Author: LegalEase Solutions

QUESTIONS PRESENTED

1. Can insured in the present case file a breach of contract claim against insurer?
2. Can insured in the present case file a fraud claim against insurer?
3. Whether insurer in the present case is entitled to relief as a third-party beneficiary.
4. Whether ERISA defenses are available.

SHORT ANSWER(S)

1. A claim for breach of an insurance contract is to be treated like other breach of contract claims. In order for an insured to file a valid breach of contract claim, the insured must establish all the elements of a valid contract and that the contract was substantially violated in a way which caused the insured harm. In the instant case, it appears that the insured can file a valid claim for breach of contract based on refusal to cover claims which clearly should have been covered under the contract. 

2. A valid claim of fraud can be made if all the six elements of fraud are established by the insured. A fraud claim is determined based on the facts and circumstances. In the present case, it appears that the insured cannot file a fraud claim as it will not be possible for the insured to prove a false representation by the insurer. 

3. A party can sue as a third-party beneficiary if the parties to the contract have intentionally conferred such a right. In the present case, the insured will be entitled to the rights of a third-party beneficiary only if the right was intentionally conferred upon the insured by the insurer and the medical providers. 

4. No strictly ERISA defenses were found to apply in this case.

RESEARCH FINDINGS

1. Can insured in the present case file a breach of contract claim against insurer?

An insured may be entitled to bring a breach of contract claim based on the insurer’s refusal of coverage. “There is no necessity for requiring more culpable conduct in insurance contract breaches than that required for breach of other contracts.” Kewin v. Massachusetts Mut. Life Ins. Co., 409 Mich 401, 452, 295 NW2d 50, 70 (1980). Further, “[t]o state a breach of contract claim under Michigan law, a plaintiff must first establish the elements of a valid contract.” In re Brown, 342 F.3d 620, 628 (6th Cir. 2003).

“The elements of a valid contract in Michigan are 1) parties competent to contract, 2) a proper subject matter, 3) a legal consideration, 4) mutuality of agreement, and 5) mutuality of obligation.” Id. (citing Thomas v. Leja, 187 Mich App 418, 468 NW2d 58, 60 (1990)). Additionally, “the refusal by an insurance company to pay a claim must be ‘made in good faith and upon reasonable grounds for the belief that the insurer was not liable to pay that claim.” Murphy v. Cincinnati Ins. Co., 772 F.2d 273, 276 (6th Cir. 1985).

In Bowlers’ Alley, Inc. v. Cincinnati Ins. Co., 32 F. Supp. 3d 817 (E.D. Mich. 2014), the plaintiff insured brought an action against the insurer for breach of contract for the insurer’s refusal to pay the agreed amount under the insurance policy. Id. at 817. The court held that the Plaintiff had stated a viable cause of action in its complaint. Id. at 824. The court noted that “[t]he plaintiff alleges that it complied with all of its duties under the complaint when submitting its claim, but the insurer unreasonably refused to pay for its covered loss amounting to $2.6 million. Under Michigan law, that is sufficient to state a prima facie claim for breach of contract.” Id. at 823.

Therefore, an insured is entitled to make a breach of contract claim if it can establish all the elements of a valid contract and show that that contract was violated in a way which caused the insured damages. In the present case, if the insurer failed to cover things that were clearly to be covered under the insurance contract, insured can prove breach. Here, insured incurred medical bills of $760,000 but the insurer paid only $487,000. As a result of this, insurer did not get the weekly and daily therapy, meds, treatment, etc. and the medical providers stopped providing their services. The insured was deprived of the necessary care as a result of the insurer’s refusal to cover. Hence, so long as the insured can show that what was not covered were things that should have been covered, he can prove breach.

2. Can insured in the present case file a fraud claim against insurer?

A fraud claim is not applicable in the instant case. In Cooper v. Auto Club Ins Ass’n, 481 Mich 399, 751 NW2d 443, 451 (2008), the court observed that:

the elements of fraud in the insurance context are: (1) that the insurer made a material representation; (2) that it was false; (3) that when the statement was made, the insurer knew that it was false, or the insurer made it recklessly without any knowledge of its truth and as a positive assertion; (4) that the insurer made the statement with the intention that it would be acted upon by the insureds; (5) that the insureds acted in reliance upon the statement; and (6) that the insureds consequently suffered injury.

Id. at 414.

Regarding the first and second prongs of false material misrepresentation, it is “a general rule that statements promissory in their character that one will do a particular thing in the future are not misrepresentations, but are contractual in their nature.” Blue Cross & Blue Shield of Michigan v Paul, 174 Mich App 188, 193, 435 NW 2d 420, 422 (1988). In the present case, it appears that the insured cannot make a valid fraud claim against the insurer because the insurer did not make any false representations. Here, the only possibility for a fraud claim by the insured against insurer is a false representation regarding the promise to cover. However, based on the elements of fraud, such an allegation does not have a valid basis as false representation about a future event cannot be a reason for a fraud claim. Thus, the insured cannot bring a fraud claim against the insurer.

3. Whether insurer in the present case is entitled to sue as a third-party beneficiary?

“M.C.L. § 600.1405 draws a distinction between intended third-party beneficiaries who may sue for a breach of a contractual promise in their favor, and incidental third-party beneficiaries who may not.” Brunsell v. City of Zeeland, 467 Mich 293, 296, 651 NW2d 388, 390 (2002). Further, “[t]he parties to a contract must intentionally confer beneficiary status on a third party.” Border City Sav. & Loan Ass’n v. First Am. Title Ins. Co. of Mid-Am., 768 F.2d 89, 91 (6th Cir. 1985) (citing Bowen v. Nelson Credit Centers, Inc., 137 Mich App 76, 357 NW2d 811, 814 (1984)). Further, “[a]n incidental beneficiary has no legally recognized contractual claim against either party.” Id.

“A person is a third-party beneficiary of a contract only when that contract establishes that a promisor has undertaken a promise directly to or for that person.” Schmalfeldt v. N. Pointe Ins. Co., 469 Mich 422, 428, 670 NW2d 651, 654 (2003) (citing M.C.L. § 600.1405). The court also observed that “the plain language of this statute reflects that not every person incidentally benefitted by a contractual promise has a right to sue for breach of that promise . . . . Thus, only intended, not incidental, third-party beneficiaries may sue for a breach of a contractual promise in their favor.” Id. at 427 (citing Brunsell v. Zeeland, 467 Mich 293, 296, 651 NW2d 388 (2002)). See also Shathaia v. Travelers Cas. Ins. Co. of Am., 984 F. Supp. 2d 714, 722 (E.D. Mich. 2013), reconsideration denied (Dec. 17, 2013).

Therefore, only an intended third-party beneficiary may sue for a breach of a contract. The parties to the contract must intentionally confer this right to the beneficiary. Thus, to determine whether insured was indeed a third party beneficiary, a court will look to see if the contract or any other evidence shows an intent to confer a third party benefit upon a third party. If there is such evidence in this case, insured will be a third party beneficiary.

ERISA Defenses

After a thorough search, it was found that the only available defenses against an ERISA claim are defenses made by employers, the party typically responsible for ERISA obligations, against the claims of employees, the party entitled to relief for violations of those obligations. Thus, based on our research no strictly ERISA defenses were found to apply.

CONCLUSIONS

1. Therefore, it appears that the insured in the present case can file a valid breach of contract claim against the insurer as the insured has established the elements of valid contract and refusal of insurer to cover the loss amounts to a breach.
2. The insured in the instant case cannot file a claim of fraud because in order to establish a valid claim of fraud the insured has to prove a false representation by insurer. It appears that the insured here cannot satisfy this requirement.
3. In the instant case, for the insured to claim benefits as a third-party beneficiary, the right has to be intentionally conferred upon the insured by the parties to the contract.
4. No strictly ERISA defenses were found to apply in this case.