Yes, ITS filters all mail that comes in through the U-M email gateway machines for viruses. Outgoing mail is also checked for viruses. For details about how this works, see the E-mail Virus Filtering at U-M page.
Yes, even though U-M blocks viruses at the mail gateway, you still need antivirus software on your machine—and it needs to be configured for automatic updates. See Safe Computing for information about downloading and installing antivirus software for your Mac or PC.
This happens when your email address is put in the sender field of a message sent by someone (or something) else, and that message is rejected as undeliverable. In short, here is what happens:
Mail is sent that appears to be from you, but is not. (A virus might raid a victim's address book for addresses and find yours, or a spammer might use addresses harvested from websites or elsewhere, or a program randomly generating addresses might generate yours.)
The mail is delivered to an invalid address. Or the mail is delivered to a valid address but is rejected because it contains a virus.
The destination mail system returns the mail to the apparent sender (you).
There isn't much you can do about these rejections other than report the problem to the Internet Service Provider where the mail was actually sent from (instead of where it appears to be sent from). Sometimes you can determine this from looking at the full headers. If a virus rejection message's full headers indicate it originated at U-M, you can forward it to the ITS Service Center (email@example.com) for assistance.
Some email that looks like it is sent from U-M is actually sent by people trying to steal your password. U-M will never ask you for your password. See Safe Computing for more information on spam and phishing email.