SRSCovenant Case Shakes Up Michigan No-Fault World

By: Shant R. Sagherian

A recently published Michigan Court of Appeals decision has been hailed as a big win for medical providers in the already congested area of Michigan No-Fault litigation, and has left those writing the checks in a state of flux as to how to adequately resolve first party auto claims with some degree of finality. In Covenant Medical Center v. State Farm, the Michigan Court of Appeals held that a release signed by an insured did not discharge a no-fault insurer’s liability where the insurer has received separate claims from a medical provider.

In 2011, Jack Stockford, a State Farm insured, was injured in a motor vehicle accident. In 2012, Covenant Medical provided medical services to Stockford for the injuries he sustained. Covenant Medical billed State Farm $43,484.80 for services provided to Stockford, sending bills to State Farm on three separate occasions: in July, August, and October of 2012. Later, Stockford executed a release of all claims incurred through January 10, 2013, which included the time period during which Covenant Medical rendered its services.

Covenant filed suit for the outstanding bill. State Farm moved for summary disposition, arguing that Covenant Medical’s claims were barred by the settlement payments from State Farm to Stockford and the release signed by him as part of the settlement. The trial court concluded that the release barred Covenant Medical’s claims and granted summary disposition in favor of State Farm.

On appeal, the Court looked to the language of the Michigan No-Fault statute to reverse the trial court’s decision. Specifically, the Court relied on MCL § 500.3112, which provided, in pertinent part:

Payment by an insurer in good faith of personal protection insurance benefits, to or for the benefit of a person who it believes is entitled to the benefits, discharges the insurer’s liability to the extent of the payments unless the insurer has been notified in writing of the claim of some other person.

The Court held that because State Farm had notice in writing of Covenant Medical’s claim, State Farm’s payment to Stockford did not discharge its liability to Covenant Medical. The Court reasoned that such a payment was not in good faith because the insurer was aware of a third party’s right and sought to extinguish those rights without providing notice to the affected third party. Therefore, Covenant Medical could pursue the $48,484.80 bill (along with penalties, interest, and costs) in a separate lawsuit, notwithstanding the release executed by the underlying insured. The Covenant Court opined that MCL § 500.3112 required that the no-fault insurer apply to the circuit court for an order directing how the no fault benefits should be allocated, which was not done by the insurer in this case.

The ripples of Covenant have been felt among litigators, their clients, and legal commentators throughout the legal community. This decision has undoubtedly called into question the common practice of an individual insured asserting claims for bills of the insured’s medical providers as part of his or her no-fault claim. In the past, when an insurer and its insured settled a no-fault claim, the insured (or his or her attorney) would pay the outstanding medical bills out of the settlement amount. Now, insurers and their counsel must diligently pursue circuit court approval of all PIP settlements in accordance with MCL § 500.3112. Attorneys are also well served to notify all providers from whom the insurer has received claims of any upcoming settlements.

Undoubtedly, the Covenant decision raises several practical difficulties in settling no-fault claims with some degree of finality. For example, MCL § 500.3112 provides that an insurer may apply to a circuit court for approval of the settlement, but does not address cases pending in district court which do not meet the circuit court jurisdictional threshold.

Additionally, the Court does not specify what it means to have been “notified in writing of the claim of some other person.” Is it enough for the medical provider to simply submit their bills to the insurer, or does the provider need to send something in addition to the bills?

There has been no indication yet of an appeal to the Michigan Supreme Court. However, no-fault attorneys will undoubtedly have their finger on the pulse of this important case for any further developments that may occur in the future.


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