When somebody commits fraud to get a contract, the other party can seek to rescind the contract after discovering the fraud. A rescinded contract is “void ab initio” – it is as if the contract was never made.
The innocent 3rd party rule provides that fraud by the contracting party cannot hurt an innocent 3rd party who would benefit from the contract.
Example: Adam slips at Brenda’s store. Brenda’s insurer would pay Adam. But, Brenda lied in her insurance application, so the policy gets rescinded. Under the innocent 3rd party rule, the insurer still has to pay Adam.
In Titan v. Hyten, 491 Mich. 547 (2012), the Michigan Supreme Court basically killed the innocent 3rd party rule. In Bazzi v. Sentinal, 315 Mich. App. 763 (2016), the Michigan Court of Appeals killed it more (but see Lesson 50).
Meemic v. Fortson (Mich App, May 29, 2018) brought it back to life, somewhat.
In the Meemic case, the insureds’ son had a PIP claim. The insureds fraudulently claimed attendant care benefits, like for times that the son was in jail.*
The Court of Appeals found in favor of the claimant, holding that “equity appears to lean in favor of protecting the innocent third party who was statutorily mandated to seek coverage under a validly procured policy and was, unlike the claimant in Bahri, wholly uninvolved in the fraud committed after the policy was procured.”
* PIP means a no-fault auto claim. In this case, the son was injured when he was “riding on the hood of a car” and the driver accelerated and turned. The son fell off and hit his head. Under Michigan PIP, your own car insurer pays medicals, “replacement services,” “attendant care,” and 85% wage loss benefits. “Attendant care” means providing for the injured person’s physical “care, recovery or rehabilitation.” Meemic v. Fortson, p. 2, citing Douglas v Allstate Ins Co, 492 Mich 241, 259-260, 262-263 (2012)