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Court of Appeals Addresses No-Fault Policy Reformation and Exclusions in Published Opinion

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Joseph E. Kozely & Laura J. Garlinghouse
Foster Swift No-Fault E-News
November 14, 2008

On November 14, 2008, the Michigan Court of Appeals held in a published opinion that (1) no-fault insurers may utilize a household exclusion to limit liability coverage to the statutory minimum; and (2) an insurer does not have a duty to investigate a policy applicant's (mis)representations. Manier v MIC Gen Ins Co (Docket No. 279586).

Plaintiff's parents purchased a no-fault automobile insurance policy from Defendant MIC General Insurance Company.  Plaintiff was listed as a driver for one of the insured vehicles, a 2001 Oldsmobile Silhouette.  In the application, Plaintiff's parents represented that Plaintiff lived with them in Westland and that the Silhouette would be stored in Westland.  The policy provided liability coverage of $100,000 per person and $300,000 per accident.  It also included a household exclusion for liability coverage that restricted coverage to the statutory minimums of $20,000 per person and $40,000 per accident.

After the policy took effect, Plaintiff's children were injured in a motor vehicle accident involving the Silhouette and Defendant paid all first party no-fault claims on behalf of the children. Thereafter Defendant discovered that Plaintiff and his children did not live in Westland with Plaintiff's parents but rather in Ypsilanti, and that the Silhouette was not stored in Westland but rather in Ypsilanti.  Defendant retroactively reformed the no-fault policy to reflect Plaintiff's correct address.  Defendant did not change the policy limits, the household exclusion, or make any other substantive changes.

Plaintiff filed suit against Defendant for additional first-party no-fault benefits and a declaration that Defendant had improperly reformed the contract.  The trial court granted summary disposition to Defendant, holding that Defendant had paid all no-fault benefits and that the reformed policy contained the same coverage as the original policy.

The Court of Appeals affirmed. The Court rejected Plaintiff's argument that Defendant could easily have discovered the misrepresentations in the policy application and held that Defendant was entitled to reform the policy when the misrepresentations were discovered.

The Court also rejected Plaintiff's argument that Defendant could not reform the policy because the injured children were "innocent third parties." The Court held that Plaintiff's claim was "factually unfounded" because Defendant did not alter the policy limits when it reformed the policy.  The Court suggested that reformation would be permissible as to third parties if the effect was to void optional insurance coverage.

Finally, the Court held that the household-related exclusion in the policy was enforceable.  The Court distinguished this case from prior cases in which exclusions that eliminated liability coverage for members of the insured's household were held to violate public policy.  In this case, the exclusion did not eliminate coverage but merely limited it to the statutory minimum. 

This case is important for its clarification of an insurer's right to limit liability coverage to the statutory minimum for members of the insured's household and to reform a policy retroactively for misrepresentations in the application for insurance, and for its ruling that insurers do not have a duty to investigate the accuracy of representations in the application.