Rescission in Michigan Requires Preprocurement Fraud
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Lie About Where Vehicle Was Garaged After Policy Inception Not Basis for Rescission
This appeal turns on whether fraud occurred in relation to an April 26, 2018 renewal contract for a policy of insurance under the no-fault act issued by plaintiff, Encompass Indemnity Company (“Encompass”).
In Samuel Tourkow, by David Tourkow v. Michael Thomas Fox, and Sweet Insurance Agency, formerly known as Verbiest Insurance Agency, Inc., Third-Party Defendant-Appellee. Encompass Indemnity Company, et al, Nos. 367494, 367512, Court of Appeals of Michigan (February 12, 2025) resolved the claims.
The plaintiff, Encompass Indemnity Company, issued a no-fault insurance policy to Jon and Joyce Fox, with Michael Fox added as an additional insured. The dispute centers on whether fraud occurred in relation to the renewal of this policy on April 26, 2018.
Michael Fox was involved in an accident on December 26, 2018, which led to a lawsuit filed by David Tourkow on behalf of Samuel Tourkow. Encompass rescinded the policy, alleging material misrepresentations about the garaging location of Michael’s vehicle. Michael then filed a third-party claim against Sweet Insurance Agency, alleging negligence.
The trial court initially granted summary disposition in favor of Encompass and Sweet, but this decision was appealed. The appellate court found that the trial court erred in its conclusions regarding preprocurement and postprocurement fraud and that Michael’s due process rights were violated.
THE TRIAL COURT’S GRANT OF SUMMARY DISPOSITION IN FAVOR OF ENCOMPASS WAS ERRONEOUS
The Foxes argued the trial court erred by granting summary disposition in favor of Encompass and abused its discretion by declaring the April 26, 2018 renewal policy void ab initio.
The circumstances under which an insurer may invalidate an insurance contract based on fraud in Michigan now requires a court to separate fraud into two broad categories based on when it occurred:
1 fraud that occurred before the parties entered into an insurance contract (preprocurement fraud); and
2 fraud that occurred after the parties entered into an insurance contract (postprocurement fraud).
If fraud occurred before the parties entered into the insurance contract (preprocurement), then rescission is available as a remedy. If fraud occurred after the contract was signed, but before litigation began, then rescission is available as a remedy only if the fraud substantially breached the contract. Finally, if fraud occurred after litigation began-which necessarily also means that it occurred after the contract was signed- then rescission is not available as a remedy.
In sum, the trial court erred by granting summary disposition in favor of Encompass based on the trial court’s erroneous conclusion that preprocurement fraud occurred in relation to the vehicle involved in the accident, a Ford F-150.
The Court of Appeals concluded that it follows that the trial court abused its discretion by holding the renewal policy was void ab initio on the basis of the alleged fraud. The decision in favor of Encompass was reversed.
The trial court erred by granting summary disposition in favor of Encompass.
ZALMA OPINION
Rescission is an equitable remedy based upon the concept of fairness. In most states a misrepresentation of a material fact, like where a vehicle is garaged, is grounds for rescission even if the misrepresentation was innocent or unintentional. In Michigan, however, the Court of Appeals explained that rescission requires evidence of fraud in the inception of the policy before the policy was issued. In this case, the fraud about the garaging of the vehicle happened after the policy was issued so there was no right to rescind in Michigan.
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