Michigan Supreme Court; Docket #142774; Published
Michigan Court of Appeals; Docket #291899; Unpublished
Justice Markman for the majority joined by Justices Young, Jr., M.B. Kelly, and Zahra; 4-3 per curiam;
Justice Hathaway dissenting, joined by Justices Cavanagh and M. Kelly;
Official Michigan Reporter Citation: ____ Mich ____ (2012); Link to Opinion
In this 4-3 per curiam Opinion by Justice Markman, the Michigan Supreme Court reversed the Court of Appeals and held that an insurance company may avail itself of traditional legal and equitable remedies to avoid providing liability coverage under an insurance policy on the basis of fraud in the application for insurance, even though the fraud was easily ascertainable and the claimant was an innocent third-party who was injured by the negligence of the person who obtained the insurance. In so holding, the Court declared that Michigan law does not recognize the existence of an “easily ascertainable” rule and, therefore, overruled the Court of Appeals’ decision in State Farm v Kurylowicz, 67 Mich App 568 (1976) and its progeny. The majority Opinion stated that such an analysis was consistent with an earlier Supreme Court decision in the case of Keys v Pace, 358 Mich 74 (1959).
The person who sought insurance in this case was McKinley Hyten, who obtained a provisional driver’s license in April of 2004. In January 2007, Hyten’s driver’s license was suspended by the Secretary of State because of multiple moving violations and two minor traffic accidents. In light of what Hyten perceived as assurances from her probation officer, she anticipated that her driver’s license would be restored at a district court hearing scheduled for August 24, 2007. Hyten’s mother telephoned an independent insurance agent who, after being told that Hyten’s license had been suspended, informed Hyten’s mother that Hyten could not be insured until her license had been restored. Nonetheless, an application for insurance from Titan Insurance Company was filled out on Hyten’s behalf on August 22, 2007 and postdated to August 24, 2007. Hyten signed that application for insurance. The form inquired as to whether there were any unlicensed or suspended drivers in the applicant’s household. The response to that question was “No.” On August 24, 2007, the policy became effective. However, at the August 24, 2007 hearing, Hyten’s driver’s license was not restored as anticipated and was not, in fact, restored until approximately one month later on September 20, 2007. Subsequently, in February 2008, Hyten was involved in an accident resulting in serious injuries to Howard and Martha Holmes. In the process of investigating that accident, Titan learned that Hyten did not have a valid driver’s license when the policy was issued and therefore filed the instant declaratory judgment action seeking to declare the policy issued to Hyten void ab initio for the reason that Titan allegedly would never have accepted the risk and would not have issued the insurance policy had it known that Hyten was suspended at the time she submitted her application. The trial court and the Court of Appeals rejected the argument of Titan Insurance Company that it was entitled to declare the policy void ab initio on the basis of fraud because Hyten’s suspended license status was easily ascertainable by simply ordering her driver’s record. Therefore, under the “easily ascertainable” rule set forth in Kurylowicz, the lower courts ruled against Titan.
In reversing the lower courts, the majority Opinion by Justice Markman held that the concept of an “easily ascertainable” doctrine was specifically rejected by the Michigan Supreme Court in its 1959 opinion in Keys v Pace, supra. There, the insured person caused a motor vehicle accident resulting in injury to the other driver. The injured party filed suit against the defendant insured for injuries sustained in the accident. While the suit was pending, the defendant’s insurance company declared the policy void ab initio because it was discovered that the insured person had misrepresented a material fact in the application for insurance, namely that he had falsely stated that his license had not been suspended within the past three years when, in fact, it had been. In Keys, the Court of Appeals allowed the insurer to declare the policy void ab initio. Justice Markman, commenting on the Keys holding, stated:
“Keys answered the precise question presented in this case in the affirmative, holding that an insurer may avail itself of traditional legal and equitable remedies to avoid liability under an insurance policy on the ground of fraud, notwithstanding that the fraud may have been easily ascertainable, and notwithstanding that the claimant is a third party.”
However, despite Keys, the Court of Appeals in Kurylowicz, on similar facts, reached a different conclusion. Although acknowledging that the Keys decision had never been overruled, the Kurylowicz panel disregarded that precedent stating that the case had never been cited subsequent to its rendition. As a result, the Kurylowicz panel held that “where an automobile liability insurer retains premiums, notwithstanding grounds for cancellation reasonably discoverable by the insurer . . . , the insurer will be estopped to assert that ground for rescission thereafter.” That ruling subsequently became known as the “easily ascertainable” rule and was relied upon by the Court of Appeals in the instant case. This rule only bars the insurer from voiding the policy where a claim was made by an innocent third party. It does not prevent voiding the policy where the person seeking benefits was the perpetrator of the misrepresentation.
In rejecting Kurylowicz and reaffirming Keys, the majority Opinion by Justice Markman held:
“Although Keys was decided before the no-fault act became law, we take this opportunity to reaffirm the principles stated therein, to wit, that an insurer has no duty to investigate or verify the representations of a potential insured. See Keys, 358 Mich at 84-85. . . . The Keys rule, which allows an insurer to avail itself of a legal or equitable remedy on the ground of fraud in the application for insurance, notwithstanding that the claimant is a third party and the fraud could have been discovered through further investigation, comports with the long-established understanding of fraud in Michigan.
As already noted, it is well settled in Michigan that fraud in the application for an insurance policy may allow the blameless contracting party to avoid its contractual obligations through the application of traditional legal and equitable remedies. Michigan’s common law has consistently defined the elements of fraud without reference to whether the fraud could, upon the exercise of reasonable diligence in carrying out further investigation, have been discovered by the party claiming that it was harmed by the fraud. . . . To hold an insurer to a different and higher standard, one that would require it affirmatively to investigate the veracity of all representations made by its contracting partners before it could avail itself of these remedies, would represent a substantial departure from the well-established understanding of fraud. We discern no basis for treating insurers differently from all other parties who enter into contracts in this state.
For these reasons, we reaffirm the principles set forth in Keys and hold that an insurer is not precluded from availing itself of traditional legal and equitable remedies to avoid liability under an insurance policy on the ground of fraud in the application for insurance, even when the fraud was easily ascertainable and the claimant is a third party.”
In light of the fact that the trial court did not conduct an independent inquiry as to whether the common law elements of fraud and misrepresentation were satisfied in this case, but instead decided the matter by simply applying the “easily ascertainable” rule, the majority opinion remanded the case to the trial court “because it is unclear whether the trial court found that the insured obtained her policy through fraud.”
Justice Hathaway, joined by Justices Cavanagh and M. Kelly, dissented. She stated “I believe that the 'easily ascertainable' rule should remain the law of this state because it is soundly based in existing caselaw and this state’s policy regarding automotive liability insurance and compensation for innocent third-party accident victims.”