Mutual Rescission May be Eliminated by a Balance of Equities

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Michigan Allows Rescission for Fraud to be Avoided if Injured Party is Innocent

Michigan Automobile Insurance Placement Facility (MAIPF) appealed an unpublished order of the Court of Appeals where the trial court ordered denying MAIPF’s motion for summary disposition and granting defendant, Falls Lake National Insurance Company’s (Falls Lake), motion for summary disposition. In University Of Michigan Regents v. Michigan Automobile Insurance Placement Facility, and Unnamed Assignee Of The MAIPF, Defendant, and Falls Lake National Insurance Company, No. 354808, Court of Appeals of Michigan (January 20, 2022) the Court of Appeal required a defrauded insurer to prove its right to rescission is more fair than the rights of an innocent third party.

Falls Lake, after conducting an investigation, notified Pierson that his no-fault policy was rescinded because Pierson made two material misrepresentations in his insurance application. Falls Lake also mailed to Pierson a check in an amount sufficient to refund the paid premium on the policy. Importantly, Pierson endorsed and cashed the refund check accepting the rescission.

ANALYSIS

In Bazzi v Sentinel Ins Co, 502 Mich. 390; 919 N.W.2d 20 (2018) the Michigan Supreme Court recognized that the judicially created innocent-third-party rule, which precluded an insurer from rescinding an insurance policy procured through fraud when such rescission would impact an innocent third party but it was abrogated by our Supreme Court’s decision in Titan Ins Co v Hyten, 491 Mich. 547; 817 N.W.2d 562 (2012). An insurance policy procured by fraud may be declared void ab initio at the option of the insurer.

The rescission was accomplished by mutuality of action, i.e., by return and acceptance of the premium.

The court concluded, therefore, that remand was necessary in order for the circuit court to balance the equities between Falls Lake, as a defrauded insurer, and Trevino, as an innocent third party.

ZALMA OPINION

Rescission, by definition means that the policy never existed. Both Falls Lake and its insured agreed to the rescission. The answer should be obvious; no one should be allowed to profit from fraud. The innocent injured person loses no rights against the person who injured him – he can sue and collect from whatever assets the driver has. Neither have a right to insurance. If the court weighs the equities and makes the insurer pay for a policy that does not exit is a failure to understand reality and impose on an insurer the payment of a claim for which it obtained no premium and the court will victimize it again rather than impose the costs on the fraud perpetrator.

© 2022 – Barry Zalma