Farmers Insurance Exchange v. Anderson

Hood, J. This case arises from a motor vehicle accident in which Robert Gale was killed after his vehicle collided with a vehicle driven by defendant Dillon. The automobile driven by Dillon was owned and insured by Dillon’s mother, Joyce Anderson. Plaintiff, Farmers Insurance Exchange, *216 claimed that Anderson procured the policy by fraud and that, therefore, it should not have to provide coverage. The trial court disagreed and granted summary disposition in favor of defendants pursuant to MCR 2.116(I)(2). Farmers now appeals as of right. We reverse. Joyce Anderson applied for insurance on the subject vehicle and represented that she would be the primary driver. Anderson did not disclose that Dillon, whose driver’s license had been revoked, would be operating the vehicle. In fact, as a person with a revoked license, Dillon was ineligible for motor vehicle insurance. The policy provided a liability limit of $100,000 a person, with a $300,000 limit in any one accident. At the time of the collision that resulted in Gale’s death, Dillon not only was unlicensed and uninsured, but also was driving while intoxicated. The Gale family initiated a wrongful death action against Dillon and Anderson. Farmers then filed a complaint for declaratory judgment, arguing that it had no duty to defend Dillon or to provide coverage, because Dillon had been using the vehicle without Anderson’s permission. Farmers further argued that it had no duty to defend or indemnify Anderson, because Anderson had made fraudulent and material misrepresentations in procuring the insurance policy. More specifically, Farmers asserted that Anderson had represented that she would be the primary driver of the vehicle even though she knew that Dillon would be the primary driver. Therefore, Farmers argued, the policy should be declared void ab initio and rescinded. Alternatively, Farmers argued that if it was precluded from declaring the entire policy void ab initio, then the policy should be reformed to provide only the statutorily required minimum limits of *217 $20,000/$40,000 rather than the stated policy limits of $100,000/$300,000. Competing motions for summary disposition were filed. The trial court, relying on Ohio Farmers Ins Co v Michigan Mutual Ins Co, 179 Mich App 355; 445 NW2d 228 (1989), denied Farmers’ motion for summary disposition and granted summary disposition in favor of defendants. This appeal followed. Plaintiff now concedes liability for the statutory $20,000/$40,000 limits. Therefore, the issue we must decide is whether an automobile insurer who, upon discovering that the insured has made fraudulent and material misrepresentations in procuring the policy, may assert rescission as a basis to limit its liability to the statutory minimum, even when innocent third parties have been injured. We first note that when an accident occurs in this state, the scope of liability coverage is determined by the financial responsibility act, MCL 257.501 e£ seq.; MSA 9.2201 et seq. League General Ins Co v Budget Rent-A-Car of Detroit, 172 Mich App 802, 805; 432 NW2d 751 (1988). Section 520 of the act, MCL 257.520; MSA 9.2220, provides in relevant part: (f) Every motor vehicle liability policy shall be subject to the following provisions which need not be contained therein: (1) 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; .„. . except as hereinafter provided, no fraud, misrepresentation, ... or other act of the insured in obtaining or retaining such policy . . . shall constitute a defense as against such judgment creditor. *218 (g) 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 specifíed for a motor vehicle liability policy and such excess or additional coverage shall not be subject to the provisions of this chapter. [Emphasis added.] Generally, a material misrepresentation made in an application for no-fault insurance entitles the insurer to void or to cancel retroactively the policy. Katinsky v Auto Club Ins Ass’n, 201 Mich App 167, 170; 505 NW2d 895 (1993). However, this right to rescind a policy altogether ceases to exist once there is a claim involving an innocent third party. Id. As indicated previously, Farmers concedes that the language of § 520(f)(1) necessitates this result. However, Farmers contends that even though an innocent third party was injured, its liability should be limited to the statutory minimum, because the policy was fraudulently obtained. We agree. As stated above, § 520(f)(1) prohibits an insurer from using fraud as a basis to void completely coverage under an insurance policy once an innocent third party has been injured. Thus, once an accident occurs, coverage in the amount of the statutory minimum of $20,000/$40,000 must be available for claims by innocent third parties, notwithstanding the fact that the policy in question may have been procured by fraud. However, this prohibition is found only in § 520(f)(1), which, again, deals with the statutorily mandated minimum coverage of $20,000/$40,000. By contrast, § 520(g), which addresses excess coverage, does not include such a limitation. In fact, in drafting § 520(g), the Legislature expressly provided that *219 the additional coverage contemplated in that section "shall not be subject to the provisions of this chapter.” Thus, reading §§ 520(f)(1) and 520(g) together, it is evident that the Legislature did not intend to preclude an insurer from using fraud as a defense to void optional insurance coverage. Had the Legislature intended to do so, the same prohibitory language found in § 520(f)(1) would have been included in § 520(g), namely, that, with regard to mandated minimum coverage, fraud on the part of the insured in obtaining or retaining a policy shall not constitute a defense for the insurer against a judgment creditor. See Sebewaing Industries, Inc v Village of Sebewaing, 337 Mich 530, 545; 60 NW2d 444 (1953). By failing to include this prohibitory language in § 520(g) and by specifically exempting the excess or additional coverage permitted by § 520(g) from the remaining provisions of the chapter, the Legislature made it clear that it did not intend to deprive insurers of this defense with respect to a claim for excess coverage. Despite the holdings in Ohio Farmers and Katinsky, we do not go so far as to say that a validly imposed defense of fraud will absolutely void any optional excess insurance coverage in all cases. To the contrary, when fraud is used as a defense in situations such as these, the critical issue necessarily becomes whether the fraud could have been ascertained easily by the insurer at the time the contract of insurance was entered into. We think it unwise to permit an insurer to deny coverage on the basis of fraud after it has collected premiums, when it easily could have ascertained the fraud at the time the contract was formed — Ohio Farmers was such a case. We are mindful that the Ohio Farmers panel concluded generally that "once an innocent third *220 party is injured in an accident in which coverage is in effect on the automobile, an insurer will be estopped from asserting rescission as a basis upon which it may limit its liability to the statutory minimum.” Id. at 364-365. Again, unlike the present case, Ohio Farmers involved a situation where the fraud relied on by the insurer was readily ascertainable at the time the contract for insurance was formed. Moreover, neither Ohio Farmers nor Katinsky addressed §§ 520(f)(1) and 520(g) of the financial responsibility act. Instead, both panels analyzed the respective cases solely in light of public policy considerations. As stated previously, when an accident occurs in this state, the scope of liability coverage is determined by the financial responsibility act. League General, supra. Because, as we have indicated, the financial responsibility act is controlling with respect to Farmers’ responsibility, Ohio Farmers and its progeny are not controlling in our resolution of this case. To the extent that those cases may be found to be inconsistent with our holding here, we decline to follow them. In the present case, Dillon’s name was nowhere to be found on the application for insurance that was completed by Anderson. Therefore, the trial court properly concluded that it would have been virtually impossible for Farmers to know that it should obtain Dillon’s driving record, because it had no reason to believe that he would be operating the subject vehicle. Additionally, we accept the trial court’s assumption pursuant to the parties stipulation for purposes of the motion, that Anderson committed fraud to obtain the policy. Reviewing the issue de novo, we conclude that the trial court erred in granting summary disposition in favor of defendants, because Farmers was entitled *221 to use fraud as a defense to limit coverage under the policy to the statutory minimum. Therefore, defendants were not entitled to judgment as a matter of law. Sections 520(f)(1) and 520(g); Borman v State Farm Fire & Casualty Co, 198 Mich App 675, 678; 499 NW2d 419 (1993). Reversed and remanded. We do not retain jurisdiction.