Michigan Court of Appeals; Docket No. 291899; Published
Judges Gleicher, K.F. Kelly, and Zahra; Unanimous (2-0) (Judge Zahra did not participate in the decision)
Official Michigan Reporter Citation: Forthcoming; Link to Opinion
The Michigan Supreme Court reversed the Court of Appeals' decision on 6/15/12; Link to Opinion
In this lengthy 2-0 Opinion (Judge Zahra did not participate in the decision, because of his appointment to the Supreme Court), written by Judge Gleicher, the Court of Appeals affirmed the trial court’s order denying Titan Insurance Company’s motion for summary disposition on the issue of whether Titan could reform its policy of insurance issued to Hyten by reducing the tort liability coverage available to the injured parties, Mr. and Mrs. Holmes (hereinafter “the Holmes”), from the stated policy limits of $100,000 per person and $300,000 per occurrence, to the statutory minimums of $20,000 per person and $40,000 per occurrence, on the basis that Hyten fraudulently misrepresented that Ms. Holmes possessed a driver’s license when she signed the application for insurance. The Court of Appeals also affirmed the trial court’s order granting summary disposition in favor of Hyten, as well as Farm Bureau Insurance Company which intervened as a defendant on the basis that it provided uninsured motorist coverage to the Holmes.
There is a complicated procedural history underlying this case. The case arises out of a motor vehicle accident that occurred on February 10, 2008. At that time, Hyten was driving a 1997 Dodge Stratus and caused an accident that injured the Holmes. At the time of the accident, the 1997 Dodge Stratus that Hyten was driving was insured under an automobile insurance policy Titan Insurance Company issued to Hyten on August 24, 2007. Notably, the insurance policy included residual bodily injury coverage in the amount of $100,000 per individual and $300,000 per occurrence. Upon being notified by the Holmes’ attorney that they were pursuing a liability claim against Hyten, Titan filed a declaratory action seeking to reform the liability coverage to the statutory minimum of $20,000 per individual and $40,000 per occurrence, on the basis that Hyten had made material misrepresentations in her application for insurance.
The basis for Titan’s argument that Hyten had committed a material misrepresentation was that on the day the policy took effect, August 24, 2007, Hyten did not have a valid driver’s license. The long history underlying the status of Hyten’s driver’s license begins with Hyten obtaining a provisional driver’s license in April 2004. Over the next 2.5 years, she obtained multiple driving violations and had two minor traffic accidents. On January 6, 2007, the Secretary of State suspended Hyten’s driver’s license. Around the same time, Hyten’s mother, Ann Johnson, inherited the 1997 Dodge Stratus that was involved in the accident at issue in this case. Johnson planned to hold the vehicle for Hyten’s use and ownership until after her license was reinstated. Based on assurances from Hyten’s probation officer, Johnson anticipated that Hyten’s license would be restored at a scheduled court date on August 24, 2007. On August 22, 2007, in preparation for Hyten’s license restoration, Johnson spoke by telephone with an insurance agent, Brett (last name not provided in Opinion). It is not clear from the opinion why Johnson was contacting an insurance agent on Hyten’s behalf. Nevertheless, in response to Johnson’s call, Brett filled out a Titan Insurance Michigan automobile insurance application on Hyten’s behalf. In their conversation, Johnson informed Brett that Hyten’s driver’s license was suspended and Brett responded that Hyten could not be insured until her driving privileges had been reinstated. Johnson then advised Brett that Hyten’s license would likely be reinstated on August 24, 2007. Accordingly, Brett post-dated the application to August 24, 2007. The application did not identify that any of the drivers in Hyten’s household were unlicensed or had their licenses suspended or revoked as of that date. On Hyten’s behalf, Johnson paid $719 for the Titan Insurance premium for the policy of insurance that would be issued to Hyten and would cover the 1997 Dodge Stratus. On either August 22, 2007 or August 23, 2007, Hyten ultimately signed the application at Brett’s office and testified that she simply “skimmed over” the contents the application. On August 24, 2007, at the aforesaid scheduled court date, Hyten learned she would not regain her driving privileges until she completed a driver assessment. Accordingly, Hyten did not drive the Dodge Stratus until she completed the assessment and her license was officially reinstated. Hyten’s license was officially reinstated on September 20, 2007, at which time Hyten began using the Dodge Stratus.
In affirming the trial court’s Order denying Titan’s motion for summary disposition, the Court of Appeals ultimately held that because Titan could have easily ascertained Hyten’s misrepresentation, Titan could not reform Hyten’s policy to reduce the residual coverage to the statutory minimum limits. In reaching its holding, the Court of Appeals discussed the three insurance concepts of policy cancellation, rescission, and reformation. The Court of Appeals explained that cancellation and rescission are two distinct methods of terminating insurance coverage. The Court cited the Court of Appeals case of United Security Ins Co v Ins Comm’r, 133 Mich App 38 (1984), for the proposition that, “when a policy is cancelled, it is terminated as of the cancellation date and is effective up to such date; however, when a policy is rescinded, it is considered void ab initio and is considered never to have existed.” The court went onto explain that reformation of an insurance policy is an equitable remedy and cited the Michigan Court of Appeals case, Najor v Wayne Nt’l Life Ins Co, 23 Mich App 260 (1970), for the following proposition:
“A written instrument may be reformed where it fails to express the intentions of the parties thereto as a result of accident, inadvertence, mistake, fraud, or inequitable conduct, or both fraud and mistake, fraud or inequitable conduct being on one side and mistake on the other. Conversely, in the absence of satisfactory proof of accident, fraud, or mistake, there is no basis for a court of equity to reform an instrument.”
The Court of Appeals further explained that in this case, the policy of insurance could not be cancelled through rescission, as the right to completely rescind a no-fault automobile insurance policy “ceases to exist once there is a claim involving an innocent third party.” Farmers Ins Exch v Anderson, 206 Mich App 214 (1994). Furthermore, the Court noted that once an insurable event occurs, “the liability of the insurer with respect to insurance required by the No-Fault Act becomes absolute.” Ohio Farmers Ins Co v Michigan Mutual Ins Co, 179 Mich App 355 (1989).
In regards to whether the insurance policy could be reformed to reduce the liability limits to $20,000 per individual and $40,000 per occurrence, the Court of Appeals discussed the long-line of cases addressing whether an insurer could reduce liability coverage to a third party on the basis that misrepresentations were made by the policyholder in obtaining the insurance coverage. The court discussed the case of Farmers Ins Exch v Anderson in which the Court of Appeals held that while MCL 257.520(f) prohibits an insurer from using fraud as a basis to void complete coverage under an insurance policy once an innocent third party has been injured, MCL 257.520(g) makes it clear that an insurer is not precluded from using fraud as a defense to void optional insurance coverage, such as liability coverage in excess of the statutory minimum of $20,000 per individual and $40,000 per occurrence. However, in discussing the Farmers Ins Exch case, the Court of Appeals explained that the decision created a notable exception to reform liability coverage on the basis of fraud, when the insurer could have easily ascertained the fraud at the time the contract was formed.
After discussing the Farmers Ins Exch case, the Court of Appeals went on to explain that in the case of State Farm Mut Auto Ins Co v Kurylowicz, 67 Mich App 568 (1996), the Court of Appeals held that, “an automobile liability insurer must undertake a reasonable investigation of the insured’s insurability within a reasonable period of time from the acceptance of the application and the issuance of a policy. This duty directly inures to the benefit of third parties injured by the insured.” The court in Kurylowicz further explained that “an injured (innocent third) party, who has obtained an unsatisfied judgment against the insured, may properly proceed against the insurer; the insurer cannot then successfully defend upon the ground of its own failure reasonably to investigate the application.” In applying the principles from Farmers Ins Exch and Kurylowicz, the Court of Appeals in this case reasoned that the trial court correctly found that Titan’s agent could have easily ascertained whether Hyten had a license, for example, by asking to see her driver’s license.
After reaching its specific holding that Titan could not reform the insurance policy to reduce the liability coverage, the court then provided an additional discussion regarding the legal underpinnings of the “easily ascertainable” rule. In its discussion, the court explained that MCL 500.3220 provides a definite window of time of 55 days for an insurer to cancel an automobile policy. However, the court ultimately explained that in order to cancel a policy based on fraud or misrepresentation, the insurer must demonstrate it was reasonable for it to rely on the misrepresentations of the insured. The court explained that in a situation where the fraud was easily ascertainable, the insurer cannot demonstrate that it is reasonable or justifiable for it to have relied upon the misleading or false statements. With respect to the “easily ascertainable” rule, the court similarly explained that this rule does not conflict with MCL 500.3220, because rescission and cancellation of insurance contracts is based in equity, and the “easily ascertainable” rule recognizes that it would not be equitable to allow an insurer to cancel or rescind a policy based on fraud or misrepresentation the insurer could have easily identified through its own investigations. Accordingly, the Court of Appeals ultimately refused Titan’s request to overrule Kurylowicz and its progeny.
The court further noted that the Titan policy could not be reformed, because Hyten’s unlicensed status was cured approximately five months before the accident and Titan has produced no evidence to suggest that it was not willing to insure Hyten as long as she had a valid driver’s license.
Finally, the court rejected Titan’s argument that Farm Bureau, the uninsured/underinsured motorist carrier, did not have standing to join the case. The Court of Appeals ultimately explained that due to Farm Bureau’s potential liability for the Holmes’ injuries, if there was not sufficient liability coverage under the Titan policy, Farm Bureau had a “real interest in the cause of action” for purposes of standing.