Michigan Court of Appeals; Docket # 348380; Unpublished
Judges Redford, Riordan, and Tukel; per curiam
Official Michigan Reporter Citation: Not Applicable; Link to Opinion
Innocent Third-Party Doctrine (Post-Bazzi)
In this unpublished per curiam opinion, the Court of Appeals affirmed the trial court’s order requiring Defendant to reimburse Citizens Insurance Company for the amount it paid to Plaintiff, Ronnie EL-Achkar, to settle his claims for no-fault benefits because Plaintiff was an innocent third-party and a balance of the equities weighed against recission of the policy as it pertained to him.
Plaintiff’s injury occurred when he was the passenger of a car being driven by Ali Bazzi and insured through Defendant. Unbeknownst to Plaintiff, the insurance policy had been fraudulently procured by Ali Bazzi’s mother. Thus, after receiving a default judgment allowing it to rescind the policy as it pertained to Ali Bazzi, Defendant moved for summary disposition on Plaintiff’s claim against Defendant for PIP benefits. The trial court denied the motion, finding that Plaintiff had a claim due to the innocent third-party rule. The Court of Appeals affirmed.
In reaching its holding, the Court of Appeals noted that the burden of establishing a right to rescission lies with the party who is seeking recission. The Court elaborated further, stating that while an insurer may rescind and treat a policy as void ab initio between the insurer and the insured, “when two equally innocent third parties are affected, the court is required, in the exercise of [its] equitable powers, to determine which blameless party should assume the loss.” In balancing the equities, the Court followed a five factor test, which included (1) the extent to which the insurer could have uncovered the subject matter of the fraud before the innocent third party was injured; (2) the relationship between the fraudulent insured and the innocent third party to determine if the third party had some knowledge of the fraud; (3) the nature of the innocent third party’ s conduct, whether reckless or negligent, in the injury -causing event; (4) the availability of an alternate avenue for recovery if the insurance policy is not enforced; and (5) a determination of whether policy enforcement only serves to relieve the fraudulent insured of what would otherwise be the fraudulent insured’ s personal liability to the innocent third party.
Applying these factors, the court concluded that the balance of the equities weighed against recission. Factor 1 did not weight in favor or against recission, as the court found that while Defendant could have done more to discover the fraud before the accident (and indeed discovered the fraud quickly after its post-accident investigation), it was still possible that the perpetrators of the fraud could have “concealed their subterfuge.” Factor 2, however, weighed against recission, as Plaintiff had no relationship with the fraudulently insured and had no knowledge of the fraud. Similarly, factor 3 weighed against recission, as there was no evidence that, as a passenger of the vehicle, Plaintiff acted recklessly or negligently in the injury-causing event. Factor 4 also weighed against recission, as Plaintiff lacked an insurance policy to claim no-fault benefits under. Further, while Defendant argued that Plaintiff was entitled to recover under the Michigan Assigned Claims Plan, the court held that this “should not and cannot be factored into the equities balancing test’s fourth-factor inquiry because that factor would be rendered nugatory since the availability of coverage under the MACP[,] if considered[,] would always require concluding that the factor favors rescission.” Finally, the Court found that factor 5 also weighed against recission because enforcement of the policy would not transfer Ali Bazzi’s tort liability to the Plaintiff from the insured, a shell company with no assets or employees formed primarily to perpetuate the fraud, to the insurer. Therefore, the Court found that the equities weighed against recission, and ordered Defendant to reimburse Citizens Insurance for the amount it paid to the innocent third party to settle his claims for no-fault benefits.