Case Title: Coburn v. Fox

Citation: 389 N.W.2d 424, 425 Mich. 300

Docket Number: 74502

State: michigan

Court: Michigan Supreme Court

Date: 1986-07-08T00:00:00Z

Document:
Decided July 8, 1986.
Robert L. Coburn, P.C., for the plaintiffs.
Faintuck, Shwedel & Wolfram (by William G. Wolfram) for Progressive Casualty Insurance Company.
*302 Amicus Curiae:
Lopatin, Miller, Freedman, Bluestone, Erlich, Rosen & Bartnick (by Richard E. Shaw and Monica F. Linkner) for Michigan Trial Lawyers Association.
CAVANAGH, J.
The issue in the present case is whether the enactment of the Michigan no-fault insurance act[1] invalidates any provision in a no-fault contract relieving the insurer of liability should the insured fail to cooperate in defending a claim by an injured third party. Progressive Casualty Insurance Company argues that such clauses are valid in Michigan under Allen v Cheatum, 351 Mich 585; 88 NW2d 306 (1958). Plaintiffs argue that allowing insurers a defense of noncooperation leaves the injured third party without the protection mandated by the no-fault act.
FACTUAL BACKGROUND
The parties stipulated to the following facts:
The trial court found that Fox's failure to cooperate resulted in a default summary judgment as to liability in plaintiffs' favor despite evidence that decedents may have been at fault. It held that Fox's acts constituted a breach of his insurance policy and were prejudicial to defendant-insurer. The showing by defendant-insurer of due diligence in attempting to secure Fox's cooperation and the actual prejudice resulting from Fox's noncooperation was found to constitute a valid defense under Allen v Cheatum, supra.
*307 The Court of Appeals did not question the determination by the trial court that Fox had violated this clause in his contract. Nor did the Court discuss whether or not the insurer had used due diligence in attempting to secure Fox's cooperation or whether the default judgment constituted actual prejudice to the insurer under Allen v Cheatum. Rather, it held that the enactment of Michigan's no-fault law in 1972 made Allen inapplicable. The Court found that the insurer has adequate remedies against its insured without penalizing the injured victim:
THE MICHIGAN RULE AND THE NO-FAULT LAW
The "Michigan Rule" was enunciated in Allen v Cheatum, supra, decided in 1958. In Allen, as in the present case, defendant-insurer raised the defense of noncooperation of its insured to a garnishment action. This Court found that the insurer has the burden of showing more than noncooperation; it must also show actual prejudice:
The Michigan no-fault insurance act became law on October 1, 1973, fifteen years after Allen v Cheatum, and the act's constitutionality was upheld in Shavers v Attorney General, 402 Mich 554, 578; 267 NW2d 72 (1978). In Belcher v Aetna Casualty, 409 Mich 231, 240; 293 NW2d 594 (1980), this Court discussed the effect of the no-fault law on the common-law tort system. In most cases, injured motorists seek compensation from their own insurers and thus avoid the delay involved in litigation.
The right to pursue a tort claim is preserved under the act where an injured person has suffered death, serious impairment of a bodily function, or permanent serious disfigurement caused by another's ownership, maintenance, or use of a motor vehicle. MCL 500.3135; MSA 24.13135. Plaintiffs' cause of action arose after the enactment of the no-fault law and is controlled by it. There is no defense of noncooperation provided for within the no-fault act itself.
Before the enactment in 1973 of the no-fault insurance act, motorists could choose whether or not to carry liability insurance. If they purchased insurance at all, MCL 500.3009; MSA 24.13009 required that the policy include minimum liability coverage for bodily injury, death, and property damage. This insurance coverage, mandatory if a policy was purchased, was not compulsory  drivers could, under the Motor Vehicle Accident Claims Act, MCL 257.1101 et seq.; MSA 9.2801 et seq. (MVACA), choose to be uninsured. Under the MVACA, the driver could pay a set fee and obtain registration for the vehicle. In the event of an *309 accident, injured persons obtained recovery from the Motor Vehicle Accident Claims Fund, administered by the Secretary of State, who in turn recovered from the uninsured motorist.
Under Michigan's no-fault act, both personal injury protection (PIP) and residual liability insurance is now required. Insurance coverage to protect oneself from the costs of injury through PIP benefits and to protect injured third parties through residual liability insurance is compulsory. Persons violating the no-fault requirements are subject to a criminal penalty. MCL 500.3102(2); MSA 24.13102(2).
The decision by the Legislature to make residual liability coverage compulsory under the no-fault act is critical. Before 1973, motorists purchased insurance to protect themselves. Under the no-fault act, the Legislature requires PIP and liability insurance to protect the members of the public at large from the ravages of automobile accidents. While a noncooperation clause may be valid where the insurance was optional, the general rule where an injured third person seeks recovery under a compulsory liability policy is that the failure of the insured to cooperate with the insurer is not a valid defense:
Plaintiffs contend that the Michigan rule has been abrogated in automobile cases by the enactment of this compulsory scheme of motor vehicle insurance. Thus, Progressive, as Fox's no-fault insurer, must pay the judgment against Fox regardless of whether there is a dispute between the insurer and the insured as to the cooperation of the insured under the insurance contract. We agree.[3]
*311 Allowing Progressive to successfully assert a defense of noncooperation six years after plaintiffs had filed suit and almost one year after plaintiffs had secured a default judgment would deny plaintiffs the protection intended by the no-fault act. A *312 defendant whom plaintiffs had successfully sued under the no-fault act would suddenly become an uninsured motorist when plaintiffs attempted to collect their judgment.
CONCLUSION
We believe that the Court of Appeals reached the right result for the right reasons. The decedents, Robert and Jeanne Coburn, were in a class intended to be protected by the no-fault statute. Because of the compulsory nature of the liability insurance, the noncooperation of the insured is not a good defense in an action between a third-party victim and an insurer to the extent of the statutorily required minimum residual liability insurance.
Affirmed.
WILLIAMS, C.J., and LEVIN, BRICKLEY, BOYLE, and RILEY, JJ., concurred with CAVANAGH, J.
ARCHER, J., took no part in the decision of this case.
[1]  MCL 500.3131 et seq.; MSA 24.13131 et seq.
[2]  The minimum residual liability coverage mandated by the no-fault act is $20,000 for injury to one person in one accident or $40,000 for injury to two or more persons in one accident. Mr. Fox's no-fault policy was limited to this minimum coverage. The trial court awarded plaintiffs $40,000 plus costs, mediation sanctions, and interest. MCL 500.3131; MSA 24.13131, MCL 500.3009(1); MSA 24.13009(1).
[3]  In Frankenmuth Mutual Ins Co v Latham, 103 Mich App 66; 302 NW2d 329 (1981), the insurer sought to have a policy of insurance declared void because the insured had made a misrepresentation as to the validity of his driver's license at the time he obtained the insurance. The insured had been involved in an accident where a third party had been injured and had brought a claim against the insurer for damages. The Court of Appeals stated:

"The liability of the insurer with respect to insurance required by the act becomes absolute whenever injury or damage covered by such policy occurs.... [N]o violation of policy provisions may be used to defeat or avoid the policy." [Frankenmuth, supra, p 68.]
In State Farm Mutual Automobile Ins Co v Kurylowicz, 67 Mich App 568; 242 NW2d 530 (1976), the insured had misrepresented to the insurer facts regarding his operator's license. After the policy was issued, the insured was involved in an accident in which a third party was killed. Upon being notified of the claim, the insurer declared the policy void, backdating its declaration to the date of issue. Decedent's estate brought suit against the insured, and the matter was turned over to the insurer for representation. The insurer requested that the policy be declared void ab initio to avoid defending the matter or payment of the claim. The Court of Appeals, while noting that the matter had occurred prior to the enactment of the compulsory motor vehicle insurance act, affirmed the lower court's decision, citing the legislative intent to provide a means of recovery for losses by accident victims, stating:
[T]he policy of the State of Michigan regarding automobile liability insurance and compensation for accident victims emerges crystal clear. It is the policy of this state that persons who suffer loss due to the tragedy of automobile accidents in this state shall have a source and a means of recovery. Given this policy, it is questionable whether a policy of automobile insurance can ever be held void ab initio after injury covered by the policy occurs. [Kurylowicz, supra, p 574.]
In Auto-Owners Ins Co v Ins Comm'r, 141 Mich App 776; 369 NW2d 896 (1985), the Court of Appeals, in considering whether an insurer may rescind a no-fault policy on the grounds of a material misrepresentation, stated that a policy may be rescinded and declared void ab initio where it was procured through the insurer's intentional misrepresentation of a material fact. However, the Court of Appeals noted that the case did not involve an injury to a third person and that if it had, the policy could not be rescinded to avoid such a claim.
The public policy considerations present where an innocent third party must bear the risk of an intentional misrepresentation by the insured are not present where, as is here asserted, the person seeking to collect no-fault benefits is the same person who procured the policy of insurance through fraud.[1]
[1] In noting this difference in United Security [Ins Co v Ins Comm'r, 133 Mich App 38; 348 NW2d 34 (1984)], the Court distinguished the cases of DAIIE v Ayvazian, 62 Mich App 94, 99-100; 233 NW2d 200 (1975); Frankenmuth Mutual Ins Co v Latham, 103 Mich App 66; 302 NW2d 329 (1981), and State Farm Mutual Automobile Ins Co v Kurylowicz, supra, wherein this Court disallowed the insurance companies' attempts to use the insureds' misrepresentation to rescind the policy ab initio and avoid liability to other claimants. [Auto-Owners, supra, p 780.]
The Court of Appeals reached the same result in Cunningham v Citizens Ins Co, 133 Mich App 471; 350 NW2d 283 (1984). The insurer was allowed to rescind a policy procured through fraud because there had been no injury to a third party.
Had innocent third parties been seriously injured in a collision with plaintiff's vehicle, we believe that public policy would compel us to hold that coverage for the accident existed, at least for these third parties. [Cunningham, supra, p 477.]