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A Better Partnership
June 15, 2016

COA holds that the insurers are not required to pay no-fault benefits to innocent third parties if the insured obtained automobile insurance coverage through fraud

In Bazzi v Genex, No. 320518 the Court of Appeals held that the “innocent third-party rule” abolished by the Michigan Supreme Court in Titan v Hyten, 491 Mich 547; 817 NW2d 562 (2012) for contractual insurance policies was also abolished with respect to statutory no-fault insurance. For the parties in Bazzi, this means that if an insured obtains coverage through fraud, the insurer is not obligated to pay no-fault benefits to an innocent third-party.
 
Plaintiff Ali Bazzi sought no-fault insurance benefits for injuries he sustained in an automobile accident while driving a car owned by his mother, Third-Party Defendant Hala Bazzi. Third-Party Defendant Hala Bazzi used her company, Mimo Investments, LLC, to obtain a commercial automobile policy from Defendant Sentinel Insurance for the car driven by Plaintiff Ali Bazzi. Defendant Sentinel won a third-party complaint against Third-Party Defendant Hala Bazzi to rescind her commercial automobile policy on the grounds that it was fraudulently obtained. The trial court denied Sentinel’s motion for summary disposition against Plaintiff Ali Bazzi on the grounds that he was still entitled to no-fault benefits under Third-Party Defendant Hala Bazzi’s fraudulent policy because of the “innocent third-party rule.” The Court of Appeals reversed the trial court’s decision and remanded the case so that the trial court can determine: (1) whether the judgment against Third-Party Defendant Hala Bazzi conclusively establishes fraud and therefore provides a basis for Defendant Sentinel to rescind the policy, and (2) whether there is a genuine issue of material fact regarding the fraud issue. The Court of Appeals directed the trial court to grant summary disposition for Defendant Sentinel against Plaintiff Ali Bazzi if it finds in favor of Sentinel on either of those issues.
 
Titan v Hyten held that an insurer could not avoid liability to innocent third parties based on easily ascertainable fraud. Following that precedent, the Court of Appeals determined that: (1) the “easily ascertainable rule” and the “innocent third-party rule” are one in the same, (2) Titan clearly held that fraud is an available defense to an insurance contract except where prohibited by statute, (3) there is no statute that prevents fraud from being used as a defense with respect to no-fault benefits, and therefore (4) the “innocent third-party rule” was abolished by Titan. “Therefore, if an insurer is able to establish that a no-fault policy was obtained through fraud, it is entitled to declare the policy void ab initio and rescind it, including denying the payment of benefits to innocent third parties.”
 
The Court of Appeals remanded for findings on the issue of fraud. Judge Boonstra concurred in the judgement, but wrote separately to clarify that fraud and other common-law defenses are available to insurers whether the policy is contractual or statutorily mandated (i.e., no-fault). Judge Beckering dissented, arguing that the “easily ascertainable rule” and the “innocent third-party rule” are one in the same, and would have affirmed the trial court’s decision.

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