No Restitution from Defrauded Insurer

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Esurance Property & Casualty Insurance Company (Esurance) appealed the trial court's order granting summary disposition in favor of Nationwide Mutual Fire Insurance Company (Nationwide), and denying Esurance's request for summary disposition. In Nationwide Mutual Fire Insurance Company v. Esurance Property & Casualty Insurance Company, and Derek Allen Gregory and Blair Gregory, No. 361298, Court of Appeals of Michigan (June 15, 2023) Esurance alleged its insured defrauded it when it acquired the policy and it was entitled to rescind the policy regardless of the trial court's balancing the equities.

PERTINENT FACTS

In 2015, Derek Gregory (Derek) was driving a truck insured by Esurance and co-owned with his wife, Blair Gregory (Blair). The truck collided with Daniel Moore (Moore), who was riding a bicycle. Moore was injured in the accident. Moore was uninsured, and his claim for personal protection insurance ("PIP") benefits was assigned to Nationwide via the Michigan Automobile Insurance Placement Facility (MAIPF). Nationwide paid a total of $454,871.09 in medical expenses on behalf of Moore.

Nationwide subsequently filed this lawsuit against Moore and Esurance seeking to recover the PIP benefits it paid on Moore's behalf. Nationwide alleged that Esurance, as the insurer of the truck was in a higher priority position and was required to reimburse Nationwide.

The Bases for Rescission

Esurance subsequently filed a third-party complaint against Nationwide and the Gregorys, alleging that Blair had failed to disclose several material facts in her application for the insurance policy, including that she was married, that Derek occasionally drove the truck, that Derek had been in prior accidents involving alcohol, that Blair had been involved in prior accidents, and that Blair had filed prior claims with other insurance providers. Esurance argued that Blair's misrepresentations in her insurance application constituted fraud, warranted rescission of the policy, and prohibited Nationwide from recovering from Esurance as a higher-priority insurer.

After a hearing on Nationwide's motion, the trial court issued a written opinion granting summary disposition in favor of Nationwide. The trial court noted that rescission is not automatically applicable in the face of fraud. The trial court held that Esurance had failed to show that rescission was warranted, and that Nationwide could stand in Moore's shoes and recover from Esurance on the basis of equitable subrogation

RESCISSION

Esurance argued that the trial court erred by granting summary disposition in Nationwide's favor. Specifically, Esurance contended that the trial court abused its discretion in concluding that the balance of the equities weighed against rescission.

Equitable subrogation is a flexible, elastic doctrine of equity that is decided on a case-by-case basis. Equitable subrogation is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity, and good conscience ought to pay it.

The Michigan Supreme Court has held that the plain language of the no-fault act does not preclude or otherwise limit an insurer's ability to rescind a policy on the basis of fraud.

Although PIP benefits are mandated by statute, the no-fault act neither prohibits an insurer from invoking the common-law defense of fraud nor limits or narrows the remedy of rescission.

However, the presence of fraud by the insured does not automatically entitle an insured to rescission. When innocent parties are affected, rescission is left to the trial court's discretion. Rescission should not be granted in cases where the result thus obtained would be unjust or inequitable or in cases where the circumstances of the challenged transaction make rescission infeasible.

There is no dispute that Esurance is an innocent insurer, and that Moore is an innocent third party.

Caselaw clearly demonstrates that the equities must be balanced between the injured person and the party seeking rescission. The Michigan Supreme Court already rejected Esurance's arguments and held that such insurers may be reimbursed via equitable subrogation for PIP benefits paid on behalf of an uninsured person.

There was no evidence presented demonstrating that Esurance knew about this fraud before Moore was injured, and there was no showing of how Esurance could have been more diligent in reviewing the insurance application or in detecting the fraud.

A determination of whether policy enforcement only serves to relieve the fraudulent insured of what would otherwise be the fraudulent insured's personal liability to the innocent third party.

In totality, the court of appeal concluded that the trial court abused its discretion by holding that Esurance had failed to show that rescission was warranted. The ultimate issue in innocent-third-party cases is which innocent party should bear the ultimate burden of the insured's fraud. In this case, Moore has already recovered benefits from an alternate source, and rescission will have no effect on that coverage. In other words, if the policy is rescinded, neither Esurance nor Moore would, in practical terms, bear the burden of Blair's fraud. Under these circumstances, the trial court's decision to deny rescission fell outside the range of principled outcomes.

The trial court was ordered to enter an order granting summary disposition in favor of Esurance.

ZALMA OPINION

No one should profit from fraud. Not even an innocent insurer that paid benefits under a no-fault insurance scheme since it would have had to pay even if there was no insurance on the other side. Esurance was entitled to rescind because it would never have insured the Gregorys but for the fraud in the inception.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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