Southeast Michigan Surgical Hospital, LLC v. Allstate Insurance Co.
316 Mich. App. 657
Mich. Ct. App.2016Background
- Passenger Jamie Letkemann was injured in a rear-end crash while riding in a 2010 Ford Escape insured in the name of owner David Kreklau.
- Kreklau obtained the Allstate no-fault policy by representing he would garage and principally drive the vehicle, but he soon handed the car to Danielle Riordan, who actually garaged and primarily drove it.
- Kreklau and Riordan made payments and concealed the true primary driver; Letkemann was not involved in procuring the policy and moved into Riordan’s home later and married her.
- Allstate discovered the misrepresentations during discovery and moved for summary disposition, seeking rescission of the policy for fraud in the inducement.
- The trial court found the policy procured by fraud but held Letkemann an innocent third party protected from rescission under the innocent-third-party doctrine and granted summary disposition to plaintiffs.
- The Court of Appeals majority reversed under binding precedent (Bazzi) that, after Titan Ins Co v Hyten, abolished the innocent-third-party rule for rescinding fraud-based policies; the panel nevertheless expressed disagreement with Bazzi and called for a conflict panel.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Letkemann is an innocent third party to the fraud | Letkemann had no role in procuring the policy; he is innocent and obtained benefits through others’ fraud | Fraud in procurement entitles insurer to rescind; innocence irrelevant under post-Hyten rule | Court affirmed as a factual matter that Letkemann was an innocent third party |
| Whether Allstate waived the affirmative defense of fraud by inadequate pleading | Plaintiffs: Allstate failed to plead fraud in inducement properly and waived it | Allstate: defense became apparent in discovery; may be amended without prejudice | Court held the defense was not prejudicially waived and could be treated/added given timing and discovery |
| Whether plaintiffs are equitably estopped from allowing rescission | Plaintiffs: they relied on Allstate’s coverage and would be prejudiced if insurer rescinds | Allstate: plaintiffs cannot show prejudice because limitations/ACP timing already foreclosed alternatives | Court held plaintiffs failed to prove prejudice; estoppel unavailable |
| Whether the innocent-third-party doctrine remains available to prevent rescission of statutorily mandated PIP benefits | Plaintiffs: innocent-third-party doctrine protects statutorily mandated PIP benefits despite Hyten | Allstate: Hyten (Titan) allows rescission for fraud even as to third parties, so doctrine no longer viable | Binding precedent (Bazzi) requires reversal — innocent-third-party doctrine held no longer viable post-Hyten, so rescission allowed; panel voiced disagreement and requested conflict panel |
Key Cases Cited
- Bazzi v. Sentinel Ins. Co., 315 Mich. App. 763 (2016) (Court of Appeals holding the innocent-third-party doctrine no longer viable after Hyten)
- Titan Ins. Co. v. Hyten, 491 Mich. 547 (2012) (Michigan Supreme Court permitting insurers to rescind coverage procured by fraud for contractual amounts in excess of statutory minimums)
- Keys v. Pace, 358 Mich. 74 (1959) (common-law rule allowing insurers to deny coverage procured by material misrepresentation)
- Lake States Ins. Co. v. Wilson, 231 Mich. App. 327 (1998) (discussing estoppel and insurer’s inability to assert fraud to rescind where innocent third party injured)
- Hammoud v. Metro Prop. & Cas. Ins. Co., 222 Mich. App. 485 (1997) (application of innocent-third-party rule to PIP benefits)
- State Farm Mut. Auto. Ins. Co. v. Kurylowicz, 67 Mich. App. 568 (1976) (insurer’s duty to reasonably investigate fraud within statutory window)
- Jesperson v. Auto Club Ins. Ass’n, 306 Mich. App. 632 (2014) (limitations and notice exceptions for PIP claims)