After Rescission an Insurer May be Required Only to Pay an Innocent
Injured Person
On rare occasions bus accidents create a temptation to passengers to
claim injuries as soon as it looks like insurance may apply. When the
passengers on a bus insured by West Bend Mutual Insurance Company (West
Bend), their injuries appeared like magic. As a result of its attempted
investigation of a bus accident, West Bend moved for summary judgment
and defendant Citizens Insurance Company of the Midwest's (Citizens)
responded and filed a counter motion for summary judgment. In West Bend
Mutual Insurance Company v. Affiliated Diagnostic Of Oakland, LLC, et
al., Civil Action No. 21-cv-11007, United States District Court, E.D.
Michigan, Southern Division (February 21, 2023) the USDC weighed the
equities and resolved the dispute between two insurers.
BACKGROUND
West Bend's amended complaint states that multiple individuals
(“claimants”) allege that they were involved in an automobile accident
on February 3, 2020. West Bend insured Kristy's Early Childhood
Development Center, Inc. (Kristy's), pursuant to which West Bend
undertook to insure Kristy's solely against risks associated with the
childcare business. At the time of the accident, West Bend alleged that
the vehicle was not being used for the childcare business but was
instead being used by a separate business entity, DLB Transportation
LLC, which had held the vehicle out for hire to the claimants. West Bend
determined that Kristy's had made material misrepresentations or
concealed material facts when the policy was issued in so far as DLB
would be using the vehicle in connection with its business.
West Bend sought rescission of the policy and a declaration that the
policy was void ab initio. Only one defendant appeared in this matter
and now remains: Citizens is the assigned claims plan insurer for the
claims arising out of the underlying accident. In its motion for summary
judgment, West Bend seeks to extend rescission of the policy as to 16
natural person defendants and certain medical providers who allegedly
provided services to natural person defendants.
ANALYSIS
Rescission Of An Insurance Policy As To Innocent Third Parties Under
Michigan Law Requires A Balancing Of The Equities
Rescission as to innocent third parties is not an absolute right. When
two equally innocent parties are affected, the court is required, in the
exercise of its equitable powers, to determine which blameless party
West Bend demonstrated that it did not have any notice or opportunity to
discover the true use of the vehicle. An insurer has a reasonable right
to expect honesty in the application for insurance.
WEST BEND'S ADDITIONAL FACTORS WEIGH IN FAVOR OF RESCISSION
West Bend offers two additional arguments in support of rescission. As
Citizens acknowledges:
West Bend urged that natural person defendants have repeatedly
stonewalled and thwarted West Bend's efforts to investigate their claims
and alleged injuries and that their failure to participate in this
litigation has resulted in a substantial increase in time and cost for
West Bend to prosecute this case.
The bus passengers' refusal to participate in litigation regarding
rescission of the policy as against them suggests either ambivalence or
acquiescence in the relief sought by West Bend.
ZALMA OPINION
It was clear that the insured lied on the application and rescission was
appropriate. Whether the injured and the insurer who paid their
no-fault benefits - innocent of the misrepresentation - were entitled to
recover. Their default and refusal to submit to an examination under
oath placed the equities in favor of West Bend who had been defrauded
and the 14 people on the bus who claimed injuries only after a police
officer arrived made the case a classic bus jumping case that protected
West Bend.
