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Bazzi v. Sentinel Insurance Co.

Supreme Court of Michigan

July 18, 2018

ALI BAZZI, Plaintiff-Appellant,
v.
SENTINEL INSURANCE COMPANY, Defendant/Third-Party Plaintiff-Appellee, and GENEX PHYSICAL THERAPY, INC., and ELITE CHIROPRACTIC CENTER, PC, Intervening Plaintiffs-Appellants, and TRANSMEDIC, LLC, Intervening Plaintiff-Appellee, and CITIZENS INSURANCE COMPANY, Defendant-Appellee, and HALA BAYDOUN BAZZI and MARIAM BAZZI, Third-Party Defendants-Appellees.

          Argued January 11, 2018

          Chief Justices: Stephen J. Markman, Brian K. Zahra, Bridget M. McCormack, David F. Viviano, Richard H. Bernstein, Kurtis T. Wilder, Elizabeth T. Clement

         SYLLABUS

         Alli Bazzi brought an action in the Wayne Circuit Court against Sentinel Insurance Company and Citizens Insurance Company, seeking to recover personal protection insurance (PIP) benefits under the no-fault act, MCL 500.3101 et seq., for injuries he received while driving a vehicle leased by his mother, Hala Bazzi. Genex Physical Therapy, Inc., Elite Chiropractic Center, PC, and Transmedic, LLC, intervened in the action to recover payment for the medical services they individually provided to plaintiff for his injuries. Although Hala leased the vehicle in her own name, Sentinel Insurance insured the vehicle through a commercial policy issued to Mimo Investment, LLC, whose resident agent was plaintiff's sister, Mariam Bazzi. Sentinel Insurance filed a third-party complaint against Hala and Mariam, seeking to rescind the policy on the basis that Hala and Mariam had procured the policy through fraud. The court, Lita M. Popke, J., entered a default judgment against Hala and Mariam rescinding the policy. Sentinel Insurance then moved for summary disposition of plaintiff's PIP benefits claim and the claims of the intervening medical providers, arguing that the policy was void ab initio because it had been rescinded for fraud, which precluded recovery under the policy. The court denied Sentinel Insurance's motion, concluding that plaintiff had a valid claim for PIP benefits under the innocent-third-party rule, which provides that an insurer may not rescind benefits for mandatory coverage under an insurance policy as to an innocent third party injured in an accident, even though the insured procured the policy through material misrepresentations in the application. Plaintiff appealed by leave granted. In a split decision, the Court of Appeals, Sawyer, P.J., and Boonstra, J. (Beckering, J., dissenting), reversed the trial court and remanded for further proceedings. 315 Mich. 763 (2016). The majority reasoned that the innocent-third-party rule did not survive the decision in Titan Ins Co v Hyten, 491 Mich. 547 (2012)-which abrogated the judicially created easily-ascertainable-fraud rule-because there was no meaningful distinction between the two rules and because no statute prohibits an insurer from raising a fraud defense with respect to PIP benefits. The Supreme Court granted plaintiff and intervening plaintiffs Genex Physical Therapy, Inc., and Elite Chiropractic Center, PC's application for leave to appeal. 500 Mich. 990 (2017).

         In an opinion by Justice Wilder, joined by Chief Justice Markman and Justices Zahra, Bernstein, and Clement, the Supreme Court held:

         The Court's decision in Titan implicitly abrogated the innocent-third-party rule. An insurer may seek rescission of an automobile insurance policy on the basis of the common-law defense of fraud-even with regard to a third party seeking to recover statutorily mandated PIP benefits-because the no-fault act does not limit an insurer's ability to rescind a policy on that basis. However, an insurer is not entitled to automatic rescission of a policy with regard to a third party even though the policy was procured by the insured through fraud. Instead, a trial court must balance the equities between the insurance company and the third party to determine whether, in its discretion, the policy could be rescinded as between those parties. In this case, Sentinel Insurance could raise the defense of fraud to plaintiff's action for PIP benefits. The Court of Appeals erred when it concluded that Sentinel Insurance was automatically entitled to rescission of the contract with regard to plaintiff. The case was remanded to the trial court for it to balance the equities between the two parties to determine whether, in its discretion, the policy could be rescinded.

         1. Automobile insurance contracts are governed by a combination of statutes and the common law related to contracts. Under MCL 500.3112, PIP benefits are payable to or for the benefit of an injured person or, in the case of an individual's death, to or for the benefit of the individual's dependents. Because PIP benefits are mandated by MCL 500.3101(1) of the no-fault act, issues regarding the award of those benefits are decided by construing the statute and the policy together as though the statute is part of the policy, and the rights and limitations of the policy coverage are governed by the statute. Conversely, the rights and limitations of a policy are entirely contractual and construed without reference to the statute if there is no applicable statute. Article 3, § 7 of the 1963 Michigan Constitution provides that common-law defenses remain in effect until they expire by their own limitations or are changed, amended, or repealed. Consequently, unless doing so is clearly prohibited by a statute, an insurer may continue to avail itself of any common-law defenses, including fraud in the procurement of the policy. The plain language of the no-fault act does not preclude or otherwise limit an insurer's ability to rescind a policy on the basis of the common-law defense of fraud, including as to a third party. Accordingly, Sentinel Insurance could raise the defense of fraud and seek rescission of the insurance policy as to plaintiff.

         2. Titan abrogated the easily-ascertainable-fraud rule-which provided that insurance companies may not rescind a policy on the basis of fraud when the fraud was easily ascertainable-and overruled prior Court of Appeals decisions, including State Farm Mut Auto Ins Co v Kurylowicz, 67 Mich.App. 568 (1976). Titan implicitly abrogated the innocent-third-party rule as well; the two rules overlap because the easily-ascertainable-fraud rule only applies when a third-party claimant is involved. In its discussion of the no-fault act, Titan also rejected the underlying reasons for the innocent-third-party rule, reasoning that there was no basis in the no-fault act to support the proposition that public policy requires a private business to maintain a source of funds for the benefit of a third party with whom the business has no contractual relationship. The Titan Court's reasoning was not dependent on whether the coverage was optional or mandatory under the act because each benefit is predicated on a valid contract between the insured and the insurer. Moreover, public policy does not compel adoption of the innocent-third-party rule. Although an innocent third party might have a reasonable right to expect that other drivers have the minimum coverage required by the no-fault act (like PIP benefits), the innocent party does not have an absolute right by operation of law to hold an insurer liable for the fraud of the insured. Any implication in Titan that MCL 500.3101(1), like the example of MCL 500.3009(1) used in Titan, limits the availability of rescission because both statutes mandate certain coverage-as opposed to the optional coverage at issue in Titan-was nonbinding dicta.

         3. In general, fraud in the inducement to enter a contract renders the contract voidable at the option of the defrauded party. Accordingly, an insurance policy procured by fraud may be declared void ab initio at the option of the insurer, with the effect being that the contract is considered never to have existed. A claim to rescind a contract is equitable in nature, and the claim is therefore not strictly of right but instead granted as a remedy in the sound discretion of the trial court. A trial court must balance the equities to determine whether a party is entitled to the rescission the party seeks, and the remedy should not be granted when the result would be unjust or inequitable. In other words, the trial court must determine which party should assume the loss when both parties affected are equally innocent and blameless. In light of the fact that equity allows complete justice to be done in a case by adapting its judgments to the unique circumstances of each case, an insured's fraud in an application of insurance does not automatically allow the insurer to rescind the policy with respect to third parties. In this case, although the contract with Mimo Investment was void ab initio because of Mimo Investment's fraud in the application, the Court of Appeals erred by concluding that the contract was therefore automatically void ab initio between Sentinel Insurance and plaintiff. The case was remanded to the trial court to determine whether, in its discretion, the insurance policy could be rescinded between those parties.

         Affirmed in part, reversed in part, and remanded to the trial court for further proceedings.

          Justice McCormack, joined by Justice Viviano, dissenting, disagreed with the majority's conclusion that Titan abrogated the innocent-third-party rule. Titan held that an insurer may use traditional legal and equitable remedies to defend against optional residual-liability insurance unless those remedies are limited by a statute. But unlike the optional residual-liability insurance at issue in Titan, PIP benefits are required and mandated by the no-fault act: MCL 500.3101(1) and (5), read together, require the insurer to provide PIP coverage in every policy unless that coverage may be excluded as provided in MCL 500.3017. And the no-fault act provides that all eligible claimants injured in an automobile accident are entitled to PIP benefits from their own insurer, from another insurer in order of priority, or from the Michigan Assigned Claims Plan. Because mandatory PIP coverage arises by statute, the rights and limitations on PIP coverage are governed by that statute; rescission is allowed when it is consonant with the act, and is not allowed when it is not. It is not allowed in this case because that remedy is not consonant with the statute's mandate that all eligible claimants are entitled to receive PIP benefits. The majority's reasoning-that the Legislature's failure specifically to exclude the defense of rescission indicates that it survives as an available defense-conflicts with the rules of statutory construction. Titan does not provide a doctrinal basis for the majority's decision either, because the innocent-third-party doctrine is distinct from the easily-ascertainable-fraud rule abrogated in Titan. The innocent-third-party doctrine is substantively sound: it survived Titan, and there is no principled basis to reject it now. The majority's decision to permit litigation of equitable defenses that conflict with the statute will interfere with the Legislature's expressed priorities: ensuring prompt and assured payment of coverage for eligible claimants and reducing litigation. Only lawyers stand to gain from the majority's remedy- balancing the equities in every case will prove costly and inefficient for insurers and accident victims alike. Justice McCormack would have held that because the act mandates the payment of third-party PIP benefits and explicitly provides for cost-shifting and other remedies for insurers to invoke after payment has been made, the Legislature intended to abrogate those common-law remedies and equitable remedies that conflict with the act. Accordingly, Justice McCormack would have allowed Sentinel to avoid or reduce its obligations relative to the assigned claims insurer, Citizens Insurance Company, by raising defenses permitted by the act, but would not have allowed Sentinel to avoid its PIP obligations by seeking to rescind the policy based on fraud.

         BEFORE THE ENTIRE BENCH

          OPINION

          WILDER, J.

         Plaintiff, Ali Bazzi, was injured while driving a vehicle owned by his mother, third-party defendant Hala Baydoun Bazzi, and insured by defendant Sentinel Insurance Company (Sentinel).[1] Plaintiff sued Sentinel for mandatory personal protection insurance (PIP) benefits under Michigan's no-fault act, [2] and Sentinel sought and obtained a default judgment rescinding the insurance policy on the basis of fraud. This Court is now asked to decide whether the judicially created innocent-third-party rule, which precludes an insurer from rescinding an insurance policy procured through fraud when there is a claim involving an innocent third party, survived this Court's decision in Titan Ins Co v Hyten, 491 Mich. 547; 817 N.W.2d 562 (2012), which abrogated the judicially created easily-ascertainable-fraud rule. In answer, we hold that Titan abrogated the innocent-third-party rule but that the Court of Appeals erred when it concluded that Sentinel was automatically entitled to rescission in this instance. Accordingly, we affirm in part, reverse in part, and remand to the trial court to consider whether, in its discretion, rescission is an available remedy.

         I. FACTS AND PROCEEDINGS

         Plaintiff sued for PIP benefits after he was injured while driving a vehicle owned by his mother, Hala Bazzi. The vehicle had been leased by LaFontaine Honda to Hala Bazzi for personal and family use. Although Hala Bazzi leased the vehicle in her name, personally, she sought and procured from Sentinel a commercial automobile policy for no-fault coverage, which listed Mimo Investment, LLC, as the insured. Plaintiff's sister, third-party defendant Mariam Bazzi, is the resident agent of Mimo Investment.[3]

         Sentinel claimed that the insurance policy was procured through fraud by Hala and Mariam Bazzi because Mimo Investment was a shell company, the vehicle was not being commercially used by Mimo Investment, and no one had disclosed to Sentinel that plaintiff would be a regular driver of the vehicle. Sentinel filed a third-party complaint against Hala and Mariam Bazzi and obtained a default judgment rescinding the policy.[4]

         Sentinel then moved for summary disposition of plaintiff's claim, arguing that rescission of the policy made it void ab initio and precluded recovery under the policy. The trial court denied the motion on the basis of the innocent-third-party rule, which prevents an insurer from rescinding an insurance policy on the basis of material misrepresentations in the application for insurance as to a claim made by a third party who is innocent of the fraud. After the Court of Appeals denied Sentinel's interlocutory application for leave to appeal, this Court remanded the case to the Court of Appeals for consideration as on leave granted. Bazzi v Sentinel Ins Co, 497 Mich. 886 (2014).

         On remand, the Court of Appeals issued a split, published decision reversing the trial court and remanding for further proceedings. Bazzi v Sentinel Ins Co, 315 Mich.App. 763, 780-782; 891 N.W.2d 13 (2016). The majority held that the innocent-third-party rule did not survive this Court's decision in Titan because there was no meaningful distinction between the easily-ascertainable-fraud rule and the innocent-third-party rule and because no statute prohibits an insurer from raising a fraud defense with respect to PIP benefits. Id. at 772-773, 778-782.

         Plaintiff and intervening plaintiffs Genex Physical Therapy, Inc., and Elite Chiropractic Center, PC, [5] filed an application for leave to appeal in this Court, which was granted. Bazzi v Sentinel Ins Co, 500 Mich. 990 (2017). For the reasons discussed in this opinion, we affirm the Court of Appeals' holding that Titan abrogated the innocent-third-party rule and reverse the portion of the Court of Appeals' opinion holding that Sentinel is automatically entitled to rescission. We remand to the trial court to determine whether rescission is available as an equitable remedy as between Sentinel and plaintiff.

         II. STANDARD OF REVIEW

         This Court reviews de novo a trial court's decision on a motion for summary disposition. DeFrain v State Farm Mut Auto Ins Co, 491 Mich. 359, 366; 817 N.W.2d 504 (2012). A motion for summary disposition under MCR 2.116(C)(10) shall be granted if there is no genuine issue regarding any material fact and the movant is entitled to judgment as a matter of law. Maiden v Rozwood, 461 Mich. 109, 120; 597 N.W.2d 817 (1999). This Court also reviews de novo questions of statutory interpretation and the proper interpretation of a contract. Titan, 491 Mich. at 553.

         III. ANALYSIS

         A. THE INNOCENT-THIRD-PARTY RULE DOES NOT SURVIVE TITAN

         As a general rule, Michigan's no-fault insurance system is "a comprehensive scheme of compensation designed to provide sure and speedy recovery of certain economic losses resulting from motor vehicle accidents." Belcher v Aetna Cas & Surety Co, 409 Mich. 231, 240; 293 N.W.2d 594 (1980). The Insurance Code has various requirements detailing the benefits that Michigan automobile insurance policies must provide, including PIP benefits, which "are payable to or for the benefit of an injured person or, in the case of his death, to or for the benefit of his dependents." MCL 500.3112. Because "PIP benefits are mandated by statute under the no-fault act, . . . the statute is the 'rule book' for deciding the issues involved in questions regarding awarding those benefits." Rohlman v Hawkeye-Security Ins Co, 442 Mich. 520, 524-25; 502 N.W.2d 310 (1993).

         Consequently, automobile insurance contracts are governed by a combination of statutory provisions and the common law of contracts. Insurance policies are contracts" 'subject to the same contract construction principles that apply to any other species of contract.'" Titan, 491 Mich. at 554, quoting Rory v Continental Ins Co, 473 Mich. 457, 461; 703 N.W.2d 23 (2005). When a provision in an insurance policy is mandated by a statute, the policy and the statute must be construed together as though the statute were part of the policy, and "the rights and limitations of the coverage are governed by that statute." Titan, 491 Mich. at 554 (quotation marks and citation omitted). In the absence of any applicable statute, however, "the rights and limitations of the coverage are entirely contractual and construed without reference to the statute." Id. (emphasis added).

         It is well established that common-law defenses "shall remain in force and effect until they expire by their own limitations, or are changed, amended or repealed." Const 1963, art 3, § 7. Legislative amendment of the common law has not been lightly presumed by Michigan appellate courts. Wold Architects & Engineers v Strat, 474 Mich. 223, 233; 713 N.W.2d 750 (2006), citing Marquis v Hartford Accident & Indemnity (After Remand), 444 Mich. 638, 652 n 17; 513 N.W.2d 799 (1994). The issue of whether a statute preempts, changes, or amends the common law is one of legislative intent. Wold Architects & Engineers, 474 Mich. at 233. In ascertaining legislative intent, our first step is to look at the words of the statute. Id. Accordingly, unless clearly prohibited by statute, an insurer may continue to avail itself of any common-law defenses, such as fraud in the procurement of the policy. Titan, 491 Mich. at 554-555.

         MCL 500.3112 states, in pertinent part, that "[PIP] benefits are payable to or for the benefit of an injured person or, in the case of his death, to or for the benefit of his dependents." There is no question that PIP benefits are mandated by the statute and that the insurance policy must therefore be read together with the no-fault act; instead, the question is whether the statute prohibits an insurer from availing itself of the defense of fraud.

         When the Legislature intends to limit the common-law remedies available to an insurer for misrepresentation or fraud, that intent is clearly reflected in the language employed in the statute. For example, MCL 500.3220-part of the no-fault act-"limits the ability of a licensed insurer to 'cancel' automobile coverage after a policy has been in effect for at least 55 days." Titan, 491 Mich. at 557-558, citing MCL 500.3220. Additionally, MCL 257.520(f)(1) of the financial responsibility act, MCL 257.501 et seq., explicitly precludes rescission based on fraud or misrepresentations. See MCL 257.520(f)(1) ("The liability of the insurance carrier with respect to the insurance required by this chapter shall become absolute whenever injury or damage covered by said motor vehicle liability policy occurs . . . [and] no fraud, misrepresentation, assumption of liability or other act of the insured in obtaining or retaining such policy . . . shall constitute a defense as against such judgment creditor."). In this case, however, the plain language of the no-fault act does not preclude or otherwise limit an insurer's ability to rescind a policy on the basis of fraud.[6] Therefore, Sentinel may raise that defense and seek rescission of the no-fault insurance policy.

         In the past, Michigan courts have held that the "right to rescind ceases to exist once there is a claim involving an innocent third party" because "[p]ublic policy requires that an insurer be estopped from asserting rescission when a third party has been injured." Katinsky v Auto Club Ins Ass'n, 201 Mich.App. 167, 170-171; 505 N.W.2d 895 (1993), citing Darnell v Auto-Owners Ins Co, 142 Mich.App. 1, 9; 369 N.W.2d 243 (1985), and Ohio Farmers Ins Co v Mich. Mut Ins Co, 179 Mich.App. 355, 364-365; 445 N.W.2d 228 (1989); see also Morgan v Cincinnati Ins Co, 411 Mich. 267, 273, 277; 307 N.W.2d 53 (1981) (holding that the intentional burning of a home by one spouse would not bar the innocent spouse's recovery under a statutory fire insurance policy because the policy named both spouses as "the insured").

         A" 'public policy' rationale does not compel the adoption" of such a rule, however, and this Court implicitly abrogated the so-called "innocent-third-party" rule in Titan, 491 Mich. at 565, 570, 573. In that case, the defendant had her driver's license suspended in January 2007 but expected that it would be restored at a hearing held on August 24, 2007. Id. at 551. In the meantime, the defendant sought car insurance from the plaintiff, Titan Insurance Company. Id. at 551-552. On the defendant's application, which she signed on August 22, 2007, and postdated August 24, 2007, she stated that her license was not suspended; the defendant's license, however, was not restored until September 20, 2007. Id. In February 2008, she crashed the insured vehicle into a vehicle driven by Howard and Martha Holmes. Id. at 552.

         While investigating the accident, Titan discovered the defendant's misrepresentation. Id. Titan sought a declaration that if the Holmes family brought an action against the defendant and prevailed, Titan was not obligated to indemnify the defendant above the minimum liability coverage limits required by the financial responsibility act. Id.

         The trial court granted summary disposition in favor of the defendant, reasoning that Titan could have easily ascertained whether the defendant's license was valid. Id. at 553. The Court of Appeals affirmed, [7] relying on State Farm Mut Auto Ins Co v. Kurylowicz, 67 Mich.App. 568; 242 N.W.2d 530 (1976). The rule established in Kurylowicz prohibited insurers from asserting the defense of fraud once an insurable event occurred and there was an innocent, injured third party if the fraud perpetrated by the insured was easily ascertainable by investigation. Titan, 491 Mich. at 563-564.

         This Court held that "an insurer is not precluded from availing itself of traditional legal and equitable remedies to avoid liability under an insurance policy on the ground of fraud in the application for insurance, even when the fraud was easily ascertainable and the claimant is a third party." Id. at 571. Thus, Titan abrogated the judicially created easily-ascertainable-fraud and innocent-third-party rules, and it overruled Kurylowicz and its progeny.

         We are not persuaded by the argument of plaintiff, intervening plaintiffs, and the Court of Appeals dissent that Titan only addressed the easily-ascertainable-fraud rule, and left undisturbed the innocent-third-party rule. See Bazzi, 315 Mich.App. at 790 (Beckering, J., dissenting). Titan recognized that these rules overlap because "the 'easily ascertainable' rule . . . only applies when a third-party claimant is involved." Titan, 491 Mich. at 563. The Titan Court explained that an insurance carrier could resort to traditional legal and equitable remedies, including rescission, even when the fraud was "easily ascertainable and the claimant is a third party." Id. at 572, 573 (emphasis added). Because these two factors are insufficient to preclude rescission even when combined, each factor on its own is insufficient to preclude rescission.

         Moreover, in Titan, this Court rejected the underlying reasons for the innocent-third-party rule in contemplation of the no-fault act:

[I]t is contended that the "easily ascertainable" rule is required for the protection of third parties. However, there is simply no basis in the law to support the proposition that public policy requires a private business in these circumstances to maintain a source of funds for the benefit of a third party with whom it has no contractual relationship. While perhaps authority exists in the Legislature to enact such a law, see, e.g., MCL 500.3172 (pertaining to the Michigan Assigned Claims Facility), this authority has not been exercised by the Legislature in this instance. The no-fault act seeks to protect third parties in a variety of ways, including through tort actions, but it states nothing about altering the common law that enables insurers to obtain traditional forms of relief when they have been the victims of fraud. . . . Absent insurance, the operator of the motor vehicle is personally liable for tort liability. By requiring an insurer to indemnify an insured despite fraud in obtaining an insurance policy, . . . the insured [is relieved] of what would otherwise be the insured's personal obligation in the face of his or her own misconduct. As between the fraudulent insured and the insurer, there can be no question that the former should bear the burden of his or her fraud. [Id. at 568-569.]

         This rationale applies in full force to the innocent-third-party rule, which, like the easily-ascertainable-fraud rule, also precludes an insurer from raising a fraud defense to deny coverage under an insurance policy procured by fraud. Imposition of the rule would require Sentinel to indemnify Mimo Investment for the benefit of plaintiff despite the fraud that was committed when obtaining the insurance policy, relieving Mimo Investment of what would otherwise be its obligation in the face of its own agent's misconduct.

         Plaintiff, intervening plaintiffs, and the Court of Appeals dissent, further contend that mandatory liability minimums-including PIP coverage, which is mandatory under MCL 500.3101(1)-must be paid by an insurer under a policy despite any fraud in the acquisition of that policy. In support of this position, they cite MCL 500.3009(1), [8] which provides the policy coverage minimums for all motor vehicle liability insurance policies, and Titan, 491 Mich. at 572, in which this Court stated:

Should Titan prevail on its assertion of actionable fraud, it may avail itself of a traditional legal or equitable remedy to avoid liability under the insurance policy, notwithstanding that the fraud may have been easily ascertainable. However, as discussed earlier in this opinion, the remedies available to Titan may be limited by statute. . . .17

[Emphasis added.]

17 For example, MCL 500.3009(1) provides the policy coverage minimums for all motor vehicle liability insurance policies.

         The same argument was made in State Farm Mut Auto Ins Co v Mich. Muni Risk Mgt Auth (On Remand), 317 Mich.App. 97, 105; 892 N.W.2d 451 (2016) (Murphy, J., concurring) (reasoning that "[b]y observing that MCL 500.3009(1) limits available remedies for actionable fraud, the Supreme Court effectively telegraphed its view that an insurer would be liable under a policy with respect to liability coverage required by MCL 500.3009(1) in connection to an innocent third party injured by a negligent driver who had fraudulently procured the policy").

         We reject the premise that there is a controlling distinction between mandatory coverage, i.e., statutorily mandated PIP benefits, and optional coverage. Whether statutory benefits or optional benefits are at issue, each is predicated on the existence of a valid contract between the insured and insurer. Moreover, our reasoning in Titan was not dependent on whether the coverage at issue was mandatory or optional. Rather, we recognized that common-law defenses are available when there are contractual insurance policies but limited when a statute prohibits the defense. Titan, 491 Mich. at 558, 572. Although PIP benefits are mandated by statute, the no-fault act neither prohibits an insurer from invoking the common-law defense of fraud nor limits or narrows the remedy of rescission. Additionally, because Titan considered only optional benefits, there was no reason for this Court to opine on any purported statutory limitations on common-law defenses for mandatory coverage. As such, any implication derived from Titan's footnote 17 and accompanying text that MCL 500.3101(1) somehow limited the availability of rescission-see Titan, 491 Mich. at 572 & n 17-was nonbinding dicta. Haksluoto v Mt Clemens Regional Med Ctr, 500 Mich. 304, 313 n 3; 901 N.W.2d 577 (2017) (" 'Obiter dicta are not binding precedent.' ") (citation omitted). We acknowledge that several lower court opinions have questioned whether permitting rescission of a policy would be incompatible with the compulsory nature of the no-fault act, particularly after a third party has sustained injury. See, e.g., Cunningham v Citizens Ins Co of America, 133 Mich.App. 471, 481, 484-489; 350 N.W.2d 283 (1984) (Brennan, J., dissenting) (concluding that rescission ab initio was not an available remedy to insurers under this state's compulsory insurance scheme); Kurylowicz, 67 Mich.App. 579 (holding that a policy of no-fault insurance becomes absolute once an injury arises), overruled by Titan, 491 Mich. at 551. However, although an innocent third party might have a reasonable right to expect that other drivers carry the minimum insurance required under the no-fault act, that expectation does not, by operation of law, grant an innocent third party an absolute right to hold an insurer liable for the fraud of the insured. In other words, an insurer has a reasonable right to expect honesty in the application for insurance, [9] and there is nothing in the no-fault act that indicates that the reasonable expectations of an innocent third party surmount the reasonable expectations of the insurer.

         Accordingly, we hold that Titan abrogated the innocent-third-party rule and that Sentinel is therefore not precluded from raising a defense of fraud.

         B. RESCISSION IS AN EQUITABLE REMEDY, NOT AN ABSOLUTE RIGHT

         While we agree with the Court of Appeals majority that Titan abrogated the innocent-third-party rule, we do not agree that Sentinel was categorically entitled to rescission.

         Generally, "[f]raud in the inducement to enter a contract renders the contract voidable at the option of the defrauded party . . . ." 5A Michigan Civil Jurisprudence, Contracts, § 44, p 215 (emphasis added), citing Tocco v Tocco, 409 F.Supp.2d 816 (ED Mich, 2005), Star Ins Co v United Commercial Ins Agency, Inc, 392 F.Supp.2d 927 (ED Mich, 2005) (applying Michigan law), Rooyakker & Sitz, PLLC v Plante & Moran, PLLC, 276 Mich.App. 146; 742 N.W.2d 409 (2007), Custom Data Solutions, Inc v Preferred Capital, Inc, 274 Mich.App. 239; 733 N.W.2d 102 (2006), Samuel D Begola Servs, Inc v Wild Bros, 210 Mich.App. 636; 534 N.W.2d 217 (1995), and Whitcraft v Wolfe, 148 Mich.App. 40; 384 N.W.2d 400 (1985). For that reason, an insurance policy procured by fraud may be declared void ab initio at the option of the insurer. Darnell, 142 Mich.App. at 9 (stating that "[w]here a policy of insurance is procured through the insured's intentional misrepresentation of a material fact in the application for insurance, and the person seeking to collect the no-fault benefits is the same person who procured the policy of insurance through fraud, an insurer may rescind an insurance policy and declare it void ab initio"), citing Cunningham, 133 Mich.App. 471, and United Security Ins Co v Comm'r of Ins, 133 Mich.App. 38; 348 N.W.2d 34 (1984). In effect, the insurance policy is considered never to have existed. United Security Ins Co, 133 Mich.App. at 42 (" 'When a policy is cancelled, it is terminated as of the cancellation date and is effective up to such date; however, when a policy is rescinded, it is considered void ab initio and is considered never to have existed.' "), quoting 8B Appleman, Insurance Law and Practice, § 5011, p 403. Additionally, "[u]nless rescinded, a voidable contract imposes on the parties the same obligations as if it were not voidable." 1 Williston, Contracts (4th ed), § 1:20, p 76.

         Rescission abrogates a contract and restores the parties to the relative positions that they would have occupied if the contract had never been made. Wall v Zynda, 283 Mich. 260, 264-265; 278 N.W. 66 (1938).[10] Because a claim to rescind a transaction is equitable in nature, it "is not strictly a matter of right" but is granted only in "the sound discretion of the court." Amster v Stratton, 259 Mich. 683, 686; 244 N.W. 201 (1932). See id. (stating that "[e]quitable relief . . . is not strictly a matter of right, but rather a remedy, the granting of which rests in the sound discretion of the court"); Windisch v Mortgage Security Corp of America, 254 Mich. 492, 495; 236 N.W. 880 (1931) (stating that one who seeks equity must "do equity") (quotation marks and citation omitted); Lenawee Co Bd of Health v Messerly, 417 Mich. 17, 31; 331 N.W.2d 203 (1982) (stating that rescission is "an equitable remedy which is granted only in the sound discretion of the court"), citing Harris v Axline, 323 Mich. 585; 36 N.W.2d 154 (1949), and Hathaway v Hudson, 256 Mich. 694; 239 N.W. 859 (1932). See also Browne v Briggs Commercial & Dev Co, 271 Mich. 191, 194; 259 N.W. 886 (1935) (stating that ...


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