Marilyn Williams vs. Farm Bureau
On January 28, 2021, the Michigan Court of Appeals issued, in an opinion marked for publication, its decision in Mary Williams v Farm Bureau, Docket No. 349903 (Michigan Court of Appeals, 2021). Ultimately, the decision is a huge blow for insurers, as it effectively eliminates the well-known Bahri defense for fraud committed in the claims process.
Typically, insurers relied on two major decisions when defending fraud: (1) Bazzi for recission of the policy based on fraud in the application (i.e., fraud in procuring the policy itself), and (2) Bahri for denying a claim and voiding the policy for fraud conducted during the claim process or litigation. Recently, Michigan’s appellate courts rendered three decisions that admittedly limited the application these defenses. For instance, Meemic v Forston, 2020 Mich Lexis 1355 (2020), held that the fraud defense was not available to non-parties to the insurance contract, as it is not a defense that exists under the common law. That case specifically involved a claimant who was not the “named insured,” so it was still possible to argue that Bahri was not overruled, and that an insurer could still use it to defend a claim when a named insured commits fraud.
Subsequently, the Court of Appeals decided Glasker v Abenshire¸ 2020 Mich App Lexis 5298 (2020), which held that, because the insurer was not “specific” when pleading fraud in its Affirmative Defenses at the outset of a case, the Bahri defense could not be used at trial. The logical conclusion drawn from Glasker was that Bahri remained good law, as long as an Affirmative Defense regarding fraud was specific. The Court of Appeals then decided Haydaw v Farm Bureau, 2020 Mich App Lexis 4427 (2020), where it held that false statements made “during litigation” were not a basis for denying a claim or voiding a policy; rather, the false statements constituted a simple discovery violation that could either be sanctioned by the Court or exploited on cross-examination at trial. Again, a close reading of this opinion seemed to leave open situations where the fraud was committed pre-suit. In turn, we continued to use the Bahri defense when (1) Affirmative Defenses were filed reserving it; (2) when a named insured committed the fraud; and (3) when the fraud was performed pre-suit.
However, in Williams, the Court of Appeals has closed off these “holes” in the prior opinions, as it specifically ruled that Bahri cannot be used for fraud committed in the claims process. In Williams, the plaintiff was involved in a motor vehicle accident in September of 2016. There seems to be no dispute that fraud was committed during the claims process; rather, the parties disputed what the remedy for the insurer was when the claimant commits such an action and whether Bahri could apply. The Court, following Haydaw and Meemic, turned to the text of the No-Fault Act, reasoning that, since PIP benefits are statutorily mandated, the defenses against those benefits must arise from the Act as well. The Court therefore noted that “the text of the No-Fault Act does not authorize insurers to void or rescind a No-Fault policy on the basis of fraud or misrepresentation.” Rather, there are a number of circumstances in the No-Fault Act that disqualify a claimant from No-Fault benefits, such MCLA §500.3113, but the Legislature did not include any such disqualification when the claimant commits fraud. Therefore, the Court believes that no such defense should exist.
The Court further noted that, in Meemic, the Supreme Court only mentioned Bahri in a footnote and declined to determine “whether and to what extent that case survived this holding.” The Williams Court therefore took up that opportunity and left no ambiguity to its decision, stating: “[w]e conclude that Bahri remains good law only to the extent that it is consistent with the No-Fault Act and common law as explained in Meemic. In other words, it applies only in cases of fraud in the inducement.” Put simply, Bazzi remains good law, as insurers can still rescind policies for fraud in the application; however, insurers can no longer argue that a policy is void, and a claim denied, due to false submissions in the claims process, as “sorting out the truth” is the function of the jury. Therefore, we would argue that a jury can still be posed a question as to whether fraud was committed during litigation, a tactic that has proven successful.
In response to the argument that an insurer will have no recourse for fraudulent claims, the court notes that “an insurer maintains the power to deny claims or parts of claims it believes are fraudulent.” The plaintiff then bears the burden of filing suit to prove the reasonable necessity of his or her claimed expenses. The Court maintains the “saving grace” of MCLA MCLA § 500.3148(2) – that a court may still award attorney’s fees to an insurer if the claim “was in some respects fraudulent or so excessive as to have no reasonable foundation.”
In turn, insurers may still deny fraudulent claims, citing that the fraud proves that the claims are not reasonable and necessary. Attorneys should then file a Motion for Security of Costs, arguing that attorney’s fees will likely be awarded due to the fraud. Judges that may have previously dismissed these cases based on Bahri may then order the plaintiff to post a security bond for the insurer’s attorney’s fees if they believe the claim is fraudulent. Other than proceeding to a jury trial, this may be the only likely way to remain aggressive in defending fraudulent claims.