HAYDAW V FARM BUREAU

Fraud committed after an insurance cutoff should not lead to a dismissal.

Bahri v IDS: Great for insurance companies.   Horrific for everyone else. 

In 2014, the Michigan Court of Appeals decided one of the most consequential cases ever relating to the No-Fault Act,  Bahri v IDS Property Casualty Insurance Company. The case paved the way for insurers to entirely rescind policies and dismiss cases as a result of perceived fraud.  Most significantly, the Bahri decision allowed insurers to deny payment to doctors and medical providers who had nothing to do with the alleged fraud, and typically knew nothing about it.   

No-Fault Fraud

The Bahri decision sent massive shock-waves through the Michigan No-Fault world.  Clients and medical providers suddenly became targets of unfair and disproportionate punishment, often times for trivial acts that insurers would fixate on and embellish.  Entire surgeries would go unpaid.  Nurses, doctors, and care providers would often work for months helping a patient and get no payment as a result of Bahri.  Further, many injured car accident victims lost their lifetime medical benefits due to a simple mistakes.

After Bahri, it became very easy for an insurance company to allege fraud and seek the dismissal of a PIP case. The insurance company’s attorney only had to show that the client had recklessly made a misrepresentation about the PIP claim to the insurance company.   Even an honest mistake on paperwork or in a deposition could lead to rescission of the insurance policy and dismissal of all claims under Bahri.  

As such, Bahri became a massive impediment to settling cases and getting fair results.  Insurers were incentivized to argue fraud on as many cases as possible.   They were emboldened by Bahri.   Some defense attorneys would even bait our clients into making a mistake during a deposition with the intent of setting up the case for dismissal, screwing the doctors, and causing the client to lose lifetime medical benefits.   

A dismissal for fraud meant that the client would lose all present and future personal injury protection insurance (PIP) benefits. Medical bills would go unpaid and future medical coverage would be denied for the subject accident.  Additionally, any intervening plaintiff, such as a client’s doctor or physical therapist, would be denied payment by the insurance companies because the Court held that intervening plaintiffs “stand in the shoes of the plaintiff.”  In other words, if the plaintiff could not receive PIP benefits, neither could the intervening plaintiff(s)/doctors. 

How Haydaw Took Some Of The Power Away From Insurance Companies

Bahri is defeated

In July of 2020, the Michigan Court of Appeals revisited the the ability of insurers to make harsh, blanket dismissals.  In  Haydaw v Farm Bureau Insurance Company, the Court essentially reversed much of the Bahri decision and ruled that insurance companies could not rescind a policy (and dismiss a case) based on fraud, if the fraud occurred after the insurance company had already cutoff a client’s benefits.

In other words, the Court basically held that insurance companies could no longer get cases dismissed based on fraud if the fraud occurred during litigation.  The Court reasoned that “fraudulent” statements made during litigation should not be grounds for dismissal because by the time litigation occurs, it is the jury or judge who will rely on the statements made, not the insurance company. It is up to the trier of fact (judge or jury) to determine the plaintiff’s credibility.  

Additionally, the Court mentioned that by the time litigation occurs, the parties are opponents and the duty of disclosure is governed by civil procedure and not by the insurance policy.   Accordingly, while fraud or misrepresentation prior to the commencement of litigation can be grounds for rescission and dismissal, once litigation has commenced subsequent allegations of fraud cannot grounds for dismissal. 

As discussed further below, much of the Court’s rationale was based on the fact that the insurer is the first to breach the insurance policy by not paying benefits.  Accordingly, it cannot breach a contract and then seek to rescind it.   Importantly, the Court recognized that Bahri provided insurance companies with incentive to bait plaintiffs into making a false statement during depositions.  This is a very important acknowledgement by Court, and should provide some comfort for our future clients.  

What Does All Of This Mean For Me?

Imagine it’s the day of your deposition, and you did not sleep well last night because you were nervous about the deposition. You were in an auto accident and injured your back. At the deposition, the attorney for the insurance company asks you if you ever experienced back pain before the accident. You forget that you saw a doctor one time, 8-years ago, for back pain and you answer “no.”  The defense attorney has records from that one doctor visit.

Under the Bahri holding, the insurance company could argue that you committed fraud by failing to mention your previous back pain. Your case would likely be dismissed, and you would lose your PIP benefits. Additionally, your doctor, therapists, and any others who helped you would not get paid by the insurance company.  From that one innocent mistake, you could end up hundreds of thousands of dollars in debt. 

No-Fault Fraud Question

Under the Haydaw holding, the above would not be true.  The Court most likely would not dismiss your case due to “fraud.” Haydaw  prevents these exact scenarios from occurring.  Haydaw stops the unfair practice of skillful defense attorneys baiting nervous, forgetful, and naive plaintiffs from making misrepresentations on the record.

It is very rare that we have clients who intentionally try to deceive the insurance companies.  We do encounter those clients.  If you are lying, your case should be dismissed and you can only blame yourself for the consequences.

Conversely, it is very common for our clients to make inadvertent mistakes and misrepresentations during depositions and throughout litigation.  Your case should not be dismissed for these mistakes.  You should not be forced into debt because of these mistakes.  The Haydaw decision helps prevent such dismissals and levels the playing field for all of our clients. 

For the Lawyers: A Legal Analysis of Haydaw

Case Background

Nael Haydaw (Plaintiff) was in a car accident and suffered from injuries. When his insurance company (Defendant) withheld his PIP benefits, Plaintiff sued the company. 

Defendant requested medical records for Plaintiff, and Plaintiff authorized them to be released. 

At the deposition, Defendant asked Plaintiff if he had ever injured himself before the accident. Plaintiff denied that he had injured himself previously and said that he only visited a doctor for the flu. Plaintiff’s medical records showed that this was not entirely true. Yes, Plaintiff had seen a doctor for the flu, but he also had issues with his back, neck, and shoulders before the accident. His pain was so bad that his doctor prescribed pain medication. 

Defendant argued that Plaintiff misrepresented his medical history and moved for summary disposition because of the fraud provision in the policy it provided to Plaintiff, and because of Bahri v IDS Prop Cas Ins Co, 308 Mich App 420; 864 NW2d 609 (2014).

The trial court granted Defendant’s motion for summary disposition. Plaintiff appealed.  

 

The Court of Appeals’ Holding and Reasoning

The primary issue that the Court focussed on was whether false statements made by the insured during litigation violate a policy’s fraud provision and cancels the coverage.

Plaintiff had many arguments but the two arguments that the Court of Appeals concentrated on were: his argument that Defendant had his medical records, so Defendant was aware of his medical history, and his argument that the “trier of fact” should determine his credibility. 

The Court held that false statements made by the insured during litigation do not constitute a case dismissal or a policy recession under the policy’s fraud provision.

The Court, admittedly, had never addressed this issue in a published opinion. Because of this, the Court looked to other courts to see how they handled this issue. The majority of the courts that this Court reviewed developed a general rule to resolve this issue. The general rule is that false statements made during litigation do not trigger a policy’s fraud provision. 

The Court of Appeals felt that this rule was persuasive because once litigation begins, it’s not the insurance company that relies on the statements, it’s the judge or jury. 

The Court also considered the Bahri holding in this case. The Court determined that Bahri applies to misrepresentations that the insured makes before litigation. It’s the pre-litigation statements that the insurance companies rely on and use to make decisions about the claim, not the statements made during litigation.

The Court recognized that allowing insurance companies to argue fraud after ligation would give them an unfair, and manipulated, advantage. By the time litigation occurs, insurance companies have documents, such as medical records, and they could try to trick the insured into making a mistake during a deposition, while already knowing what the correct answer is. 

Finally, the Court discussed the “first-breach” law. Michigan has a rule where a party cannot argue breach of contract against a contractual party when the same party using that argument initiated a substantial breach or failure to perform, first. 

With regard to the “first-breach” rule being applied to this case, the Court concluded that summary disposition due to misrepresentation could not be granted until it was determined that Defendant’s denial of the claim was justified and not a breach. 

The Court reversed the trial court’s holding and remanded.

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