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Everything Old is New Again

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Mark J. Colon
Foster Swift No-Fault E-News
June 20, 2012

In a 4-3 decision, the Michigan Supreme Court ruled on June 15, 2012, that the principles set forth in the 1959 Supreme Court decision of Keys v Pace allow an insurer to avail itself of the defense of fraud in the application for insurance, even if the claimant is an injured third party and the fraud could have been easily ascertainable.  In reaching this decision in Titan Ins Co v McKinley Hyten, et al, (No 142774), the Supreme Court overruled the prominent case of State Farm Mut Auto Ins Co v Kurylowicz, 67 Mich App 568; 242 NW2d 530 (1976) and its progeny.

In Titan, Hyten, whose driver's license was suspended, signed an application for insurance with Titan on August 22, 2007, with the expectation her license was being reinstated on August 24, 2007.  Hyten did not disclose that her license was suspended.  Hyten did not actually receive her license until September 20, 2007.  In February, 2008, Hyten was driving the insured vehicle when she collided with third parties and injured them.  While investigating the accident, Titan learned that Hyten did not have a valid driver's license when the policy was issued (which was August 24, 2007).  Titan filed a declaratory action seeking a determination that it was not obligated to indemnify Hyten against the third parties because of Hyten's fraudulent conduct in her application for insurance.

In affirming the trial court, the Court of Appeals relied on Kurylowicz, asserting that once an insurable event has occurred and a third party possesses a claim against an insured, an insurer is not entitled to reform the policy to the third-party's detriment when the fraud by the insured was easily ascertainable.

The Supreme Court explained that because insurance policies are contracts, common-law defenses, such as "fraud," may be invoked to avoid contract enforcement.  The doctrine of fraud does not require the party asserting fraud to have performed an investigation of all assertions and representations made as a prerequisite to establishing fraud.

The Supreme Court pointed out that the precise question of whether an insurer may avoid liability under an insurance policy on the grounds of fraud in the application, when the fraud was easily ascertainable and the claimant is a third party, was the "precise question" addressed in Keys in 1959.

The Supreme Court makes clear in its newest "Titan" decision that Kurylowicz is "out," and Keys is back "in."