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Mutual termination can be eliminated through a share balance



Michigan Automobile Insurance Placement Facility (MAIPF) appealed an unpublished decision of the Court of Appeal ordering the Court of Justice to dismiss MAIPF's claim for summary judgment and grant of National Insurance Company (FallsFurance Company) Lake), motion for summary disposition. In University of Michigan Regents v. Michigan Automobile Insurance Placement Facility, and named holder of MAIPF, Defendant and Falls Lake National Insurance Company No. 354808, Court of Appeals of Michigan (January 20), 202, 2026 Court of Appeal that a fraudulent insurer would prove that its right of cancellation is fairer than the rights of an innocent third party.

FACTS

Sterling Pierson applied for car insurance from Falls Lake to cover his 2003 Chevy Malibu. The application required that Pierson, among other things, identify all household members who were 14 years of age or older and other vehicles he owned. Falls Lake completed the application review and issued an insurance policy to Pierson without knowing that Pierson was lying about facts that were crucial to the decision to insure or not insure Pierson.

After Trevino got out of the vehicle, he opened the driver's door and attacked Pierson. As a consequence of this fear, Pierson drove away with Trevino clinging to the driver's side door and was dragged down the street. Trevino sustained serious bodily injuries during these events and was treated for these injuries at a medical facility owned and operated by the plaintiff.

Trevino sued. Falls Lake, after conducting an investigation, announced to Pierson that its no-fault policy was repealed because Pierson made two material misstatements in his insurance application. Falls Lake also sent a check to Pierson with an amount sufficient to repay the premium paid on the insurance. Importantly, Pierson approved and redeemed the refund check and accepted the termination.

Complainants, as holders of Trevino, sued Falls Lake and MAIPF. According to Falls Lake, it was entitled to summary disposition because it had terminated its insurance policy issued to Pierson as a consequence of his misconduct, and Pierson had ratified this termination by accepting the refund of the premium. Falls Lake claimed that the repeal invalidated the policy ab initio. Falls Lake thus provided no cover for Trevino's damages.

MAIPF claimed that Bazzi v Sentinel Ins Co, 502 Mich. 390; 919 N.W.2d 20 (2018), required that the shares be balanced before the insurance between Falls Lake, as a fraudulent insurer, and Trevino, as an innocent third party, could be revoked with respect to the innocent third party's claims. It further argued that the shares weighed in favor of Falls Lake retaining liability under the Trevino insurance contract and since the Falls Lake insurance coverage applied to Trevino during this balancing act, both Trevino and the plaintiff were not entitled to benefits through the indemnity plan.

The Access Court held that it did not have to balance the shares with respect to innocent third parties and that Falls Lake was not obligated to pay Trevino's medical bills, but that MAIPF was so indebted.

ANALYSIS

I Bazzi v Sentinel Ins Co, 502 Mich. 390; 919 NW2d 20 (2018), the Supreme Court of Michigan recognized that the legally created rule of innocent third parties, which prevented an insurer from canceling insurance obtained through fraud when such termination would affect an innocent third party, was repealed by our Supreme Court decision i Titan Ins Co v Hyten, 491 Mich. 547; 817 N.W.2d 562 (2012). An insurance policy taken out through fraud can be annulled ab initio at the insurer's choice. While the Innocent Third Party Rule no longer prevents insurers from seeking termination for fraud in Michigan, insurers are not categorically entitled to termination. The Michigan Supreme Court stated:

[W] when two equally innocent parties are affected, the court must, in the exercise of its fair powers, decide which faultless party is to bear the loss. . . . [W] here one of the two innocent parties must suffer from the wrongful act. . . by another, that one must suffer the loss by the act or omission of which such third party could commit wrongdoing. The doctrine is a just one, and does not go beyond what is necessary to protect the innocent party in whose favor it is relied upon. fraud in the application for insurance gives an insurer an absolute right to cancel the insurance vis-à-vis third parties. To determine the outcome, the courts must consider the following factors:

  1. the extent to which the insurer could have disclosed the object of the fraud before the innocent third party was injured;
  2. the relationship between the fraudulent insured and the innocent third party to determine whether the third the party had some knowledge of the fraud;
  3. the nature of the innocent third party's conduct, whether ruthless or negligent, in the event causing the damage;
  4. the availability of an alternative route of recovery if the insurance is not enforced; and
  5. an assessment of whether the execution of the insurance only serves to release the fraudulent insured from what would otherwise be the fraudulent insured's personal liability to the innocent third party

The parties do not dispute that Pierson made two material misstatements in his application on faultless insurance. There is also no dispute that Falls Lake and Trevino are impeccable parties in Pierson's material omissions in the insurance application, or that Falls Lake repealed Pierson's insurance policy and Pierson ratified the cancellation.

The revocation is effected by mutual action, ie by return and approval of the premium. I Meemic Ins Co v Fortson, 506 Mich. 287, 310 n 19; 954 N.W.2d 115 (2020), the Supreme Court dealt with the distinction between reasonable remedies for revocation and remedies for revocation as follows: Before remedies were merged, the trial in fairness and judicial review was separate. When it comes to justice, however, the rule is not so rigid and the decree will place the parties in the status quo, as far as possible. Notwithstanding the distinctions between remedies for revocation and remedies for revocation, courts are required to balance justice between a deceived insurer and an innocent third party before extending the reciprocal revocation of an insurance without fault to an innocent third party.

Revocation, whether it is legal or reasonable, governed by reasonable principles and courts have a wide margin of discretion in granting revocation. Like reasonable annulment, annulment as a remedy is not a matter of right either, but rather is granted in the sound exercise of a judge's discretionary judgment. Since the legal basis for reasonable revocation and revocation under law are the same, the logic is that the same rule applies in matters concerning revocation under law.

The court therefore concluded that detention was necessary for the district court to balance the shares between Falls Lake, as a fraudulent insurer, and Trevino, as an innocent third party.

Termination by definition means that the policy has never existed. Both Falls Lake and its insured agreed to the termination. The Michigan court, which ignores the fraud, now demands that the court decide who is most injured, the deceived insurer or the innocent third party. The answer should be obvious; no one should be allowed to profit from fraud. The innocent injured person does not lose rights against the person who injured him – he can sue and collect from which assets the driver has. None of them are entitled to insurance. If the court weighs the shares and makes the insurer pay for an insurance that does not expire is an inability to understand reality and imposes on the insurer the payment of a claim for which it has not received a premium and the court will offend it again rather than forcing the costs to the fraudster .


© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to the position of insurance consultant specializing in insurance coverage, handling insurance claims, bad faith and insurance fraud almost equally for insurance fraudsters policyholder.

He practiced law in California for more than 44 years as an attorney for insurance coverage and claims management and more than 54 years in the insurance industry.

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