Ever since the Michigan Supreme Court issued Bazzi v Sentinel Ins Co, 502 Mich 390; 919 NW2d 20 (2018), courts have wrestled with balancing the equities in rescission cases involving third parties to an insurance contract. In Mullen v Progressive Marathon Ins Co (Docket No. 350015), an unpublished decision, the Court of Appeals ruled that Progressive’s rescission of an automobile insurance policy was proper, as applied to “an innocent third party,” based on the insured’s material misrepresentation and the Court’s consideration of the “Markman factors.” Additionally, because the policy was void ab initio as a result of the rescission, the Court held that the Michigan Automobile Insurance Placement Facility (MAIPF) should have assigned the plaintiff’s claim for personal protection insurance (PIP) benefits to a servicing insurer. The MAIPF’s failure to assign the claim entitled the plaintiff to seek PIP benefits directly from the MAIPF.
Plaintiff Ronald Mullen was involved in a motor vehicle accident while driving with a suspended driver’s license. The vehicle Mullen was operating belonged to his wife. It was insured under her Progressive automobile insurance policy.
After the accident, Mullen claimed PIP benefits from Progressive. While reviewing the claim, Progressive discovered that Mullen’s license was suspended at the time of the accident. It also realized that Mullen’s wife (its insured) failed to list Mullen as a household driver on her insurance application, even though the couple was married and resided together when she submitted it. So Progressive issued a letter declaring the insurance policy void based on material misrepresentations or fraudulent conduct related to the insurance application. It also refunded the insured’s premium payments via direct deposit.
Later, Mullen claimed PIP benefits through the MAIPF. The MAIPF did not assign the claim to a servicing insurer.
Mullen then filed a lawsuit against Progressive and the MAIPF. He sought PIP benefits from Progressive or, in the alternative, a declaratory judgment holding that the MAIPF was required to assign his claim to a servicing insurer. He further alleged that he was entitled to recover benefits directly from the MAIPF because it unlawfully failed to assign his claim.
Progressive and the MAIPF moved for summary disposition, arguing that neither was responsible for paying PIP benefits to Mullen. The trial court ultimately granted summary disposition in favor of both defendants. Concerning Progressive, the trial court held that the insurer was permitted to rescind the insurance policy under the balancing-of-the-equities analysis set forth in Bazzi. As to the MAIPF, the trial court held that Mullen was not entitled to recover no-fault benefits directly from the facility, and the MAIPF had no obligation to assign his claim because the Progressive policy was valid on the date of the accident. Mullen appealed.
Court of Appeals’ Analysis
Regarding Progressive’s dispositive motion, the Court of Appeals’ inquiry began with whether the insured’s material misrepresentations warranted rescission of the policy. The Court held that they did. So the panel turned to the recently adopted test for balancing the equities (known as “the Markman factors”) to determine whether full rescission of the policy as to Mullen (the insured’s husband, an “innocent third party”) was the appropriate remedy. It balanced the factors as follows:
- The first factor, whether the insurance company could have discovered the fraud before the accident occurred, weighed in favor of Progressive. There was no evidence that Progressive could have made greater efforts to ascertain the truth of the insured’s representations on the insurance application. And it didn’t owe a duty to investigate or verify the applicant’s representations.
- The second factor, whether Mullen’s spousal relationship with the insured suggested that he knew about the fraud, also weighed in favor of Progressive. The insured testified at her deposition that she told Mullen that he wasn’t listed as a driver on her insurance policy.
- The third factor, whether Mullen’s conduct contributed to the accident, also weighed in favor of Progressive to a small degree. There was no evidence that Mullen caused the accident, but he knew that he wasn’t allowed to drive with a suspended license. And he wouldn’t have been involved in an accident if he hadn’t been driving.
- The fourth factor, whether Mullen has an alternative means of recovery, weighed in favor of Progressive. If the policy was properly rescinded, Mullen could seek PIP benefits from the MAIPF.
- The fifth factor, whether enforcing the policy would only relieve the insured of her personal liability to Mullen, also weighed in Progressive’s favor. There was no evidence that she was personally liable to Mullen for his accident-related injuries.
Based on this application of the Markman factors, the Court of Appeals concluded that the trial court did not abuse its discretion in concluding that full rescission of the policy was equitable. Thus, it upheld summary disposition in Progressive’s favor.
Given its conclusion that the policy was void ab initio (i.e., from the beginning), the Court of Appeals reversed the trial court’s grant of summary disposition in favor of the MAIPF. Because a valid insurance policy did not exist at the time of the accident, and Mullen’s claim for no-fault benefits was not obviously ineligible, he was entitled to assignment of his claim to a servicing insurer. And because the MAIPF failed to do so, Mullen was entitled to seek no-fault benefits (in the form of monetary damages) directly from the MAIPF.
Mullen reveals the types of facts that may persuade a court to fully rescind an insurance policy, even as applied to a third party. The equity-balancing analysis under Bazzi will always depend on the circumstances. But Mullen illustrates the questions that insurers should ask in determining whether rescission is viable in cases involving a third party to the insurance contract.
If you have questions about rescission or applying “the Markman factors,” please feel free to contact the author, MaryRachel Dysarz. More information about Collins Einhorn’s General and Automotive Liability Practice Group is available here.