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In 2008, the Michigan Supreme Court, by a 4-3 majority, issued an opinion in United States Fidelity Insurance & Guaranty Co. v. Michigan Catastrophic Claims Ass’n (hereinafter “USF&G I”),1 a hotly contested case concerning whether a Michigan auto insurer must be indemnified for payments being made to an injured party under Michigan’s automobile no-fault law, without considering any reasonableness requirements for those payments.  Following a personnel change in the court, and with no new arguments or facts being presented, the court granted a motion for rehearing.  On July 21, 2009, in “USF&G II,”2 the court reversed itself, again with a 4-3 majority issuing the court’s decision.

Michigan’s No-Fault Statutory Scheme

In 1978, Michigan created the Michigan Catastrophic Claims Association (“MCCA”), an entity intended to protect Michigan insurers from being overburdened by the unlimited personal injury protection benefits required by the state’s no-fault law. The MCCA essentially acts as a reinsurer, indemnifying member insurance companies for losses incurred in the event of “catastrophic” injury claims, those that result in the payment of personal injury benefits in excess of a statutory cap.3

More specifically, Michigan law provides that the MCCA “shall provide and each member shall accept indemnification for 100% of the amount of ultimate loss sustained under personal protection insurance coverages in excess of” a threshold loss amount determined by the date the underlying policy was issued or renewed.4 The term “ultimate loss” is defined as “the actual loss amounts that a member is obligated to pay and that are paid or payable by the member,” but not including claim expenses.5 

Based on the total amount of catastrophic claims payments anticipated to be made by the MCCA, the MCCA establishes a premium to be paid by the member insurers, which, of course, is ultimately passed on in an assessment to policy holders, in other words, all Michigan drivers.6 By its statutory charter, the MCCA is granted a number of enumerated powers, including a catchall provision allowing the MCCA to “perform other acts... necessary or proper to accomplish the purposes of the [MCCA] and that are not inconsistent with” the statute and MCCA’s “plan of operation.”7

USF&G I: The Reasonableness of Insurer Claims

In USF&G I, the Court was confronted with the issue of whether the MCCA was statutorily empowered to review the reasonableness of claims for indemnity submitted by member insurers. The case arose out of a no-fault insurance policy held by Daniel Migdal, a USF&G insured who was seriously injured in a 1981 accident. Ever since the time of his injury, Mr. Migdal has required attendant care on a 24-hour basis. In a case filed by Mr. Migdal’s father in 1988, USF&G in 1990 entered into a consent judgment under which USF&G must pay $17.50 per hour for attendant care, subject to a compounded annual inflation rate of 8.5%.9 By 2003, inflation had driven the payments made pursuant to the consent judgment to $54.84 per hour, well in excess of the applicable $250,000 threshold for MCCA indemnification of catastrophic claims. MCCA refused to reimburse USF&G for amounts over $22.05 per hour, which the MCCA deemed to be the reasonable cost for care. It made this determination after considering that while USF&G was making full payment under the consent decree to “Medical Management,” a company created by Mr. Migdal’s father, Medical Management in turn only paid the nurses actually providing care between $21 and $25 per hour. Even with the cost of benefits for the nurses, Mr. Migdal’s company was generating profits of approximately $200,000 in 2003.9 

In USF&G I, the Michigan Supreme Court addressed two questions pertaining to the MCCA’s statute: first, whether the MCCA was even allowed to review member insurer claims, and second, the extent of review, if permissible (more precisely, whether application of a “reasonableness” standard was permitted).10

Writing for a four justice majority, Justice Robert Young in USF&G I began his analysis by incorporating the statute’s definition of “ultimate loss” into the provision mandating indemnification, explaining that the statute provides that “[the MCCA] shall provide and each member shall accept indemnification for 100% of the amount of [the actual loss amounts that a member is obligated to pay and that are paid or payable by the member] sustained under personal protection insurance coverages in excess of” the applicable threshold.11

From this, the court concluded that there are three requirements for indemnification, with the MCCA’s obligation to indemnify arising only if all three requirements are met. Specifically, to be reimbursable, (1) the claim must be for “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 insurance coverages”; and (3) the loss must exceed the statutory threshold.12 Because the Legislature determined that only certain claims are reimbursable, the court reasoned that having the MCCA review claims to ensure they meet the statutory requirement was “necessary or proper to accomplish the MCCA’s purposes” and was also “not inconsistent” with the MCCA’s statute.13  Further, because the MCCA’s plan of operation has always provided that reimbursements follow verification by the MCCA “of the propriety and amount of the payments made and the member’s entitlement to reimbursement,” review of claims by the MCCA would in no way be inconsistent with the plan of operation.14  In other words, review of claims by the MCCA is encompassed by the statute’s broad “catch-all” grant of power to the MCCA.15

Having concluded that the MCCA’s statute allowed for review of member claims, and that prior Michigan Supreme Court precedent had also implicitly recognized this power, the court expressly determined that the MCCA may review claims of member insurers and reject those that fail to meet the requirements for reimbursement.16 The court next turned to the question of whether the MCCA is permitted to review claims for reasonableness and refuse to indemnify what it deems unreasonable charges.  In contesting this point, the plaintiffs in the case pointed to the language of the MCCA’s statute providing that “100%” of loss due to a member insurer’s obligation must be covered, and also pointed out that the statutory section concerning indemnification nowhere uses the term “reasonable.”17 

The court, however, explained that the compulsory coverage mandated by Michigan’s no-fault act defines personal protection insurance benefits as “allowable expenses consisting of all reasonable charges incurred for reasonably necessary products, services and accommodations for an injured person’s care recovery, or rehabilitation.”18  (Emphasis added.)  From this, the court determined that coverage for reasonable charges is the statutory minimum, and that where an insurer provides this minimum coverage, the MCCA’s power to review whether claims by an insurer meet the test for indemnification (actual loss a member is obligated to pay) necessarily includes determining if charges are reasonable.19

Recognizing that the MCCA must indemnify members for losses they are obligated to pay, and that members may choose to offer more than the minimum required coverage, the court did not simply conclude that the MCCA in all instances could apply a reasonableness test to decide whether to reimburse an insurer for a particular claim.  Rather, the court held that MCCA has the authority to refuse to indemnify unreasonable charges if the underlying policy provides coverage only for “reasonable charges.”  “If the policy provides broader coverage, the MCCA must review for compliance with the broader coverage and indemnify claims within that coverage, but it may reject claims in excess of that coverage.”20  Accordingly, the court remanded the case to the trial court to examine the MCCA’s decision in light of the USF&G policy at issue.21

Writing for the three-member dissenting minority, Justice Elizabeth Weaver began her analysis in a markedly different place, starting from the proposition that in undertaking the interpretation of statutes, “what is ‘plain and unambiguous’ often depends on one’s frame of reference” and that the “frame of reference” for interpreting plain language “shares a deep nexus with the intent of the Legislature.”22  The dissent then concluded that the term “coverages” in the provision governing what claims must be reimbursed was distinct from the definition of “benefits” and its reasonableness component.23  Instead, the dissent opined that the term “coverages” should be broadly defined, and that it should include all contractual liability of an insurer—not simply the liability under the terms of the policy, but any liability later acceded to under a consent judgment or other settlement.24  Consequently, when the statute requires indemnification for “ultimate loss sustained under personal protection insurance coverages”, this encompasses any amount the insurer has agreed to pay, regardless of whether the underlying policy includes a reasonableness component.25

USF&G II

Three days after the Court rendered its decision in USF&G I, the composition of the court changed, with former Chief Justice Cliff Taylor having been replaced by new Justice Diane Hathaway.  A motion for rehearing was filed in the case, and the court granted it.  On July 21, 2009, ten days before the close of the court’s term and without any further briefing or argument on the merits of the case, the court issued a new decision.  In USF&G II, Justice Weaver authored a new four-justice majority opinion.  This opinion was virtually word-for-word a repetition of her earlier dissent, augmented with only a few mostly footnoted replies to the dissenting opinions in USF&G II.

In his dissent to USF&G II, Justice Young argued that rehearing in the case should not have been granted, citing all the way back to 1879 and 1886 Michigan Supreme Court decisions for the consistently upheld principle that “a motion for rehearing should be denied unless a party has raised an issue of fact or law that was not previously considered but which may affect the outcome.”26  In response to Justice Weaver’s contention that Michigan’s Court Rules provide that rehearing can be granted simply if the court believes that a prior opinion was erroneous, he pointed out that the actual standard in the rules is that rehearing can be granted based on a “palpable error by which the court and the parties have been misled.”27  Given that no such argument was advanced here, that no new arguments had been raised by the parties and that no new rationale appeared in the new majority’s opinion, Justice Young concluded that rehearing was improperly granted—solely because of the change in composition of the court.28

With regard to the substance of the new majority opinion, the dissent acknowledged that the terms “coverages” and “benefits” in the statute are not identical.  The dissent, however, reasoned that this was immaterial for purposes of the analysis of what amounts must be indemnified under the statute.  In the dissent’s view, even the majority’s definitions of the term “coverages” made clear that the term refers only to the scope of the underlying policy and not to separate later created agreements in the form of the consent judgment providing for payments far beyond an original policy tied to reasonable benefits.29

* Lance Boldrey is a member in the Government Policy Department of Dykema, a leading national law firm.  He is resident in the firm’s Lansing, Michigan office, and served as Deputy Counsel to former Michigan Governor John Engler (R).

 

Endnotes

1  759 N.W. 2d 154 (Mich. 2008).

2  United States Fidelity Insurance and Guaranty Co. v. Michigan Catastrophic Claims Ass’n, 484 Mich. 1, 13 (Mich. 2009).

3  USF&G I at 424; MCL 500.3104.

4  MCL 500.3104(2).

5  MCL 500.3104(25)(c).

6  MCL 500.3104(22).

7  MCL 500.3104(8)(g).

8  USF&G I at 418.

9  Id.  Reportedly, by 2009, the hourly costs had risen to $89 per hour and the profi ts of the company created by Mr. Migdal’s father were estimated by the MCCA at approximately $500,000.  High Court’s Insurance Ruling Will Cost Drivers, Critics Say, Lansing State Journal, August 17, 2009.

10 USF&G I at 423.

11 Id. at 425.

12 Id.

13 Id.

14 Id.

15 See MCL 500.3014(8)(g).

16 USF&G I at 427-28.

17 Id. at 428.

18 Id. at 430.

19 Id.

20 Id. at 432.

21 Id.

22 Id. at 445 (Weaver, J., dissenting).

23 Id. at 446.

24 Id. at 450.

25 Id.

26 USF&G II at 10.

27 Id. at 11.

28 Id. at 10. Justice Young also noted that new Justice Diane Hathaway had run on a platform of favoring “middle-class families” and opposing “big insurance companies and corporate special interests.” Id. at 13 n.32.

29 Id. at 12.

 

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