Insufficient Evidence Of Fraud: Auto Insurer Not Entitled To Rescind Policy

An auto insurance company could not rescind an insured’s policy ab initio (“from the beginning”) because there was not enough evidence the insured made fraudulent statements during the application process, the Michigan Court of Appeals has ruled.

In Durga v MemberSelect Ins Co (Docket No. 371891), the plaintiff, Desiree Durga, was in a crash while driving her new Chevy Silverado that was insured by the defendant, MemberSelect Insurance Company. The Silverado was considered a total loss. When the defendant refused to pay the insurance claim, the plaintiffs filed this breach of contract lawsuit. The plaintiffs alleged the defendant breached the contract by rescinding the policy based on an incorrect allegation that Desiree had “made a fraudulent misrepresentation in the application process.” The defendant, however, claimed it could rescind the policy ab initio because Desiree had made “false, material representations” when she purportedly told the defendant during the application process that the plaintiff, Justin Durga, “was ‘not licensed,’ ‘unlicensed,’ that he has ‘0’ years licensed, or that he did not have a license.”

The Benzie County Circuit Court granted the plaintiffs’ motion for summary disposition and denied the defendant’s motion for summary disposition. The trial court entered an order in the plaintiffs’ favor for $82,476.04, which represented the damage incurred to the Silverado. The defendant appealed.

The Court of Appeals affirmed.

“[W]ith regard to defendant’s affirmative defense of fraudulent misrepresentation, defendant has failed to prove to a reasonable degree of certainty any of the six elements required” under Titan Ins Co v Hyten, 491 Mich 547 (2012), the Michigan Court of Appeals wrote. “[N]ot only has defendant not provided clear and convincing evidence of fraud in this case, defendant has provided no evidence of fraud, meaning it is not entitled to rescission.”

Judge Colleen A. O’Brien, Judge Mark T. Boonstra and Judge Randy J. Wallace were on the Court of Appeals panel that issued the unpublished opinion.

Insurance Policies

As a result of the plaintiff, Justin Durga, having two or more substance abuse convictions in seven years, his Michigan driver’s license was mandatorily revoked from June 9, 2007 “until the requirements” in MCL 257.303(2)(c) were satisfied.

In June 2012, Desiree applied for auto insurance with the defendant for a Jeep Grand Cherokee that she owned. According to Desiree, “[a]t that time I fully disclosed to AAA that my husband, Justin Durga, did not have a valid driver’s license.” The defendant’s records showed that the plaintiffs had been “AAA Insured” since June 29, 2012.

Although the defendant alleged that Desiree’s application for insurance contained a material misrepresentation, “it has not produced a copy of her June 2012 application in this case,” the Court of Appeals observed in its opinion. Rather, in response to a request for production of documents, including the policy, the defendant stated: “This application for insurance no longer exists.”

In the trial court, the defendant relied on two documents to support rescinding the plaintiff’s policy: 1) a “New Declaration Certificate” (certificate) and an “Automobile Application Addendum and Authorization” (addendum), “the latter of which was only signed by AAA sales representative, Jeanine Michalski, at 9:53AM on February 25, 2013.” The certificate “states that Desiree Durga is ‘ASSIGNED’ and Justin Durga is ‘NOT LICENSED’” and under an item labeled “Years Licensed,” it states “7” for Desiree and “0” for Justin. However, in the addendum next to a line asking, “Do all drivers have a valid driver’s license including drivers 16 years of age with a graduated license?” the “Yes” box was checked. Although the addendum included the signature of Jeanine Michalski on the “Sales Representative” line, the “Signature of Applicant” line was blank. “In her affidavit, Desiree Durga’s avers that ‘I never stated that Justin Durga had a valid driver’s license, nor did I ever prepare or sign this Addendum.’”

According to the Court of Appeals, the addendum “indicates that the Durgas carried automobile insurance with Farmers Insurance Exchange through March 15, 2013, and consistent with the certificate, it appears MemberSelect first insured Desiree Durga’s Jeep for the February 25, 2013-August 25, 2013 policy term. This policy was renewed and continued for ten years through the February 25, 2023 August 25, 2023 term at issue in this litigation. Desiree Durga’s affidavit also avers that ‘every renewal from AAA or MemberSelect continued to state that Justin Durga was not licensed – as this has not changed since 2007 or 2012 when I first acquired insurance from AAA and then later, Member Select.’”

On June 22, 2023, Desiree was driving the Silverado when it collided with another vehicle. No one suffered serious injury, but the Silverado was a total loss. Desiree submitted an insurance claim to the defendant. She was later contacted by an individual with the AAA Insurance Special Investigations Unit and, in a July 12, 2023 recorded telephone interview, that individual asked whether the Silverado was being used in the operation of the Durgas’ business (which would result in an exclusion of coverage). Desiree indicated that none of the vehicles insured under the policy were used in their business, and that the vehicles used in their business were insured through another company. “Consistent with her representations in applying for insurance in June 2012, and thereafter, she further confirmed in this interview that her husband Justin Durga does not have a valid driver’s license and does not drive any of the vehicles insured by the MemberSelect policy.”

The plaintiffs received a July 21, 2023, letter from the defendant, indicating their auto insurance policy was being cancelled as of August 23, 2023, “without providing any explanation for that action.” The plaintiffs then received a July 25, 2023, letter from the defendant stating that it was rescinding the insurance policy for the February 25, 2023 through August 25, 2023 policy term. “This letter asserted that, in issuing the subject automobile insurance policy, it relied upon their representation that ‘Justin Durga is not licensed.’ It further stated: However, our review of this information reveals that the information was false or misleading and material facts were misrepresented. The false or misleading facts include, but are not limited to, the following: 1. Justin Durga has a revoked driver’s license.”

The July 25, 2023, letter also indicated the defendant “was rescinding coverage and that it was void as of February 25, 2023 by application of several General Conditions contained in the automobile insurance policy and quoted in the letter. The letter further indicated that plaintiffs would receive a refund or credit of premium for this February 25, 2023-August 25, 2023 policy.”

Trial Court Proceedings

The plaintiffs filed this lawsuit in September 2023, claiming the defendant breached the insurance contract by failing to pay the claim arising from the collision that totaled the Silverado. The plaintiffs filed motions for summary disposition under MCR 2.116(C)(9) (failure to state a valid defense) and MCR 2.116(C)(10) (no genuine issue of material fact).

The defendant filed a cross-motion for summary disposition, asserting, among other things, that Desiree falsely asserted in her insurance application that “both she and her husband have a valid driver’s license.” The plaintiffs responded, emphasizing the defendant’s cross-motion “only relied upon the addendum’s indication that Justin Durga has a valid driver’s license, ignoring the contradictory statements in the certificate it simultaneously prepared that he is ‘NOT LICENSED’ and had ‘0’ years licensed, and that neither of these documents were created or signed by plaintiffs.” The plaintiffs also argued the defendant “has not and cannot demonstrate the six elements of fraudulent misrepresentation in Desiree Durga’s application for insurance to a reasonable degree of certainty so as to entitle it to rescission, where there is no application to refer to, no misrepresentation was made, and defendant’s argument relies upon underwriting guidelines that were not known or available to plaintiffs.”

The trial court held that the defendant stated a valid defense to the plaintiffs’ breach of contract claim and denied the plaintiff’s motion for summary disposition under MCR 2.116(C)(9). However, the trial court granted summary disposition for the plaintiffs under MCR 2.116(C)(10), finding that “(1) defendant doesn’t possess or can’t retrieve the actual application for insurance” on which their allegations of fraudulent misrepresentation are based, and further, (2) defendant is relying upon the affidavit of an underwriter asserting that MemberSelect’s underwriting guidelines make material distinctions between a person being ‘unlicensed’ or ‘not licensed’ versus their license being revoked when it is acknowledged that plaintiffs never had access to these guidelines.”

The trial court entered judgment in the plaintiffs’ favor for $82,476.04, representing the damages to the Silverado.

The defendant appealed.

‘Unlicensed’ And ‘Not Licensed’

On appeal, the defendant argued it was entitled to the defense of “fraudulent misrepresentation” in the insurance application process and sought to rescind the policy ab initio and not pay the plaintiff’s claim.

Noting that an insurance policy “must be enforced in accordance with its terms, which are given their ‘commonly used meaning’ if not defined in the policy,” the Court of Appeals relied on the Hyten decision. Under Hyten, the party “asserting entitlement to the defense of fraudulent misrepresentation bears the burden of proving six elements to a reasonable degree of certainty: (1) That defendant made a material representation; (2) that it was false; (3) that when he made it he knew that it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention that it should be acted upon by plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that he thereby suffered injury.”

In this case, the defendant argued that Desiree’s telling the defendant “that Justin Durga was ‘not licensed,’ ‘unlicensed,’ that he has ‘0’ years licensed, or that he did not have a license, were all false, material representations,” the Court of Appeals observed. “We disagree.”

The defendant asserted that “not licensed” meant that “a person has never been licensed, whereas Justin Durga was licensed because he had been issued a driver’s license and driver’s license number, but his license was thereafter revoked,” the Court of Appeals said. “Defendant contends, by way of the affidavit of one of its senior underwriters, Sherida Griffith, that under MemberSelect’s underwriting guidelines, ‘not licensed’ is not the same as a driver whose license has been suspended or revoked” and “a driver is only to be considered to be ‘not licensed’ if the driver has never held a driver’s license and does not have a driver’s license number.”

The defendant, however, “acknowledged that those underwriting guidelines were not made available to the plaintiffs,” the Court of Appeals noted. “Further, defendant does not otherwise contend that ‘not licensed’ or ‘unlicensed’ are terms defined by its application or automobile insurance policy, which means they are given their commonly used meaning, and ambiguities are construed against the drafter in favor of coverage.”

Therefore, the Court of Appeals turned to “the lay dictionary definition of ‘not licensed’ or ‘unlicensed’ to determine their commonly used meaning.” The appeals court explained that Merriam-Webster’s Collegiate Dictionary (11th ed) defines “license” as “’permission to act,’ or ‘a permission granted by competent authority to engage in a business or occupation or in an activity otherwise unlawful.’ Further, the prefix ‘un-’ means ‘not’ and the suffix ‘-ed’ means ‘having.’ Additionally, ‘not’ is ‘used as a function word to make negative a group of words or word.’ Accordingly, ‘unlicensed’ and ‘not licensed’ are identically defined as not having permission to act or not having a permission granted by a competent authority to engage in an activity. Similarly, the Merriam-Webster.com Dictionary provides the following pertinent definition of ‘unlicensed’: ‘not licensed: such as . . . not authorized or permitted by a license.’ Defendant for its part, cites the Cambridge Learner’s Dictionary & Thesaurus for its definition of ‘unlicensed’: ‘not having a license.’ By their plain terms, we do not find that any of these dictionaries’ definitions foreclose a person whose license has been revoked from being considered ‘unlicensed’ or ‘not licensed.’ Again, any perceived ambiguity in language is construed against the drafter in favor of coverage.”

Moreover, “referring to a person whose license has been revoked as ‘unlicensed’ or ‘not licensed’ is consistent with Michigan law,” the Court of Appeals said, citing MCL 257.321 and MCL 257.52(2). “In other words, a person whose driver’s license has been revoked must go through the process of being issued a new license, i.e., a license different from the one that had to be surrendered to and destroyed by the department of state (and Justin Durga has not done so at any time relevant to this litigation).”

In addition, “defendant itself relied upon [Farmers Ins Exchange v Anderson, 206 Mich App 214 (1994)], in its summary disposition briefing wherein this Court referred to a driver whose license had been revoked as being ‘unlicensed,’” the Court of Appeals said. “Additionally, defendant … relied upon Ahmed v Tokio Marine America Ins Co, 337 Mich App 1 … (2021), which likewise refers to the plaintiff whose license had been revoked several years earlier as ‘unlicensed’ and ‘not licensed’ for purposes of denying him personal protection insurance benefits pursuant to MC[L] 500.3113(a). These consistent case references to a person whose license has been revoked being ‘unlicensed’ and ‘not licensed’ reflect the ‘commonly used meaning’ of ‘unlicensed’ and the common understanding and meaning of the colloquial phrase ‘not licensed.’”

No Rescission Of Contract

According to the Court of Appeals, the defendant failed to produce evidence of the first four elements of fraudulent misrepresentation in Hyten.

“If the guidelines had been provided to plaintiffs, then defendant could argue they should have known about the guideline’s alleged definition of ‘not insured,’” the Court of Appeals explained. “But plaintiffs had no way of knowing about that alleged definition because they were never provided with them. If defendant could establish the first four elements of fraud from Hyten … (a material misrepresentation, falsity of the representation, knowledge of falsity, and intention that it would be acted upon), then the guidelines might be relevant to whether defendant acted in reliance upon the misrepresentation and suffered injury. However, defendant cannot establish any of those elements in this case.”

Regarding the “certificate,” the defendant argued the appellate court “should interpret the phrase ‘not licensed’ to actually mean ‘never licensed,’ despite the fact that those two phrases obviously have distinct meanings,” the Court of Appeals observed. “But we decline to do so; instead, we interpret the phrase using its ‘commonly used meaning’ ….”

The defendant also maintained that Desiree represented that her husband had “0” years licensed in her June 2012 application because his license had been revoked in 2007. However, because the defendant never sought summary disposition on its affirmative defense of fraud in the application and for rescission of the policy on this ground, and because the argument was not raised in the trial court, the Court of Appeals held it was “unpreserved on appeal and, therefore, waived.”

Meanwhile, the defendant further argued the trial court abused its discretion by not upholding the policy’s rescission because “Michigan courts treat rescission more as a matter of entitlement than a matter of discretion where, as here, the claim doesn’t involve an innocent third party and rescission doesn’t depend on equitable balancing.”

The defendant “essentially asserts that, while an insurance company is entitled to rescission in cases of fraud in the inducement, it is likewise entitled to rescission in any other case as long as it does not involve an innocent third party,” the Court of Appeals said. “That is simply not the law in Michigan ….”

Therefore, “[w]e affirm the trial court’s … amended order granting plaintiffs’ motion for summary disposition pursuant to MCR 2.116(C)(10) and denying defendant’s cross-motion for summary disposition,” the Court of Appeals concluded.