PIP Update: Supreme Court Sets Limitations on Insurer's Remedy of Rescission for Post-Application Fraud

CASE INFORMATION

Name: Meemic Ins. Co. v. Fortson et al.

Court/Judge: Michigan Supreme Court – Opinion written by Justice David Viviano

Decided: July 29, 2020.

INTRODUCTION

The Michigan Supreme Court issued a new decision on July 29, 2020 in Meemic Ins. Co. v. Fortson et al. Meemic which limits the ability of an insurer to rescind an auto policy ab initio to circumstances involving fraud during the procurement of a policy. This decision does not preclude an insurer from denying payment of specific expenses that are fraudulently presented.

CASE SYNOPSIS

The Defendants, Richard and Louis Fortson, were the named insureds on a Meemic policy, and the parents and conservators of Defendant Justin Fortson, who sustained serious injuries, including brain damage, when he fell from the hood of a moving vehicle in 2009. At the time of the accident, Meemic provided coverage for allowable expenses within the applicable No-Fault insurance policy to the named insureds, Richard and Louis Fortson, as well as to Justin Fortson through a “relative resident” provision contained in the applicable policy and MCL 500.3114(1). The brain damage Justin suffered left him in need of constant attendant care services in the form of supervision. Justin’s parents elected to provide this care themselves. Meemic agreed to pay the Justin’s parents, Meemic’s named insureds, an hourly rate to provide attendant care services to their son upon the submission of monthly bills documenting the actual hours that care was provided. Following an internal investigation, Meemic discovered that Justin had been in jail for a period of 233 days and in drug rehabilitation for an additional 78 days during which time his parents had continued to bill Meemic for attendant care services.

Meemic filed suit against the Fortsons seeking to void the policy ab initio pursuant to the antifraud provision contained in their policy. Meemic sought damages as well as a determination from the Court that the insureds’ actions voided the insurance policy at its inception. The defendants filed a counterclaim for past and future attendant care services that Meemic refused to pay. Following the decision in Bazzi v. Sentinel Ins. Co. 315 Mich App 763 (2016), Meemic was granted summary disposition and this appeal followed.

The Supreme Court adopted the Court of Appeal’s holding that the fraudulent activity in the instant case did not reach back to the time of the policy’s inception. The Court found that Meemic could not have relied upon the insured’s alleged misrepresentations when issuing the policy because they did not exist at the time the policy was procured. The opinion notes that post-procurement fraud could operate as a breach of the contract, but the mere breach of a contract cannot allow a party to avoid the contract in its entirety back to its inception. Ultimately, the Meemic Court held that the contract-based fraud defense could not be used to void the policy ab initio in this instance because rescission is an equitable remedy available only when there is evidence of a misrepresentation at the time of inception of the contract that was material and would have affected or precluded the insurer from entering into the contract.

ANALYSIS

The Opinion limits an insurer’s ability use its anti-fraud provision to void a policy ab initio to situations in which there is fraud in the procurement of the policy when mandatory coverages are at issue. The Opinion only addressed this issue for the mandatory coverages provided by the Michigan No Fault Act, MCL 500.3101 et seq. Optional coverages, such as Uninsured Motorist and Under Insured Motorist coverage, are not affected by the Meemic Court’s ruling because they are to be construed without reference to the No-Fault Act.

Furthermore, this case does not overturn the Bazzi Court’s precedential abrogation of the “innocent-third-party” rule. The dispositive question in this case turns upon the extent of the common-law fraud defense, rather than Justin’s status as a third party. Essentially, contractual exclusions cannot be utilized to exclude mandatory, statutory coverages beyond those involving facts and circumstance that relate back to the procurement of the policy.

Specifically, insurers cannot seek rescission of a policy when the fraud being challenged is not evident in the procurement, application or issuance of a policy. Insurers are not precluded from filing suit or denying specific expenses claimed on the basis of fraud outside of this context. However, a legal remedy such as monetary damages, as opposed to the equitable remedy of rescission, is permissible in this context.

Further updates to Michigan law regarding insurance fraud will of course be monitored closely for changes to the precedent established in Meemic Ins. Co. v. Fortson et al.