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What Happens if Negligent Driver Lies to Car Insurance Company?

March 24, 2008 by Steven M. Gursten

Our law firm recently responded to a question submitted online from a lawyer representing a person injured in a car accident. I am re-posting that question and answer below to educate others about Michigan Car Accidents and the “Innocent Third Party Rule” designed to protect injury victims from fraud and misrepresentation.

Here’s the scenario:
An innocent person is injured in a car accident; it’s discovered later that the person who caused the accident committed fraud with his/her auto insurance company; that insurance company then refuses to pay for injuries caused by its own negligent insured.

Here’s the question posted by lawyer & our answer:
Q: I have a client who was seriously injured in a car accident in Michigan by a negligent driver. Liability is clear. I contacted the wrongdoer’s auto insurance company in an attempt to settle the case and I was told by the adjuster that the insurance company is now refusing to defend the insured or settle the car accident case because their own insured lied on his auto insurance application. This seems incredibly unfair. Is my client out of luck?

A: No, your injured client can still recover under the “Innocent Third Party” doctrine. That said, the insurance recovery may be reduced to the statutory minimum policy limit under Michigan law of $20,000 for personal injury caused by automobile accidents.

Essentially, the negligent driver becomes “uninsured”
All Michigan automobile insurance policies contain policy language allowing them to rescind or void ab initio (void back to date of contracting) an insurance policy under certain circumstances, such as fraud, material misrepresentations, failure to cooperate, and other such bad acts of the insured. If an auto insurance company is able to rescind the auto insurance contract, then the wrongdoer who caused a car accident and caused personal injury to an innocent third person will not be defended by his or her own auto insurance company’s lawyers, nor will the negligent driver who caused the accident have the insurance coverage protection of the auto insurance policy limits and could be personally liable for any pain and suffering judgment against him. Essentially, the wrongdoer becomes uninsured.

To protect innocent third parties, however, Michigan law provides a safety net for people who are injured in these circumstances.

Michigan Complied Law 257.520(f)(1) states:

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 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.

Statute language “may not be cancelled” offers protection for innocent third party
Thus, in situations where the insured person causes personal injury to another person and that person is an innocent third person who is not a party to any fraud, misrepresentation or other bad acts, then the auto insurance company cannot just void the policy. In fact, Michigan law specifically states that the policy “may not be cancelled or annulled” and no acts of “fraud, misrepresentation, assumption of liability or other act of the insured in obtaining or retaining such policy…” or “failure to cooperate” shall constitute a defense against the injured person’s injury claim. The statute uses language such as “may not be cancelled” and “shall constitute” precisely to protect an innocent third party such as this lawyer’s injured client and still provide a legal avenue for some redress such as recovery of pain and suffering damages from the auto insurance company of the person whose negligence caused the car accident.

Recovery may be limited to $20,000/$40,000 (person/incident)
Unfortunately, the pain and suffering portion of the settlement recovery will likely be limited if the auto insurance company can prove fraud, misrepresentation, or other bad acts on the part of its own insured. Recovery will likely be limited to the minimum statutory liability limits of $20,000/$40,000 (person/incident) that all registered owners of automobiles are required to carry under Michigan law to protect people that would be injured or killed by an automobile accident.

Michigan law allows insurance companies to rescind any auto insurance coverage in excess of the statutory minimum liability limits for bodily injury (personal injury) when a material misrepresentation is made during the application process (Farmers Ins Exch v Anderson, 206 Mich App 214 (1994) app den 448 Mich 920 (1995).

So, if a court finds that a material misrepresentation was made by a negligent driver who has caused a car accident at some prior time, even if it is years earlier during the application process, the auto insurance company can later reduce its own liability to the $20,000 bodily injury minimum required by law.

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