Bazzi v. Sentinel Ins. Co.

315 Mich.App. 763

891 N.W.2d 13

BAZZI

v.SENTINEL INSURANCE COMPANY.

Docket No. 320518.

Court of Appeals of Michigan.

Submitted Dec. 9, 2015, at Detroit.

Decided June 14, 2016, at 9:20 a.m.

Gary R. Blumberg, PC (by Gary R. Blumberg, Farmington Hills and Stefania Gismondi), for Ali Bazzi.

Plunkett Cooney, Bloomfield Hills (by Mary Massaron ) for Sentinel Insurance Company.

Anselmi & Mierzejewski, PC, Bloomfield Hills (by John D. Ruth and Michael D. Phillips ), for Citizens Insurance Company.

Willingham & Coté, PC, East Lansing (by John A. Yeager and Kimberlee A. Hillock ), for amicus curiae Insurance Institute of Michigan.

Donald M. Fulkerson, Westland, for amicus curiae Michigan Association for Justice.

Before: SAWYER, P.J., and BECKERING and BOONSTRA, JJ.

SAWYER, P.J.

We are asked in this case to determine whether the so-called " innocent third party" rule, which this Court established in State Farm Mut. Auto. Ins. Co. v. Kurylowicz,¹

survived our Supreme Court's decision in Titan Ins. Co. v. Hyten.² We conclude that it did not.

Plaintiff, Ali Bazzi (plaintiff), is seeking to recover personal protection insurance (PIP) benefits for injuries he sustained in an automobile accident while driving a vehicle owned by third-party defendant Hala Bazzi (plaintiff's mother).³ Intervening plaintiffs, Genex Physical Therapy, Inc., Elite Chiropractic Center, PC, and Transmedic, LLC, are healthcare providers who provided services to plaintiff as a result of those injuries and are seeking payment for those services. The vehicle driven by Bazzi was insured under a commercial automobile policy issued by defendant Sentinel Insurance to Mimo Investments, LLC.⁴ Sentinel maintains that the policy was fraudulently procured by Hala Bazzi and third-party defendant Mariam Bazzi (plaintiff's sister and the resident agent for Mimo Investments) in order to obtain a lower premium because of plaintiff's involvement in a prior accident. Sentinel maintains that the vehicle was actually leased to Hala Bazzi for personal and family use, not for commercial use by Mimo, and, in fact, that Mimo was essentially a shell company, which had no assets or employees or was not otherwise engaged in actual business activity. Sentinel also alleges as fraud that the third-party defendants failed to disclose plaintiff would be a regular driver of the vehicle. In fact, Sentinel pursued a third-party complaint against Hala and Mariam Bazzi, seeking to rescind the policy on the basis of fraud in the application.⁵

Sentinel thereafter moved for summary disposition of plaintiff's claim against Sentinel for PIP benefits, as well as the intervening plaintiffs' claims because the policy was rescinded on the basis of fraud. The trial court denied the motion, concluding that plaintiff had a claim because of the innocent-third-party rule.⁶ Sentinel sought leave to appeal in this Court, which we denied.⁷ Sentinel then sought leave to appeal in the Supreme Court which, in lieu of granting leave, remanded the matter to this Court for consideration as on leave granted.⁸ We now reverse the decision of the trial court and remand the matter for further proceedings consistent with this opinion.

The standard of review to be applied here was set forth, as follows, in Titan:⁹

This Court reviews de novo a trial court's decision on a motion for summary disposition. Shepherd Montessori Ctr. Milan v. Ann Arbor Charter Twp., 486 Mich. 311, 317, 783 N.W.2d 695 (2010). In addition, the proper interpretation of a statute is a question of law that this Court reviews de novo. Eggleston v. Bio–Med. Applications of Detroit, Inc., 468 Mich. 29, 32, 658 N.W.2d 139 (2003). The proper interpretation of a contract is also a question of law that this Court reviews de novo. Rory v. Continental Ins. Co., 473 Mich. 457, 464, 703 N.W.2d 23 (2005).

Resolution of this case begins and ultimately ends with our Supreme Court's decision in Titan. Although Titan did not involve a no-fault insurance claim for PIP benefits, we nonetheless are convinced that Titan compels the conclusion that the innocent third-party rule does not apply to a claim for those benefits. That is, if an insurer is entitled to rescind a no-fault insurance policy because of fraud, it is not obligated to pay any benefits under that policy, including PIP benefits to a third party innocent of the fraud.

In Titan, the insurer sought a declaratory judgment on the basis that, because of fraud in the application, it had no duty to indemnify its insureds in a claim brought by third parties injured in an automobile accident with Titan's insureds.¹⁰ The injured parties and their insurer maintained that Titan could not avoid liability to the innocent third parties because the fraud was easily ascertainable. While this Court agreed because of our earlier decision in Kurylowicz, the Supreme Court disagreed and overruled Kurylowicz and its progeny.¹¹

Plaintiff and defendant Citizens argue that the decision in Titan does not apply to this case for two reasons: Titan did not involve mandatory PIP benefits and it only considered the "easily ascertainable fraud" rule and not the "innocent third party" rule. These are the essential arguments in this case because if Titan does not apply here then there is binding precedent of this Court in which we applied the innocent-third- party rule to no-fault PIP cases.¹² On the other hand, if Titan does apply, then we are certainly obligated to follow a recent Supreme Court decision over an older decision of this Court. But, after careful analysis, we are not persuaded that either of these arguments provides a basis for distinguishing Titan and, therefore, we conclude that Sentinel is not obligated to pay no-fault benefits to plaintiff if it establishes that the policy was procured by fraud.

We first consider whether there is a distinction between the easily ascertainable fraud rule discussed in Titan and the innocent-third-party rule advanced in this case. We conclude that they are one and the same.

While Titan consistently referred to the easily ascertainable fraud rule set forth in Kurylowicz, it and the so-called innocent-third-party rule are not separate and distinct rules. As stated by the Titan Court:¹³

The principal question presented in this case is whether an insurer may avail itself of traditional legal and equitable remedies to avoid liability under an insurance policy on the ground of fraud in the application for insurance, when the fraud was easily ascertainable and the claimant is a third party.

Therefore, the focus of Titan was not merely on the ascertainability of the fraud; it was also relevant that the case involved a third-party claimant. Indeed, the substance of Kurylowicz was that both conditions had to apply before the insurer was prevented from raising a fraud defense. This point was recognized by the Supreme Court in Titan when it observed that "when it is the insured who seeks benefits under an insurance policy procured through fraud, even an easily ascertainable fraud will not preclude an insurer from availing itself of traditional legal and equitable remedies to avoid liability."¹⁴

In sum, Titan recognized that the rule in Kurylowicz only applied if the fraud was easily ascertainable and involved an innocent third party. Moreover, it would make no sense to conclude that an insurer has no liability if the fraud is easily ascertainable, but would retain liability if the fraud was not easily ascertainable.¹⁵ Accordingly, "easily ascertainable" and "innocent third party" are merely two different labels for the same rule and we cannot dismiss the application of Titan merely by applying the "innocent third party" label to this case and then pointing out that Titan dealt with the "easily ascertainable fraud" rule. That is, in rejecting the easily ascertainable fraud rule, the Supreme Court of necessity also rejected the innocent-third-party rule because they are, in fact, the same rule.

Furthermore, even if the decision in Kurylowicz has evolved into two separate rules—the easily ascertainable fraud rule and the innocent-third-party rule—it is irrelevant. Both these rules have their roots in the Kurylowicz decision. And Titan clearly overruled Kurylowicz "and its progeny...."¹⁶ Moreover, this point is further supported by the fact that one of the cases explicitly overruled by Titan was this Court's decision in Ohio Farmers Ins. Co. v. Mich. Mut. Ins. Co.¹⁷ While Titan did state that Ohio Farmers was overruled to the extent it held "that an insurer is estopped from denying coverage on the basis of fraud when it could have easily ascertained the fraud,"¹⁸ the discussion in Ohio Farmers regarding its reliance on Kurylowicz focused on the claimant being an innocent third party.¹⁹ In fact, Titan cited Ohio Farmers for the proposition that "it is contended that the ‘easily ascertainable’ rule is required for the protection of third parties."²⁰ Yet, the quotation from Ohio Farmers cited by Titan referred not to the fraud being easily ascertainable, but to an insurer being estopped from rescinding a policy when an innocent third party has been injured.²¹ This then brings us back to our earlier point: that the easily ascertainable fraud rule and the innocent-third-party rule are one and the same. An overruling of Ohio Farmers of necessity overrules the innocent-third-party rule.

We now turn to the other question posed in this case, whether the holding in Titan extends to mandatory no-fault benefits. We conclude that it does. Titan involved optional benefits not mandated by statute. But that was not the basis of the Court's decision. And it made the rather unremarkable observation that when insurance benefits are mandated by statute, coverage is governed by that statute.²² It is also true that "because insurance policies are contracts, common-law defenses may be invoked to avoid enforcement of an insurance policy, unless those defenses are prohibited by statute. "²³ The Court ultimately held "that an insurer is not...