In early July 2020, the Michigan Court of Appeals held in Haydaw v Farm Bureau Ins Co, ___ Mich App __; ___ NW2d ___ (2020) (Docket No. 345516), that an insurer can’t rely on an insured’s misrepresentations during discovery to void an insurance policy under a fraud provision. Haydaw preserves insurers’ ability to void policies based on pre-litigation misrepresentations. But insurers can’t void insurance policies based on misrepresentations during litigation.
Background on Haydaw
The plaintiff in Haydaw allegedly injured his back, neck, and shoulders in a car accident. He sued his insurer for benefits under his policy and Michigan’s no-fault act. During his deposition, the plaintiff testified inconsistently with his medical records. The insurer caught this discrepancy and sought summary disposition under the policy’s fraud provision and the Court of Appeals’ 2014 opinion in Bahri v IDS Prop Cas Ins Co, 308 Mich App 420; 864 NW2d 609 (2014).
The trial court granted summary disposition, and the plaintiff appealed. Following what it identified as a national trend, the Court of Appeals held that a policy’s fraud provision does not apply to statements made during litigation. Rather, inconsistent statements raise questions of credibility and intent for the jury to resolve or issues of discovery misconduct for the court to address. So, under Haydaw, misrepresentations made during discovery are not a valid basis for voiding an insurance policy.
The Court’s Rationale
Haydaw identified four reasons for its ruling. First, it noted that an insured and insurer’s relationship shifts after a lawsuit is filed. During litigation, the parties are adversaries. Within this context, it’s the factfinder’s role to determine what is true and what is false. Further, the parties’ duties of disclosure during litigation are matters of civil procedure, not contract. If a party testifies falsely or conceals information, this may constitute discovery misconduct, but it’s the court’s role to determine whether a sanction is appropriate.
Second, the Court concluded that representations made during litigation can’t fulfill the last element of fraud and false swearing under Bahri because an insured makes representations during discovery with the intent that the trier of fact will act on them, not the insurer. If an insurer acts on them, the Court reasoned, it does so as a litigation strategy, with the assistance of counsel.
Third, dismissing cases based on misrepresentations during discovery “would create a perverse incentive.” The Court noted that “an insurer with full knowledge of the insured’s medical history” may attempt to “bait or lead” the insured into making a misstatement during a deposition to create a basis for summary disposition. Haydaw, slip op at 6.
Fourth, allowing insurers to void a policy based on misrepresentations during discovery would undermine the first-breach rule. Under that rule, if an insurer breaches the contract first by denying a claim without justification, it can’t rely on its insured’s subsequent breach as a defense. So, “summary disposition on the basis of false statements would not be warranted unless and until it is determined that the denial of the claim did not breach the contract.” Id. at 7.
What does Haydaw mean for insurers?
Haydaw limits an important defense for insurers—at least for now. The insurer may (or may not) appeal this decision to the Michigan Supreme Court. Unless the Michigan Supreme Court rejects the Court of Appeals’ conclusion in Haydaw, however, insurers should take care to distinguish pre-lawsuit misrepresentations (subject to Bahri) from post-lawsuit misrepresentations (subject to Haydaw). Only pre-lawsuit misrepresentations allow insurers to enforce the fraud provisions in no-fault policies and void coverage.
If you have questions about Haydaw v Farm Bureau Ins Co or the effect of misrepresentations made during discovery, please feel free to contact the authors, Lauren A Frederick and Erin J. Rodenhouse. More information about Collins Einhorn’s General and Automotive Liability Practice Group is available here.