Kaitlyn Cramer with Novara Tesija & Catenacci PLLC weighs in on the recent Bazzi opinion.
The Supreme Court delivered its long-awaited opinion in Bazzi v Sentinel Insurance Company on July 18, 2018, holding that the innocent third-party rule did not survive previous decisions, but that any effort to rescind an insurance policy was no longer an “automatic remedy” even if fraud in the application had been found.
By way of background, the plaintiff, Alli Bazzi, sued Sentinel and Citizens Insurance Company for PIP benefits after he was injured in an accident while driving his mother Hala’s vehicle. Hala’s vehicle was insured by Sentinel through a commercial policy issued to her sister Mariam’s business, Mimo Investment. Sentinel ultimately filed a third-party Complaint against Hala and Mariam alleging fraud in the procurement of the policy and seeking rescission as a result. When a default judgment was entered against Hala and Mariam, their policy was deemed rescinded, and Sentinel then filed a Motion for summary disposition as to Plaintiff’s and his providers’ claims, arguing that the policy under which they claimed benefits was void by virtue of the rescission. The trial Court denied the Motion under the “innocent third-party rule” – that is, that Sentinel could not rescind benefits as to Alli as an innocent third party, even though his mother and aunt may have committed fraud in procuring the policy at issue.
The Court of Appeals then took up the case, reversing the trial court’s denial of the Motion. The Court reasoned that the innocent third-party rule did not survive the Supreme Court’s decision of Titan Ins Co v Hyten, 491 Mich 547 (2012). Prior to Titan, an insurer could not rescind a policy on the basis of fraud when that fraud was “easily ascertainable.” The Titan Court abrogated that rule and effectively broadened the situations in which an insurer may rescind a policy. The Court of Appeals reasoned that the innocent third-party and easily ascertainable rule were basically indistinguishable, and as a result, the trial Court should have granted the Motion, as its reliance upon Alli’s status as an innocent third-party was no longer supported by good law. The intervening providers ultimately appealed to the Supreme Court.
As a result of the appellate panel’s opinion, many insurers accelerated their efforts in rescinding policies even as to non-insured persons but waited with baited breath as to whether this approach would be constrained by the Supreme Court.
The Court’s Reasoning
The Supreme Court, in a majority opinion authored by Justice Wilder and joined by Chief Justice Markman and Justices Zahra, Bernstein, and Clement, ultimately affirmed the Court of Appeals’ ruling that Titan did indeed abrogate the innocent third-party doctrine. However, the Court further opined that that did not necessarily mean that Sentinel was automatically entitled to rescission as an equitable remedy. Rather, whether rescission is appropriate should be subject to the trial court’s discretion.
The Court first echoed its opinion in Titan in stated that, unless clearly prohibited by statute, “an insurer may continue to avail itself of any common-law defenses.” Therefore, the main question was whether the No-Fault prohibited an insurer from availing itself of the defense of fraud. The Court noted that the Legislature had specifically carved out certain defenses in other enactments, including the Financial Responsibility Act (MCL 257.501) and even other portions of the No-Fault Act. However, it had not carved out an insurer’s ability to rescind a policy based on fraud specifically, and so the Court concluded that it had not been the Legislature’s intent to limit an insurer’s ability to defend itself against fraud. As such, the defense was preserved.
While the Legislature had preserved the defense, the Court noted that some of its and the Court of Appeals’ prior opinion had limited it, such as in State Farm Mut Auto Ins Co v Kurylowicz, 67 Mich App 568 (1976), where insurers were barred from asserting the defense of fraud once an insurance event occurred and there was an innocent, injured third party, if the fraud perpetrated by the insured could have been easily ascertained by an investigation. But the Titan opinion had overruled Kurylowicz and specifically ruled that an insured was not precluded from availing itself of traditional legal and equitable remedies. The Court therefore was not persuaded by the intervening providers’ arguments that Titan had only addressed the “easily ascertainable” portion of this rule, not the status of an innocent third-party. Rather, the Court noted that the “rules overlap” as they had explained in Titan that rescission was not prohibited even when the fraud was “easily ascertainable and the claimant was a third party.”
Even though the Court clarified and confirmed that the innocent third-party rule was no more, it still had more to say as to whether rescission was an “automatic” remedy. And it is here where the opinion breaks new ground. Holding that rescission is an equitable remedy rather than an absolute right, the Court instructed trial courts to “balance the equities” when presented with a Motion seeking rescission. Rescission should thus not be granted in cases where the result would be unjust. Fraud in the application therefore does not automatically result in the rescission of a policy; rather, the trial court must explore, on a fact by fact basis, whether rescission would be punitive or unreasonable for each particular plaintiff. Accordingly, the Court remanded Alli Bazzi’s case back to the trial court for this determination.
Evaluation and Practical Implications
Interestingly, the opinion speaks to rescission and fraud in the application. The Court did not expand its holding into situations involving fraud committed during a claim (such as in Bahri v IDS Prop Cas Ins Co, 308 Mich App 420 (2014)). Recent cases have addressed an insurer’s ability to void a policy when fraud is committed during the claim, even when insurance policies may provide for this remedy explicitly. See Shelton v Auto-Owners Ins Co, 314 Mich App 648 (2017); Meemic Ins Co v Fortson, __ Mich App __ (2018) (Docket No. 337728). The Court did not reach into that area with this opinion.
Overall, the Court’s determination that rescission is an equitable remedy appears to be a way to preserve the “innocent third-party rule” without outright saying so. As a result, rescission has become a very venue-dependent issue, as the trial court is given great discretion in making its determination as to whether the rescission is fair. Both plaintiffs and defense attorneys must therefore critically evaluate the particular venue and judge handling each case.