Uninsured Motorist insurer can't avoid coverage on a technicality
Annie Smith was injured in a motor vehicle collision. She sued the at-fault, who turned out to be uninsured. Her attorneys wrote to her insurer, MEEMIC Insurance Company, informing them of the latter development and seeking to negotiate her Uninsured Motorist (UM) claim. MEEMIC refused to respond. Smith's attorneys obtained a default judgment against the at-fault and then sued MEEMIC. The trial court dismissed Smith's action against MEEMIC, in reliance on MEEMIC's policy provision that voided its UM Coverage in the event that the insured settled with, or took a judgment against, the at-fault. Smith's attorneys appealed.
The Court of Appeals noted that prior to the lower court hearing MEEMIC's motion to dismiss Smith's claim, her attorneys had taken steps to correct their mistake and they had set aside the default judgment they had entered against the at-fault. Under long-standing law, once the judgment was set aside, it was a "nullity" and therefore Smith was no longer in violation of the insurance contract.
Further, the court noted that the purpose of this contract provision is to preserve the insurer's right to seek subrogation against the at-fault. Under prior rulings of the Michigan judiciary, the insurer can enforce the provision even where it has suffered no prejudice (for example, because the at-fault has nothing which it could collect). Nevertheless, where the default judgment has been set aside, this public policy justification for the contract provision has been maintained, and there is no sound basis in civil procedure or public policy for penalizing the insured for initially seeking the default judgment. On that basis, the trial court was reversed, and MEEMIC will be required to honor its contract to pay the UM benefits purchased by Ms. Smith.