Statements during discovery can't void insurance policy

By Kelly Caplan
BridgeTower Media Newswires
DETROIT — Statements made during litigation do not implicate the fraud clause of an insurance policy, and cannot be used to justify a denial of benefits, a Court of Appeals panel has ruled, sending a man’s claim for PIP benefits back to the trial court.

No published opinion from Michigan’s appellate court had previously addressed “whether statements made during litigation after the insured’s claim is denied constitute grounds to void the policy under a fraud provision,” the court said in a published decision

So the panel looked to the 3rd U.S. Circuit Court of Appeals’ holding in American Paint Service, Inc v Home Ins Co of New York, 246 F2d 91 (CA 3, 1957) — the “leading authority” on this issue — and adopted its reasoning.

“False statements made during discovery do not provide grounds to void the policy because, by that time, the claim has been denied and the parties are adversaries in litigation,” the panel wrote. “Once suit is brought, what is truth and what is false is a matter for a jury or a judge acting as factfinder. If it can be shown that a party intentionally testified falsely, it is up to the court to determine what, if any, sanction is proper.”

The published decision, Haydaw v Farm Bureau Insurance Company was issued by Judges Douglas B. Shapiro, Amy Ronayne Krause and Mark J. Cavanagh.

Plaintiff’s counsel Paul Wayner, of Yatooma & Associates in Southfield, said the ruling corrected a bad law.

“The Haydaw decision strips away the incentive for insurers to deny their insureds’ claims and then try to ambush them in litigation hoping to win a Bahri dismissal,” he said. “It is the correct result and a big win for Michiganders.”

Defense counsel Steven Couch could not be reached for comment before deadline.

Plaintiff Nael Haydaw, who claimed back, neck and shoulder injuries from a motor vehicle accident, filed suit in October 2016 against his no-fault insurer, Farm Bureau Insurance Company.

Farm Bureau withheld personal protection insurance benefits that Haydaw argued were due under his insurance policy and the no-fault act.

The plaintiff signed litigation authorizations to release all of his medical records in February 2017, and he was deposed two months later.

English is not Haydaw’s first language; he testified and communicated with the physicians for his two insurance medical examinations via an interpreter.

After discovery, Farm Bureau said Haydaw made false statements about his medical history during discovery and in his medical examinations, and moved for summary disposition under the policy’s fraud provision and Bahri v IDS Prop Cas Ins Co, 308 Mich App 420 (2014).

Haydaw, however, said he told the truth at the deposition; his last two doctor visits before the accident were for the flu. He added that the defendant was aware of his medical history because he disclosed his medical records before the deposition. If any inaccurate statements were made, Haydaw asserted that this went to his credibility, which should be determined by the trier of fact.

Given that he communicated through an interpreter, the plaintiff also questioned the medical-examination reports’ accuracy.

The Wayne County Circuit Court granted summary disposition on the basis of the policy’s fraud provision.

The Court of Appeals panel said this issue was first addressed by the U.S. Supreme Court in 1871 in Republic Fire Ins Co of North America v Weides, which held “testimony at trial does not implicate an insurance policy’s fraud or false swearing clause.”

The panel said it is now considered a general rule that statements made during litigation do not implicate a fraud or false swearing clause, and noted that the Third Circuit’s rationale in American Paint Service said parties no longer deal on the “non-adversary level” once suit has been filed.

“If the insurer denies liability and compels the insured to bring suit, the rights of the parties are fixed as of that time for it is assumed that the insurer, in good faith, then has sound reasons based upon the terms of the policy for denying the claim of the insured,” the Third Circuit wrote. “To permit the insurer to await the testimony at trial to create a further ground for escape from its contractual obligation is inconsistent with the function the trial normally serves. It is at the trial that the insurer must display, not manufacture, its case.”

Therefore, it was inappropriate for the defendant to seek dismissal of the plaintiff’s claim because of alleged discovery misconduct; questions of credibility and intent are generally left to the trier of fact.
“[I]t is up to the trial court to determine whether a drastic sanction such as dismissal is warranted for discovery misconduct, including untruthful deposition testimony,” the panel explained. “[O]nce an insurer fails to timely pay a claim and suit is filed, the parties’ duties of disclosure are governed by the rules of civil procedure, not the insurance policy.”

Meanwhile, the defendant’s reliance on Bahri was misplaced because “the material misrepresentation must have been made with ‘the intention that the insurer would act upon it.’”

Statements made by an insured during discovery are made so that the trier of fact will act on them, not the insurer.

Finally, the panel said a contrary ruling — Farm Bureau Ins Co v TNT Equip, Inc., 328 Mich App 667 (2019) — would implicate the first-breach rule; but if an insurer was first to breach the contract by denying a claim, it can’t defend “on the grounds that the plaintiff subsequently failed to adhere to the contract.”

In the instant case, the defendant refused to provide PIP benefits to the plaintiff despite the existence of the policy.

“If the denial is unjustified it is clearly a substantial breach that would relieve plaintiff of his contractual duties under the policy,” the panel said. “Accordingly, summary disposition on the basis of false statements would not be warranted unless and until it is determined that the denial of the claim did not breach the contract.”