Darnell v. Auto-Owners Ins. Co.

• Decision Date: 19 June 1985
• Docket Number: Docket No. 75536,AUTO-OWNERS
• Parties: Timothy L. DARNELL, Plaintiff-Appellee, v.INSURANCE COMPANY, Defendant Cross-Defendant/Appellant and Cross-Appellee, and Dairyland Insurance Company, Defendant/Cross-Appellee, and State Farm Mutual Automobile Insurance Company, Defendant, Cross-Plaintiff/Appellee and Cross-Appellant.
• Court: Court of Appeal of Michigan — District of US

Page 243

369 N.W.2d 243

142 Mich.App. 1

Timothy L. DARNELL, Plaintiff-Appellee, v. AUTO-OWNERS INSURANCE COMPANY, Defendant Cross-Defendant/Appellant and Cross-Appellee and Dairyland Insurance Company, Defendant/Cross-Appellee and State Farm Mutual Automobile Insurance Company, Defendant Cross-Plaintiff/Appellee and Cross-Appellant.

Docket No. 75536.

Court of Appeals of Michigan.

Submitted Oct. 11, 1984.

Decided April 15, 1985.

Released for Publication June 19, 1985.

Fraser, Trebilcock, Davis & Foster by Ronald R. Sutton and Helen Currie Foster, Lansing, for Auto-Owners Ins. Co.

Fowler, Tuttle & Harley by David M. Clark, Lansing, for Dairyland Ins. co.

Willingham, Cote', Hanslovsky, Griffith & Foreman, P.C. by John A. Yeager, East

Lansing, for State Farm Mutual Automobile Ins. Co.

Before DANHOF, C.J., and GRIBBS and FITZGERALD ^*, JJ.

DANHOF, Chief Judge.

On September 4, 1980, plaintiff, Timothy Darnell, brought this action to recover no-fault personal injury protection (PIP) benefits after he sustained injuries on April 12, 1980, by being hit by an automobile while hand-pushing another vehicle. Plaintiff sued defendant Auto-Owners (his insurer), defendant Dairyland Insurance Company (the insurer of the vehicle that struck him) and State Farm Mutual Automobile Insurance Company (the assigned claims insurer that had been assigned the claim by the assigned claims facility, pursuant to M.C.L. § 500.3171 et seq.; M.S.A. § 24.13171 et seq.). After extensive proceedings in this matter, the trial court ruled that defendant Auto-Owners was liable for the payment of no-fault benefits to plaintiff and granted plaintiff's motion for attorney fees and costs.

On September 7, 1983, the trial court also denied a motion by defendant State Farm to recover attorney fees, interest and loss adjustment costs from defendant Auto-Owners. Defendant State Farm appeals from the trial court's denial of its request for attorney fees from Auto-Owners, and Auto-Owners appeals the lower court's ruling that the policy of insurance issued to plaintiff could not be voided ab initio despite misrepresentations made by plaintiff in his application for insurance.

Plaintiff's wife, Sheila Darnell, executed an application for automobile insurance on behalf of plaintiff with defendant Auto-Owners on April 1, 1980. Mrs. Darnell testified that she told the agent at Financial Services Center, Inc., that the only party to be insured under the policy was plaintiff. She was asked whether any drivers in her household had had their licenses revoked, restricted or suspended within the last three years; she answered the question in the negative. A certificate of insurance was issued on April 1st to plaintiff as the named insured. Mrs. Darnell stated that, at that time, she did not know her husband had a restricted license.

Soon thereafter, on April 12, 1980, plaintiff sustained injuries when a vehicle struck him from behind while he was hand-pushing another automobile. On April 14, 1980, Auto-Owners issued the policy of automobile insurance to plaintiff, although it had obtained plaintiff's driving record on April 10, 1980, and learned that his license had been restricted from April 25, 1978, through July 24, 1978. Moreover, plaintiff's license expired on his birthday, on April 20, 1980, as he was in the hospital and unable to renew it. Accordingly, on April 28, 1980, Auto-Owners' sales agency sent a notice of cancellation to plaintiff, stating that the cancellation was due to the fact that there was no licensed driver in the household. The cancellation was to be effective May 19, 1980. Mrs. Darnell, however, obtained her license, paid the ticket that had resulted in her license suspension and requested that the insurance not be cancelled as of May 19, 1980. Subsequently, Auto-Owners learned that Mrs. Darnell's driver's license had been suspended on August 2, 1977; it was not reinstated until April 30, 1980.

Then, on May 12, 1980, Auto-Owners sent a letter to plaintiff and his wife denying plaintiff insurance benefits and claiming that the policy was void ab initio due to alleged material misrepresentations in the application for insurance. However, Auto-Owners states that it received Mrs. Darnell's driving record on May 13, 1980.

Plaintiff commenced this action on September 4, 1980. On October 9, 1980, defendant State Farm filed a cross-claim against Auto-Owners, contending that Auto-Owners could not rescind the insurance policy inasmuch as a no-fault policy cannot be rescinded following an accident involving an insured; Auto-Owners did not use reasonable diligence in investigating the Darnells prior to the accident; and the grounds for cancellation were unrelated to the cause of the accident. On September 3, 1981, State Farm filed a motion for summary judgment to fix liability for no-fault benefits as to Auto-Owners. This motion was heard on October 14, 1981, and the trial court granted the motion.

In its opinion from the bench, the trial court found that provisions of the no-fault act, public policy concerning the application of the provisions of the no-fault act and this Court's decision in Frankenmuth Mutual Ins. Co. v. Latham, 103 Mich.App. 66; 302 N.W.2d 329 (1981), precluded Auto-Owners from voiding plaintiff's policy ab initio. Auto-Owners sought to set aside the order granting State Farm's motion for summary judgment. This motion was denied. Auto-Owners applied to this Court for leave to appeal on January 4, 1982. On June 18, 1982, this Court denied the application for leave to appeal.

On December 27, 1982, plaintiff filed a motion seeking to recover attorney fees from defendants pursuant to M.C.L. § 500.3148; M.S.A. § 24.13148. The trial court granted plaintiff's motion in a written opinion dated May 13, 1983. Subsequently, State Farm filed a motion seeking recovery from Auto-Owners of the no-fault benefits (totalling $76,041.72) which it had paid on behalf of plaintiff. State Farm also sought actual attorney fees pursuant to § 3148, interest pursuant to M.C.L. § 500.3148; M.S.A. § 24.13148, interest pursuant to M.C.L. § 600.6013; M.S.A. § 27A.6013, and loss adjustment costs and other taxable costs.

Auto-Owners tendered payment of all the personal injury protection benefits that State Farm had paid on July 27, 1983, but did not tender any amount for interest or the other expenses claimed by State Farm. State Farm then filed an amended motion for summary judgment seeking penalty attorney fees, penalty interest and other costs. The trial court heard State Farm's motion on September 7, 1983, and found that Auto-Owners was not liable for the fees and interest sought by State Farm. This appeal ensued.

Preliminarily, we note that State Farm's motion for summary judgment as to Auto-Owners' liability (joined in by Dairyland) was brought under GCR 1963, 117.2(1), (2) and (3). Although we hold that the lower court applied an erroneous standard of law, we find that the result reached was proper, and, therefore, pursuant to GCR 1963, 820.1(7), we affirm the order of summary judgment in favor of plaintiff.

In the instant case, while recognizing that at the time of decision below the lower court did not have benefit of the Cunningham, infra, and United Security, infra, decisions, we nevertheless reject the lower court's conclusion that the policy of insurance could not be voided once an accident occurred or where the alleged misrepresentation of fact had no ostensible relation to the accident which occasioned the injury.

Where a policy of insurance is procured through the insured's intentional misrepresentation of a material fact in the application for insurance, and the person seeking to collect the no-fault benefits is the same person who procured the policy of insurance through fraud, an insurer may rescind an insurance policy and declare it void ab initio. Cunningham v. Citizens Ins. Co. of America, 133 Mich.App. 471; 350 N.W.2d 283 (1984); United Security Ins. Co. v. Comm'r of Ins., 133 Mich.App. 38; 348 N.W.2d 34 (1984). A policy of no-fault insurance does not become absolute once an injury arises so long as there are no innocent third-party claimants involved. Accordingly, we reject the lower court's first ground for refusing to allow voidance of the policy.

We also reject the lower court's second ground for disallowing rescission. The nature of the misrepresentation need not causally relate to the accident which results in injury. See the discussion in Auto-Owners Ins. Co. v. Comm'r of Ins., 141 Mich.App. ----; --- N.W.2d ---- (1985), a case involving the same policy of insurance, in which we rejected this notion.

Nevertheless, we hold that rescission was improper in the instant case. An insurer may only void a policy of insurance ab initio where an innocent third party is not affected thereby and where it can be shown that the insured intentionally misrepresented a material fact communicated at the time of effecting the insurance; that is, where such misrepresentation substantially increased the risk of loss insured against so as to bring about a rejection of the risk or the charging of an increased premium. Here, Auto-Owners received plaintiff's driving record on April 10, yet issued the policy of insurance on April 14. Moreover, with respect to Mrs. Darnell, Auto-Owners gave notice on May 12 that it was rescinding the policy ab initio; however, it also stated that it did not receive Mrs. Darnell's driving record until May 13. It thus seems highly unlikely that it was her driving record which prompted Auto-Owners to rescind the policy. And, Mrs. Darnell's misrepresentation as to plaintiff's driving record, as a matter of law, was not material since Auto-Owners' very action of issuing the policy with knowledge of plaintiff's record belies any contention that it would have rejected the risk or charged an increased premium. Accordingly, the misrepresentations of Mrs. Darnell were not material, based upon Auto-Owners'...