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Warner Norcross + Judd LLP is a corporate law firm with over 230 attorneys serving clients in nine offices throughout Michigan. Among the largest law firms in Michigan, Warner works in virtually all areas of business law.

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The innocent third-party doctrine no longer applies in the context of an insurer’s responsibility for personal protection benefits, allowing an insurer to rescind its policy that was procured by fraud even as it relates to a third-party, says the Michigan Court of Appeals in <a href="http://publicdocs.courts.mi.gov:81/OPINIONS/FINAL/COA/20160809_C323425_78_323425.OPN.PDF" target="_blank" rel="noopener">Southeast Michigan Surgical Hospital v Allstate Insurance Co., No. 323425</a>. &nbsp;This panel of the Court of Appeals indicates this result is required by controlling precedent, but disagrees with that rule and declares a conflict with that prior opinion.&nbsp;

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Jamie Letkemann was injured while he was a passenger in a vehicle that was rear-ended.&nbsp; Southeast Michigan Surgical Hospital (SEMSH) provided medical treatment to Letkemann and asserted a third-party claim against Allstate.&nbsp; Letkemann filed a separate action against SEMSH for first-party no fault benefits and the claims were consolidated for discovery purposes.&nbsp; Michigan’s no-fault insurance regulations require vehicle owners to obtain personal protection insurance.&nbsp; An injured occupant is entitled to certain unlimited benefits covering the medical expenses resulting from the accident, and the&nbsp; insurance company will pay the entirety of the claim but may be reimbursed by the Michigan Catastrophic Claims Association for expenses incurred in excess of a specified dollar amount.&nbsp;

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Allstate learned during discovery that the no-fault policy covering the vehicle was obtained on the basis of fraudulent misrepresentations.&nbsp; Allstate moved for summary disposition arguing that it was entitled to rescind the policy because under common law an insurer may deny coverage under an insurance contract where the insurance policy was procured by the policyholder’s fraudulence.&nbsp; Plaintiffs asserted that even if the policy was obtained by fraud, Letkemann was an innocent party so Allstate could not rescind the policy as it relates to him.&nbsp; The trial court denied Allstate’s motion for summary disposition and granted plaintiff’s summary disposition.

The Court of Appeals concluded that Letkemann did not make a fraudulent misrepresentation and should be protected by the innocent third party doctrine despite fraud being used to obtain the policy, but due to the recent published decision of another Court of Appeals panel in Bazzi v Sentinel Ins Co, it was required to reverse the trial court and remand for further proceedings.&nbsp; The Court of Appeals reasoned that generally fraud in the inducement was a valid basis to rescind a no-fault policy, but such rescission did not avoid a no-fault insurer’s obligation to pay benefits to innocent third parties.&nbsp; Nonetheless, Bazzi invalidates the innocent third party doctrine in the context of an insurer’s responsibility for statutorily mandated personal protection benefits, and therefore, the Court of Appeals were required to reverse the trial court’s holding. The Court of Appeals opined that were it not bound by Bazzi, it would decline to erode injured plaintiffs’ recovery options and conclude that the innocent third party doctrine remains a viable part of the Michigan law.

Judge Sawyer <a href="http://publicdocs.courts.mi.gov:81/OPINIONS/FINAL/COA/20160809_C323425_79_323425P.OPN.PDF" target="_blank" rel="noopener">wrote separately</a> to concur with the majority’s conclusion that the case was controlled by Bazzi, but dissented with the conclusion that Bazzi was incorrectly decided.

To read our previous post on Bazzi v Sentinel Ins Co, click <a href="https://www.wnj.com/updates/coa-holds-that-the-insurers-are-not-required-to-pay-no-fault-benefits-to-innocent-third-parties-if-the-insured-obtained-automobile-insurance-coverage-through-fraud" target="_blank" rel="noreferrer noopener">here</a>.

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Jason L. Byrne

Labor and Employment

COA Panel disagrees with recent precedent that limits plaintiffs’ no-fault recovery options

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COA Panel disagrees with recent precedent that limits plaintiffs’ no-fault recovery options

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