Opinion ID: 824706
Heading Depth: 2
Heading Rank: 3

Heading: easily ascertainable

Text: The principal question presented in this case is whether an insurer may avail itself of traditional legal and equitable remedies to avoid liability under an insurance policy on the ground of fraud in the application for insurance, when the fraud was easily ascertainable and the claimant is a third party. As an initial matter, we note that this precise question was addressed in 1959 in Keys, 358 Mich 74. In Keys, the plaintiff, a third party, was involved in a motor vehicle accident with the defendant, who was insured by the Detroit Automobile Inter-Insurance Exchange (DAIIE). The plaintiff filed suit against the defendant for injuries that she had sustained in the accident. While the suit was pending, the DAIIE notified the defendant that it considered the policy void ab initio 6 The dissent’s approach of “adopt[ing] the Court of Appeals’ well-reasoned opinion in its entirety” would do utterly nothing to address the conflict between our decisions in Burch and Sivey. Post at 3. This conflict is jurisprudentially significant and deserves some reasonable resolution. 11 because it was discovered that he had misrepresented a material fact in the application for insurance, namely, that he had falsely stated that his license had not been suspended within the past three years, when, in fact, it had been. Thereafter, judgment was entered in favor of the plaintiff. After securing her judgment, the plaintiff filed an affidavit for a writ of garnishment against the DAIIE, which opposed the writ arguing that it had no duty to indemnify the defendant because the policy was void ab initio as a result of the material misrepresentation. This Court agreed and held that the defendant’s material misrepresentation entitled the insurer to avoid liability under the policy. Id. at 82-83. In so holding, Keys rejected the plaintiff’s argument that the insurer had ratified the policy, or, alternatively, had waived its right to avoid liability, because it had failed to declare the policy void at or near the time of the accident, when the insurer could have used available records to discover the misrepresentation. Writing for a unanimous Court, Justice SMITH stated as follows: What the [plaintiff’s] arguments respecting waiver, ratification, estoppel and so forth actually boil down to is simply that this Court should say that the occurrence of the accident itself should have put the insurer on notice of possible fraud and caused its search of the court files for past traffic violations. If it had done so, it is said, it would have discovered the falsehood. Should we hold that the mere occurrence of an accident is sufficient to place such a burden on the insurer with respect to each of its thousands of policy holders? Rather, is the insurer not entitled to give credence to its insured’s honesty until it has actual notice that he is a scoundrel? Moreover, if inquiry is to be demanded, is it enough to stop with the traffic court? Might not the accident suggest physical or psychiatric defects? Should investigations not also be made of the past hospitalizations of the insured? Where will we say this may stop within the existing economic framework? It is doubtful whether one who deliberately sets out to swindle an insurance company can be prevented from so doing by any such requirement, and it is even more doubtful that there is enough of this 12 practice to warrant the placing upon the insurance business of a requirement so onerous. The short answer to the arguments of waiver and estoppel is that a litigant cannot be held estopped to assert a defense, or to have waived his right thereto, because of facts he does not know, unless, as a matter of judicial policy, we are ready to say he “should” know them. This we can always do, of course, but there is nothing before us as a matter of fact or of sound policy, to warrant imposition of such knowledge. This is not to say, of course, that one may wilfully close his eyes to that which others clearly see. But nothing of the sort is here before us. In fact, when actual knowledge was gained, the insurer was not slow to act, cancelling the policy ab initio and withdrawing its legal representation of the insured. Such action was well justified. [Id. at 84-85.] Thus, Keys answered the precise question presented in this case in the affirmative, holding that an insurer may avail itself of traditional legal and equitable remedies to avoid liability under an insurance policy on the ground of fraud, notwithstanding that the fraud may have been easily ascertainable, and notwithstanding that the claimant is a third party. However, despite Keys, the Court of Appeals in Kurylowicz, on similar facts, reached a different conclusion. In Kurylowicz, the insured sought insurance coverage for his automobile from State Farm. In filling out the application for insurance, he misrepresented the fact that his driver’s license had been suspended. Thereafter, the insured was involved in an automobile accident that killed one person and injured five others. The decedent’s estate commenced an action against the insured, and State Farm filed a declaratory judgment action contending that it had no duty to indemnify the insured for injuries that he may have caused because, given the material misrepresentation in the application, the policy was void ab initio. The trial court rejected State Farm’s request for declaratory relief, and the Court of Appeals affirmed. In 13 so holding, the Court of Appeals rejected State Farm’s argument that Keys was controlling. Although acknowledging that Keys had never been overruled, the Kurylowicz panel disregarded this precedent, stating that it was “interesting to note that no Michigan appellate court has seen fit to cite this case since it was released in 1959.” Kurylowicz, 67 Mich App at 572. Moreover, the panel concluded that Keys was inapplicable “in light of the intervening legislation [the no-fault act] and the public policy of the State of Michigan which such legislation implies . . . .” Id. at 577. Kurylowicz surveyed the caselaw of other jurisdictions and, finding the reasoning in those cases persuasive, approvingly quoted a California case: “[A]n automobile liability insurer must undertake a reasonable investigation of the insured’s insurability within a reasonable period of time from the acceptance of the application and the issuance of a policy. This duty directly inures to the benefit of third persons injured by the insured.’” Id. at 576, quoting Barrera v State Farm Mut Auto Ins Co, 71 Cal 2d 659, 663; 79 Cal Rptr 106; 456 P2d 674 (1969). Ultimately, Kurylowicz held that “where an automobile liability insurer retains premiums, notwithstanding grounds for cancellation reasonably discoverable by the insurer . . . , the insurer will be estopped to assert that ground for rescission thereafter.” Kurylowicz, 67 Mich App at 579. The Kurylowicz rule has become known as the “easily ascertainable” rule, and, as the Court of Appeals noted in this case, it only applies when a third-party claimant is involved. That is, under the Kurylowicz rule, an insurer may not avail itself of traditional legal and equitable remedies to avoid liability under an insurance policy on the ground of fraud when the fraud was easily ascertainable and the claimant is a third party. See, e.g., Ohio Farmers Ins Co v Mich Mut Ins Co, 179 Mich App 355; 455 NW2d 228 (1989). 14 However, when it is the insured who seeks benefits under an insurance policy procured through fraud, even an easily ascertainable fraud will not preclude an insurer from availing itself of traditional legal and equitable remedies to avoid liability. See Hammoud v Metro Prop & Cas Ins Co, 222 Mich App 485; 563 NW2d 716 (1997).