4th Aug 2020

On July 29, 2020, the Michigan Supreme Court decided Meemic Insurance Company v Louise M. Fortson and Richard A. Fortson, Individually and as Conservator for Justin Fortson, in which it held that contractual anti-fraud provisions in no-fault policies “are valid when based on a defense to mandatory coverage provided in the no-fault act itself or on a common-law defense that has not been abrogated by the act.” The Court found that “[b]ecause Meemic’s fraud defense is grounded on neither the no-fault act nor the common law, it is invalid and unenforceable.”

Fortson may appear to be a possible death knell for fraud defenses in no-fault claims, but hope is not lost. The Court’s opinion narrow in scope and leaves open the possibility of fraud defenses in dissimilar circumstances.

BACKGROUND

Meemic filed suit against Louise and Richard Fortson, individually and as a conservator of their son, Justin Fortson, alleging that Louise and Richard fraudulently obtained attendant care payments for services that were not actually provided to Justin.

Richard and Louise were named insureds in a Meemic insurance policy. Justin was an insured as a “resident relative.” The policy contained an antifraud provision, which stated:

This entire policy is void if any insured person has intentionally concealed or misrepresented any material fact or circumstance relating to:

A. This insurance;
B. The Application for it;
C. Or any claim made under it.

In 2009, Justin suffered severe injuries—including brain damage—when he fell off the hood of a moving car, necessitating constant supervision and long-term full-time care. From October 2009 to October 2014, Louise and Richard submitted bills for attendant care, which Meemic paid.

In May 2013, Meemic began an investigation into the no-fault claim, which uncovered that between September 2012 and July 2014 Justin had been jailed for 233 days and spent another 78 days in drug rehabilitation. Louise and Richard had continued to bill Meemic for attendant care during that period.

Meemic filed suit seeking to void the policy under its antifraud provision, thereby eliminating Meemic’s duty to pay Justin’s claim, and ultimately moved for summary disposition. The trial court initially denied the motion based on the innocent-third-party rule. Following Bazzi v Sentinel Ins Co, 315 Mich App 763; 891 NW2d (2016) (overturning the innocent-third-party rule), Meemic moved for reconsideration and summary disposition was granted.

The Court of Appeals reversed, holding that Bazzi was inapplicable because the fraud in this case did not occur in the procurement of the policy and therefore did not affect the validity of the contract. Further, the Court of Appeals held that the policy’s antifraud provision was invalid because it would enable Meemic to avoid the payment of PIP benefits mandated by the no-fault act. Meemic’s appeal to the Supreme Court followed.

SUPREME COURT OPINION

The Supreme Court affirmed the Court of Appeals decision, but on different grounds, and remanded the case to the trial court for action consistent with its opinion. The Court held that “contractual [antifraud] provisions are valid when based on a defense to mandatory coverage provided in the no-fault act itself or on a common-law defense that has not been abrogated by the act.” Because Meemic’s fraud defense was grounded in neither, the Court held that it was invalid and unenforceable.

The Court opined when coverage is mandated by the no-fault act, the statute is the “rule book” for deciding the award of these benefits. Citing its decision in Rohlman v Hawkeye-Secuirty Ins Co, 442 Mich 520, 524-525; 502 NW2d (1993), the Court stated that, “[t]he policy and the statutes relating thereto must be read and construed together as though the statutes were a part of the contract, for it is presumed that the parties contracted with the intention of executing a policy satisfying the statutory requirements.”

The Court noted that Meemic did not assert a statutory defense, as the no-fault act does not include a fraud defense to PIP coverage. However, the Court stated that common-law defenses are still valid and referred to Bazzi v Sentinel Ins Co, 502 Mich 390, 400-401; 919 NW2d 20 (2018), in which it upheld the common-law defense of fraud in the inducement for coverage that was mandated by statute. Moreover, the Court made at point of stating that, “the upshot is that insurers can avail themselves of both statutory defenses and common-law defenses that the no-fault act has no displaced.”

FRAUD DEFENSES LIVE ON

Despite the Court’s holding, Fortson does not terminate fraud defenses in no-fault claims. For instance, the Court’s holding does not apply to optional coverage, such as uninsured motorist insurance.

Moreover, the Court viewed Meemic’s antifraud provision as overly broad, going so far as to refer to is as a “sweeping antifraud provision.” Arguably, a more narrowly tailored fraud provision or application of a fraud denial would not conflict with the Court’s holding here. Indeed, in Footnote 10 the Court stated, “an insurer can reject fraudulent claims without rescinding the entire policy.”

In his concurrence, Justice Zahra identified a possible path forward for insurers. He opined that the no-fault act provides that an insurer is only responsible for those PIP benefits that are “reasonably necessary.” When an insurer discovers fraud, it must deny fraudulent charges as neither reasonable nor necessary. Of course, this will not serve to void coverage for additional no-fault benefits, which should be evaluated—and if necessary, denied—on an individual basis.

Further, it was significant to the Court’s holding that Justin Fortson was neither a policyholder nor a beneficiary of the “claim allegedly obtained by fraud.” In Footnote 15, the Court addressed fraud exclusions when the fraud is related to proof of loss, as opposed to fraud in the procurement or execution of a policy. Referencing Bahri and Shelton, the Court noted:

In this case, however, because there is no allegation of fraud in relation to Justin’s claim for benefits, the Court need not address the issue of whether and to what extent fraud related to proof of loss can justify voiding the policy. Moreover, because this case involves fraud by someone other than the claim beneficiary, the Court need not address whether a clause voiding a policy for postprocurement [sic] fraud would be valid as applied to fraud by an individual who is both a policyholder and the claim beneficiary.

Here, the Court has left open the enforceability of an antifraud provision where the policyholder commits fraud in pursuit of a claim for which he or she is the beneficiary. For instance, fraud related to a policyholder’s own wage loss claim. Arguably, if a policyholder claimant were to co-sign a fraudulent claim for replacement services or attendant care, an antifraud provision would be valid.

Moving forward, insurers should continue to deny specific claims where fraud is uncovered, while understanding that voiding the policy—effectively a rescission—will be, in many circumstances, invalid.