Resident Relatives [§3114(1)]
In this 2-1 decision written by Judge Kelly, the Court of Appeals upheld the trial court regarding Plaintiffs Louise and Richard Fortson (“the Fortsons”) fraud in submitting requests for reimbursement from Defendant Meemic Insurance Company (“Meemic”). The Court found that the fraud occurred because the Fortsons admitted to submitting bills for attendant care when they knew their son Plaintiff Justin Fortson (“Justin”) was in jail, rehab, or with his girlfriend. The Court reversed the trial court regarding the exclusion of Justin from no-fault benefits based on the fraud of his parents. The Court reasoned that there was a meaningful distinction between fraud in the procurement of a no-fault policy, as was the case in Bazzi v Sentinel Ins Co, 315 Mich App 763; 891 NW2d 13 (2016), and fraud that occurs by care givers who make fraudulent representations for benefits from a no-fault policy.
Richard and Louise’s son, Justin, was injured in a motor vehicle accident and suffered a traumatic brain injury. Meemic provided no-fault benefits to Justin. The Fortsons provided care to Justin and made payment requests from Meemic for attendant care. On each request the Fortsons noted that they provided 24 hours of care each day of the calendar. In 2014, Meemic investigated the Fortsons and found that they had submitted requests for payment on days when Justin was in jail, in drug rehabilitation, and when he was staying at his girlfriends’ house. Meemic terminated Justin’s no-fault benefits and filed suit against Louise and Richard. The Fortsons counter sued arguing that Meemic was in breach of the insurance contract. The trial court found in favor of Meemic. The Fortsons appealed.
The Court first found that the Fortsons committed fraud and there was no genuine issue of material fact regarding the issue. The Court cited to Titan Ins Co v Hyten, 491 Mich App 547, 555; 817 NW2d 562 (2014), which explained the four elements of fraud: (1) that the misrepresentation was material, (2) that the representation was false, (3) the representor knew it was false, and (4) the misrepresentation was made with the intention that the insurer would act upon it. The Court explained that the Fortsons knew their son was in jail, drug rehab, or his girlfriends’ house and even though they did pay his bills on those days, it could not seriously be argued that those activities took 24 hours. The Court therefore upheld the trial court’s ruling that fraud occurred.
The Court then found that Meemic could not bar Justin from coverage based on the conduct of the Fortsons in this case under Bazzi v Sentinel Ins Co, 315 Mich App 763; 891 NW2d 13 (2016). The Court cited to Bazzi, which explained that the “innocent third-party rule” was abolished by the Michigan Supreme Court. The innocent third party rule barred an insurer from using fraud as a defense to avoid paying no-fault benefits if (1) fraud in the procurement of the policy was easily ascertainable and (2) an innocent third-party claimant was involved. The Court explained that Bazzi and the Michigan Supreme Court addressed the procurement of a no-fault policy. They did not address fraud that occurs after the procurement. The Court then found a meaningful distinction between fraud in the procurement and fraud that occurs after the procurement. Fraud in the procurement of a policy taints the entire policy and allows the insurer to void ab initio. Fraud that occurs after the procurement does not void the entire policy because it can be isolated. Here, Justin was lawfully entitled to PIP benefits and he did not commit fraud. Rather fraud was committed by his parents for benefits they did not provide after the procurement of the no-fault policy. The Court explained that Bazzi was not implicated.
“Here, regardless of Louise and Richard’s fraudulent attendant care payment requests, the policy still would have been issued. Therefore, there are no grounds for automatic rescission of the policy on the basis of fraud arising after the policy was issued, i.e., fraud that does not affect whether the policy would have been issued in the first place. Instead, at a minimum, Meemic must establish Louise and Richard’s misrepresentation affected ‘a substantial or essential part of the contract.’”
The Court next found that the fraud exclusion clause did not apply to Justin’s claim. The no-fault policy provided a fraud exclusion clause that allowed Meemic to rescind benefits if the insured committed fraud. The Court held the Fortson could not trigger the fraud exclusion clause because Justin was statutorily entitled to his benefits. MCL 500.3114(1) required Meemic to provide coverage to Justin. The Court explained that Meemic had duplicated benefits to Justin and it could not apply the fraud exclusion clause to Justin because he would have been entitled to benefits had he not been named in the policy. The anti-fraud provision conflicted with this statutory right and it was thus invalid.
“Because MCL 500.3114(1) mandates coverage for a resident relative domiciled with a policyholder, the fraud-exclusion provision, as applied to Justin’s claim, is invalid because it conflicts with Justin’s statutory right to receive benefits under MCL 500.3114(1). And, as explained above, his statutory right to receive benefits under the no fault act was triggered because his parents had a validly procured no-fault policy in place at the time of the motor-vehicle incident.”
The Court also explained that even if the fraud-exclusion clause was valid, it would not be triggered because the Fortsons were not “insured persons” as the contract demanded. The contract explained that it was void if “any insured person” had intentionally committed fraud. Meemic had canceled the policy back to 2010; therefore, when the Fortsons committed fraud after 2010 they were no longer “insured persons” under the policy. Justin remained an insured person because his claim originated in 2009.
“[O]nce the policy was cancelled on July 29, 2010, Louise and Richard were no longer named insureds under the policy, which means that they were no longer “insured persons” as defined in the policy. Further—and this is key—because the fraud was committed after the cancellation of the policy, when they were no longer insured persons, their actions were irrelevant for purposes of triggering the fraud-exclusion clause.”
Thus, the Court upheld the trial court in part regarding the Fortsons’ fraud, and it reversed regarding Justin’s disqualification from PIP benefits.
Dissent Judge Cameron:
Judge Cameron dissented from the majority arguing that this case was controlled by Bazzi. Judge Cameron disagreed that there was a meaningful distinction between fraud in the procurement and fraud after the procurement. Judge Cameron also argued that the fraud exclusion provision should apply to a resident relative because a resident relative is the same thing as an insured under MCL 500.3114(1). Finally, Judge Cameron disagreed that the Fortsons were not named insured under the policy. Judge Cameron argued that the Fortsons were the ones who bought the policy and Justin only received benefits because he was a resident relative of the Fortsons. The fact that Meemic canceled the policy after Justin’s claim did not affect the terms of the policy as it was written. Because the fraud provision stated that “any insured” person who commits fraud will void the entire policy, Judge Cameron found that the policy was in fact voided by the terms of the contract by the Fortsons.