Michigan Supreme Court Finds That Providers Do Not Have a Direct Cause of Action Under the No-Fault Act in Landmark Covenant Decision

By: Raed L. Abboo, Esq.

After months of suspense, the Michigan Supreme Court has finally issued its long awaited decision in the matter of Covenant Medical Center, Inc. v. State Farm Mutual Automobile Insurance Company. Covenant v. State Farm, ___ Mich ___, ___NW2d ___, Docket No. 152758 (May 25, 2017). The opinion was written by Justice Zahra, who was joined by Chief Justice Markman, and Justices McCormack, Viviano, and Larsen in deciding the case.

The Covenant case involved the significant issue and question of whether a healthcare provider such as a hospital, physical therapist, or MRI Center, holds a direct cause of action against a No-Fault insurer to recover alleged outstanding personal protection insurance benefits incurred by an underlying claimant under the Michigan No-Fault Act (MCL 500.3101 et seq). The Court held that “[a] thorough review of the statutory No-Fault scheme reveals no support for an independent action by a healthcare provider against a No-Fault insurer.” Essentially, the Court decided that a healthcare provider does not have a direct cause of action to sue a No-Fault insurer for its outstanding bill in Michigan. Rather, the Court stated that a provider may sue the underlying claimant and discussed other possibilities.

In that vein, the Court stated that its decision did not speak to the issue of Third Party Beneficiary rights in the context of the No-Fault Act or the Assignment of Rights under MCL 500.3143. With regard to Third Party Beneficiary rights, it is unlikely that a provider would ever be considered a Third Party Beneficiary under the No-Fault scheme to gain the ability to directly sue an insurer under the No-Fault Act. To be a Third Party Beneficiary of a contract, the contract would have had to have been created for the benefit of the Third Party. An example of a Third Party Beneficiary scenario arises when a loving grandson hires a contractor to paint his grandmother’s home. Under this scenario, the grandmother would have a direct cause of action against the contractor if the contractor breached his duty to paint her home according to the terms of the contract with her grandson. However, a healthcare provider, when discussed in the context of the Third Party Beneficiary law, fails to satisfy the elements required to form the basis for a Third Party Beneficiary scenario. The reason it fails is because a policy holder obtains No-Fault coverage in order to comply with the provisions of MCL 500.3101, not to benefit a healthcare provider in the future. Thus, because a policy holder does not obtain No-Fault insurance for the benefit of a future provider, it is unlikely that a court would render a healthcare provider a Third Party Beneficiary for purposes of a direct cause of action.

With regard to the issue of an assignment of right to sue, the Court briefly stated in footnote 40 of its decision that an underlying claimant’s ability to assign his or her right pursuant to MCL 500.3143, was not impacted by the Covenant decision. In Covenant, the Court only glossed over the ability or inability of a claimant to make an assignment, stating in pertinent part as follows:

Moreover, our conclusion today is not intended to alter an insured’s ability to assign his or her right to past or presently due benefits to a healthcare provider. See MCL 500.3143; Professional Rehab Assoc v State Farm Mut Auto Ins Co, 228 Mich App 167, 172; 577 NW2d 909 (1998) (noting that only the assignment of future benefits is prohibited by MCL 500.3143).

Consequently, whether a claimant has the “ability” to assign his right to sue to a provider may depend on the contract provisions of his No-Fault policy. Many No-Fault insurers include clauses precluding the assignment of rights. If such a term is included, courts may hold that an assignment is null and void. In addition, it is important to note that the Michigan Court Rules, namely MCR 2.113(F) require that in any action based on a written instrument, such as an assignment, the actual executed document must be attached to the complaint. This pitfall may provide an additional procedural defense to claimed “assignments.”

In this situation, it is presumed that providers will debate that a provision precluding the assignment of past or present rights would vitiate the No-Fault Act and cannot be upheld in court. However, an insurer can rebut this argument by highlighting the specific language of MCL 500.3143, which explicitly states that “[a]n agreement for assignment of a right to benefits payable in the future is void.” A policy term allowing the assignment of future rights would certainly vitiate the terms of the No-Fault Act, because MCL 500.3143 specifically disallows such assignments; however, a policy contract term which disallows past and present assignment may be upheld in court.

Additionally, it is important to note that the Covenant decision will bring forth a wave of other new issues that attorneys and courts will begin to analyze and assess in conjunction with their individual cases. Questions such as whether a non-assignment clause is enforceable against an underlying claimant, who seeks benefits only by operation of the priority rules of the No-Fault Act, will be presented. Further, other questions will arise in the context of a provider suing the underlying claimant. Even more, procedurally, it will be important to assess whether a provider will be allowed to resuscitate an existing provider lawsuit when that suit was filed prior any transfer of right to sue.

So, what happens now? There are hundreds, if not thousands, of provider lawsuits and interventions across the great state of Michigan. Judges are meeting across the state to put forth a response to Covenant and provide procedural direction on the issues. Attorneys defending each suit must review every complaint separately and analyze the claims being asserted. If a provider suit is based only on a claim for PIP benefits under the No-Fault Act, there may be an avenue for dismissal based on the Court’s holding in Covenant. In this scenario, defense attorneys should consider offering their opposing counsel a stipulation and order for dismissal if appropriate in that case. It is expected that providers have braced themselves for the Covenant decision. Thus, providers have likely obtained assignments or are in the process of obtaining assignments from underlying claimants. If an assignment exists, a review of the policy terms will be essential to determine whether a clause in the policy precludes assignment. Likewise, scrutiny of an assignment will be important to identify its legitimacy and to ascertain potential fraud.

Hence, each matter should be assessed individually based on its unique set of facts to determine the best action plan. Where a case is properly dismissible after considering the new law set forth in the Covenant decision and the specifics of each case, a motion for Summary Disposition pursuant to MCR 2.116(C)(8) and (C)(10) may be appropriate.

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