Articles & Publications 11.21.22

Michigan No-Fault Act’s New, but Old, “One Year Back Rule” and the Requirement of a Formal Denial of a Claim

The Michigan Court of Appeals, in its recently published decision, Encompass Healthcare, PLLC v. Citizens Insurance Company, COA No. 357225, November 17, 2022, provided some clarity to applying Michigan No-Fault Act’s “one year back rule” after the 2019 No-Fault reforms.

History of the “One Year Back Rule” and Tolling Provisions

Traditionally, Michigan’s “one year back rule” served to limit recovery in 1st party No-Fault actions to those losses that occurred no further back than within the year preceding the filing of the action. This rule was designed to encourage injured parties to timely pursue claims against insurers while evidence was fresh. From as early as 1978 and the Richards v. American Fellowship Mut. Ins. Co., 84 Mich. App. 629 (1978) decision until 2005, Michigan courts applied a judicially created tolling mechanism not present in the actual language of the No-Fault Act which tolled the application of the “one year back rule” until a No-Fault claim was formally denied by the insurer. The reasoning behind this mechanism, as stated by the Richards Court, was to avoid “penalizing the insured for the time the insurance company used to assess its liability.”

The application of the tolling mechanism came to an end in 2005 with the Michigan Supreme Court’s decision in Devillers v. Auto Club Ins. Ass’n, 473 Mich. 562 (2005). The Devillers Court held that Michigan’s “one year back rule” must be strictly applied as written, and since the tolling provision was not in the statute, it could no longer be applied. Devillers resulted in barring all losses that occurred further back than the year preceding the filing of the action.

However, as part of the 2019 No-Fault reforms, Michigan’s legislature codified the previous tolling mechanism in its amended version of MCL 500.3145, which now provides that the “one year back rule” is “tolled from the date of a specific claim for payment of the benefits until the date the insurer formally denies the claim.” MCL 500.3145(3).

The Encompass Healthcare Decision

Encompass Healthcare marks the first time the Michigan Court of Appeals was called on to interpret the requirement that a claim be “formally denied” to end the tolling of the one year back rule. In Encompass Healthcare, Citizens Insurance Company’s insured, Ronald Mannor, was involved in a 2017 motor vehicle accident, and the plaintiff, Encompass Healthcare, provided what it claimed was over $900,000 in treatment to Mr. Mannor through October 2018. Citizens paid just over $177,000 for the treatment, and on November 4, 2019, after Mr. Mannor assigned his rights to benefits and recovery to Encompass Healthcare, it filed suit. Citizens successfully obtained dismissal in the trial court after alleging that all of Mr. Mannor’s treatment was barred by the “one year back rule” given it had occurred more than a year prior to the filing of Encompass Healthcare’s lawsuit.

On appeal, the Encompass Healthcare Court held that, even though the treatment was prior to the No-Fault reforms, the lawsuit was filed after the effective date of the 2019 reform, and the current version of Michigan’s No-Fault statute applied—and so did the new language regarding tolling. Encompass Healthcare then argued that Citizens never formally denied its claim, so the “one year back rule” was tolled. In response, Citizens took the position that the Explanations of Review (“EORs”) it provided were sufficient formal notice of its denial of any benefits in excess of what it paid.

The Encompass Healthcare Court noted that the No-Fault Act amendments do not define “formal denial,” so instead, the Court turned to several of its prior decisions regarding the interpretation of the phrase, ultimately concluding that “a formal denial such as is necessary to end tolling must be explicit and unequivocally impress upon the insured the need to pursue further relief in court, and an insurer may end the tolling period by explicitly indicating that the insurer is denying all liability in excess of what it has paid.” The Encompass Healthcare Court then addressed whether Citizen’s EORs met this revised standard.

As in commonplace with most EORs, Citizens’ EORs issued to Encompass Healthcare contained language indicating what was “allowed” and what was “reduced,” with additional explanations, if any, that referenced only the qualifications of the reviewer. Some of the EORs even requested additional information be submitted so that the claim could be further evaluated. Reversing the trial court’s decision, the Encompass Healthcare Court concluded that, given the lack of a clear denial and, in particular, the request for additional information, Citizen’s EORs did not contain language of sufficient “finality and clarity” to end the tolling period of the one year back rule, and that Citizens failed to “explicitly indicate that the insurer was denying all liability in excess of what it had paid.”

The Implication of the Encompass Healthcare Decision Going Forward

While it is likely that the Encompass Healthcare decision will be appealed, at present, it is abundantly clear that an insurer must explicitly deny claims if it wants to toll the “one year back rule.” Relying on EORs is not necessarily insufficient per se, but if an insurer is going to rely on an EOR to deny additional liability, the language contained on the EOR should clearly and unequivocally reflect the insurer’s position regarding additional payments and liability, if any. In other words, if the claim is denied, explicitly say so. Any requests for additional documentation will likely be determined to lack the “finality” of a denial. Ultimately, a clear, unequivocal denial of any future liability to the insured and each provider is recommended to ensure the “one year back rule” is not tolled.