Insurance Companies May Now Avail Themselves of the Traditional Legal and Equitable Remedies when Faced with Fraud

Insurance Companies May Now Avail Themselves of the Traditional Legal and Equitable Remedies when Faced with Fraud

The Michigan Supreme Court has discarded the 36-year-old doctrine that once prevented insurance companies from denying claims based on fraudulent statements made in an insured’s application.  Previously, the law stated that an insurer could not deny liability in the event of fraud found on an insured’s application if the fraud would have been “easily ascertainable” by the insurer.  Now, fraud, if proven, can serve as a complete bar to recovery.  Insurance companies no longer have the duty to investigate and may rely solely on the insurance application.

In the case of Titan Insurance Company v Hyten, Hyten’s driver’s license had been suspended.  Her mother had been informed that insurance could not be provided until Hyten’s license was reinstated.  So, with the help of the insurance agent, Hyten’s mother completed a back-dated insurance application, attesting there were no unlicensed drivers in the household.  Previously, because an insurer could have easily verified the status of Hyten’s driver’s license, this fraud would not serve has a bar to recovery.  Now, insurance companies may deny such claims.

To prove fraud now, insurance providers need only prove the following: the customer made a 1) material (mis)representation; 2) the representation was false; 3) the customer knew the representation was false when she made it; 4) the customer made the misrepresentation with the intent the insurance company would rely on it; and 5) the insurance company suffered damages as a result.

While the insurance company enjoys the lower burden of proving “actual reliance,” the insured must meet the higher burden of proving that they “reasonably relied” on the insurance agent’s representations, if they wish to bind the insurance company under agency law. This is significant, and the Court does not explain why insurance companies face only a subjective standard, while the insured that rely on what their agents say face a tougher, objective standard.

Linda Davis Friedland is an attorney in our Livonia office where she concentrate her practice on Commercial Litigation, Employment and Labor Law, Corporate and Business Law, Estate Planning, Utilities Law and Municipal Law. She can be reached at (734) 261-2400 or lfriedland@cmda-law.com.

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