No policy recission where deceased driver was innocent third party

A trial court correctly denied an insurer’s request to rescind an insurance policy issued to the mother of a driver who was killed in an accident, a split Michigan Court of Appeals panel has held.

The majority said the insurer failed to meet its burden to show that rescission was warranted as to the decedent, an innocent third party.

The decedent “was the only injured party on whose behalf PIP benefits were sought and [the defendant] failed to meet its burden to show that the equities weighed in favor of enforcing rescission against him,” the judges explained. “[Decedent’s mother] was not injured and is not seeking PIP benefits for herself. The conclusion that rescission is unenforceable against [the decedent] is dispositive under these circumstances.”

The unpublished per curiam opinion, Allstate Ins. Co. v. Fremont Ins. Co . ( MiLW 08-108103 , 8 pages), was issued by Judges Stephen L. Borrello and Adrienne N. Young.

Judge Brock A. Swartzle dissented .

“Given that the equitable remedy of rescission is left to the trial court’s sound discretion, and not this Court’s discretion, I would merely vacate the trial court’s decision and permit the trial court on remand to assess anew the evidence in light of the relevant factors,” he wrote.

Alice Bell of Anselmi Mierzejewski Ruth & Sowle in Bloomfield Hills represented Allstate and L. Charlynn Turner of Secrest Wardle in Troy represented Fremont. Neither could be reached for comment.

Fatal accident

Jeremy Cundiff was on his moped when he was hit by an unknown vehicle and seriously injured on June 5, 2020. He died 10 days later as a result of his injuries.

Cundiff lived with his mother, Sharon Pabst, at the time of the accident, and had lived with her for several years. In 2013, Pabst got an insurance policy from Fremont. She renewed her policy on March 15, 2020, for a term that ended on Sept. 15, 2020. Pabst admitted Cundiff was living with her, but she never informed Fremont.

Pabst was the only driver listed on the application and the only listed driver on the declaration page. She answered “no” to questions regarding any other drivers and license revocations and suspensions. But Pabst knew Cundiff’s license had been suspended in 2018 and that he had a restricted license before it was reinstated in 2019.

Pabst filed a claim on Cundiff’s behalf, and Fremont investigated. Cundiff’s operating-while-intoxicated conviction was discovered and forwarded to the underwriting department, which determined that Cundiff was not an eligible driver and that he would not become eligible until June 25, 2021.

Fremont informed Pabst in writing that material misrepresentations of fact entitled it to rescind the policy and declare it “void at inception.” A check was issued to Pabst, which she cashed. Pabst then applied for benefits on Cundiff’s behalf through the Michigan Assigned Claims Plan, or MACP, which assigned the claim to Allstate.

Allstate filed suit against Fremont for reimbursement of PIP benefits paid, or due to be paid, on Cundiff’s behalf and also sought a declaratory judgment that Fremont was the higher priority no-fault insurer.

Fremont moved for summary disposition under MCR 2.116(C)(10). Pabst’s failure to disclose Cundiff as another driver in the home constituted a material misrepresentation that justified rescinding the policy and declaring it void ab initio.

Allstate also moved for summary disposition under MCR 2.116(C)(10), arguing that Fremont’s post-loss cancellation of Pabst’s policy was unenforceable. It also contended that the equities weighed strongly against enforcing the rescission against Cundiff as an innocent third party.

The Wayne County Circuit Court scheduled an evidentiary hearing and counsel presented arguments on balancing the equities to determine whether rescission of the policy could be enforced against Cundiff as an innocent third party.

In a written opinion and order, the court granted Allstate’s motion, concluding that the equities weighed against enforcing rescission of the policy against Cundiff.

Burden not met

In 2020’s Pioneer State Mut Ins Co v. Wright , the appeals court adopted a five-factor framework with for balancing the equities outlined in then-Chief Justice Steven Markman’s concurrence in Farm Bureau Gen Ins Co of Mich v. ACE American Ins Co .

“Here, the trial court applied the above framework, balanced the equities, and concluded that it would not be equitable to enforce rescission of the policy against Cundiff as an innocent third party,” the panel said.

The record supported the trial court’s findings on four of the factors, but not the fifth: whether enforcing the policy would simply serve to relieve the fraudulent insured of personal liability to the innocent third party by subjecting the insurer to coverage for tort liability for an at-fault insured.

“The trial court concluded that because enforcement of the policy in this case would not operate to relieve Pabst of what would otherwise be personal liability to Cundiff, equity weighed against enforcing rescission against Cundiff,” the panel wrote. “This conclusion constitutes an error of law because this Court has held that the fifth factor is ‘inapplicable’ when, as is the case here, the fraudulent insured was not involved in the accident.”

The majority also noted that Fremont’s application did not specifically ask Pabst to list all household residents or all household residents of driving age; it only asked about drivers.

“Considering the unrebutted evidence that Cundiff did not drive Pabst’s vehicles that were insured by Fremont and that Cundiff only drove a moped for which no-fault insurance was not required, it was not unreasonable for Pabst to believe that she had no duty to disclose Cundiff as a ‘driver’ in her household even if, in Fremont’s view, Cundiff hypothetically could have driven a motor vehicle,” the majority explained. “Under these circumstances, Fremont’s ambiguous and vague language contributed to the confusion that led it to pursue rescission.”

As such, Fremont didn’t meet its burden to show that rescission was warranted as to Cundiff.

“Accordingly, the trial court did not abuse its discretion in prohibiting rescission as to Cundiff as an innocent third party, and it did not err in granting summary disposition in Allstate’s favor,” the majority concluded.

If you would like to comment on this story, contact Cory Linsner at clinsner@milawyersweekly.com .

 

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