Meemic v Fortson: Deny the Claim, Don’t Void the Policy

Much like political landscapes and the tides, the Michigan court system ebbs and flows.

Over the last few months, the appellate courts have continued the shift against insurance carriers in cases involving fraudulent claims. This trend continued on July 29, 2020 with Meemic v Fortson, where the Michigan Supreme Court held that an insurance policy cannot be entirely voided on the basis of fraud that was committed after the policy application was signed. While the Court’s holding will likely result in fewer successful motions for summary disposition, it does not leave insurance carriers without recourse in defending or denying fraudulent claims.

Fortson involved a claimant, Justin Fortson, who was seriously injured in an accident, leaving him with brain damage.  For over five years after the accident, Fortson’s parents submitted monthly bills for 24-hour care that they were allegedly providing to their son. Meemic paid these benefits for the first three years without question. But after an investigation, Meemic discovered that Fortson was periodically jailed and spent time at an inpatient drug rehabilitation center. Despite this, Fortson’s parents claimed reimbursement for alleged 24-hour care over a combined 10-month period during which they could not have provided the care.

Based on these discrepancies, Meemic sought to enforce the broad anti-fraud provision in the Fortsons’ policy, which provided that the entire policy would be void if any insured person concealed or materially misrepresented a fact related to the application for the insurance, the insurance itself, or any claim made under it.  Justin Fortson was considered to be insured under his parents’ Meemic policy, but was not actually a policyholder.

Meemic first terminated Fortson’s benefits, then filed suit against Fortson and his parents seeking to void the entire policy on the basis of fraud. After the trial court granted summary disposition for Meemic, the Court of Appeals reversed, finding that Meemic’s anti-fraud provision was invalid because it allowed Meemic to circumvent the payment of statutorily-mandated personal injury protection (PIP) benefits.  Recognizing the “utopian” aims of the No-Fault Act to mandate universal PIP coverage, the Michigan Supreme Court affirmed, holding that Meemic’s anti-fraud provision was unenforceable because voiding the policy was not an approved defense under either the No-Fault Act or Michigan’s common law.

The Court first held that the No-Fault Act does not explicitly allow an insurer to void (rescind) an entire policy on the basis of fraud.  As such, there was no statutory support for Meemic’s contractual anti-fraud provision.

The Court then held that common law fraud defenses are generally limited to scenarios involving contract formation (also known as fraudulent inducement to enter into a contract), and not after the contract takes effect. Since the fraud committed by Justin Fortson’s parents occurred well after the inception of the insurance contract, the Court found that there was no common law basis for Meemic’s contractual anti-fraud provision.

Much of Fortson analyzes Meemic’s attempt to rescind the policy itself. While the Court ultimately held that rescission of the entire policy was inappropriate, the Court reaffirmed that insurance carriers have other avenues to defend fraudulent claims – such as denying fraudulent claims without rescinding the entire policy or seeking statutory attorney fees after trial for defending a claim that was in some respect fraudulent.

Overall, Fortson is a continued contraction of available fraud defenses for insurance carriers, as well as a warning about overly broad fraud provisions in insurance contracts. The Court characterized Meemic’s anti-fraud provision as “sweeping” and “broad,” impermissibly allowing it to terminate benefits for Justin Fortson “on the basis of the fraudulent activity of anyone who happened to be in or out of the car and entitled to claim under the policy.”  Under Meemic’s policy, the fraudulent activity “could occur years after the policy was entered and relate to any claim or simply to the ‘insurance.’”

The Court declined, however, to address several remaining questions.  The Court noted that the common law may allow for rescission of a contract due to “postprocurement fraud” if a party fails to perform a “substantial” part of a contract – but such an argument was not made by Meemic during the case. The Court also questioned whether such provisions would apply to policyholders, claim beneficiaries, or both.  Finally, the Court declined to analyze the burden of proof needed to void a policy for fraud committed directly by the claimant – a situation not present in Fortson because it was Fortson’s parents, not Justin Fortson himself, who committed the fraud.

Ultimately, the Court noted that the No-Fault Act’s relationship with common law defenses might need re-examination to clarify what, if any, fraud defenses are available to insurance carriers. But given the recent No-Fault Act overhaul in July 2019, major changes to the Act are not expected. Fortson should instead be seen as a warning to insurance carriers about the breadth and scope of their contractual provisions, and a limit on attempts to rescind policies unless the fraud occurred at the time the policy application was signed.