No Fault Policy Rescinded but Court Must Balance Equities Between Two Innocents
When a policy is rescinded in the eyes of the law it never existed. That is so in Michigan except when dealing with no fault auto insurance policies.
No fault insurance policies require payment of the cost of treatment of injuries regardless of fault. When a person is injured, even if he is 100% at fault he will collect under the policy. Insurance contracts, unlike common run-of-the-mill commercial contracts, are considered to be contracts of utmost good faith” and that each party to the contract of insurance is expected to treat the other fairly in the acquisition and performance of the contract. Therefore, when a policy is acquired by fraud the insurer has the right to rescind and declare the policy void from its inception.
In Ali Bazzi, and Genex Physical Therapy, Inc., and Elite Chiropractic Center, PC, and Transmedic, LLC v. Sentinel Insurance Company, and Citizens Insurance Company, and Hala Baydoun Bazzi and Mariam Bazzi, No. 154442, State Of Michigan Supreme Court (July 18, 2018) the Supreme Court of Michigan reached a Solomon-like decision allowing rescission but then sending the case back to the trial court to determine which of the innocent parties – the driver or the injured person – if any, was allowed the benefits.
Plaintiff Ali Bazzi, was injured while driving a vehicle owned by his mother, third-party defendant Hala Baydoun Bazzi, and insured by defendant Sentinel Insurance Company (Sentinel).
The car driven by Ali was insured by a policy obtained by the fraud of his mother, Hala Bazzi. The court, Lita M. Popke, J., entered a default judgment against Hala and Mariam rescinding the policy. The Supreme Court concluded that an insurer is not entitled to automatic rescission of a policy with regard to a third party even though the policy was procured by the insured through fraud. In this case, Sentinel Insurance could raise the defense of fraud to plaintiff’s action for PIP benefits. The Court of Appeals erred when it concluded that Sentinel Insurance was automatically entitled to rescission of the contract with regard to plaintiff.
Although an innocent third party might have a reasonable right to expect that other drivers have the minimum coverage required by the no-fault act (like PIP benefits), the innocent party does not have an absolute right by operation of law to hold an insurer liable for the fraud of the insured.
In general, fraud in the inducement to enter a contract renders the contract voidable at the option of the defrauded party. Accordingly, an insurance policy procured by fraud may be declared void ab initio at the option of the insurer, with the effect being that the contract is considered never to have existed. A trial court must balance the equities to determine whether a party is entitled to the rescission the party seeks, and the remedy should not be granted when the result would be unjust or inequitable. In other words, the trial court must determine which party should assume the loss when both parties affected are equally innocent and blameless.
In light of the fact that equity allows complete justice to be done in a case by adapting its judgments to the unique circumstances of each case, an insured’s fraud in an application of insurance does not automatically allow the insurer to rescind the policy with respect to third parties.
RESCISSION IS AN EQUITABLE REMEDY, NOT AN ABSOLUTE RIGHT
Generally, “[f]raud in the inducement to enter a contract renders the contract voidable at the option of the defrauded party . . . .” For that reason, an insurance policy procured by fraud may be declared void ab initio at the option of the insurer. [Barry Zalma, LexisNexis Legal Newsroom, The Equitable Remedy of Rescission: A Tool to Defeat Fraud, https://www.lexisnexis.com/legalnewsroom/insurance/b/insurancelaw/archive/2015/04/21/the-equitable-remedy-of-rescission-a-tool-to-defeat-fraud.aspx> (posted April 21, 2015) (accessed June 11, 2018) (stating that “[i]nsurance contracts, unlike common run-of-the-mill commercial contracts, are considered to be contracts of utmost good faith” and that “[e]ach party to the contract of insurance is expected to treat the other fairly in the acquisition and performance of the contract”).]
Rescission abrogates a contract and restores the parties to the relative positions that they would have occupied if the contract had never been made.
Accordingly, although the policy between Sentinel and the insured, Mimo Investment is void ab inito due to the fraudulent manner in which it was acquired, the trial court must now determine whether, in its discretion, rescission of the insurance policy is available as between Sentinel and plaintiff.
The Supreme Court ordered that the trial court must determine whether rescission is available as an equitable remedy as between Sentinel and plaintiff.
The dissent argued cogently that it was futile to attempt to balance the equities between innocent third parties.
Rescission of third-party PIP benefits makes financial sense only if the insurer stands to prevent the claimant from receiving PIP benefits entirely, thus reducing the insurer’s proportion of the costs. If the claimant is a third party and otherwise eligible for PIP benefits, such a result is impermissible under the statute. And so the innocent-third-party doctrine is consonant with (or a useful shorthand for) that statutory requirement. The no-fault act is a comprehensive statutory scheme in which the Legislature established a clear intent to mandate PIP coverage for all eligible claimants.
The majority’s decision to permit rescission litigation when that remedy is inconsistent with the Act is a victory only for lawyers. Innocent third parties must be covered one way or another because the statute requires it and the equitable balancing cannot impose a remedy contrary to law. Insurers lose too. Sentinel’s “win” in today’s innocent-third-party rescission litigation will be another insurer’s loss when the MACP assigns it to pick up the tab. Lawyers, on the other hand, have lots of new litigation to pursue.
The court, trying to please by splitting the baby – as did King Solomon – helped no one and killed the baby. It declared the policy void from its inception as to the named insured but not void as to the permissive driver and the injured party requiring the trial court to determine which should pay. In essence the insurer will always be obligated to pay, even on a void policy, since it will invariably be found to be less innocent than an injured person. The Supreme Court quoted an article I wrote and then refused to follow it by refusing to acknowledge that when a policy is acquired by fraud it is void from its inception as to everyone since it never really existed.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant 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 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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