To Obtain Rescission an Insurer Must Prove the Result is Fair to All

Rescission is an Equitable Remedy that Must be Fair to All Effected

Rescission is an equitable remedy. It does not allow for payment of damages. It requires that a court act fairly to all involved.

In Citizens Insurance Company Of America v. Pioneer State Mutual Insurance Company, and Allstate Insurance Company, No. 346360, State Of Michigan Court Of Appeals (December 19, 2019) a reimbursement action for no-fault benefits by an assigned claims insurer, plaintiff Citizens Insurance Company of America, on appeal sued Pioneer Mutual Insurance Company and obtained a favorable judgment. Pioneer challenged the trial court’s decision to deny its motion for summary disposition and grant defendant Allstate Insurance Company’s motion for summary disposition.

BACKGROUND

In November 2015, Brittany Baumgart was injured in a pedestrian-motor vehicle accident while she was crossing a road. She was taken to McLaren Macomb Hospital for treatment. At the time of the accident, Brittany was living with her father, Jeffry Baumgart, who was insured under a no-fault policy issued by Pioneer. The motor vehicle involved in the accident was insured by Allstate. The two insurers disputed coverage.

Pioneer is in the highest order of priority because it insured Brittany’s resident relative, Jeffry, at the time of the accident. However, Pioneer rescinded Jeffry’s policy on the basis of alleged material misrepresentations made in his insurance application. Specifically, in his October 2013 application Jeffry effectively represented that he was the only resident in his household. Jeffry explained at deposition that he did not identify Brittany as a household resident because at the time of the application she was incarcerated. He explained that even though Brittany had a room in his house and received mail there, she stayed there only sporadically between her frequent incarcerations. Testifying in 2017, Jeffry estimated that Brittany had been incarcerated for at least 8 out of the past 10 years.

Jeffry cashed the premium refund check sent by Pioneer after its rescission.

INNOCENT THIRD PARTY RULE

Before the trial court issued its decision, the Michigan Supreme Court decided Bazzi v Sentinel Ins Co, 502 Mich 390, 396; 919 NW2d 20 (2018), which held that the “innocent-third-party rule,” precluded an insurer from rescinding an insurance policy procured by fraud when there was a claim involving an innocent third party. However, the Court clarified that rescission was an equitable remedy, and that insurers did not have an “automatic” right to rescind an insurance policy with respect to third parties.

The trial court issued an opinion and order granting Allstate summary disposition. The court first determined that Jeffry did not make a false statement in his insurance application. The court noted Pioneer’s position that Brittany was domiciled with Jeffry even when she was incarcerated, but it was properly unpersuaded that “domicile” is the same as “household resident” or “living with” especially as it relates to a layperson filling out an application for insurance. Finding no intent to deceive the trial court determined that equity did not favor rescission with respect to Brittany.

ANALYSIS

The thrust of Pioneer’s argument is that Allstate should not be able to contest Pioneer’s decision to rescind the policy because Jeffry, the insured, has not done so. However, even when an insurance policy is declared void ab initio, the trial court must determine whether rescission is equitable as to third parties claiming benefits under the policy.

In Bazzi, the insurer successfully argued that the policy was procured by fraud and obtained a default judgment rescinding the policy. On appeal, the sole issue was the viability of the innocent third-party rule. The Supreme held that the doctrine had been abrogated but clarified that the equitable remedy of rescission does not function by automatic operation of the law. Thus, even though the policy between the insurer and the insured was void ab initio due to the fraudulent manner in which it was acquired, the trial court still needed to determine whether, in its discretion, rescission of the insurance policy is available as between the insurer and the claimant.

The Court of Appeal concluded that the fact the policy had been rescinded with respect to the insured is not dispositive of whether rescission is warranted as to a third party’s claim for benefits. Because the PIP statute directs the circuit court to resolve the coverage dispute, the disputing insurers, who are mandatory parties to the action, plainly have standing to make arguments relevant to that dispute.  The no-fault act does not define the term “interested party,” but clearly the injured person qualifies.

RESCISSION

Regardless of who initiated the claim, this action concerned who would be responsible for reimbursement to Citizens for payments made on her behalf and who would have priority over any future claim for PIP benefits that she might make. Equitable remedies, like rescission, must adapt to the circumstances of each case. Equity jurisprudence molds its decrees to do justice amid all the vicissitudes and intricacies of life. Equity allows complete justice to be done in a case by adapting its judgments to the special circumstances of the case.

The trial court determined that rescission would be unjust and inequitable given the lack of evidence showing that Jeffry made false statements in the application or that he intended to defraud Pioneer. To the degree an innocent misrepresentation may be considered grounds to rescind as to the policyholder, making an innocent misrepresentation is less culpable behavior than actual fraud and so weighs against rescission as to a third party. Courts are not required to grant rescission in all cases.

Even assuming that Pioneer made reasonable investigation efforts, it was still in a better position than Allstate to investigate Jeffry’s application. In sum, the trial court considered the nature of the alleged misrepresentations and determined that rescission would not be just as to the injured party.

When there is no evidence that the insured acted with fraudulent intent and the third party was not involved in the alleged misrepresentations, the trial court did not abuse its discretion in determining that rescission was not warranted.

ZALMA OPINION

Rescission must result in fairness to all. Although the rescission as to the named insured was proper because he misrepresented a material fact, it was not fair to the victim who was injured and had no involvement in the application for insurance. The result in this case was fair to everyone but the insurance company: Jeffrey’s policy was rescinded and he was entitled to keep the return premium. The no-fault law allowed Brittany to receive the no-fault benefits and indicates a need to revise the no fault law.


© 2020 – 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 zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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