United States Fidelity Insurance & Guaranty Co. v. Michigan Catastrophic Claims Association

Transcription

1 United States Fidelity Insurance & Guaranty Co. v. Michigan Catastrophic Claims Association: Oh Ye State Legislature, Hear the Cries of Michigan Motorists; The State Supreme Court Adds to the List of No-Fault Areas in Need of Reform! INTRODUCTION On July 21, 2009, the Michigan Supreme Court decision in United States Fidelity Insurance & Guaranty Co. v. Michigan Catastrophic Claims Ass n 1 ( USF & G II ) eliminated the Michigan Catastrophic Claims Association s ( MCCA ) ability to deny reimbursement to insurance companies for excessive payments of personal protection insurance ( PIP ) benefits to catastrophically injured policyholders. 2 The decision is said to be the cause of a 19% premium increase throughout Michigan, which became effective on July 1, 2009, because it would provide little incentive for insurance companies to diligently negotiate settlements involving PIP benefits payments. 3 Consequently, the MCCA was compelled to take measures necessary to generate the extra funding needed to cover potentially excessive member-insurer claims. According to one dissenting opinion, this decision will represent a $693.8 million bill that will [ultimately] be passed onto and shared by every Michigan automobile owner because of the uncontrolled liability that [this Court has] creat[ed] for the MCCA. 4 The Michigan No-Fault Insurance Act ( No-Fault Act ) was introduced in 1973 and is unlike any other no-fault auto insurance scheme in the United States. The No-Fault Act requires that Michigan motorists carry no-fault coverage under their automobile insurance policies. 5 The no N.W.2d 101 (Mich. 2009). 2. See id. at Id. at app. (Affidavit of Gloria Freeland, Apr. 8, 2009, 4, 6). 4. Id. at 122 (Young, J., dissenting). 5. MICH. COMP. LAWS ANN (1) (West 2002) (stating that owners of vehicles required to be registered in Michigan shall maintain security for payment of benefits under personal protection insurance [PIP] ).

2 732 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 fault policies written by insurance providers in Michigan require unlimited payments of PIP benefits without regard to fault for insured auto-accident victims, some of whom have sustained catastrophic injuries. 6 The mandatory and unlimited nature of the Michigan s no-fault policies placed too great a burden on insurers, particularly small insurers, in the event that an injured motorist seeks to recover on a policy. 7 In response to these concerns, the Michigan Legislature created the MCCA in The primary purpose of the MCCA was to indemnify member insurers for losses sustained as a result of PIP payments exceeding a certain statutory threshold, which in turn would support the purpose of the No-Fault Act assur[ing] that victims of automobile accidents are promptly and adequately compensated. 9 In USF & G II, 10 the Michigan Supreme Court s understanding of the primary purpose underlying the creation of the MCCA caused it to reverse itself regarding whether the MCCA may review and reject member insurers reimbursement claims. After granting rehearing from its previous disposition, 11 the court in USF & G II interpreted the relevant provisions of the Michigan No-Fault Act in a manner that restricted the MCCA s purpose exclusively to the provision of indemnification for member insurer payments, stripping it of the ability to review and reject claims on a reasonableness basis. 12 However, the court s application of the statute s language was arguably inconsistent with its plain meaning. Furthermore, although the court did base its finding on a number of compelling policy considerations, it disregarded the intent of the Legislature, as reflected by the language of the No-Fault Act, by failing to place a check on member insurer claims, which will contribute to significant premium increases and thus threaten the financial viability of Michigan s no-fault system. Part I of this Note will introduce no-fault insurance generally, the Michigan no-fault scheme, and the role played by the MCCA according to the applicable provisions of the No-Fault Act. Part II will provide the necessary background to USF & G I and II; in particular, this Part will explain the differing interpretations of the No-Fault Act underlying each decision concerning the MCCA s purpose and, consequently, its power to 6. See id In re Certified Question, 449 N.W.2d 660, 661 (Mich. 1989). 8. U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 759 N.W.2d 154, 160 (Mich. 2008), overruled by USF & G II, 795 N.W.2d 101 (Mich. 2009). 9. Shavers v. Kelley, 267 N.W.2d 72, 118 (Mich. 1978) (Coleman, J., concurring); see also Shavers 267 N.W.2d at 77 ( The goal of the no-fault insurance system was to provide victims of motor vehicle accidents... [with] adequate and prompt reparation for certain economic losses ) N.W.2d 101, 104 (Mich. 2009). 11. U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 762 N.W.2d 911, 911 (Mich. 2009). 12. USF & G II, 484 Mich. at

3 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 733 review member insurer claims. Part III will demonstrate that the consequences of USF & G II cannot be justified in light of its inconsistencies with the relevant statutory provisions, the MCCA s plan of operation, Michigan case law, and the court s unexplained deviation from general principles governing motions for rehearing. Part III also illustrates the inability of USF & G II to effectively balance competing public policy interests (e.g., prompt payment of benefits to injured policyholders, the need to control insurance costs as well as the health of Michigan s insurance system) because its holding will not serve to eliminate instances of excessive member insurer PIP payments throughout the industry. Finally, Part IV will propose recommendations to supplement the MCCA s newly-adopted procedures in response to USF & G II as well as statutory amendments which are directed at enforcing the new procedures adopted by MCCA to address the fundamental problem. This Note illustrates the importance of a comprehensive effort to effectively reform these specific Michigan no-fault defects without blind reliance on a judicial policy judgment that is founded on questionable rationale, stands on fragile procedural footing, and has already been the catalyst of a $64.5 million premium increase throughout Michigan. I. NO-FAULT INSURANCE GENERALLY: THE MICHIGAN NO-FAULT SCHEME AND THE ROLE OF THE MCCA Although no-fault insurance systems are intended to resolve the various deficiencies of the traditional tort system, their operation does not come without a price. Particularly, Michigan s unique provision of unlimited PIP benefits required the creation of the MCCA to spread its tremendous financial burdens more evenly throughout the industry. The dispute in the USF & G matter further illustrates the complexities and public-policy conflicts that permeate the State s No-Fault jurisprudence. A. Basic Purpose of No-Fault Insurance Under the traditional tort system, an injured person s path to compensation was fraught with obstacles. 13 For example, seriously injured auto-accident victims were frequently denied recovery because the tort system required that the blame rest unequivocally upon the shoulders of the individual adjudged at fault. 14 Consequently, the slightest indication of contributory negligence would often provide the basis for leaving even the most seriously injured accident victim empty-handed. Additionally, even the successful claimant would often incur tremendous out-of-pocket medical expenses and income loss because the required statutory minimum 13. See ROBERT LOGEMAN, INST. CONTINUING LEGAL EDUC., MICHIGAN NO-FAULT AUTOMOBILE CASES: LAW AND PRACTICE 1.1 (Martha F. Mothershead ed., 1988). 14. Id.

4 734 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 third-party liability coverage was a meager $20, The burden placed on the courts by such claims also significantly contributed to the claimants costs due to the amount of time that would typically elapse between the filing of the complaint and the receipt of compensation. 16 Furthermore, the common incidence of at-fault drivers failing to carry third-party liability coverage, as was required by law, obviously presented an even more devastating situation for the injured accident victim, unless of course the uninsured had an atypical deep pocket. Finally, and perhaps most disturbingly, the traditional system discriminated on a socio-economic basis; the uneducated and less fortunate were often forced to prematurely settle claims with the opposing party s insurer due to an extreme economic need or an inability to hire competent legal counsel. 17 No-fault insurance was designed to rectify the deficiencies of the traditional tort system. 18 Unlike the traditional system where an accident victim is required to file a third-party claim against the responsible party, the victim s recovery under a no-fault plan may be sought from two sources: the victim may (1) file a first-party claim against its own insurer for economic losses 19 and (2) file a claim against the insurer of the party at fault for damages arising out of the victim s pain, suffering, disfigurement, etc., thus taking the form of a typical automobile negligence action. 20 Therefore, although the party at-fault retains the same rights as the injured party with respect to recovery from its own insurance company for medical expenses and wage loss, that party may not bring a claim against the blameless party s insurer. Thus, the no-fault system would effectively ease concerns regarding the contributory negligence of the injured party, the atfault party s failure to carry third-party liability coverage, the inherent inequity of the adversarial third-party claim, and the lengthy litigation that consumes significant judicial resources. The generous benefits provided to both parties through a no-fault system are balanced by a legislative tradeoff: to recover non-economic losses, such as medical treatment costs, the injury or injuries sustained must be catastrophic, resulting in death, permanent serious disfigurement, or 15. Id. 16. See id. 17. Id. 18. Id See id. 1.3 ( Economic losses refer to expenses involving medical/rehabilitative treatment as well as past, present, and future wage losses exceeding yearly and monthly statutory minimums which may only be sought through tort against the insurer of the at fault party) (citing Ouellette v. Kennedy, 378 N.W.2d 470, 472 (Mich. 1985)). See also MacDonald v. State Farm Mut. Ins. Co., 350 N.W.2d 233, 236 (Mich. 1984) (denying an award for economic losses because the plaintiff s claim for losses was in excess of those permitted by the No-Fault Act). 20. See id. 1.3.

5 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 735 serious impairment of a body function. 21 Thus, although insurers may potentially pay larger sums in economic benefits to their insureds, their exposure to potentially more costly non-economic damages and excess economic damage is limited. 22 Therefore, this system would compensate virtually all auto-accident victims by providing for prompt payment of lost medical/rehabilitative expenses and lost wages, regardless of fault, while reserving a plaintiff s right to file tort claims for other non-economic losses not recoverable through a first-party claim. 23 B. Michigan No-Fault and the Role Played by the MCCA By October 1, 1973, the Michigan Legislature finally recognized the deficiencies of the traditional tort system and enacted its own form of nofault insurance under the Michigan No-Fault Insurance Act. 24 Throughout the years following its inception, the No-Fault Act has been the subject of numerous legislative amendments. 25 As a result, Michigan s system has become the most comprehensive no-fault scheme in the United States. 26 The Michigan No-Fault Act stands completely separate from any other no-fault legislation. The most significant distinction is that it provides unlimited personal protection insurance (PIP) benefits, which an accident victim may recover from his or her own insurer in the event that an autorelated injury is sustained. 27 The unlimited PIP coverage is mandatory for all registered owners of motor vehicles throughout the state. 28 Therefore, insurance companies writing policies in accordance with Michigan law must provide the unlimited PIP coverage to policyholders. The mandatory nature of unlimited economic compensation gave rise to concerns surrounding the extraordinary liability that it potentially 21. A catastrophic injury is one qualifying as a serious impairment of a body function, or an objectively manifested impairment of an important body function that affects the person s general ability his or her normal life. See MICH. COMP. LAWS ANN (7) (West 2002). 22. Id. 23. See Shavers v. Kelley, 267 N.W.2d 72, 77 (Mich. 1978). 24. Id. 25. See LOGEMAN, supra note 13, Id. at ix. 27. Memorandum from the Mich. Catastrophic Claims Ass n, MCAA Premium Assessment Set for (March 30, 2009) (on file with the author) [hereinafter MCCA 2009 Premium Assessment]. As of 2008, thirteen other states had non-compulsory no-fault laws: Delaware, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania, and Utah. Although each jurisdiction varies, virtually all of them provide a limited amount of economic recovery under a first-party claim. Whereas, Michigan s scheme provides unlimited economic benefits for certain claims. IRVIN E. SCHERMER & WILLIAM J. SCHERMER, AUTOMOBILE LIABILITY INSURANCE 72:2, 74:2, 76:1, 81:1, 82:2, 86:2, 88:2, 95:2, 97:2, 99:2, 102:2, 103:2, 109:2 (4th ed. 2007). 28. MICH. COMP. LAWS ANN (1) (West 2002).

6 736 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 imposed upon insurers. 29 Although the Legislature recognized that claims involving catastrophic injuries would be rare, they could arise unpredictably, affecting large and small insurance companies alike. 30 Particularly, medium and small-sized insurers would potentially be at a competitive disadvantage because they would write substantially fewer policies by which the costs of providing unlimited economic benefits could be spread. 31 As a result, the smaller insurer would be forced to charge higher premiums per vehicle, thus attracting even a smaller number of clients. 32 In response to concerns that Michigan s unlimited PIP benefits placed too great a burden on insurers, particularly small insurers, in the event of catastrophic injury claims, the Legislature created the MCCA in This legislative effort was directed toward alleviating the competitive inequities among insurance companies by effectively dispersing the costs of the system throughout the industry. Additionally, because the MCCA was considered an association of insurers, which would maintain vast statistical data providing an adequate resource for anticipating the overall costs of PIP claims, the inherent unpredictability of such claims could be mitigated. 34 The duties and powers by which the MCCA would realize its objectives are outlined in Michigan Compiled Laws section Section 3104(1) requires that: Each insurer engaged in writing insurance coverages that provide the security required by section 3101(1) within [Michigan], as a condition of its authority to transact insurance in this state, shall be a member of the [MCCA] and shall be bound by [its] plan of operation..., [and] may withdraw from the association only upon ceasing to write insurance that provides the security required by section 3101(1) Thus, pursuant to section 3104(1), every insurance company engaged in writing no-fault policies in Michigan must maintain membership with the MCCA throughout the entire period that it is engaged writing auto insurance policies. The controversy surrounding the Michigan Supreme Court decision in USF & G II, which led to the significant increase in the MCCA s annual assessments charged to member insurers and consequently to Michigan motorists, involves the interplay of M.C.L. sections 3104(2), 3104(25)(c), 29. See In re Certified Question, 449 N.W.2d 660, 661 n.2 (Mich. 1989). 30. Id. 31. Id. 32. See id. 33. Id. at Id. at 661 n MICH. COMP. LAWS ANN (1), (3) (West 2002).

7 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 737 and 3107(1)(a). Section 3104(2) states that [t]he [MCCA] shall provide and each member [insurer] shall accept indemnification for 100% of the amount of ultimate loss sustained under personal protection insurance coverages [PIP][,] provided that the aggregate amount of the loss exceeds a statutorily specified amount. 36 Section 3104(25)(c) defines ultimate loss as the actual loss that a member [insurer] is obligated to pay and that are paid or payable by the member[.] 37 [P]ersonal protection coverages refers to the protections afforded under the PIP policy, or the sum of the risks assumed by the member insurer. 38 Section 3107(1)(a) sets forth what the member insurer is obligated to pay under personal protection coverages [(PIP)]. Under section 3107(1)(a), member insurers must pay the policyholder personal protection benefits, defined as [a]llowable expenses consisting of all reasonable charges incurred for reasonably necessary products, services and accommodations for an injured person s care, recovery, or rehabilitation for the catastrophically injured policyholder. 39 Thus, a member insurer is only obligated to the policyholder to the extent that the costs are reasonable as to their amounts, necessary for accommodation, actually incurred, and motor-vehicle related. 40 In sum, the MCCA s primary purpose, within the Michigan nofault scheme, is to provide complete reimbursement to member insurers for losses sustained from payments of PIP benefits that the member was obligated to pay under no-fault coverage, which exceed the applicable statutory threshold. Following the MCCA s statutory design, its liabilities are potentially enormous. Between 1979 and 2009, over 23,100 catastrophic injury claims were reported to the MCCA. 41 More than half of the reported claims were active, resulting in future payments potentially exceeding $70 billion. 42 The figures provided by the MCCA account for the inflating costs of economic expenditures, including medical products, services, and accommodations necessary for the adequate care, recovery, and 36. Id (2)(a) (k). The specified amount is determined according to the date that the policy on a motor vehicle is issued or renewed. 37. Id (25)(c). 38. See Certified Question, 449 N.W.2d at 665. The court stated that in the context of the statute, the reference to personal protection insurance coverages in section 3104(2) is a shorthand reference to the no-fault personal protection coverages that are generally the subject of the act. Id.; see also BLACK S LAW DICTIONARY 422 (9th ed. 2009) (defining coverage as [t]he risks within the scope of an insurance policy ). 39. MICH. COMP. LAWS ANN (1)(a) (West 2002) (emphasis added). 40. Nasser v. Auto Club Ins. Ass n, 457 N.W.2d 637, 645 (Mich. 1990) (quoting Nelson v. Detroit Auto. Inter-Ins. Exch., 359 N.W.2d 536, 538 (Mich. Ct. App. 1984)). 41. MCCA 2009 Premium Assessment, supra note 27, at Id.

8 738 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 rehabilitation of catastrophically injured policyholders. 43 The MCCA estimates that approximately 1,050 PIP claims are filed with it each year and the amounts paid on these policies can be expected to rise. 44 To cover these costs, section 3104(7)(d) allows the MCCA to calculate and charge to [member insurers] a total premium sufficient to cover the expected losses and expenses... that the [MCCA] will likely incur during the period for which the premium is applicable. 45 The assessments charged by the MCCA are fixed amounts charged on a per-vehicle basis. 46 Although the MCCA assessments are directly charged to member insurers, they are nearly always passed onto Michigan motorists. 47 Furthermore, even though the assessment is a fixed amount charged to the member insurer, insurers typically cover the costs associated with the administration of PIP policies by adding additional charges to policyholder premiums. Consequently, the system in place that provides the MCCA with the necessary funding to effectuate its indemnification responsibilities under section 3104(2) rests entirely upon the shoulders of the policyholder. If the MCCA is determined not to have the power to review and cannot devise a systematic claim-management process to limit excessive member insurer claims, the MCCA assessments will see a substantial increase because it will have to account for tremendous expenses required to satisfy even the most unreasonable claims. This result will represent the $643.8 million bill that each Michigan motorist will share. A. Case Background II. UNITED STATES FIDELITY INSURANCE CO. V. MCCA On August 22, 1981, Daniel Migdal was involved in a serious car accident sustaining catastrophic injuries including a traumatic brain injury with cerebral spastic quadriplegia, severe motor apraxia, and dysphasia. 48 In 1988, Daniel s father ( Mr. Migdal ) sued the no-fault insurance provider, United States Fidelity Insurance and Guaranty Company ( Insurer ), to recover the tremendous costs of providing Daniel s constant 43. Memorandum from the Office of Financial and Insurance Services on Michigan Catastrophic Claims Ass n 4 (Mar. 28, 2006) [hereinafter MCCA Memo 2006], available at MCCA 2009 Premium Assessment, supra note 27, at 1. Because of the unpredictability of claims involving the MCCA, a $ deficit per-vehicle ratio was estimated, and thus assessments will presumably increase to cover claims. Id. 45. MICH. COMP. LAWS ANN (7)(d) (West 2002). 46. See id. 47. MCCA Memo 2006, supra note 43, at U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 795 N.W.2d 101, 104 (Mich. 2009).

9 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 739 care under the no-fault policy he held. 49 Some two years after the filing of the complaint, the parties entered into a consent judgment ( Settlement ) whereby the Insurer paid $35,000 in exchange for being discharged of all contractual liability for the nursing care that it had previously provided under the policy. 50 In addition to the $35,000 amount, the Insurer also agreed to pay $17.50 per hour for Daniel s 24-hour care for the following year. 51 Although the $17.50 hourly rate was fixed for the year immediately following the date of the settlement, the Insurer agreed that the rate would increase annually at a rate of 8.5%, which was to be compounded based on the rate for the previous year. 52 The Insurer continued to fulfill its obligations under the Settlement until the aggregate of the payments made reached the statutory threshold, thus invoking the indemnification duties of the MCCA. 53 The MCCA began to reimburse the Insurer for the payments; however, by 2003, the hourly rate had increased to $54.84 per hour for Daniel s 24-hour nursing care, and according to the Insurer, it had disbursed over $7 million under the policy. 54 Consequently, the MCCA eventually refused to reimburse the Insurer for the payments that were being made to Daniel pursuant to the Settlement. 55 In refusing to continue the indemnification payments, the MCCA asserted that the Insurer was incurring an ultimate loss that was unreasonable and which the Insurer was not obligated to pay because according to section 3107, member insurers are only required to provide PIP benefits consisting of reasonable charges. 56 In other words, the MCCA maintained that the losses sustained by the Insurer did not fall within the definition of the ultimate losses in section 3104(2) because the Insurer was incurring losses for which it obligated itself to pay in excess of the reasonableness standard in section 3107(1)(a). The Oakland County Sixth Circuit Court of Michigan granted Insurer s motion for summary disposition holding that the MCCA must 49. Id. 50. Id. 51. Id. 52. Id. According to this formula, USF & G would have distributed $7,644, in PIP benefits under Daniel s policy through Brief of the Commissioner of the Office of Financial and Insurance Regulation as Amicus Curiae Supporting Defendant-Appellant at 10, U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, (Mich. 2007) (No ). 53. USF & G II, 795 N.W.2d at At the time, the statutory threshold was $250,000. Id. at Id. at 105; Brief of Auto Club Insurance Ass n as Amicus Curiae Supporting Defendant-Appellant at 5, U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, No (Mich. Ct. App. 2005). 55. USF & G II, 795 N.W.2d at Id. See MICH. COMP. LAWS ANN (25)(c) (West 2002) (defining ultimate loss as the [t]he actual loss amounts that a member [insurer] is obligated to pay and that are paid or payable by the member ) (emphasis added).

10 740 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 reimburse it for the ultimate loss sustained as a result of writing Migdal s policy. 57 The Circuit Court denied the MCCA s motion on the grounds that the language of section 3104 does not incorporate the same reasonableness standard that governs the policy between a member insurer and a policyholder under section 3107(1)(a). 58 Ultimately, a judgment was entered, ordering the MCCA to reimburse the amount of $1,725,072 and requiring that future payments under the Settlement continue to be paid for Daniel s care and reimbursed by the MCCA. 59 In the meantime, a similar situation arose in Hartford Insurance Co. v. MCCA. 60 Contrary to the Oakland County Circuit Court s conclusion with regard to Migdal, the court in Hartford found that the reasonableness of payments made under a no-fault policy was an element in determining the amount which the MCCA was obligated to reimburse. 61 Hartford immediately appealed, and the Michigan Court of Appeals consolidated USF & G and Hartford. 62 On appeal, the appellate court found that MCL (2) does not incorporate a reasonableness [element] and requires the MCCA to reimburse insurers for any amount of PIP benefits paid in excess of the statutory threshold. 63 Shortly after, the MCCA s motion for leave to appeal to the Michigan Supreme Court was granted. 64 In USF & G I, the Michigan Supreme Court held that according to section 3104(2), the purpose of the MCCA was to indemnify member insurer claims meeting the requirements of that section, and thus it may review a particular claim and refuse its indemnification to the extent that the payments are not in compliance therewith. 65 Approximately three months later, the justices on the court voted to grant rehearing. 66 On rehearing, the court reversed, holding (1) that the MCCA is required by statute to reimburse member insurers for 100 percent of the ultimate loss exceeding the applicable statutory threshold without regard to the reasonableness of the member insurer payments; (2) that the MCCA s power under section 3104(7) to adjust the members practices and procedures do not encompass adjustment of the payment amounts agreed to between members and policy holders; and (3) that the provisions of the No- 57. USF & G II, 795 N.W.2d at Id. 59. See id. 60. Id. 61. Id. at Id. 63. Id. (citing U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 731 N.W.2d 481, 486 (Mich. Ct. App. 2007)). 64. U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 748 N.W.2d 240 (Mich. 2008). 65. See U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n (USF & G I), 759 N.W.2d 154, 165 (Mich. 2008). 66. U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 762 N.W.2d 911 (Mich. 2009).

11 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 741 Fault Act granting the MCCA the authority to perform acts not enumerated within the statute that are necessary and proper to accomplish its purpose does not include the power to review claims for reasonableness. 67 B. Comparative Analysis In comparison, the opinions in USF & G I and USF & G II possessed different understandings of the MCCA s purpose and plan of operation. In particular, their respective conclusions were derived from drastically different interpretations of the language in section 3104(2), which would ultimately dictate the determination as to whether the MCCA possesses any authority to review member insurer claims. USF & G I found that the MCCA possesses the statutory authority to review claims for compliance with section 3104(2) because its purpose was to indemnify only those claims. Conversely, the court in USF & G II did not appear to read section 3104(2) as imposing significant limitations on member insurers reimbursement claims, but instead emphasized the MCCA s obligations under the statute. 68 In USF & G I, the court s analysis was dissected into two basic questions: (1) whether the MCCA had any authority to review a member insurer s claims; and (2) whether the authority to review included the ability to assess the reasonableness of member insurer claims and to subsequently refuse their indemnification on that basis. 69 In addressing both questions, USF & G I outlined the requirements set forth in section 3104(2), which a member insurer s claim must meet for indemnification: (1) The claim sought to be indemnified must be for the ultimate loss, i.e., the actual loss amounts that a member is obligated to pay and that are paid or payable by the member; (2) The claim must be sustained under personal protection coverages; and (3) The loss must be in excess of the statutory threshold. 70 In finding that the MCCA may review member insurer claims, USF & G I concluded that even though section 3104(2) does not explicitly authorize the MCCA to do so, the requirements that must be met for 67. USF & G II, 795 N.W.2d at Compare id. ( We now hold that the indemnification obligation set forth in MCL (2) does not incorporate the reasonableness standard... [and] the powers granted to the MCCA in [section] 3104(7)... [d]o not encompass adjustment to the payment amount agreed between claimants and member insurers. (emphasis added)), with USF & G I, 759 N.W.2d at 160, 161 ( Not every member insurer claim is entitled to indemnification... ; [e]ach claim must meet the requirements of section 3104(2). (emphasis added)). 69. USF & G I, 759 N.W.2d at 160, Id. at 161 (emphasis added) (quotations omitted) (citing MICH. COMP. LAWS ANN (2) (West 2002)).

12 742 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 indemnification under section 3104(2) reflect the Legislature s judgment that such relief should only be available under the most extraordinary circumstances. 71 Essentially, the Legislature intended that the MCCA indemnify only those claims that meet the requirements of section 3104(2). 72 Thus, to accomplish this objective, the review of member insurer claims for compliance with the statute would be necessary and proper and thus one of the MCCA s un-enumerated powers under 3104(8)(g). 73 Therefore, allowing the MCCA to review claims for statutory compliance was not inconsistent with section 3104 or the MCCA s plan of operation. 74 In sum, because the MCCA s purpose is to indemnify only those claims meeting certain requirements, reviewing claims for compliance is necessary for the realization of that purpose, notwithstanding the absence of explicit statutory permission. Accordingly, the settlement paid to Daniel, for which the Insurer sought indemnification, was exemplary of a claim subject to the MCCA s review power because there was a question as to whether it complied with the second requirement of section 3104(2) that it be sustained under the original policy or PIP coverage. 75 USF & G II held a different understanding of the MCCA s purpose, which would influence its determination concerning the extent of the MCCA s statutory authority to review claims. The USF & G II decision was based on its emphasis of the obligations imposed on the MCCA by section 3104(2). USF & G II maintained that the purpose of the MCCA was relatively straight-forward: The MCCA is an unincorporated nonprofit association, whose purpose is to provide insurers with indemnification for PIP policies that exceed a certain threshold. 76 According to the court, this purpose essentially limited the scope of the MCCA s necessary or proper authority per section 3104(8)(g); essentially, if the insurer sustained some loss in excess of the applicable threshold as a result of writing PIP coverage, it was entitled to 71. USF & G I, 759 N.W.2d at Id. 73. Id. (referring to MICH. COMP. LAWS ANN (8)(g) (West 2002)) ( In addition to other powers granted to it by this section, the [MCCA may also]... [p]erform other acts not specifically enumerated within this section that are necessary or proper to accomplish the purposes of the [MCCA] and that are not inconsistent with this section or the plan of operation. ). 74. Id. at 161. The court in USF & G I quoted the MCCA s primary purpose as follows: [t]he [MCCA] shall, upon verification of propriety and amount of the payments made and the member s entitlement to reimbursement therefore, reimburse the member the amount due it. Id. (citing MICH. CATASTROPHIC CLAIMS ASS N, PLAN OF OPERATION (2007)), available at 01 _18_2007.pdf. 75. Id. at U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 795 N.W.2d 101, 110 (Mich. 2009) (citing MICH. COMP. LAWS ANN (1) (West 2002)).

13 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 743 indemnification. 77 According to this understanding, any review of member claims on the basis of reasonableness would not promote such a narrow purpose and would thus not be conferred upon the MCCA by virtue of section 3104(8)(g). 78 In conclusion, the court in USF & G I placed emphasis on the claim requirements in the statute and found that the MCCA s purpose was to indemnify only those claims satisfying section 3104(2), and thus to accomplish that objective, the review for compliance was necessarily and properly conferred, notwithstanding the absence of explicit statutory permission. 79 Conversely, USF & G II emphasized the obligations imposed on the MCCA in section 3104(2) in construing a more narrow purpose; that the MCCA was to indemnify all claims resulting in a member insurer s loss that surpassed the applicable threshold; and because the review of claims was not necessary to realize that purpose, the power to review is not among the MCCA s un-enumerated powers Different Conclusions as to the Operation of the Term Coverages in the Scheme of Section 3104(2) As a result of the conflicting understandings of the MCCA s intended purpose derived from emphasizing the claim limitations in section 3104(2) or the obligations that it imposed on the MCCA the meaning and purpose of the term coverages within the statute was also a subject of disagreement. 81 While the court in USF & G I would interpret the meaning of coverages to allow indemnification for a settlement exceeding the applicable threshold provided that its payment terms were included in the original policy, USF & G II concluded that the usage of the term was intended to encompass a more broad range of liability to promote quick and effective recovery for policyholders. 82 Consequently, USF & G II concluded that the settlement reached between the Insurer and Daniel was 77. See USF & G II, 795 N.W.2d at 113 ( Section 3104(8)(g) allows the MCCA to fulfill the specific requirements of the statute. Accordingly, we interpret section 3104(8)(g) as granting the MCCA the limited power to further its purpose of prompt and efficient indemnification of its members. ). 78. See id. 79. See discussion supra Part II.B. 80. See id. 81. See USF & G I, 759 N.W.2d at 165 ( A loss sustained under [PIP] coverage... [i]s one sustained under a policy providing the compulsory security requirements of [the No-Fault Act] ) (citing In re Certified Question, 449 N.W.2d 660, 665 (Mich. 1999)). But see USF & G II, 484 Mich. at 16 ( Under the common meaning of coverage, the contractual amount that an insurer agrees to pay an insured is considered part of the insurer s coverage, [including settlements]. ). 82. See generally, USF & G II, 795 N.W.2d at (citing MICH. COMP. LAWS ANN (1) (West 2002)).

14 744 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 encompassed by section 3104(2) and deserving of indemnification from the MCCA. 83 In finding that the MCCA may review claims for compliance with the requirements of section 3104(2), one of which being that the ultimate loss be sustained under PIP coverages, the court in USF & G I concluded that the MCCA may review the claim to verify the extent to which it fell within the original policy: [W]hen a member s policy provides coverage for only reasonable charges, then the MCCA may refuse to indemnify unreasonable charges. If the policy provides broader coverage, the MCCA must review for compliance with the broader coverage and indemnify claims within that coverage... [because] claims in excess of the member s PIP coverages are not sustained [thereunder]. 84 Thus, USF & G I stood for the proposition that the MCCA may review a member insurer claim for compliance with the requirements set forth in section 3104(2), including verification that the ultimate loss be sustained under PIP coverages. 85 Following this rationale, if United States Fidelity had provided coverage for all necessary medical costs in addition to the $7.6-million surplus, then the settlement reached with Daniel would have complied with all requirements of section 3104(2) and thus maintained the attributes of a claim for which the MCCA s purpose mandates reimbursement. 86 Therefore, USF & G I did not necessarily purport to allow the MCCA to review claims specifically on the basis of reasonableness. In USF & G II, the court defined coverages as the extent of protection afforded by an insurance policy or the amount of funds reserved to meet liabilities as protection against a risk or risks specified in an insurance policy. 87 However, the court ultimately found that the settlement agreed to subsequent to the original policy was coverage or within the extent of protection afforded by [the original] insurance policy[,] stating that [u]nder the common meaning of coverage, the contractual liability amount that an insurer agrees to pay an insured is considered a part of the insurer s coverage. 88 The court emphasized that the term coverages connotes a broad meaning, and because the MCCA is not subject to any laws with respect to insurers, it is not an insurer for 83. See USF & G II, 795 N.W.2d at USF & G I, 759 N.W.2d at 164 (citations omitted). 85. Id. at But see Farmers Ins. Exch. v. South Lyon Cmty. Schools, 602 N.W.2d 588, 590 n.1 (Mich. Ct. App. 1999) (suggesting that perhaps the MCCA s duties are even more narrow: the MCCA is not obligated to indemnify its member insurers for amounts the insurers are not obligated to pay under their no-fault policies. (emphasis added)) N.W.2d at 109 (citation omitted). 88. Id.

15 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 745 purposes of section 3107(1)(a), which establishes a reasonableness standard as a floor for the amount of PIP benefits that insurers must provide to policyholders. 89 In sum, the respective understandings of the MCCA s purpose would cause each court to apply the term coverages in section 3104(2) differently, thereby reaching different conclusions regarding the scope of MCCA s indemnification obligation. In USF & G I, the court found that the term coverages simply requires that any amount of PIP benefits paid by a member, whether under a settlement or another form of agreement, be provided for in the original policy, and the MCCA may review a particular claim to verify its compliance with that requirement. 90 In USF & G II, the court would reverse, finding that coverage connotes a broad meaning and thus encompasses a wide range of liabilities inclusive of settlements formulated between insurers and policyholders and subsequent to the original policy. 91 III. THE COSTS OF THE PRECEDENT SET IN USF & G II CANNOT BE JUSTIFIED The rationale employed by the court in USF & G II to support its ultimate conclusion is unpersuasive from various perspectives and cannot be justified in light of its consequences. The court s narrow understanding of the MCCA s purpose and consequently its lack of power to review member claims for compliance with section 3104(2) is contrary to Michigan case law and the MCCA s plan of operation. Additionally, its application of the term coverages in section 3104(2), which it considered sufficiently broad to encompass outstanding agreements such as settlements, is inconsistent with its own cited definition and disrupts the function of the MCCA. Furthermore, the court s apparent failure to follow the long-standing protocol for granting rehearing also undermines the credibility of this decision. Finally, USF & G II essentially ignores important policy concerns by failing to reduce instances of excessive payments throughout the industry. A. The USF & G II Interpretation of Section 3104(2) is Inconsistent with Michigan s No-Fault Jurisprudence and the MCCA s Plan of Operation Construing the indemnification obligations in section 3104(2) as leaving the MCCA without the authority to review member claims is inconsistent with Michigan case law and the MCCA s plan of operation. In In re Certified Question, the Michigan Supreme Court decided a case involving a plaintiff insurance company which paid Michigan no-fault 89. Id. at See USF & G I, 759 N.W.2d at See USF & G II, 795 N.W.2d at 109.

16 746 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 benefits in excess of the applicable amount to an Illinois resident whom it had insured under a policy written in that state, but who was injured in an accident occurring in Michigan while riding as a passenger in an automobile driven by a Michigan resident. 92 The court squarely rest[ed] [its] finding of the [L]egislature[ s] intent to limit indemnification under section 3104(2) in finding that the MCCA is not obligated to reimburse no-fault benefits paid under a policy written outside of Michigan. 93 The legislative direction that the court in In re Certified Question found controlling was the reference to personal protection insurance [(PIP)] coverages in section 3104(2) which must include the compulsory security requirements of [Michigan law] a requirement that was not met by the policy in question because the policyholder was not a Michigan resident. 94 Therefore, the MCCA was permitted to refuse indemnification for payments made by the insurer under the no-fault policy written in Illinois. 95 Accordingly, In re Certified Question provides an example of how the courts have understood the MCCA s purpose in the past that each claim by a member insurer is subject to the requirements in section 3104(2), and the purpose of the MCCA is only to indemnify those claims. Providing the MCCA with the power to review claims, at least for compliance with the requirements of section 3104(2), is not a novel proposition according to the Michigan Supreme Court. Thus, the notion that the MCCA s purpose broadly encompasses each member insurer loss that surpasses the applicable threshold, without having opportunity to ensure that the particular claim is within the contemplation of section 3104(2), would be contrary to previous decisions. 96 The MCCA s plan of operation requires, inter alia, [t]he economical... [a]dministration of the association [in addition] to the prompt and efficient provision of indemnity. 97 If the MCCA s purpose is indeed confined to providing indemnification for every claim that merely caused the member an ultimate loss... [i]n excess of the applicable threshold, 98 the MCCA is essentially obligated to indemnify claims on what appears to be a no-questions-asked basis. Requiring the MCCA to indemnify claims under the theory asserted by United States Fidelity that they suffered some ultimate or actual loss exceeding the statutory amount due to some outside agreement or settlement would be negating the check N.W.2d 660, 662 (Mich. 1989). 93. Id. at (emphasis added). 94. Id. at 662, See id. at See generally Liberty Mut. Ins. Co. v. Mich. Catastrophic Claims Ass n, 638 N.W.2d 155, (Mich. Ct. App. 2001) (holding that the MCCA can refuse to indemnify claims paid under other provisions of section 3401 that do not meet the applicable requirements). 97. MICH. COMP. LAWS ANN (17) (West 2002). 98. Id. at (25)(c).

17 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 747 on member insurer s claims in section 3104(2) and thus far from an economical... [a]dministration of the association. 99 This conclusion is contrary to the MCCA s plan of operation because the MCCA would lose its status as an indemnitor and assume a role more closely analogous to that of a guarantor, at least with respect to amounts which member insurers agree to pay in excess of the applicable statutory threshold. 100 B. USF & G II Interprets Section 3104(2) in a Manner That Disrupts Michigan s No-Fault System Applying the term coverages according to USF & G II is inconsistent with the design of Michigan s no-fault system because it does not provide the MCCA with the necessary foresight to charge an appropriate assessment to cover its potential liabilities. For example, USF & G II assumes that the Insurer drafted a policy providing protection for $821, in excess of the necessary medical costs through By that same year, the total benefits paid for Daniel s care would exceed the entire cost of providing Daniel s care by $7.64 million. 102 Consequently, this case represents a tremendous liability that could not have been foreseen and thus not accounted for by the MCCA in assessments charged to the Insurer. USF & G II confined itself to determining whether the MCCA may review member claims on the basis of reasonableness alone. 103 The court in USF & G II was perhaps led down that path by the MCCA s assertion that the ultimate loss sustained under PIP coverages, for which it is to indemnify under section 3104(2), is defined as what the Insurer was obligated to pay. 104 Thus, because section 3107(1) establishes that member insurers are only obligated to provide reasonable PIP benefits, then section 3104(2) essentially incorporates a reasonableness requirement, and the MCCA may refuse a claim on that basis. 105 The court in USF & G II correctly dismissed this argument, relying on the fact that PIP coverages, which are not subject to a reasonableness requirement in 3104(2), have a distinct meaning from the PIP benefits dealt with in 99. Id Although assessments may be periodically adjusted to cover excess losses paid by the MCCA from previous periods, substantially excessive settlements payments in the aggregate will force the MCCA to adjust the assessments more frequently and thus contribute to higher insurance premiums. See id. 3104(7)(d) Brief of the Commissioner of the Office of Financial and Insurance Regulation as Amicus Curiae Supporting Defendant-Appellant, U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 759 N.W.2d 154 (No ), at 10 (Mich. 2008) [hereinafter Commissioner s Brief ] Id See U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 795 N.W.2d 101, 107 (Mich. 2009) See id. at 105; see MICH. COMP. LAWS ANN (25)(c) Id. at 108.

18 748 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 section 3107(1), and therefore the reasonableness standard did not translate into section 3104(2). 106 However, USF & G I only purported to allow the MCCA to review and reject a particular claim to the extent that it failed to satisfy section 3104(2) specifically, whether the payment terms of a settlement were provided for within the original coverage to ensure that the claim was an ultimate loss sustained under a PIP policy. 107 Accordingly, if a member insurer does provide broader coverage within the original policy, the broader coverage would be considered an expected loss. The expected loss would have been included in the formula used by the MCCA to calculate the final per-vehicle premium assessment charged to the Insurer. Ultimately, at least a portion of the $7.6-million excess would have been accounted for in covering Migdal s claim. However, if member insurers excessive payments of benefits under settlements are considered within the coverage provided for in the original policy, then members are entitled to indemnification for those amounts despite not having paid for such a level of security. Therefore, because the court s interpretation and application of the term coverages does not allow the MCCA to accurately assess and account for expected liabilities and thus disrupts Michigan s no-fault scheme, it is misguided. C. The Decision to Grant Rehearing Did Not Comply with Applicable Standards In addition to the court s questionable interpretation of section 3104(2) in USF & G II, its apparent failure to follow the applicable protocol for granting rehearing also undermines the credibility of its holding. Governing any decision to grant rehearing is the principle that it will [g]enerally... not be granted. 108 However, the moving party must demonstrate a palpable error by which the court and the parties have been misled and show that a different disposition of the motion must result from correction of the error. 109 Therefore, unless the moving party is unable to demonstrate an issue of law or fact that was not previously considered but 106. Id. at U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 759 N.W.2d 154, 162 (Mich. 2008) ( [Section] 3104(2) does not contain the word reasonable or any variation thereof[.] ). See also id. at 166 n.1 (Markman, J., concurring) ( [T]he majority opinion does not attempt to incorporate [a reasonableness] requirement [as a part of] MCCA s statutory power to review... claim[s]..., [r]ather... the MCCA can review a member s claims for compliance with the policy, which... generally [only obligates] member insurers to reimburse reasonable claims based on section ) MICH. CT. R (F)(3) Id.

19 Summer 2010] USF&G V. MCCA: UNREASONABLE INDEMNIFICATION 749 which would necessarily require a different outcome, a motion for rehearing will generally be denied. 110 In USF & G II, the court justified its decision to grant the Insurer s motion for rehearing even though a palpable error did not appear to exist. 111 In fact, even if there were such a palpable error as required by Michigan Court Rule 2.119(F)(3), 112 it remains unknown because [the court granted] rehearing without further briefing or oral argument. 113 Voting to deny rehearing, the new minority in USF & G II referred to Peoples v. Evening News Ass n 114 to illustrate that a rehearing will not be ordered on the ground merely that a change of the members of the bench has either taken place, or is about to occur. 115 The majority in USF & G II stated that if the composition of the court changes, which it did as a result of Justice Hathaway s appointment beginning on January 1, 2009, and the composition becomes such that the [new] majority of the [c]ourt sees a reason to grant rehearing, then [it] is not precluded from doing so under Peoples [or Rule 2.119(F)(3)] because the Rule does not inhibit the discretion of the court. 116 However, Justice Weaver s opinion offered absolutely no reason for why the case should be reheard, other than those previously articulated in her dissent in USF & G I. 117 Justice Weaver stated that if, for instance, four justices on the newly composed court concluded that the challenged opinion was erroneous, those justices can vote to grant rehearing [and] the same holds true whether the deciding vote is a new justice..., [o]r whether the deciding vote comes from a justice who signed 110. See Nichols v. Marsh, 29 N.W. 37, 38 (1886), denying rehearing because the court discover[ed] no point which was not presented and considered on the original argument[.] See also Thompson v. Jarvis, 40 Mich. 526, 526 (1879), stating that a rehearing must generally be denied [u]nless new evidence has been found since the decision of the case, of such a nature as to require consideration See U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n (USF & G Rehearing), 762 N.W.2d 911 (Mich. 2009) (granting a rehearing without articulating the basis for doing so); see also USF & G II, 795 N.W.2d at 115 (Young, J., dissenting) ( As Justice Weaver s former dissent in these cases and the majority s new opinion make obvious, the parties have not raised a new issue of fact or law to merit rehearing. ) MICH. CT. R (F)(3) USF & G II, 795 N.W.2d at 116 n.11 (Young, J., dissenting) (citing USF & G Rehearing, 762 N.W.2d at 911) N.W. 691, 691 (Mich. 1883) USF & G II, 795 N.W.2d at (Young, J., dissenting) (citing Peoples, 16 N.W. at 691) USF & G II, 795 N.W.2d at 106 n.12 (majority opinion) (emphasis added) See generally U.S. Fid. Ins. & Guar. Co. v. Mich. Catastrophic Claims Ass n, 759 N.W.2d 154, (Mich. 2008) (Weaver, J., dissenting). Justice Weaver s dissent presented almost verbatim the arguments used for the opinion in USF & G II, suggesting that the only reason for granting rehearing was because the new majority simply disagreed with USF & G I.

20 750 UNIVERSITY OF DETROIT MERCY LAW REVIEW [Vol. 87:731 the challenged opinion and changed his or her mind after further consideration. 118 Justice Weaver s statement purporting to allow the justices to simply change their mind implies that the court s decision to grant rehearing in this case was indeed based on a disagreement with USF & G I and which required Justice Hathaway s swing vote to put the case back on the court s docket. 119 However, this would appear to ignore Rule 2.119(F)(3) because if the justices may change their mind, there would be little use for the existence of the Rule that maintains a palpable error requirement. As a result, granting the Insurer s motion for rehearing was arguably in error and thus undercuts the integrity of the USF & G II decision. D. The USF & G II Holding Does Not Strike an Appropriate Balance Although USF & G II based its decision on at least one important policy concern, its absolute denial of the MCCA s power to review claims was misguided considering several other policy perspectives. The court in USF & G II stated that the [No-Fault Act] is designed to minimize administrative delays and factual disputes that would interfere with achievement of the goal of expeditious compensation of damages... [, and] [t]he ability to settle claims is essential to meeting [that] goal. 120 This concern is intuitively well-founded, at least if the MCCA was allowed to review and reject claims on a reasonableness basis, because insurers would be more reluctant to settle claims if there was some possibility that it would be rejected by the MCCA s subsequent review. Furthermore, permitting another layer of dispute surrounding a claim s compliance with section 3104(2), as suggested by USF & G I, may potentially place another obstacle between the injured policyholder and recovery. However, in addressing the overall increase in costs, the court in USF & G II concluded that such questions were better left to the Legislature and that the 19- percent-increase in premiums was [n]onetheless... highly speculative and, indeed, unfounded. 121 USF & G II defended the position that the MCCA has an absolute indemnification obligation by pointing to other provisions of the No-Fault Act, which allow the MCCA to adjust the practices and procedures of member insurers if they are considered inadequate to meet the needs and liabilities of the MCCA. 122 Although the court may have been correct in 118. USF & G II, 795 N.W.2d at 106 n.12 (emphasis added) See id. at 116 n.11 (Young, J., dissenting) ( Moreover, I find it odd that Justice Hathaway... finds it appropriate to cast her vote to overturn the [December 28, 2008] decision without so much as attending argument on this case or allowing the party opposing the motion to have its day in court. ) Id. at (citing Miller v. State Farm Mut. Auto Ins. Co., 302 N.W.2d 537, 546 (Mich. 1981)) Id. at Id. at