An insurer’s decision to rescind a no-fault insurance policy because it was fraudulently procured does not automatically result in a rescission applicable to all claimants. Rather, the court must perform a separate balancing of the equities between the insurer and each third-party claimant. In El-Achkar v Sentinel Ins Co, Ltd (Docket No. 348380), an unpublished opinion, the Court of Appeals upheld the trial court’s denial of an insurer’s motion to rescind an insurance policy—even though the court had already rescinded the policy in relation to another claimant—because the insurer failed to establish that equity weighed in favor of rescission as to the second claimant.
Setting the Stage
Plaintiff Ronnie El-Achkar suffered injuries in an accident while riding as a passenger in a vehicle recklessly operated by Ali Bazzi. Both were ejected from the vehicle. Defendant Sentinel Insurance Company, Ltd., insured the vehicle under a commercial automobile policy that it issued to Mimo Investments, LLC, a shell company associated with Ali’s relatives, Hala Bazzi and Mariam Bazzi. Ali and El-Achkar both sought personal protection insurance (PIP) benefits from Sentinel and ultimately filed lawsuits against the insurer.
Sentinel maintained that Hala and Mariam fraudulently procured the policy in order to obtain a lower premium despite Ali’s accident history. In Ali’s lawsuit, Sentinel filed a third-party complaint to rescind the policy. After it obtained a default judgment in its favor on that complaint, it argued that it wasn’t liable for PIP benefits related to Ali and El-Achkar’s accident because of the rescission.
The Michigan Supreme Court weighed in on the issue in Ali’s lawsuit. It held that, even if an insurer validly rescinds a policy in relation to the insured, the court must separately balance the equities between the insurer and an injured third party to determine whether the insurer may rescind its policy as to that party. Bazzi v Sentinel Ins Co, 502 Mich 390, 410-412; 919 NW2d 20 (2018). On remand, the trial court balanced the equities and reaffirmed its earlier decision, which rescinded the policy and held that Sentinel wasn’t liable for Ali’s claims.
Later, in El-Achkar’s case, the trial court concluded that the equity-balancing analysis weighed against Sentinel. Accordingly, it held that Sentinel was liable for El-Achkar’s no-fault claims. Sentinel appealed.
Court of Appeals’ Analysis
Rejecting Sentinel’s arguments on appeal, the Court of Appeals held that the trial court’s consideration of the equities and ultimate ruling were proper. After the Supreme Court’s opinion in Bazzi, it wasn’t enough for the court to balance the equities between Sentinel and the insured, or Sentinel and Ali. To justify rescission of the policy as to El-Achkar, the trial court needed to separately balance the equities between him and Sentinel. And an application of the “Markman factors” (the recently adopted test for the equity-balancing analysis) weighed against rescission of the policy in relation to El-Achkar.
The Court’s analysis began with the first factor: whether Sentinel could have discovered the fraud before El-Achkar was injured. The record reflected that Sentinel issued the subject policy to Mimo Investments, LLC, “without conducting any real investigation regarding the company, the ownership of the insured vehicles, or who the intended drivers of the vehicle would be.” El-Achkar, unpub op at 5. The record didn’t show whether Sentinel performed any investigation between the policy’s issuance and the accident, or whether investigation before the accident would have revealed the fraud. But Sentinel discovered the fraud rather easily after the accident. Even so, the Court of Appeals concluded that this factor didn’t weigh for or against rescission because the perpetrators of the fraud may have concealed their subterfuge from Sentinel.
As to the second factor—whether the injured party had a relationship with the fraudulent insured—the record reflected that El-Achkar had no relationship with the fraudulent individuals and company, and no knowledge of the fraud. Thus, this factor weighed against rescission.
The Court held that the third factor, whether El-Achkar’s conduct contributed to the accident, also weighed against rescission. As a passenger, El-Achkar lacked control over the events causing the accident, and there was no evidence that El-Achkar acted recklessly or negligently.
The fourth factor, whether El-Achkar had an alternative means of recovery, also weighed against rescission. The Court of Appeals explained that “the fact that an injured third person can seek PIP benefits from the MACP as a last resort should not and cannot be factored into the equities balancing test’s fourth-factor inquiry . . . .” El-Achkar, unpub op at 7. El-Achkar lacked another insurance policy under which he could claim no-fault benefits because he had no insurance policy of his own. Accordingly, this factor weighed against Sentinel.
The fifth and final factor required consideration of whether enforcing the policy would only serve to relieve the fraudulent insured of personal liability to the innocent third party. The Court held that enforcing the policy would not have that effect in this case because Ali was at fault for the accident, and it was doubtful, practically speaking, that El-Achkar would collect damages if he sued Mimo and Ali. So the fifth factor weighed against rescission as well.
Accordingly, the Court of Appeals held that the trial court did not abuse its discretion when it denied Sentinel’s motion to rescind the policy as to El-Achkar. Sentinel failed to establish its entitlement to rescission under a separate and distinct balancing of the equities between itself and El-Achkar.
El-Achkar reminds courts and litigants that, in cases involving rescission, Bazzi requires a separate balancing of the equities for each third party claiming no-fault benefits under an automobile insurance policy. It also reaffirms that courts should apply “the Markman factors” when they balance the equities in rescission cases, and identifies facts that are relevant to each factor.
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.