No refund from defrauded insurer

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Esurance Property & Casualty Insurance Company (Esurance) appealed the trial court’s order granting summary disposition in favor of Nationwide Mutual Fire Insurance Company (Nationwide), denying Esurance’s motion for summary disposition. IN Nationwide Mutual Fire Insurance Company v. Esurance Property & Casualty Insurance Company and Derek Allen Gregory and Blair Gregoryno. 361298, Court of Appeals of Michigan (June 15, 2023) Esurance argued that its insureds had defrauded them when they acquired the policy and that they were entitled to rescind the policy regardless of whether the trial court balanced the equities.

REAL FACTS

In 2015, Derek Gregory (Derek) drove a truck that was insured by Esurance and co-owned with his wife, Blair Gregory (Blair). The truck collided with Daniel Moore (Moore), who was riding a bicycle. Moore was injured in the accident. Moore was uninsured and his personal protection insurance (“PIP”) claim was assigned to Nationwide through the Michigan Automobile Insurance Placement Facility (MAIPF). Nationwide paid a total of $454,871.09 in medical expenses on Moore’s behalf.

Nationwide subsequently filed this lawsuit against Moore and Esurance to recover the PIP benefits it paid on Moore’s behalf. Nationwide argued that Esurance, as the insurer of the truck, had a higher priority and was obligated to indemnify Nationwide.

Grounds for dismissal

Esurance subsequently filed a third-party complaint against Nationwide and the Gregorys, alleging that Blair had failed to disclose several material facts in her application for the policy, including that she was married, that Derek occasionally drove the truck, that Derek had been in previous accidents involving alcohol, that Blair had been involved in previous accidents and that Blair had previously submitted claims with other insurers. Esurance argued that Blair’s misrepresentations in her insurance application constituted fraud, warranted cancellation of the policy and prohibited Nationwide from recovering from Esurance as a higher priority insurer.

After a hearing on Nationwide’s motion, the district court issued a written opinion granting summary disposition in favor of Nationwide. The District Court noted that rescission is not automatically applicable in cases of fraud. The district court held that Esurance had not shown that rescission was justified and that Nationwide could stand in Moore’s shoes and recover from Esurance on the basis of equitable subrogation

TERMINATION

Esurance argued that the trial court erred by granting summary disposition in Nationwide’s favor. Specifically, Esurance argued that the court abused its discretion in concluding that the balance of the equities weighed against rescission.

Equitable subrogation is a flexible, elastic doctrine of equity that is determined on a case-by-case basis. Equitable subrogation is the means by which equity is used to compel the final payment of a debt by one who in fairness, justice, and good conscience ought to pay it.

The Michigan Supreme Court has held that the plain language of the no-fault act does not preclude or otherwise limit an insurer’s ability to rescind a policy for fraud.

Although PIP benefits are provided by statute, the wrongdoing does not prohibit an insurer from invoking the statutory defense of fraud or limit or limit the remedy of rescission.

However, the occurrence of fraud by the insured does not automatically entitle an insured to rescission. When innocent parties are affected, cancellation is left to the discretion of the district court. Revocation should not be granted in cases where the result so obtained would be unfair or unjust or in cases where the circumstances surrounding the disputed transaction make rescission impossible.

There is no dispute that Esurance is an innocent insurer and that Moore is an innocent third party.

Case law clearly shows that the equities must be balanced between the injured person and the party seeking rescission. The Michigan Supreme Court already rejected Esurance’s argument, holding that such insurers can recover via equitable subrogation for PIP benefits paid on behalf of an uninsured.

There was no evidence to show that Esurance knew of this fraud before Moore was injured, and there was nothing to show how Esurance could have been more diligent in reviewing the insurance application or in detecting the fraud.

An assessment of whether enforcement of the policy serves only to relieve the fraudulent insured from what would otherwise be the fraudulent insured’s personal liability to the innocent third party.

Overall, the Court of Appeals concluded that the trial court abused its discretion in finding that Esurance had not shown that rescission was warranted. The ultimate question in innocent third party cases is which innocent party should bear the ultimate burden of the insured’s fraud. In this case, Moore has already recovered benefits from an alternate source, and a rescission has no effect on that coverage. In other words, if the policy is rescinded, neither Esurance nor Moore would, in practical terms, bear the burden of Blair’s fraud. Under these circumstances, the district court’s decision to deny annulment fell outside the scope of principled outcomes.

The trial court was ordered to enter an order granting summary disposition in favor of Esurance.

No one should profit from fraud. Not even an innocent insurer that paid benefits under a no-fault policy because it would have had to pay even if there was no insurance on the other side. Esurance was entitled to rescind because it would never have insured the Gregorys but for the fraud at the outset.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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