precedents since they are lower

court opinions issued without applying the holding in Rory v Continental Ins Co, 473 Mich 457,

470-471; 703 NW2d 23 (2005), that public policy is not a matter of judicial preference but,

rather, must be reflected in the constitution, statutes, or common law. The so-called public

policy relied on for the innocent third party doctrine was a mere judicial preference and the

authority for that has thus now been overruled in Rory. And this rejection of judicial-preference-

in-contravention-of-statute remains the law in Michigan jurisprudence as recently demonstrated

in Spectrum, 492 Mich at 521, 534, when this Court overruled both the judicially created "chain

of permissive use" doctrine and "family joyriding exception" as being contrary to the express

language ofMCL 500.3113(a).

In Titan, this Court continued to adhere to the Rory rationale that public policy is not

judicial preference. It did so in the related context pe1iaining to the easily ascertainable rule

when it overruled Kurylowicz, and its progeny because public policy is not mere judicial

preference:

4 United Security Ins Co v Michigan Ins Comm 'r, 133 Mich App at 43; Cunningham, 133 Mich App at 477; Auto-Owners Ins Co v Michigan Ins Comm'r, 141 Mich App at 780; Katinsky, 201 Mich App at 171; Johnson, 209 Mich App at 64; Auto-Owners Ins Co v Michigan Mut Ins Co, 223 Mich App at 214. 5 Hammoud v Metropolitan Property & Cas Ins Co, 222 Mich App at 488 (citing Katinsky and Darnell); Lake States Ins Co v Wilson, 231 Mich App at 331 (citing Johnson). 6 Roberts v Titan Ins Co, 282 Mich App 339, 360; 764 NW2d 304 (2009) (citing Darnell); Manier v Mic Gen Ins Corp, 281 Mich App 485, 491; 760 NW2d 293 (2008) (citing Lake States Ins Co v Wilson, which in turn cited Johnson). Both of these cases were overruled in part by Titan v Hyten, 491 Mich at 551 n 1.

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This "public policy" rationale does not compel the adoption of the "easily ascertainable" rule. In reaching its conclusion, Kurylowicz effectively replaced the actual provisions of the no-fault act with a generalized summation of the act's "policy." ... We believe that the policy of the no-fault act is better understood in terms of its actual provisions than in terms of a judicial effort to identify some overarching public policy and effectively subordinate the specific details, procedures, and requirements of the act to that public policy. [Titan, supra, 491 Mich at 565.]

The Titan Court recognized that injured third parties had means of recovery under the no-

fault act, and there was no need to resort to generalized "public policy" to provide them with

benefits:

Third-party victims of automobile accidents have a variety of means of recourse under the no-fault act, and it is to those means that such persons must look, not to a judicial articulation of policy that has no specific foundation in the act itself and was designed to modify and supplant the details of what was actually enacted into law by the Legislature. [Jd. at 565-566.]

The Court in Titan even noted that there was no basis in the law to require a private

insurer to provide benefits. It did allow for legislation that could change this, and cited MCL

500.3172 as an example of the legislative enactment providing benefits to third parties under the

Assigned Claims Plan:

[T]here is simply no basis in the law to support the proposition that public policy requires a private business in these circumstances to maintain a source of funds for the benefit of a third party with whom it has no contractual relationship. While perhaps authority exists in the Legislature to enact such a law, see, e.g., MCL 500.3172 (pertaining to the Michigan Assigned Claims Facility), this authority has not been exercised by the Legislature in this instance. [Titan, supra at 568.]

Thus, to the extent that earlier Court of Appeals cases cited the "innocent third party"

doctrine in dicta, or asserted that public policy precluded insurers from rescinding their policies,

these obiter dictum have been explicitly rejected by this Court in Titan which applied the same

principle of Rory that precludes claiming a public policy rationale to preclude rescissions.

Moreover, as between a defrauded insurer and the Assigned Claims Plan, the Legislature has

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created a remedy for a truly innocent third party which this Court recognized in Titan. It is the

assigned claims plan. That should be the exclusive remedy.

III. The "Mandatory Coverage" Argument is a Red Herring. Coverage notwithstanding fraud is legislatively mandated elsewhere but not in the no-fault act.

Attempts have been made to distinguish Titan on the basis that Titan dealt only with non-

mandatory cc;werage. However, the rule is now entrenched that (a) rescissions are allowed at

common Jaw, (b) this right to rescind is not negated statutorily, and therefore (c) rescissions may

negate PIP coverage. See Cunningham v Citizens, supra, 133 Mich App 471, 478: "We do not

agree that any provision in the no-fault act, MCL 500.3101 et seq.; MSA 24.13101 et seq.;

precludes Citizens from rescinding plaintiffs policy so that it is void ab initio." Accord, Titan,

supra, 491 Mich at 554 (common-Jaw defenses may be invoked unless prohibited by statute.)

Moreover, reinforcing that the coverage was not mandatory, the Court in Cunningham v Citizens

also ruled out Assigned Claims Plan coverage because the claimant was the owner disqualified

from PIP because the rescission left the owner uninsured. Id, 133 Mich App 471, 481. So the

actual holding was that PIP coverage was not mandatory. If it were, the Court could not have

upheld the rescission and ruled out Assigned Claim coverage.

Other decisions of that era likewise held that PIP coverage was subject to rescission of

the policy through which PIP was claimed. Auto-Owners Ins Co v Commissioner of Ins, 141

Mich App 776, 780; 369 NW2d 896 (1985) (citing Cunningham v Citizens, among other cases);

United Security Ins Co v Commissioner of Ins, 133 Mich App 38, 43; 348 NW2d 34 (1984).

This position has never been reversed or overruled and instead has been reinforced after 1990.

See Hammoud v Metropolitan Prop and Cas Ins Co, 222 Mich App 485, 488; 563 NW2d 716

(1997) (citing Cunningham v Citizens.) While these cases often included dicta as to a different

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result applying to innocent third parties, the holdings squarely suppmi the position that no-fault

benefits are not mandatory such that rescissions are not allowed.

Bazzi claims that PIP coverage may not be excluded despite the fraud pursuant to

Rohlman v Hawkeye-Security Ins, 442 Mich 520; 502 NW2d 310 (1993); Coburn v Progressive

Cas Ins Co, 425 Mich 300; 389 NW2d 424 (1986); Cruz v State Farm Mut Auto Ins Co, 466

Mich 588; 648 NW2d 591 (2002); and Titan Ins Co v Hyten, supra, and several irrelevant cases

pertaining to fire insurance policies/ because PIP policy provisions are governed by the no-fault

act, which mandates PIP coverage. Bazzi's interpretation of the case law and the no-fault act

itself is faulty. Neither Rohlman, Coburn, nor Cruz pertained to fraud cases. These cases merely

held that "when a provision in an insurance policy is mandated by statute, the rights and

limitations of coverage are governed by that statute." Titan at 554, citing Rohlman at 524-525.

See also Cruz at 598. Still, the question is not what coverage is mandated by a valid policy, but

whether the policy is validly in effect or is subject to the common law defense of rescission ab

initio so that there is no policy. To answer the relevant question, Titan requires a focus on

whether the Legislature has prohibited the common law remedy of rescission. So where is the

no-fault act provision that mandates coverage by precluding rescission? Certainly MCL

500.3101 mandates that an owner or registrant obtain PIP and liability coverage. But, that

assumes a contract of insurance applies and provides no answer for the real question: where is

7 Morgan v Cincinnati Ins Co, 411 Mich 267; 307 NW2d 53 (1981) and Borman v State Farm Fire & Cas Co, 446 Mich 482; 521 NW2d 266 (1994), both turned on the difference between the "an insured" language in the policy versus the mandatory "the insured" language in MCL 500.2832. Williams v Auto Club Group Ins Co, 224 Mich App 313; 569 NW2d 403 (1997), concluded that this language was reenacted in MCL 500.2833. While Bazzi cites all these cases stating that policy language cannot differ from mandatory statutory language, Bazzi fails to identifY the statutory language in the no-fault act that precludes an insurer from rescinding PIP coverage.

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the provision requiring a defrauded insurer to provide coverage by saying that it may not

rescind?

The Insurance Code well reflects that when the Legislature has wanted to preclude

rescission, it has made that clear. For example, it has provided that certain policies are

incontestable notwithstanding statements in an application. Examples of incontestability statutes

precluding rescissions are seen in statutes such as MCL 500.4014 (application shall be endorsed

onto life policy, which shall be "incontestable ... [after] 2 years"), MCL 500.4208 (annuity

policy "shall be incontestable ... [after] 2 years"), and MCL 500.4432 (Group Life "policy shall

be incontestable after 2 years"). Conditional incontestability is specified for disability policies in

MCL 500.3408. And in the auto insurance and financial responsibility context, for a certified

policy issued pursuant to MCL 257.518 or MCL 257.519, discussed in Titan as the policies to

which MCL 257.520 applies, the Legislature has amply demonstrated what mandatory coverage

is when that is what the Legislature intends. MCL 257.520 illustrates real mandatory coverage

not subject to rescission: "no statement made by the insured ... shall defeat or void said policy,

and ... no fraud, misrepresentation ... or other act of the insured in obtaining or retaining such

policy ... shall constitute a defense against such judgment creditor. " (Emphasis added.) That is

a mandatory coverage provision.

By contrast, there is no such mandatory coverage provision in the no-fault act, mandating

PIP coverage notwithstanding fraud of an insured and so precluding rescissions. While

procuring coverage is certainly mandatory with respect to owners and registrants of vehicles

required to be registered, MCL 500.3101 - MCL 500.3103, these same statutes notably do not

state that an insurer is required to insure those who defraud or that the policies are incontestable

as to claimants of benefits notwithstanding misrepresentations in applications.

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Moreover, an insurer's duties as to most personal auto policies are established in the

Essential Insurance Act, MCL 500.2101 et seq. It, too, lacks an anti-rescission provision for

fraud as is found in MCL 257.520(£)(1). However, even in the Essential Insurance Act, an

insurer is not required to insure an ineligible person who is ineligible due to insurance fraud. See

MCL 500.2103, MCL 500.2118-MCL 500.2120. Among other reasons to deny coverage, a

person is ineligible for coverage for insurance fraud as well as a bad driving record. MCL

500.2103(l)(h); MCL 500.2103(1)(c). The latter includes fraud in an application:

an individual who has been successfully denied, within the immediately preceding 5-year period, payment by an insurer of a claim in excess of $1,000.00 under an automobile insurance policy, if there is evidence of fraud or intent to defraud involving an insurance claim or application.

Thus, the Legislature clearly contemplated that an msurer might deny benefits or

coverage to a person who has engaged in fraud. When the Legislature wants mandatory

coverage not subject to rescission, it has stated that fraud or misrepresentation is not a defense or

that coverage is incontestable. And, the Legislature knows that there can be fraud in an

application. The Legislature made it a felony to make a fraudulent statement to an insurer in an

application:

A fraudulent insurance act includes, but is not limited to, acts or omissions committed by any person who knowingly, and with an intent to injure, defraud, or deceive:

(a) Presents ... to ... an insurer ... any oral or written statement knowing that the statement contains any false infonnation concerning any fact material to an application for the issuance of an insurance policy. [MCL 500.4503.]

A person who commits a fraudulent insurance act under section 4503 is guilty of a felony ... [MCL 500.4511 (1 ).]

The Legislature has not promoted insurance fraud by requiring insurers to insure fraud or

those who engage in it, apart from the very specific situations of incontestability after a stated

period of time like 2 years in life and annuity policies, or for the particular certified auto policies

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to which MCL 257.520(£)(1) applies. Even with regard to otherwise mandatory coverage under

the no-fault act, there is lacking similar provisions. Thus, a no-fault insurer may rescind for

fraud and is not required to treat no-fault coverage as incontestable or insure persons who

misrepresent material information in an insurance application or claim.

Indeed, in Titan, 491 Mich at 554, this Court clarified its holding in Rohlman that the

common law remedy had to be prohibited by statute before it was unenforceable:

[B]ecause insurance policies are contracts, common-law defenses may be invoked to avoid enforcement of an insurance policy, unless those defenses are prohibited by statute. [!d.]

As with the Comi of Appeals opinion in Cunningham, the Titan Court found nothing in

the no-fault act that precluded an insurer from voiding coverage on the basis of fraud:

The no-fault act ... states nothing about altering the common law that enables insurers to obtain traditional forms of relief when they have been the victims of fraud .... As between the fraudulent insured and the insurer, there can be no question that the fanner should bear the burden of his or her fraud. [491 Mich at 568-569 .]

Finally, the reasonableness of an insurance provision is not an issue for courts. That is

for the Insurance Commissioner. Rory, supra, 473 Mich at 475 ("The reasonableness of

insurance contracts is a matter for the executive, not judicial branch of government.") There is

thus no reason to judicially incentivize fraud by permitting a person to claim "innocent third

party" status to obtain benefits notwithstanding the fraud that was committed for the very

purpose of obtaining those benefits to which he was not entitled.

It is the owner or registrant of a vehicle who is required to obtain mandatory coverage.

And the owner or registrant fails to meet this requirement when the owner or registrant

misrepresents or conspires to misrepresent material facts like concealing the fact that Mr. Bazzi

had previously been in a serious accident.

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IV. If the Equities are Weighed, They Favor Rescission

A review of the cases in which the "innocent third party" was raised demonstrates that

most so-called "innocent third parties" are closely affiliated with or related to the fraudulent

party. And often, the fraudulent statements are made for the specific purpose of affording the

"innocent third party" coverage to which he or she would not otherwise be entitled to.

In the instant case, Bazzi was the adult son of the fraudulent party, and the fraud was

perpetrated to afford Bazzi coverage notwithstanding his poor driving record and accident

history. Other cases to which this case may apply show that misrepresentations may likewise be

the basis of seeking coverage.

In Farm Bureau Gen Ins Co v Ace American Ins Co, unpublished opinion per curiam of

the Court of Appeals, issued January 19, 2017 (Docket Nos. 329585, 329614), attached as

Exhibit A, currently being held in abeyance by this Court pending the resolution in the instant

case, the purportedly innocent third party accompanied her husband and daughter to the

insurance agent's office, held the money for the policy premium, and sat silently as her husband

and daughter gave fraudulent statements pertaining to her driving record in order to obtain

coverage.

In Southeast Michigan Surgical Hasp v Allstate Ins Co, 316 Mich App 657; 892 NW2d

434 (2016) (Court of Appeals Docket No. 323425) currently being held in abeyance, the owner

and his sister-in-law defrauded the insurance company, and the "innocent third party" was the

sister-in-law's cohabitant (later husband, later ex-husband).

In Hammoud v Metropolitan Property & Cas Ins Co, supra, 222 Mich App at 488-489,

the purported innocent third party was the owner with responsibility to maintain insurance, and

he allowed his brother to obtain the insurance by misrepresenting his status as a driver.

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This may be why, although many cases mention the so-called innocent-third-party rule,

none of the published, binding cases actually apply it to preclude rescission. Insurance fraud is a

problem that is one of the threats to the Michigan no-fault system with its generous medical

benefits compared to any other state reparation system. As recognized by former Chief Justice

Taylor in Cruz, 466 Mich at 597, "[t]he general difficulty of determining when a claim was not

valid [as a result of fi·aud] has been described in scholarly writings in the insurance field as being

of 'staggering proportions."' Yet fraud in the insurance spectrum is clearly a serious problem as

demonstrated by the number of bills currently being introduced by Michigan lawmakers. See

HB 4488, HB 4672, HB 4715, and HB 5013, all pertaining to the Legislature's efforts to catch

fraudulent parties. If the equities are considered, they favor rescission, not retention of the

judicially created innocent third party doctrine. The truly innocent claimants have a legislative

remedy in the Assigned Claims Plan. There is no reason to judicially inflict the loss on a

defrauded insurer.

CONCLUSION AND RELIEF REQUESTED

Amicus Insurance Alliance of Michigan respectfully requests that this Comi affirm the

Court of Appeals in a published opinion, and hold that the trial court's denial of Sentinel's

summary disposition motion was in error, and render the following holdings:

1. A defrauded insurer may rescind otherwise "mandatory" PIP coverage when the

insurance was procured on the basis of fraudulent misrepresentations in the application.

2. The innocent third party doctrine has no place in the context of first-party PIP

benefits, and does not preclude a defrauded insurer from rescission because the legislative

remedy for truly innocent claimants is the Assigned Claims Plan, and it is the exclusive remedy.

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3. The Michigan Assigned Claims Plan is legislatively designated to provide first-

party benefits to those truly innocent persons injured in motor vehicle accidents who do not have

their own insurance and it alone must do so, not a defrauded insurer.

Dated: October 11, 2017

I:\Team_f\Yeager\858291AM-Bazzi v SentineiiSCtl85829amicus.brief.SCt.doc

Respectfully submitted,

WILLINGHAM & COTE, P.C. Attorneys for Amicus Curiae

BY __ ~!.~s~!K~il~nb~e~r~le~e~A~.~R~ill~o~c~k __ __

22

John A. Yeager (P26756) Kimberlee A. Hillock (P6564 7) 333 Albert Avenue, Suite 500 East Lansing, MI 48823 517-351-6200

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EXHIBIT A

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STATE OF MICHIGAN

COURT OF APPEALS

FARM BUREAU GENERAL INSURANCE COMPANY OF MICHIGAN,

v

Plaintiff/Counter Defendant­Appellant/Cross-Appellee,

ACE AMERICAN INSURANCE COMPANY,

and

Defendant/Cross-Defendant­Appellee/Cross-Appellant,

MARK RUECKERT and MARY AN PETOSKEY,

and

Defendants-Appellees/Cross­Appellees,

ROBYNN RUECKERT,

Defendant-Counter Plaintiff-Cross­Plaintiff/ Appellee/Cross-Appellee,

ACE AMERICAN INSURANCE COMPANY,

Plaintiff-Appellee/Cross-Appellant,

v

FARM BUREAU GENERAL INSURANCE COMPANY OF MICHIGAN,

Defendant-Appellant/Cross­Appellee.

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UNPUBLISHED January 19,2017

No. 329585 Kent Circuit Court LC No. 13-010616-CK

No. 329614 Kent Circuit Court LC No. 15-000605-CK

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Before: MURPHY, P .J ., and METER and RONAYNE KRAUSE, JJ.

PER CURIAM.

Plaintiff, Farm Bureau General Insurance Company of Michigan (Farm Bureau), appeals as of right the order of the Kent Circuit Court, granting summary disposition in favor of defendant, Ace American Insurance Company (Ace). Ace cross-appeals that same order to present an alternative ground for affirrnance.1 We reverse and remand.

On May 22, 2013, pedestrian Robynn Rueckert was struck and injured by a truck insured by Ace. Earlier that year, Robynn's husband, Mark, and her daughter, Maryan Petoskey, had been named insured on an insurance policy with Farm Bureau. A month prior to the accident, Farm Bureau informed Mark and Petoskey that it was cancelling the policy, effective May 25, 2013, because of incomplete information on the policy application. The accident occurred prior to the effective date of the cancellation, and Robynn submitted a claim for no-fault personal injury protection (PIP) benefits. However, Farm Bureau subsequently concluded that the insurance policy application contained material misrepresentations, and as a result, rescinded the policy from its inception date. The instant declaratory action concerns whether Farm Bureau or Ace is the priority insurer. In summary, Farm Bureau and Ace dispute whether there were in fact any material misrepresentations on the application, whether Farm Bureau's initial cancellation of the policy precluded it from subsequently rescinding it, and whether Robynn is an innocent third party against whom the rescission cannot apply.

A grant or denial of summary disposition is reviewed de novo on the basis of the entire record to determine if the moving party is entitled to judgment as a matter of law. Maiden v Rozwood, 461 Mich 109, 118; 597 NW2d 817 (1999). When reviewing a motion under MCR 2.116(C)(l 0), which tests the factual sufficiency of the complaint, this Court considers all evidence submitted by the parties in the light most favorable to the non-moving party and grants summary disposition only where the evidence fails to establish a genuine issue regarding any material fact. Id. at 120. We also review de novo as a question of law the trial court's interpretation of a contract. Klapp v United Ins Group Agency, Inc, 468 Mich 459, 463; 663 NW2d 447 (2003).

The discovery of "a material misrepresentation in the application for insurance" generally entitles an insurer to rescind a policy, even if the discovery takes place after the loss. Burton v Wolverine Mut Ins Co, 213 Mich App 514, 517-518; 540 NW2d 480 (1995). However, if the insurer instead cancels the policy upon discovering the misrepresentation, the insurer may not then also rescind it. !d. at 517-520. Nevertheless, the insurer cannot be estopped from doing so on the basis of facts of which the insurer was actually unaware, even if those facts could have been easily ascertained. Titan Ins Co v Hyten, 491 Mich 547, 562-571; 817 NW2d 562 (2012). Both the missing information and the misrepresentations concerned Robynn, or, specifically, the spouse of an applicant.

1 Ace was not required to file a cross-appeal to do so. See Vanslembrouch v Halperin, 277 Mich App 558, 565; 747 NW2d 311 (2008).

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Significantly, in the former case, the application indicated that Mark was married but omitted basic information like his spouse's name, date of birth, and so on. Thus, the cancellation was not due to any misrepresentation at all, but rather a simple failure to provide any information. In contrast, the later discovery was that the application also contained incorrect information; for example, stating that all drivers in the household had a valid Michigan driver's license, denying that any driver had been convicted in the past 36 months of operating a motor vehicle while intoxicated or impaired, and denying that either an applicant or a member of the household drove or moved any vehicle owned by the applicant which had not had all the required insurance in force for the previous six months. In fact, Robynn's license was suspended, she had convictions for both operating a vehicle while intoxicated and operating under the influence of liquor, and Robynn had been ticketed a week before the application at issue for driving a Trailblazer leased by Mark with a suspended license and after the insurance policy on that Trailblazer had itself been rescinded.

Had Farm Bureau initially discovered the misrepresentations and cancelled the policy as a result, it would not have been permitted to subsequently decide to rescind it instead. However, Farm Bureau acted within its rights to respond differently to two completely distinct discoveries. Put another way, cancelling the policy did not preclude subsequently rescinding the policy on a different basis that was unknown at the time of the cancellation. The trial court apparently concluded that Farm Bureau subsequently decided that it should have rescinded the policy instead of cancelling it, when in fact Farm Bureau rescinded the policy in addition to cancelling it. Case law establishes that Farm Bureau may do so.

Ace argues that in the alternative, Robynn is an innocent third party and, because there was no serious dispute that she was uninvolved in the policy application process, Farm Bureau may not rescind the policy as to her. As Ace recognized in its reply brief, after it submitted its cross-appeal brief, this Court decided Bazzi v Sentinel Ins Co,_ Mich App _; _ NW2d _ (2016) (Docket No. 320518). In that case, this Court held that the "innocent third-party rule" no longer exists in Michigan. An application for leave to appeal to our Supreme Court has been filed in that case, and certainly Ace has preserved its argument in the event it is reversed. However, in the meantime, we are constrained to follow Bazzi and to reject Ace's alternative argument. MCR 7.215(C)(2)2

Farm Bureau further argues that this Court should hold that it is entitled to summary disposition as a matter of law because the evidence shows no question of material fact that it was entitled to rescind the policy based on the material misrepresentations in the application.

2 Judges MURPHY and RONAYNE KRAUSE concur that we are bound by Bazzi, but both believe that Bazzi was wrongly decided. Judge MURPHY expressed his reasoning in his concurring opinion in State Farm Mut Auto Ins Co v Mich Muni Risk Mgt Auth (on Remand),_ Mich App _, _; _NW2d _ (2016) (Docket No. 319710), slip op at 5-7. Judge RONAYNE KRAUSE expressed her reasoning in her lead opinion in Southeast Mich Surgical Hasp, LLC v Allstate Ins Co,_ Mich App _, _; _NW2d _ (2016) (Docket No. 323425), slip op at 5-6. Leave to appeal to our Supreme Court is pending in both cases.

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"Although this issue was not decided below, a party should not be punished for the omission of the trial court." Klooster v City of Charlevoix, 488 Mich 289, 310; 795 NW2d 578 (2011) (quotation omitted). An issue is preserved for appeal if it was raised in the trial court, irrespective of whether the trial court decided it. Peterman v Dep't of Natural Resources, 446 Mich 177, 183; 521 NW2d499 (1994).

We find room for disagreement whether Robynn could or should be considered a "driver" within the meaning of the policy application. However, one of the questions-that the application stated would make the applicant ineligible if answered affirmatively-pertained to a driver or any other member of the household, which indisputably includes Robynn and equally indisputably should have been answered affirmatively but was not. 3 Ace makes a persuasive case that there is doubt whether Mark and Petoskey engaged in intentional fraud. However, "actionable fraud" is not the only kind of "fraud or misrepresentation" that would entitle a party to rescind a contract if the contract had been procured thereby. Titan, 491 Mich at 555-558. Innocent misrepresentation has no scienter element, but rather requires "that the misrepresentation be made in connection with making a contract and the injury suffered by the victim must inure to the benefit of the misrepresenter." Jd. at 556-557 n 5 (quotation omitted). The above misrepresentation was clearly made in connection with making the contract, and we agree with Farm Bureau that it was harmed by being exposed to a risk to which it did not agree while Mark and Petoskel received insurance benefits to which they were not entitled.

We are also unpersuaded by Ace's arguments to the effect that any misrepresentations were technically made by Farm Bureau's agent rather than by Mark or Petoskey. Even if Mark struggled to read the application, Petoskey testified that she did not have any trouble reading, she simply did not read the application before signing. "A contracting party has a duty to examine a contract and know what the party has signed, and the other contracting party cannot be made to suffer for neglect of that duty." Montgomery v Fidelity & Guaranty Life Ins Co, 269 Mich App 126, 130; 713 NW2d 801 (2005). Both of them signed the application after having had the opportunity to read and review it, which constitutes making any representations or misrepresentations therein. Id. at 129-130.

"[A] fact or representation in an application is 'material' where communication of it would have had the effect of 'substantially increasing the chances of loss insured against so as to bring about a rejection of the risk or the charging of an increased premium."' Oade v Jackson Nat'/ Life Ins Co ofMich, 465 Mich 244, 253-254; 632 NW2d 126 (2001) (quotation marks and citation omitted). We note that the application unambiguously stated that Mark and Petoskey

3 Specifically, as discussed above, the question was, "Has the applicant or a member of the applicant's household driven or moved any vehicle owned by the applicant which had not had the required insurance in force in the preceding six months?" (emphasis added). 4 Because Robynn was not involved in the application process, she was not a "misrepresenter," so whether she received any benefit at Farm Bureau's expense does not have any bearing on whether innocent misrepresentation occurred except to the extent Mark and Petoskey incidentally benefitted from Robynn receiving benefits.

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would have been ineligible for insurance had the answer been answered accurately. In addition, "(r]ecission is justified ... if a party relies upon the misstatement," regardless of whether the misrepresentation was innocent or intentional. Lash v Allstate Ins Co, 210 Mich App 98, 103; 532 NW2d 869 (1995); 21st Century Premier Ins Co v Zufelt,_ Mich App _; _ NW2d _ (2016) (Docket No. 325657); slip op at 5. The Farm Bureau investigator testified in his deposition that he believed that the misrepresentations affected whether Farm Bureau would have issued the policy. The record does not contain any true contradiction to this statement.

Therefore, we conclude that there is no genuine question of fact that Mark and Petoskey made a material misrepresentation on the insurance policy application that entitled Farm Bureau to rescind the policy, and on the facts of this case, Farm Bureau's earlier cancellation of the policy on a different basis did not preclude it from the subsequent rescission upon discovery of the misrepresentation. We therefore reverse the trial court's grant of summary disposition in favor of Ace and remand for entry of summary disposition in favor of Farm Bureau. We do not retain jurisdiction.

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lsi William B. Murphy lsi Patrick M. Meter lsi Amy Ronayne Krause

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Order September 12, 2017

155395-6 & (74)

FARM BUREAU GENERAL INSURANCE COMPANY OF MICHIGAN,

· · Plaintiff/Counterdefendant-Appellee/Cross-Appellant,

v

ACE AMERICAN INSURANCE COMPANY, Defendant/Cross-Defendant­Appellant/Cross-Appellee,

and

MARK RUECKERT and MARY AN PETOSKEY, Defendants-Appellees,

and

ROBYNN RUECKERT, Defendant-Counterplaintiff­Cross-Plaintiff/ Appellee.

--------------------------------~/

ACE AMERICAN INSURANCE COMPANY, Plaintiff-Appellant/Cross-Appellee,

v

FARM BUREAU GENERAL INSURANCE COMPANY OF MICHIGAN,

Defendant-Appellee/Cross-Appellant.

SC: 155395 COA: 329585

Michigan Supreme Court Lansing, Michigan

Stephen J. Markman, Chief Justice

Brian K. Zahra Bridget M. McCormack

David F. Viviano Richard H. Bernstein

Joan L. Larsen Kurtis T. Wilder,

Justices

Kent CC: 13-010616-CK

SC: 155396 COA: 329614 Kent CC: 15-000605-CK

------------------------------~/ On order of the Court, the application for leave to appeal the January 19, 2017

judgment of the Court of Appeals and the application for leave to appeal as cross-

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2

appellant are considered and, it appearing to this Court that the case of Bazzi v Sentinel Ins Co (Docket No. 154442) is pending on appeal before this Court and that the decision in that case may resolve an issue raised in the present applications, we ORDER that the applications be held in ABEYANCE pending the decision in that case.

a0906

I, Larry S. Royster, Clerk of the Michigan Supreme Court, certify that the foregoing is a tme and complete copy of the order entered at the direction of the Co uti.

September 12, 2017

Clerk