COA: Fraud After No-Fault Policy Procured Doesn’t Prevent Claim By ‘Innocent Third Party’

An auto accident victim is entitled to no-fault insurance benefits under his parents’ no-fault policy where the victim’s parents committed insurance fraud after the policy was purchased and already in effect, the Michigan Court of Appeals has ruled in a 2-1 published decision.

In Meemic Ins Co v Fortson (Docket No. 337728), the Court of Appeals majority reversed summary disposition for Meemic Insurance, finding that the fraud exclusion in the parents’ no-fault policy was invalid to the extent that it conflicted with MCL 500.3114(1).

The majority further held the policy’s fraud exclusion did not prevent the accident victim – the son of the insureds – from receiving no-fault benefits under his parents’ policy because the parents’ engaged in fraud after coverage had been canceled. According to the majority, Bazzi v Sentinel Ins Co, 315 Mich App 763 (2016), lv gtd 500 Mich 990 (2017), is dispositive only in situations where fraud occurred in the actual procurement of the policy.

In Bazzi, a Court of Appeals panel held that Michigan’s so-called “innocent third-party rule” was abolished by the ruling Titan Ins Co v Hyten, 491 Mich 547 (2012). The rule, which has been part of Michigan jurisprudence for four decades, says that innocent third parties are entitled to no-fault personal injury protection (PIP) benefits even if the insured committed fraud when purchasing the policy.

Benefits Paid, Then Canceled

Justin Fortson was injured in a September 2009 car accident and claimed PIP benefits through his parents’ no-fault insurance policy, issued by Meemic Insurance. From 2009 through 2015, Meemic paid the attendant-care services claims that were filed by Justin’s parents, who asserted they provided him 24-hour care and supervision. After an investigation, however, Meemic discovered that Justin’s parents had not provided him care and supervision during that entire time.

As a result, Meemic canceled the policy, stopped paying Justin’s PIP benefits and filed a lawsuit against the parents. The parents counter-claimed, asserting that Meemic breached the insurance contract by terminating their son’s coverage and refusing to pay any further benefits.

The trial court granted summary disposition for Meemic, relying primarily on Bazzi. The parents appealed, arguing the trial court erred by granting summary disposition for Meemic because there was a genuine issue of material fact about whether they had committed fraud and because Bazzi did not determine the outcome of the case.

‘Bazzi’ Not Dispositive

According to the Court of Appeals majority, while the trial court properly held that Justin’s parents had committed fraud in connection with their claims for attendant-care services, the trial court wrongly relied on Bazzi to discontinue Justin’s PIP benefits.

Although the majority acknowledged that Justin was an “innocent third party” pursuant to Bazzi, it noted that the fraud happened after the policy was issued and not in its procurement. As a result, Bazzi was dispositive of the outcome, the majority reasoned.

In its analysis, the majority explained that when a no-fault policy is rescinded because of fraud in its procurement, it is the same as if no valid policy ever existed. On the other hand, fraud that arises after a no-fault claim is made does not affect whether a valid policy existed, the majority noted. Here, because there was a valid no-fault policy at the time of Justin’s accident, the mandated coverages in the No-Fault Act were applicable and, as a result, Justin properly sought PIP benefits under his parents’ policy pursuant to MCL 500.3114(1), the majority said.

The majority also differentiated the present case from Bahri v IDS Property Casualty Ins Co, 308 Mich App 420 (2014). In Bahri, the Court of Appeals ruled that a no-fault insurer can use a fraud exclusion to void the entire insurance contract, even though the fraud arose after the policy was procured. Looking to Bahri, the majority relied on principles of equity and said: “[E]quity appears to lean in favor of protecting the innocent third party who was statutorily mandated to seek coverage under a validly procured policy and was, unlike the claimant in Bahri, wholly uninvolved in the fraud committed after the policy was procured.”

Focus On The Fraud Exclusion

Next, the Court of Appeals majority examined whether the fraud exclusion was a valid contract provision, as applied to Justin’s claim for PIP benefits. The policy at issue defined the term “insured person” as a named insured or the “resident relative” of a named insured. The fraud exclusion in the policy said:

“This entire policy is void if any insured person has intentionally concealed or misrepresented any material fact or circumstance relating to:

A. This insurance;

B. The Application for it;

C. Or any claim made under it.”

Looking to the policy language, the majority held that because MCL 500.3114(1) mandates coverage for a “resident relative” domiciled with a policyholder, the fraud exclusion provision, as applied to Justin’s claim, was invalid because it “conflict[ed] with his statutory right to receive benefits.”

Moreover, even if the fraud exclusion was valid, the fraud committed by Justin’s parents was not enough to trigger the application of the exclusion, the majority stated, because when the parents engaged in the fraud, they were not “insured persons” under the policy. The majority pointed out that Meemic canceled the policy through a notice sent on June 14, 2010, which said that as of July 29, 2010, the policy was no longer in effect. “Accordingly, once the policy was cancelled on July 29, 2010, [the parents] were no longer named insureds under the policy, which means they were no longer ‘insured persons’ as defined in the policy,” the majority wrote.

As a result, Meemic’s decision to cancel the policy had no impact on Justin’s PIP claim because it was filed before the policy was terminated, the majority explained, noting that no-fault contracts are “occurrence” policies and not “claims made” policies. In other words, coverage applied no matter when a claim is made, as long as the triggering act for coverage occurred during the policy period, the majority observed.

In conclusion, the majority found that because Justin’s parents were not “insured persons” when they engaged in insurance fraud, the policy’s fraud exclusion did not apply and could not be asserted by Meemic to deny Justin’s claim for PIP benefits.

Dissent: Rule ‘Resurrected’

In a dissenting opinion, Judge Thomas Cameron said the majority was improperly “resurrecting” a “new form” of the abolished innocent third-party rule. “The fact that the fraud here occurred in subsequent claims for services – and not in the procurement of the policy – is of no consequence to the outcome of this case,” Cameron wrote. “The only question here is whether the fraud provision at issue was valid and should be applied to the circumstances of this case.”

Further, the majority “concludes that an insurance policy’s fraud provision contravenes the no-fault act when applied to resident relatives,” Cameron said. “[T]here is no meaningful distinction for purposes of coverage between a policyholder and a resident relative. … Whether a policyholder or a resident relative, the policy’s provisions are applicable to the no-fault claim as long as they do not conflict with the no-fault act.”

The majority also concluded that, “after cancellation, the policy’s provisions will no longer apply to the policyholder who committed the fraud when the claimant is a third party,” Cameron explained. “The fact that plaintiff cancelled the policy after Justin’s claim was filed does not affect the terms of the policy as it was written,” he wrote. “Defendants are still named insureds on the declarations page of that policy, and it would be illogical to treat the policy, for purposes of Justin’s claim, as not having any named insured simply because plaintiff cancelled the policy after Justin filed his claim. Moreover, the fraud provision at issue states that any insured person – rather than the insured person – who commits fraud will void the entire policy. For purposes of Justin’s claim, defendants were still considered insureds for servicing any and all future claims based on the occurrence at issue – Justin’s injuries from the accident.”

“Because I disagree with all three holdings, I respectfully dissent,” Cameron said. “Defendants submitted fraudulent claims in contravention to the policy’s fraud provision, and the innocent-third-party rule should not allow Justin to continue collecting PIP benefits.”