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New Supreme Court Decision, Titan Insurance V Hyten Regarding Duty To Investigate And “Easily Ascertainable” Rule For Misrepresentation Cases

The Michigan Supreme Court has recently issued an opinion in Titan Insurance v Hyten ____ Mich ____ (2012), in which it overruled cases holding that an insurer could be estopped from asserting rescission of an insurance policy based on a misrepresentation if knowledge of the misrepresentation could have been “easily ascertainable” by the insurer.

The case involved an applicant for an auto policy who failed to disclose that her driver’s license had been suspended. The trial court and Court of Appeals held that the insurer could have easily ascertained this information by checking the record, and thus, the insurer was estopped from raising the misrepresentation as a basis for rescission of the policy.

The Supreme Court reversed and held that the trial court and Court of Appeals were in error as were several prior Court of Appeals opinions which had developed the “easily ascertainable” rule to estop insurers from rescinding policies based on misrepresentations in applications.

We have always taken the position that the easily ascertainable rule should not apply because the insurer should not have any duty to investigate to determine whether representations made by the insured were correct or not. We successfully made this argument in Manier v MIC General Insurance Corp, 281 Mich App 4485, 490 (2008). See also: Hammoud v Metropolitan Insurance Company, 222 Mich App 485, 489 (1987); United Security Ins Co v Commissioner of Insurance, 133 Mich App 38, 45 (1984). We based this argument on the early Michigan Supreme Court decision in Keyes v Pace, 358 Mich 74, 84—85 (1959), where the Supreme Court held that an insurer has no duty to investigate or verify the representations of a potential insured.

The Supreme Court decision in Titan Insurance v Hyten restates this rule and states that all cases to the contrary are overruled and holds that an insurer has no duty to investigate or verify the representations of a potential insured and that an insurer can defend against providing coverage on the basis of fraud in the application notwithstanding that the fraud could have been discovered through further investigation or could have been easily ascertained.

The only problem with the case is that it does not cite the policy language, and states that there are several different fraud theories such as fraudulent misrepresentation, innocent misrepresentation and silent fraud also known as fraudulent concealment. The definition of fraud set forth by the court requires:

  1. A material representation
  2. That was false
  3. The person making it knew it was false or made it recklessly without any knowledge of its truth and as a positive assertion
  4. The statement was made with the intention that it should be acted upon
  5. The representation was acted upon
  6. There was an injury suffered.

The problem with this is that the third element requires knowledge of the falsity. Numerous Michigan appellate cases have held that issues of knowledge are issues of fact which cannot be determined on a motion for summary disposition. See Mina v Gen Star Indemnity Co, 218 Mich App 678, 687 (1996), rev’d in part on other grounds, 455 Mich 866 (1997); Harris v Lapeer Public School Sys, 114 Mich App 107, 116 (1982); Rayis v The Shelby Mut Ins Co of Shelby Ohio, 80 Mich App 387, 392 n3 (1978); Arevalo v Auto Club Ins Ass’n, unpublished opinion per curiam of the Court of Appeals, issued May 18, 2010 (Docket No. 289863); Smith v Farm Bureau Ins Co, unpublished opinion per curiam of the Court of Appeals, issued March 5, 2009 (Docket No. 281034); and Beard v Allstate Indemnity Co, 2011 US Dist Lexis 85490 (ED Mich, 2011).

This fails to recognize the authorities which have held that a misrepresentation need not be intentional to serve as the basis for rescinding an insurance policy, and there is no necessity to prove intent. Handbook on Insurance Coverage Disputes Section 3.01(c); U. S. Fidelity & Guaranty v Black, 412 Mich 99, 120 (1981); Legel v American Community Mut Ins Co, 201 Mich App 617, 618 (1993); Lash v Allstate Ins Co, 210 Mich App 98, 103 (1995); Lake States Ins Co v Wilson, 231 Mich App 327, 331 (1998).

This is a very important issue which unfortunately was not addressed by the Supreme Court in the decision.

We would recommend that all insurers review the conditions of their policy to assure that the misrepresentation/fraud condition does not require fraud or an intentional misstatement but only that there was a false statement. This would then avoid having to prove intent which would arguably be a question of fact.

It is most important that the insurer be able to raise and succeed on the misrepresentation argument on a motion rather than have to try the case.