A. Vince Colella
Moss & Colella P.C.
As lawyers, we have all subscribed to the axiom, “bad facts make bad law.” This phrase rang true in 2014, when a Michigan Court of Appeals panel found in favor of an auto insurer that invoked a fraud exclusion in its policy to deny claims for replacement service benefits brought pursuant to the No-Fault Act. The case, Bahri v. IDS Prop. Cas. Ins. Co., 308 Mich. App. 420, 864 N.W.2d 609 (2014), set off a firestorm of insurer claims of fraud and served as a hefty weapon in the arsenal of insurance defense lawyers. Bahri involved a contentious dispute over the plaintiff’s submission of household service claims for a 19-day period that pre-dated the accident, and for activities that the plaintiff alleged she could not do in the face of surveillance video showing otherwise. Naturally, the carrier cried foul, while the plaintiff unpersuasively argued mistake. The opinion sounded the death knell for claims that teetered on the brink of material misrepresentation and opened the door to unrelenting scrutiny of far too many plaintiff No-Fault cases.
Over the years, Bahri went largely unchallenged. Only 19 cases since its release were distinguished from the opinion. Many of these cases involved claims that were not subject to an automobile policy of insurance containing a “fraud exclusion.” Rather, in these cases “coverage” under the No-Fault act was determined by statutory priority. In Richardson v Allstate, 328 Mich. App. 468 (2019), the court denied a claim of fraud where the claimant was assigned an auto insurance company through the Michigan Assigned Claims Plan. Similarly, where benefits were payable under priority section 3114 (uninsured city bus passenger), the defense of fraud has also been rejected. Washington v Brothern, 2019 Mich App LEXIS 359. Of course, there have been the occasional cases where auto insurance companies levied accusations of fraud where no clear intent could be proven resulting in favor of plaintiff. But for the most part, Bahri motions have served as the basis to deny claims outright or as leverage in settlement for less than fair value. Until now.
On July 9, a Michigan Court of Appeals panel confronted the issue head on in the case of Haydaw v. Farm Bureau Ins. Co., 2020 Mich. App. LEXIS 4427 (Ct. App. July 9, 2020). The case arose out of Farm Bureau’s claim that Mr. Haydaw (of whom English is not his primary language), provided an inaccurate medical history at his deposition. Haydaw argued he testified truthfully and any inconsistency was due to a genuine misunderstanding of the questions. Thus, the Court of Appeals was left to decide “whether statements made during litigation after the insured’s claim is denied constitute grounds to void the policy under a fraud provision.” Id at *4. The panel’s deep historical dive included a citation from the United States Supreme Court that held, “testimony at trial does not implicate an insurance policy’s fraud or false swearing clause.” [emphasis added] Republic Fire Ins Co of North America v Weides, 81 U.S. 375, 382-383 (1871). The Haydaw panel also surveyed other states and found that “the overwhelming majority of jurisdictions hold that only false statements made before legal proceedings have begun can serve to void an insurance policy”. For similar reasons, “statements made during litigation are by their nature incapable of satisfying the elements for voiding a policy on the basis of post-loss fraud. In order to obtain that relief under Bahri, 308 Mich App at 424-425, the material misrepresentation must have been made with “the intention that the insurer would act upon it.” Id. at *8, 9.
However, the court did not stop there. Additionally, it examined general principles of contract law and determined that allowing statements made during litigation to serve as a basis for fraud would violate the “first-breach” rule. Under Michigan law, “[the] one who first breaches a contract cannot maintain an action against the other contracting party for [their] subsequent breach or failure to perform.” Flamm v Scherer, 40 Mich App 1, 8-9 (1972). That is, if the insurer is in breach by wrongfully denying the claim, it may not attempt to later void the policy based upon fraud.
Speaking from an equitable standpoint, this decision is long overdue. For years, auto accident attorneys have faced the challenges of vetting every minor inconsistency, insignificant embellishment, and honest mistake. Household service calendars and attendant care forms had to be tediously scrutinized for the most innocuous oversight. Arguably this was not the intent of the Bahri decision, however, it was certainly the chilling effect that was left in its wake. It is likely that Haydaw will be appealed to the Michigan Supreme Court, however, unlike in Bahri, auto accident attorneys remain hopeful that “good facts will make for good law.”
A. Vince Colella is a founding partner of Moss & Colella P.C., a Southfieldbased law firm specializing in personal injury and civil rights. He can be reached at firstname.lastname@example.org.
This article was first published in the Detroit Legal News on August 6, 2020