This case involved a policy of no-fault insurance issued by IDS to Isha Simpson and Aquanetta Terry. Simpson and Terry were friends who co-owned a 2014 Chrysler 300. Simpson and Terry were not related legally or biologically, and they did not share a residence. When Terry testified that she and her friend Simpson used Simpson's address on the application because it was less expensive to purchase insurance with Simpson's address than with Terry's Detroit address, they admitted to a fraudulent application.
In Northland Radiology, Inc., et al. v. USAA Cas. Ins. Co., et al., No. 346345 (Mich. App. June 18, 2020), American Anaesthesia Associates, LLC (AAA), appealed the order of the trial court granting the defendant, IDS Property Insurance Company (IDS), summary disposition. IDS cross-appealed the same order, challenging the trial court's determination that it was obligated to refund the full premium amount to its insureds to effectuate rescission of its no-fault insurance policy.
Facts of the Case
In 2016, Simpson and Terry applied to purchase a policy of no-fault insurance from IDS. They listed themselves at the top of the first page of the application next to "applicant" and provided Simpson's address in Redford, Michigan. Simpson and Terry listed themselves as drivers.
Above the signature line were warnings that the statements made in the application were made for the purpose of procuring an insurance policy and that the policy could be rescinded if the statements were untrue or incomplete. Simpson and Terry both signed the application. Both Simpson and Terry later testified that Terry had her own residence in Detroit and never lived at Simpson's Redford address.
The policy warned that coverage would not be provided to a claimant who intentionally concealed or mispresented a material fact, engaged in fraud, or made a false statement. Specifically, the policy provided the following.
We do not provide coverage for any insured or person making claim under this policy who, whether before or after a loss, has:
Intentionally concealed or misrepresented any material fact or circumstance;
Engaged in fraudulent conduct; or
Made false statements;
relating to this insurance and/or in connection with any accident or loss for which coverage is sought under this policy.
In February 2017, Simpson was a passenger in the Chrysler 300 when another car hit the vehicle. Simpson sued IDS, as well as the driver and the owner of the other vehicle, seeking damages for injuries arising from the car accident and alleging that IDS refused to pay personal protection insurance benefits owed under the no-fault act. Simpson subsequently assigned her right to seek reimbursement for services to various healthcare providers, including AAA.
An IDS underwriter testified that, based on its underwriting guidelines, because the Chrysler 300 was cotitled to Simpson and Terry, Simpson and Terry were not related, Terry never lived at the Redford address, and the vehicle was not garaged at the address, IDS would not have issued the policy.
The trial court granted IDS's motion, determining that there was no genuine issue of material fact that Simpson made a material misrepresentation on the application by listing Terry as a driver living in Simpson's household when evidence showed that Simpson and Terry were not related and Terry never lived at Simpson's address.
Analysis of the Case
An insurance policy is a contract that is subject to the rules of contract interpretation and common-law contract defenses, including fraud, unless those defenses are prohibited by statute. The no-fault act does not prohibit an insurer from invoking the common-law defense of fraud, nor does it limit or narrow the remedy of rescission.
Fraudulent misrepresentation may support an equitable remedy, such as the rescission of a contract. To establish fraudulent misrepresentation, the plaintiff must show the following.
The defendant made a material representation;
It was false;
When the defendant made the representation, the defendant knew it was false, or made it recklessly, without knowledge of its truth and as a positive assertion;
The defendant made the representation intending the plaintiff to act upon it;
The plaintiff acted in reliance upon it; and
The plaintiff suffered damage as a result.
A misrepresentation is material when an insurer would not have issued a policy in the manner or at the rate at which it was issued if the misrepresentation or nondisclosed fact had been known to the insurer. An insurer's statement that it would not have issued a policy if it had known the previously undisclosed information is sufficient to establish materiality. In this case, the evidence supports the trial court's finding that Simpson and Terry made material misrepresentations in the application for insurance.
Rescission is justified without regard to the intentional nature of the misrepresentation as long as it is relied on by the insurer. Reliance might exist when the misrepresentation relates to the insurer's guidelines for determining eligibility for coverage since its underwriting guidelines would require IDS to refuse to issue the policy to Simpson and Terry if it had known that they were not living together. Therefore, the trial court's determination that Simpson and Terry made material misrepresentations in the application is supported by the record.
An insurer may rescind a policy on the basis of a material misrepresentation made in an application for no-fault insurance. When an insurer rescinds an insurance policy as the result of fraud by the insured, the rescission abrogates the policy and returns the parties to the relative positions that they would have occupied if the contract had never been made.
The trial court noted in its opinion that rescission is not a matter of right but is instead discretionary with the trial court. The trial court found that Simpson made a material misrepresentation in the application for insurance regarding whether Terry was a member of Simpson's household living at the address stated in the application. The trial court concluded that based on the evidence, IDS permissibly rescinded the policy. Although AAA is innocent of the fraud perpetrated by Simpson and Terry, it is the assignee of Simpson and, therefore, is essentially the same person as Simpson, standing in her shoes for purposes of recovery against IDS. IDS's rescission of the policy, therefore, is effective against AAA because it is effective against Simpson.
The trial court correctly determined that IDS was required to refund the premiums in light of the rescission of the policy. However, requiring IDS to refund the premiums without considering IDS's claim that it had already paid to or on behalf of the insureds more than the amount of the premiums restored Simpson and Terry to their precontract position, but not IDS.
IDS should be given an opportunity to present its claim that the refund of the premiums should be weighed against amounts paid by IDS under the policy in the trial court's balancing of the equities.
A lie on the application for insurance to get less expensive insurance with Simpson's Redford address than with Terry's Detroit address was sufficient to prove the application was fraudulent, and neither the named insureds nor their assignees were entitled to any of the benefits of the policy. Rescission is an equitable remedy that is available to protect insurers against fraudulently obtained insurance. The insureds tried to save money by lying on the application for the insurance, and because of their fraud to save money, they lost the insurance coverage, and their assignee was left with nothing.
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