Tell The Truth Or Face Consequences
An insurance agent’s duty to the client does not end when the
policy is signed. On the contrary, it is an ongoing responsibility
with serious legal implications.
For an auto agent, this duty includes assuring that a client
injured in an auto accident is able to recover under the policy.
Often, this means educating clients about their policies. An
educated client is much less likely to do something to jeopardize
coverage.
One important aspect of client education includes advising
clients as to the importance of being completely forthcoming both
when applying for insurance, and when making a claim. When a
client is not forthcoming, i.e., when the client misrepresents a
material fact, the insurance company may have the right to void
the policy, leaving an injured client without coverage, and potentially
stripping the client of the right to sue an at-fault driver.
This is particularly important when it comes to uninsured and underinsured motorist coverage (UM/UIM) because many insurance
companies will include fraud provisions in their policies,
and recent law has held that such provisions are valid.
As such, a client who misrepresents a material fact when filing a
UM/UIM claim risks having their no-fault policy voided “ab initio,”
i.e., as if it never existed. Not only would this leave the insured
without coverage, but it could also preclude the victim from suing
the other driver. This is because, under Michigan law, a driver who
is injured while driving his own vehicle cannot sue for damages if
that driver was uninsured at the time of the accident.
For a detailed discussion of UM/UIM coverage,
see ‘Understanding Uninsured/Underinsured
Motorist Coverage,’ in the January 2003 issue of
the Michigan Auto Law News.
‘Cohen’
In the past, a no-fault policy could only be
rescinded for misrepresentation when the inaccuracy
existed in the application for coverage.
However, this changed in 2001 when the
Michigan Supreme Court decided Cohen v. Auto
Club Ins. Ass’n.
In a nutshell, this case stands for the proposition
that an insurer may void the entire policy
when an insured misrepresents a material fact in
a claim for excess coverage — in this case, UM
benefits.
Although such a provision may conflict with
the No-Fault Act regarding insurance benefits
required by law, e.g., statutorily required coverage,
it is enforceable when a claim for UM benefits
is involved because these benefits are
optional and not required by law.
Coverage Dispute
In Cohen, an insured was seriously injured in
a car accident. Although the driver of the other
vehicle was uninsured, the insured appeared to
be covered because she had UM benefits under
her auto policy. The policy also contained a provision
allowing such claims to be submitted to
arbitration.
However, the insurance company refused to
arbitrate the claim, citing a clause allowing it to
void the entire policy if the insured misrepresented
facts or circumstances about the accident.
The policy-voiding provision provided: “This
entire Policy is void if an insured person has
intentionally concealed or misrepresented any
material fact or circumstance relating to a) this insurance; b) the Application for it; or c)
any claim made under it.”
According to the insurance company,
the insured overstated her wage loss.
The insured denied the allegation and
sued for benefits under the policy. She
claimed the alleged misrepresentation was
irrelevant because no part of her UM claim
sought wage loss benefits. She also argued
that a no-fault policy could only be
rescinded by misrepresentation in the
application for coverage.
Both the trial court and the Michigan
Court of Appeals agreed with the insured.
However, the Michigan Supreme Court
reversed, siding with the insurance company.
Important Ruling
In its ruling, the Supreme Court
explained that the Court of Appeals erroneously
lumped UM coverage in with
other coverages required by law.
In finding for the insured, the Court of
Appeals relied on MCL 257.520(f) (1),
which provides that “no statement made
by an insured or on his behalf and no violation
of said policy shall defeat or void
said policy.”
According to the Supreme Court, however,
the appeals court should have looked
instead at MCL 257.520(g), which renders
the former statute inapplicable when UM
coverage is involved.
Unlike those other coverages, UM coverage
is not required by law and, therefore,
the clause in the insured’s policy voiding
it for misrepresentation was valid.
In other words, such a clause can in fact
be used to void a no-fault policy, the
Supreme Court explained.
Hence the importance of understanding
UM/UIM coverage and how to keep that
coverage viable.
'Material' Misrepresentation
Since Cohen, no case has challenged the
notion that policy voiding provisions can
be used to void no-fault policies.
However, some cases have distinguished
Cohen. based on specific facts.
For example, in Auto Club Ins. Ass'n v.
Juncaj, an auto policy could not be
rescinded where an insured failed to notify
his insurance company that his address had
changed and that his daughter was the principal
driver of one of his vehicles because he
did not make a "material misrepresentation."
However, since the Supreme Court's
decision, the ruling in Cohen has stood
strong, and some predict it could even be
extended to cover fraud in any motor
vehicle liability policy.
‘Fibbers’ Beware
Finally, it is well known that some
agents routinely advise their clients to “fib” when it comes to their home address,
other drivers, and so forth.
These agents must understand that if
their client is later seriously injured by an
uninsured or underinsured driver, their
entire no-fault policy could be rescinded.
This would leave the client without the
ability to collect UM/UIM coverage, and
could expose the agent and the agency to
significant legal liability.
As such, agents must carefully advise
clients not only in the application process,
but in the claims process as well.
A quick review of the applicable law
every now and then will help those in the
insurance industry better serve their
clients and themselves.
Auto Law ‘Snapshot’
Insurance Fraud & Excess Coverage
Important statutes and cases regarding insurance fraud
in Michigan:
Statute: MCL 257.520(f)(1)
Language: “Every motor vehicle liability policy shall be subject
to the following provisions: ‘The liability of the insurance carrier
with respect to the insurance required by this chapter shall
become absolute whenever injury or damage covered by said
motor vehicle liability policy occurs; said policy may not be cancelled
or annulled as to such liability by any agreement between
the insurance carrier and the insured after the occurrence of the
injury or damage; no statement made by the insured or on his
behalf and no violation of said policy shall defeat or void said
policy, and except as hereinafter provided, no fraud, misrepresentation,
assumption of liability or other act of the insured in
obtaining or retaining such policy, or in adjusting a claim under
such policy, and no failure of the insured to give any notice, forward
any paper or otherwise cooperate with the insurance carrier,
shall constitute a defense as against such judgment creditor.’”
Court Interpretation: Courts have focused on the language “no
statement made by the insured or on his behalf and no violation
of said policy shall defeat or void said policy” to preclude insurance
companies from rescinding no-fault policies based on misrepresentations
made after the application process is complete.
However, this section does not apply to excess coverage, such as
UM/UIM.
Impact On Agents: When additional, optional coverages such as
UM/UIM are involved, the statutory mandate above does not
apply (see below).
Statute:
MCL 257.520(g)
Language: “Any policy which grants the coverage required for
a motor vehicle liability policy may also grant any lawful coverage
in excess of or in addition to the coverage specified for
a motor vehicle liability policy and such excess or additional
coverage shall not be subject to the provisions of this chapter.
With respect to a policy which grants such excess or additional
coverage the term ‘motor vehicle liability policy’ shall
apply only to that part of the coverage which is required by
this section.”
Court Interpretation: The Michigan Supreme Court has ruled
that this statute renders MCL 257.520(f) (1) inapplicable to
excess coverage.
Impact On Agents: An insurance company may void a no fault
policy when an insured makes a material misrepresentation
in a claim for UM/UIM coverage. This extends the general
rule that an insurance company can declare a policy void ab
initio if the insured obtained the policy through intentional
misrepresentation of a material fact in the application process.
Case:
Cohen v. Auto Club Ins. Ass’n.
Facts: An insured was seriously injured in a car accident.
Although the other driver did not have insurance, the insured
had an uninsured motorist policy with Auto Club. Auto Club
denied coverage, however, pointing to a clause in the policy
allowing it to void the entire policy where the insured misrepresented
a material fact. According to Auto Club, the insured
misrepresented her wage loss. The insured denied the allegation,
and sued Auto Club.
Ruling: The Michigan Supreme Court found in favor of the insurance
company, holding that because uninsured motorist coverage
is not required under the No-Fault Act, the provision allowing the
insurance company to void the policy was appropriate.
Impact On Agents: This ruling instructs that insurance companies
can include provisions in no-fault policies allowing
them to void the entire policy when an insured misrepresents
a material fact concerning excess coverage. In addition to
leaving an insured without coverage, this would preclude the
insured from filing suit against an at-fault driver. Some
experts predict this fraud provision may ultimately be
extended and allow insurance companies to void any motor
vehicle liability policy.
Case:
Auto Club Ins. Ass’n v. Juncaj, et al.
Facts: An insured’s daughter was involved in an auto accident
with the insured’s van. Her passengers later sued the insured and
his family for injuries they sustained in the accident. During the
investigation, the insurance company rescinded the insured’s policy
on the ground that he had failed to notify them that his
address had changed and that his daughter had become the principal
driver of van. The insurance company relied on a provision
in the contract stating that the policy was void if the insured
intentionally concealed or misrepresented a material fact relating
to the policy, the application, or any claim made under the policy.
Ruling: The Michigan Court of Appeals rejected the insurance
company’s argument, ruling that, once an innocent third party is
injured in an accident that is subject to coverage, the insurer
cannot assert fraud to rescind the policy with respect to required
coverage. In so ruling, the court distinguished the case from
Cohen, noting that, although the fraud provision was valid, the
insured did not make a “material misrepresentation.”
Impact On Agents: A fraud provision will be found valid as it
relates to excess coverage, and enforced when the insured makes
a material misrepresentation. Agents must be sure to advise their
clients to be forthcoming when applying for coverage, and when
making claims.
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