Innocent Party Doctrine Not Applicable to Commercial Insurance
I continue to report, until I turn blue in the face, that the covenant of good faith and fair dealing applies equally to the insured as it does to the insurer. Insurance is nothing more than a contract that requires, to be effective, that each party deals fairly with the other and that they reach an agreement as to who, for what perils, and what amounts insurance is sought. If either party lies to the other about the who, what, why, where, when and how of the insurance policy a contract cannot be made.
When one of the parties to an insurance policy learns that the other lied the injured party has the right to rescind the policy, return the consideration, and be in the same position they were in before the contract of insurance was issued. In Farm Bureau General Insurance Company Of Michigan v. Robert Elzer, doing business as Diverse Contracting, Defendant, and Devon Holmes, Intervening Defendant, and Citizens Insurance Company Of America and State Farm Automobile Insurance Company, Court of Appeals of Michigan 2017 WL 359731, No. 329332 (January 24, 2017) Farm Bureau asked the Court of Appeals to allow it to rescind even though an innocent person, not a party to the contract, was injured.
Robert Elzer secured no-fault insurance coverage under his Farm Bureau commercial automobile policy for a personal vehicle owned and operated by a family friend. Elzer’s misrepresentation to Farm Bureau appeared to entitle the insurer to rescind the policy. However, the circuit court rejected Farm Bureau’s attempt to avoid providing coverage.
Robert Elzer owned a business—Diverse Contracting and secured a business automobile insurance policy through Farm Bureau General Insurance Company of Michigan. The insurance application indicated that all insured vehicles must be titled to Elzer. Elzer also checked a box indicating that he was the sole driver of the vehicles insured by the policy.
On January 20, 2014, Elzer contacted Farm Bureau to add a 2002 Ford Explorer to the policy. Elzer neither owned nor drove the vehicle. The vehicle was titled to and used by Danielle Petrie, a friend of Elzer’s wife. Elzer reported that he insured the Explorer because Petrie “couldn’t afford insurance of her own” and Elzer wanted “to help her out.”
One month later, the Explorer was involved in an accident. Petrie’s sister’s fiancé, Shawn Kimbrough, was driving and collided head-on with a vehicle in which Devon Holmes was a passenger. Both Kimbrough and Holmes were injured. Kimbrough was treated at Munson Medical Center and incurred more than $200,000 in medical expenses.
Munson approached Farm Bureau for reimbursement of personal protection insurance (PIP) benefits. Farm Bureau denied the claim based on Elzer’s purported misrepresentation that the Explorer was titled to and driven by him and was used for his business.
A series of lawsuits followed. The current action was filed, in part, to determine whether Farm Bureau could rescind the policy covering the Explorer and to determine the priority of insurers to cover Kimbrough’s first-party PIP benefits: Farm Bureau (as issuer of Elzer’s commercial auto policy), Citizens (as assignee by MACP), or State Farm Automobile Insurance Company (the no-fault insurer of Kimbrough’s mother, with whom he resided). Ultimately, the circuit court accepted Citizen’s position. The trial court applied the innocent party doctrine when it concluded Farm Bureau could not rescind.
On June 14, 2016, after the trial court decision, the court of appeal in Bazzi v Sentinel Ins Co, ___ Mich App ___; ___ NW2d ___ (Docket No. 320518, 2016) concluded that innocent permissive driver loses entitlement to first-party PIP benefits when the insurer rescinds coverage due to someone else’s fraud in the application process. Pursuant to Bazzi, Farm Bureau had the authority to rescind the policy for the Explorer and deny PIP benefits even to Kimbrough, who played no role in the application process, if Elzer committed fraud.
Elzer made a material misrepresentation when he contacted his insurance agent to add a vehicle to his commercial policy knowing that the vehicle was not being used for commercial purposes. A misrepresentation need not be an oral or verbal statement. Misrepresentation means any manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts. Elzer clearly knew the commercial policy covered only vehicles used for his business. Therefore, by calling to add the vehicle, Elzer was representing that the vehicle was commercial in nature. Under Michigan law, the liability portion of a policy that exceeds the statutory mandated minimum may be rescinded due to applicant fraud despite that an innocent person seeking third-party liability damages may be affected.
Elzer admitted at his deposition that he knew the vehicle was not commercial. Elzer’s own admissions established the second and third elements for Farm Bureau’s fraud defense. Elzer also clearly intended Farm Bureau to act in response to his misrepresentation. He called the insurance agent to elicit action—the addition of the vehicle to his policy. And Farm Bureau acted in reliance on Elzer’s misrepresentation by following through and adding the vehicle to the policy’s coverage. If Farm Bureau were not permitted to rescind the policy, it would suffer harm as a result of relying on Elzer’s knowing, material misrepresentation.
Elzer’s admissions supported Farm Bureau’s claim to rescind the insurance coverage of the Explorer, warranting summary dismissal of any claim against this insurer. Accordingly, the court reversed the circuit court’s denial of Farm Bureau’s summary disposition motion and remanded for further proceedings consistent with this opinion.
Although I can feel sorry for the injured party the innocence of the injured person does not require an insurer to give up its right to rescission when the insurer is the victim of fraud. The injured party is not without a remedy and may sue and obtain judgment for the injuries from the person responsible for the injuries. Farm Bureau owes nothing.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
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