Bazzi v. Sentinel ruling stops auto insurance companies from automatically denying No-Fault benefits to blameless car crash victims based on fraud by an insured
In its recent ruling in Bazzi v. Sentinel Insurance Company, the Michigan Supreme Court brought a welcome end to an awful case. For years now, auto insurance companies would automatically deny No-Fault insurance benefits to completely innocent but injured third-party drivers if it was shown that an insured had committed fraud.
Unfortunately, there remains some ugly news as well. The Bazzi case has also officially declared the end of the innocent third-party rule in Michigan for injured car crash victims.
Specifically, the Bazzi court announced:
- “In this case, … the plain language of the no-fault act does not preclude or otherwise limit an insurer’s ability to rescind a policy on the basis of fraud. Therefore, Sentinel may raise that defense and seek rescission of the no-fault insurance policy.” (Page 7)
- But “Sentinel was [not] automatically entitled to rescission in this instance.” (Page 2)
- “In this instance, rescission does not function by automatic operation of the law.” (Page 17)
- “We … reverse the portion of the Court of Appeals’ opinion that held Sentinel was automatically entitled to rescission by operation of law. We remand to the trial court to determine whether rescission is available as an equitable remedy as between Sentinel and plaintiff.” (Page 18)
This is an important victory for innocent car crash victims because they are no longer at the mercy of greedy auto insurance companies that seek to punish them for wrongdoing they had no part in.
It’s also a much-needed reminder to car insurance companies – as well as some Michigan courts – that, despite the enormous and still largely unregulated power that insurers are afforded under the law (the state of Michigan still cannot regulate insurance company profit margins, for example), the insurance companies do not automatically win. They still must do what’s right, fair and equitable when it comes to handling crash victims’ No-Fault claims.
What does Bazzi really mean for car accident victims?
For the nearly 30 years leading up 2016, Michigan courts had followed what’s called the “innocent third-party” rule.
This provided valuable protection to innocent crash victims by preventing an insurer from rescinding a No-Fault car insurance policy and, thus, denying all rightfully and legally owed benefits to an innocent car accident victim just because the person who took out the policy did so fraudulently.
Significantly, the Bazzi Court described the rule as follows:
- It “precludes an insurer from rescinding an insurance policy procured through fraud when there is a claim involving an innocent third party.” (Page 2)
- “In the past, Michigan courts have held that the “right to rescind ceases to exist once there is a claim involving an innocent third party” because “[p]ublic policy requires that an insurer be estopped from asserting rescission when a third party has been injured.” [Note: The Supreme Court cited cases involving the “innocent third-party rule” going back to 1981.] (Page 7)
In 2016, when the Michigan Court of Appeals got the Bazzi case, the judges decided to throw out the “innocent third-party rule” – a decision that insurers quickly pounced on and exploited as a green light to automatically rescind policies and deny benefits to victims (who had nothing to do with committing fraud) at even the slightest hint of fraud by an insured.
While not completing restoring the protection that existed prior to Bazzi – which the justices could have and should have done – the Supreme Court’s Bazzi ruling that fraud by an insured doesn’t mean insurers are “automatically entitled to rescission by operation of law” provides considerable protection to innocent crash victims.
What is required for rescission after Bazzi?
Significantly, Bazzi establishes that if an insurer wants to pursue rescission against an innocent third-party crash victim due to fraud committed by the insured’s customer (i.e., the insured), then the burden is on the insurer to prove that rescission is justified.
In particular, the justices stated:
“[F]raud in the inducement to enter a contract renders the contract voidable at the option of the defrauded party … [U]nless rescinded, a voidable contract imposes on the parties the same obligations as if it were not voidable.” (Pages 14-15)
The Bazzi justices also made clear what factors a trial court must consider when evaluating an insurer’s claim for rescission against an innocent third-party based on fraud committed by the insurer’s insured:
- “When a plaintiff is seeking rescission, ‘the trial court must [exercise its “sound discretion” to] balance the equities to determine whether the plaintiff is entitled to the relief he or she seeks.” (Pages 15-16)
- “[R]escission should not be granted in cases where the result … would be unjust or inequitable … [or] where the circumstances of the challenged transaction make rescission unfeasible …” (Pages 16-17)
- “Equitable remedies are adaptive to the circumstances of each case …” (Page 17)