On Friday, in Titan Ins. Co. v. Hyten, et al., Case No. 142774, the Court ruled that an insurance company may avail itself of traditional legal and equitable remedies to avoid liability under an automobile insurance policy, even where the fraud may have been 'easily ascertainable' if the insurer had performed an investigation, and where the claimant is a third party. The Court's decision overruled the 'easily ascertainable' rule established by State Farm Mut. Auto Ins. Co. v. Kurylowicz, 67 Mich. App. 568 (1976), and its progeny. Additionally, the Court reaffirmed its prior holding in Keys v. Pace, 358 Mich. 74 (1959), in which it made a similar ruling prior to the enactment of the No Fault Act. The Court's ruling will likely have a significant impact on no fault insurance litigation throughout the state.
This case concerns an insurance policy issued to Hyten. At the time this insurance policy was issued to Hyten, her license was suspended for a series of traffic violations and accidents. Hyten's mother, Johnson, contacted an insurance agent authorized to issue Titan insurance policies. Johnson told the agent that Hyten would likely get her license back on August 24, 2007. The insurance agent filled out the insurance application and on August 22, 2007, Hyten signed the application and paid the insurance premium. The insurance application stated that no one in Hyten's household had his or her driving privileges suspended, revoked, or was otherwise unlicensed. In fact, Hyten's driver's license was not restored until September 20, 2007. In February 2008, Hyten was in a car accident and innocent third parties were injured.
Upon learning of the automobile accident and conducting an investigation, Titan Insurance discovered that Hyten did not have a valid driver's license as of the date the insurance policy was issued. It further determined that Hyten had lied on her application for insurance. In anticipation of the injured third parties filing a lawsuit, Titan filed a declaratory action seeking to have the automobile insurance contract reformed to reduce liability coverage limits to the statutory minimum because the insured, Hyten, misrepresented that she was licensed at the time she submitted her insurance application. Both parties moved for summary disposition and the circuit court granted summary disposition in favor of Hyten finding that Titan could have easily ascertained whether Hyten had a license. The court declined to reduce the coverage to the statutory minimum.
The Court of Appeals affirmed the circuit court's decision, relying on Kurylowicz. Under the rule established in Kurylowicz, 'an automobile liability insurer must undertake a reasonable investigation of the insured's insurability within a reasonable period of time from the acceptance of the application and the issuance of a policy.' Id. at 576. In this case, the Court of Appeals held that Titan had not shown that it reasonably relied on Hyten's misrepresentation that she was licensed at the time she submitted the insurance application. Further, the Court of Appeals pointed out that MCL 500.3220(a), which allows an insurer to cancel a policy within 55 days 'if the risk is unacceptable to the insurer,' 'envisions that no-fault insurers will either perform an investigation to determine whether to accept a new risk, or forfeit the opportunity to later decide that an insured's driving record or other characteristic should require cancellation of the policy.' The Michigan Supreme Court disagreed and ruled that the Court of Appeals erred in disregarding its earlier decision in Keys, which the Court opined was directly on point. As an initial matter, the Court noted that an insurance policy is a contract, and therefore unless prohibited by statute common law defenses, such as fraud, may be invoked to avoid enforcement of an insurance policy. The Court next stated that a party asserting actionable fraud, innocent misrepresentation, or silent fraud is not required to prove it performed an investigation of all assertions and representations made by the contracting partner as a pre-requisite to establishing fraud. Therefore, unless the common law legal and equitable remedies are narrowed by statute, an insurer is not required to conduct an investigation.
The Court of Appeals reviewed two statutes which potentially narrow a fraud defense in this context: MCL 500.3220(a) and MCL 257.501. The Court concluded that only MCL 257.501, which arises under the Financial Responsibility Act, applied to limit an insurer's remedy in this context. However, the Court concluded that MCL 257.501 will only limit an insurer's ability to raise a fraud defense if the insurance policy was certified under MCL 257.518 or 257.519. Here, MCL 257.501 will prevent Titan from escaping all liability under the policy. Titan will at least be responsible for indemnifying Hyten for the minimum bodily injury liability coverage under Michigan law--$20,000 per person and $40,000 per occurrence.
Finally, the Court held that the Kurylowicz erred in ignoring the established precedent in Keys. While the court in Kurylowicz commented that its decision was grounded in public policy, specifically that third parties who are injured in automobile accidents should have a means of recovery, the Supreme Court noted that there are other avenues for recovery for these plaintiffs under the No Fault Act. The Court also stated that there is no reason for third parties to receive special treatment. Michigan case law has consistently defined the elements for fraud, and that does not include an affirmative duty to investigate every representation made to the party asserting fraud. The opinion concluded by stating that the Court was reaffirming Keys as good law, even though Keys had been decided before the No Fault Act was enacted.
It was unclear from the record whether the trial court had found that all of the elements of actionable fraud were satisfied. Therefore, the Supreme Court remanded this case to the trial court for further proceedings.
Justice Hathaway authored a dissenting opinion, joined by Justices Cavanagh and Kelly. In that opinion, Justice Hathaway noted that she would have adopted the Court of Appeals' opinion because it is based on 'sound case law' and Michigan's public policy concerning compensating innocent victims of automobile accidents.