BAZZI: SUPREME COURT CLARIFIES THE INNOCENT THIRD PARTY RULE BY CREATING A BALANCING TEST WITH REGARD TO THE EQUITABLE DEFENSE OF FRAUD

On July 18, 2018, the Supreme Court released for publication its opinion in Bazzi et al v Sentinel et al. ___Mich___(2018)(Docket No. 154442). The Supreme Court was presented with the question of whether an innocent third party could seek No-Fault PIP Benefits from an insurer that had rescinded the policy based upon fraud in the application. In essence the Court was asked to determine whether the long-standing judicially created innocent third-party rule, which had permitted benefits to that party in certain situations was applicable to No-Fault PIP benefits which are mandated by statute. The Court held that its opinion in Titan Ins. Co v Hyten, 491 Mich 547 (2012), which had abrogated the innocent third party rule as to negligence actions was affirmed; however, rescission was not an automatic right, and thus, the trial courts had to balance the equities of each party before entering a judgment.

In the Bazzi case, Plaintiff, Ali Bazzi had brought an action seeking to recover No-Fault PIP Benefits for alleged injuries while operating a vehicle leased by his mother, and insured under a Sentinel Insurance commercial policy that was issued to Mimo Investment, LLC. Sentinel filed a separate Declaratory Judgment action to rescind the policy on the grounds that the policy had been fraudulently obtained by Plaintiff’s mother and sister.

Sentinel then moved for summary disposition in the underlying action by Ali Bazzi, (which also included intervening medical providers), on the basis that the policy was void ab initio. The trial court denied Sentinel’s Motion for Summary Disposition, in Bazzi’s action for benefits, holding that under the innocent-third party rule an insurer could not rescind the policy as to an innocent third party even if there was fraud.

The ruling of the trial court was appealed, and the Michigan Court of Appeals held that the innocent third party rule did not survive the Supreme Court’s decision in Titan, and further concluded that there was no statute that prohibited an insurer from raising a fraud defense with respect to PIP Benefits justifying summary disposition. Thereafter, the Michigan Supreme Court has now reversed in part this decision and remanded the case to the trial court for further proceedings.

The Michigan Supreme Court’s Opinion analyzed the Michigan No-Fault Statute in conjunction with the rights and limitations of a contractual policy. The Court reasoned that when ascertaining the legislative intent of the statute, fraud in the procurement of the policy was not clearly prohibited by statute, and thus, remained an applicable defense for the insurer. The Court further rejected the idea that there was a distinction to be made between statutorily mandated PIP benefits and optional coverage, as both were predicated upon the existence of a contract. Thus, the court held that common-law defenses, such as fraud were available where there was a contractual insurance policy, and that defense was not prohibited by statute. As a result, the Court affirmed its holding that Titan had abrogated the innocent-third party, and upheld an insurer’s right to rescind a policy of insurance on the basis of common-law fraud- even with regard to an innocent third party.

The Supreme Court, however, further clarified that the right to rescission of the insurance policy contract with respect to a third party is not absolute, holding that rescission is an equitable remedy that rests with the sound discretion of the court. In this regard, the Court reasoned that the trial court must balance the equities between the insurance company and the innocent third party to determine whether the policy should be rescinded as to those parties. The Court found that rescission would not be permissible where the result obtained would be unjust or inequitable.

In light of this decision it will be imperative that the insurance company seek rescission in a just and timely manner, so as not to impact the rights of the purported innocent third party seeking No-Fault PIP Benefits from another source. Practically speaking, the rights of the alleged innocent insured could be in jeopardy based upon the one-year statute of limitations under MCL 500.3145. The Court sought to allow the trial courts discretion to balance the equities of each party based upon the unique circumstances of each case.

No-Fault Insurance Defense July Kitch Report