Michigan Court of Appeals; Docket # 320518; Published
Judges Sawyer, Beckering and Boonstra; Non-unanimous Opinion by Judge Sawyer (with Judge Boonstra concurring and Judge Beckering dissenting)
Official Michigan Reporter Citation: Not Applicable; Link to Opinion; Link to Concurrence; Link to Dissent 
On remand from the Michigan Supreme Court as on leave granted; Link to Order
STATUTORY INDEXING:
Not Applicable
TOPICAL INDEXING:
Cancellation and Rescission of Insurance Policies
Fraud/Misrepresentation
Intervention by Service Providers and Third-Party Payors in PIP Claims
Motor Vehicle Code (Financial Responsibility Act) (MCL 257.501, et seq.)
CASE SUMMARY:
In this published Opinion by Judge Sawyer, the Court of Appeals held that the "innocent third-party rule" does not apply in a first-party no-fault case where the insurance policy had successfully been rescinded based on fraud. The Court further held that the innocent third-party rule, first established by the Michigan Supreme Court in State Farm Mut Auto Ins Co v Kurylowicz, did not survive the 2012 ruling in Titan Ins Co v Hyten.
Plaintiff Ali Bazzi was injured while driving a vehicle owned by third-party defendant Hala Bazzi, who was his mother, and sought PIP benefits for his injuries. Intervening plaintiffs Genex Physical Therapy, Elite Chiropractor Center and Transmedic provided medical services to plaintiff after the accident and sought payment in this case for their services. The vehicle driven by Bazzi was insured under a commercial no-fault policy issued by defendant Sentinel Insurance to Mimo Investments, LLC. Sentinel claimed that Hala Bazzi and Mariam Bazzi (plaintiff's sister and resident agent for Mimo Investments) fraudulently purchased the policy in order to obtain a lower premium, due to plaintiff's involvement in a prior accident. Sentinel asserted the vehicle was actually leased to Hala Bazzi for personal and family use, not for commercial use by Mimo, and that Mimo was essentially a "shell company" that had no assets or employees, or was not otherwise engaged in any business activity. Sentinel's fraud claim also included an allegation that it was not disclosed that plaintiff would be a regular driver of the vehicle. In fact, Sentinel had previously pursued a successful claim against Hala and Mariam Bazzi to rescind the policy based on fraud. Sentinel moved for summary disposition on plaintiff's claim for PIP benefits, as well as the intervening medical providers' claims, based on the policy having been rescinded for fraud. The trial court denied the motion, finding that plaintiff had a claim based upon the innocent third-party rule. Sentinel's appeal was denied by the Michigan Court of Appeals. Sentinel then appealed to the Michigan Supreme Court, which, in lieu of granting leave, remanded the case to the Court of Appeals for consideration as on leave granted.
On remand, the Court of Appeals reversed the trial court, finding that the innocent third party rule is no longer viable in light of the Supreme Court's decision in Titan Ins Co v Hyten, 491 Mich 547 (2012). In this regard, the Court of Appeals said:
"Resolution of this case begins and ultimately ends with our Supreme Court's decision in Titan. Although Titan did not involve a no-fault insurance claim for PIP benefits, we nonetheless are convinced that Titan compels the conclusion that there is no innocent third-party rule as to a claim for those benefits. That is, if an insurer is entitled to rescind a no-fault insurance policy based upon a claim of fraud, it is not obligated to pay benefits under that policy even for PIP benefits to a third party innocent of the fraud."
Plaintiff argued, however, that Titan did not apply because: 1) it did not involve mandatory PIP benefits and 2) it only considered the easily ascertainable rule and not the innocent third-party rule. Rejecting these arguments, the Court of Appeals found that Titan did, indeed, extend to mandatory no-fault benefits and that the easily ascertainable rule and the innocent third-party rule are one and the same. The Court stated:
"'[E]asily ascertainable' and 'innocent third-party' are merely two different labels for the same rule and we cannot dismiss the application of Titan merely by applying the 'innocent third-party' label to this case and then pointing out that Titan dealt with the 'easily ascertainable' rule. That is, in rejecting the 'easily ascertainable' rule, the Supreme Court of necessity also rejected the 'innocent third-party' rule because they are, in fact, the same rule. ... [T]he question is not whether PIP benefits are mandated by statute, but whether that statute prohibits the insurer from availing itself of the defense of fraud. And none of the parties identify a provision in the no-fault act itself where the Legislature statutorily restricts the use of the defense of fraud with respect to PIP benefits."
The Court of Appeals continued by addressing defendant Citizens Insurance Company's claim that Titan did not apply because it involved the Financial Responsibility Act, and not the No-Fault Act. The Court disagreed, finding that Citizens misconstrued the discussion in Titan regarding MCL 257.520. The Court said:
"[T]he Court concluded that limitation on the fraud defense contained in MCL 257.520(f)(1) does not apply to all automobile insurance policies. ... While it specifically establishes that MCL 257.520(f)(1) only restricts the fraud defense as to coverage required under Chapter V of the vehicle code, it also explains why it is not relevant whether a coverage is mandatory or not. Rather, it is only relevant whether the Legislature has restricted the availability of the fraud defense with respect to a particular coverage. ... [U]nless the insured in this case had an outstanding, unsatisfied judgment, and there is no indication that this is the case, then the provisions of MCL 257.520 would simply not apply. This is in contrast to MCL 500.3101, which requires that the owner or registrant of a motor vehicle driven on a highway carry certain insurance coverages, including residual liability insurance. And under MCL 500.3131 and MCL 500.3009, the minimum limits are similar to that required under the financial responsibility act. But, unlike the provisions of the financial responsibility act, none of those statutes restrict the availability of the fraud defense."
The Court of Appeals further rejected Citizens' argument that the innocent third-party rule should remain intact as a matter of public policy. According to the Court, keeping the rule would ignore Michigan Supreme Court case precedent, and it is for the Legislature, not the judiciary, to determine whether an innocent third-party rule should be established.
Based on the foregoing, the Court of Appeals held the trial court erred in denying summary disposition for Sentinel by relying on the erroneous conclusion that the "innocent third-party" rule remained viable after the Supreme Court's decision in Titan. However, the Court remanded the matter for the trial court to address whether:
• the default judgment against Hala and Mariam Bazzi conclusively established fraud and provided a basis for Sentinel to rescind the policy as to all parties, or whether the remaining parties are entitled to litigate the issue of fraud, and
• there is a genuine issue of material fact regarding the fraud issue.
If the trial court determines either of these questions in favor of Sentinel, the court "shall enter" summary disposition in Sentinel's favor, the Court of Appeals said. However, if the trial court rules against Sentinel on both questions, then it "shall deny" summary disposition, the Court said.
The Court of Appeals concluded:
"[T]he Supreme Court in Titan clearly held that fraud is an available defense to an insurance contract except to the extent that the Legislature has restricted that defense by statute, ... the Legislature has not done so with respect to PIP benefits under the no-fault act, and, therefore ... the judicially created innocent third-party rule has not survived the Supreme Court's decision in Titan. Therefore, if an insurer is able to establish that a no-fault policy was obtained through fraud, it is entitled to declare the policy void ab initio and rescind it, including denying the payment of benefits to innocent third-parties."
Judge Boonstra concurred and said there is "no way to continue applying the innocent third-party rule in the PIP context." In so doing, he concurred in the majority's determination that pursuant to Titan:
"where an insurer is able to establish that a no-fault policy was obtained through fraud, it is entitled to declare the policy void ab initio and rescind it, including denying the payment of benefits to innocent third-parties."
Judge Beckering dissented and said:
"... I would conclude that the easily ascertainable and innocent third-party rules are not 'one and the same,' and case law bears out a clear distinction. Furthermore, because they are different rules and because the coverage at issue in Titan — contractually-based excess liability coverage — is substantially different from the type of coverage at issue in this case —statutorily-mandated benefits — I would decline to extend Titan and would instead adhere to 30 years of this Court's published decisions applying the innocent third-party rule. In this respect, I would affirm the decision of the circuit court, save for the circuit court's decision to limit PIP benefits to the statutory minimums set forth in MCL 257.520, which does not apply to the coverage at issue."
Editor's Note: Innocent third parties are not completely barred from collecting PIP benefits under this decision. Rather, they are barred from recovering benefits under a policy with respect to which the insured has committed fraud. Innocent third parties may still make a claim for PIP benefits through the assigned claims facility or another source of coverage that may be in the order of priority. Also, in those instances where fraud is found more than one year after the accident, innocent third parties may be time barred from filing a claim with the assigned claims facility.
