Michigan Court of Appeals; Docket #359077; Unpublished
Judges Cavanagh, Garrett, and Yates; Per Curiam
Official Michigan Reporter Citation: Not Applicable; Link to Opinion
Innocent Third-Party Doctrine
In this unanimous, unpublished, per curiam decision, the Court of Appeals reversed the trial court’s summary disposition order in favor of Plaintiff Pioneer State Mutual Insurance Company (“Pioneer”), in Pioneer’s action for declaratory judgment against Defendant Nationwide Mutual Fire & Insurance Company (“Nationwide”). The Court of Appeals held that the equities weighted against Pioneer rescinding the subject policy as to Tyler McCallister, an innocent third-party.
Tyler McCallister was severely injured in a motor vehicle accident while traveling as a passenger in a vehicle driven by Tyler Caron. Caron and McCallister had both consumed alcohol, cocaine, and marijuana prior to the accident, which left Caron dead. The vehicle they had been traveling in was owned by Caron’s grandparents, Donald and Wanda Matthias, and insured under their policy with Pioneer. After the accident, Pioneer uncovered numerous misrepresentations the Matthiases made regarding the location in which the vehicle was garaged, who the drivers of the vehicle were, and who lived with them, prompting it to rescind the policy. McCallister then filed an application for no-fault PIP benefits with the Michigan Automobile Insurance Placement Facility, which assigned his claim to Nationwide. Nationwide disputed its priority status as opposed to Pioneer, prompting Pioneer to file an action for declaratory judgment, seeking a ruling that it was not responsible for McCallister’s claim because the subject policy was rescinded. The trial court balanced the equities and found that they weighed in favor of rescission as to McCallister.
The Court of Appeals reversed the trial court’s summary disposition order, holding that a proper balancing of the equities weighed against rescinding the policy as to McCallister. The factors to be considered when balancing the equities in innocent-third party cases include:
“(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. [Id.]”
The Court of Appeals found that the first factor weighed neither in favor of rescission nor against it. In Pioneer State Mut Ins Co v Wright, 331 Mich App 396 (2020), the Court of Appeals held that if there is no evidence regarding whether the insurer could have or should have discovered an insured’s fraud—as were the circumstances in this case—the first factor is neutral.
“The trial court found that the first factor—the extent to which Pioneer could have uncovered the insureds’ alleged misrepresentations before McCallister was injured—favored rescission because Pioneer had no reason to question the truthfulness of the insureds’ representations. In Wright, 331 Mich App at 412, however, this Court found that the first factor did not weigh in favor of either party when no evidence suggested that there could have been a more diligent effort on the part of the insurer to discover alleged misrepresentations. Here, there is similarly no evidence that Pioneer could have done more to discover the alleged misrepresentations about who was living at the policy address or driving the vehicle at issue. ‘[A]n insurer has no duty to investigate or verify the representations of a potential insured,’ Titan Ins Co, 491 Mich at 570, and Comstock testified that it was the obligation of the insureds under the policy to report any changes after the initial application. As for the garage change, the evidence suggests that Pioneer was informed of the contradiction, but did not make any further inquiry. A change request made in 2015 indicates that ‘[g]araged location has been removed’ for the vehicle involved in the accident. This notation suggests that the insureds disclosed a change in the garaging location and that Pioneer knew about the disclosure. Although the first factor ‘does not impose a duty to investigate upon insurers,’ it does consider ‘any information disclosed’ by the insured in the procurement of insurance. Wright, 331 Mich App at 412 n 6. Accordingly, this factor is either neutral or weighs slightly against rescission. The trial court erred by finding that it supported rescission.”
The Court found that the second factor weighed against rescission because there was no evidence McCallister knew the Matthiases had made any misrepresentations to Pioneer.
“The trial court found that the second factor—whether McCallister had knowledge of the fraud—weighed against rescission because there was no evidence that McCallister knew that the insureds made a misrepresentation. Pioneer agrees and concedes that this factor weighs against rescission. See Wright, 331 Mich App at 412 (‘The second factor, the innocent third party’s potential knowledge of the fraud, weighs against rescission because there is no evidence that [the innocent third party] was ever aware of [the insured’s] representations.’). Therefore, the trial court did not err by finding that this factor weighed against rescission.”
The Court found that the third factor weighed against rescission, because although McCallister chose to ride as a passenger in a vehicle driven by someone who was under the influence of alcohol and drugs, that decision did not actually cause or contribute to the accident in any way.
“The trial court found that the third factor—the nature of McCallister’s conduct, whether reckless or negligent, in the injury-causing event—was neutral. The court explained that while McCallister and Wilson ‘did nothing directly to cause the crash that resulted in their injuries, they should have been aware that they were exposing themselves to a heightened risk of harm as a result of voluntarily riding in a vehicle operated by a person they knew or should have known was consuming alcohol, marijuana, and cocaine in their presence.’ In Wright, 331 Mich App at 412, this Court found that the third factor weighed against rescission because the innocent third party was merely a passenger and was not involved in the operation of the vehicle. Similarly, McCallister was a passenger in Caron’s vehicle and was not involved in its operation. Even if McCallister were negligent by riding in the vehicle with knowledge that Caron was intoxicated or under the influence of drugs, McCallister’s negligence did not contribute to the accident. The ‘injury-causing event’ was Caron’s decision to speed away from pursuing police officers while possibly intoxicated. And McCallister testified that after Caron failed to pull over, he told Caron to stop the vehicle multiple times. Because McCallister’s conduct did not contribute to the accident, this factor weighs against rescission, and the trial court erred by finding that this factor was neutral.”
The Court found that the trial court did not err in finding that the fourth factor weighed in favor of rescission, because if the policy were rescinded as to McCallister, he would still receive PIP benefits from Nationwide.
“The trial court found that the fourth factor—the availability of an alternative avenue for recovery if the insurance policy is not enforced—favored rescission because McCallister would continue to receive PIP benefits from Nationwide and might recover some portion of his third-party claim from the estates. The availability of another source of PIP benefits, from Nationwide in this case, weighs in favor of rescission. See Wright, 331 Mich App at 414. See also Farm Bureau, 503 Mich at 906 (MARKMAN, J., concurring) (stating that an alternative avenue for recovery may include the assigned claims plan). McCallister argues, however, that neither estate has sufficient assets to pay third-party tort damages and thus the trial court erred by finding that this was an alternative source of recovery. The trial court acknowledged that the estates may be insolvent, but still found that this factor supported rescission. Importantly, in Wright, 331 Mich App at 413, this Court noted that ‘the fourth factor considers the present situation.’ The trial court noted the possibility that the estates might be insolvent, but there was no evidence presented that they were, in fact, insolvent. At any rate, recovery from Nationwide remains an available alternative option. Because there are alternative sources of recovery available to McCallister, the trial court did not err by finding that this factor weighed in favor of rescission.”
The Court found that the fifth factor was not applicable to this case because the Matthiases were not involved in the accident. Enforcement of the policy, therefore, would not shift liability from the Matthiases to Pioneer.
“Finally, the trial court found that the fifth factor—a determination of whether policy enforcement only relieves the fraudulent insured of what would otherwise be the fraudulent insured’s personal liability to the innocent third party—weighed somewhat in favor of rescission because enforcing the insurance policy would not primarily shift liability from the fraudulent insured to the innocent insurance company, but some tort liability might shift to Pioneer. In Wright, 331 Mich App at 414, this Court found that this factor was not applicable when the ‘fraudulent insured’ was not involved in the accident. See also Farm Bureau Gen Ins Co of Mich v ACE American Ins Co, 337 Mich App 88, 107; 972 NW2d 325 (2021). Similarly, this factor is not applicable in this case because the alleged wrongdoers are the insureds, who were not involved in the accident. Therefore, the trial court erred by finding that this factor supported rescission.”
Adding up the five factors, the Court noted that two weighed against rescission, one weighed in favor of rescission, one was neutral, and one was inapplicable. Thus, a balancing of the equities weighed against rescission as to McCallister.