November 28, 2015

NJ Supreme Court Considers the Limits of Liability Coverage Owed to Innocent Third Parties

In a matter handled by attorneys other than those at Cipriani & Werner, the New Jersey Supreme Court considered to what extent the issuer of a basic automobile policy voided due to fraudulent application must pay the liability claims of innocent third parties.

In Citizens United Reciprocal Exchange v. Perez, et al., 2015 N.J. LEXIS 871 (August 13, 2015), Defendant Sabrina A. Perez applied for an automobile insurance policy with Citizens United Reciprocal Exchange (CURE). Perez chose basic coverage with an optional $10,000 coverage limit for third party bodily injury liability. CURE’s application required Perez to list all household residents of driving age. She failed to disclose Luis Machua as a household resident of driving age. Machua had a poor driving record and CURE would have denied coverage had it been revealed he was a resident of the home.

On April 21, 2010, Machua was operating Perez’s motor vehicle and was involved in an accident with Dexter Green. Green filed a personal injury law suit as did Machua. Both claims were denied by CURE and declaratory judgment was sought. The trial court concluded that in situations where an insurance policy is voided as a result of misrepresentations made by the insured, innocent third parties are nonetheless entitled to coverage. Relying on prior precedent, the trial court determined that Green was entitled to $15,000 per person/$30,000 per accident coverage which it deemed to be the minimum coverage mandated by New Jersey’s motor vehicle financial responsibility law.

CURE appealed and, in a split decision, the Appellate Division affirmed the trial court’s holding stating that a voided policy is to be molded to the mandatory minimum coverage of $15,000/$30,000. Thus, the majority of the appellate court concluded Green was entitled to $15,000. In contrast, the dissent asserted that an innocent injured party should not be entitled to more coverage than that provided under the issued policy. The dissent concluded prior case law did not apply because it addressed a standard policy and not a basic one. Previously, New Jersey’s financial responsibility law provided for only one type of mandatory coverage, to wit, “the standard policy.” However, amendments to the financial responsibility law now allow for other, less costly coverage, including the “basic” policy which Ms. Perez had purchased. Because there was a dissent, CURE had the right to petition for certification to the Supreme Court, which in turn granted certification.

The Supreme Court reversed the holdings of the trial and appellate courts. Instead, it found that New Jersey law is settled such that where a factual misrepresentation is made in an insurance application, a carrier may justify rescission if the insurer relied on the misrepresentation in determining whether to issue the policy. But, the rescission of a policy due to an insured’s material misrepresentation at the policy’s inception does not mean that the insurer escapes liability as to innocent third parties. Thus, while no first party benefits would be owed to Perez, under the settled law, Green, as an innocent third party, was clearly entitled to recover.

The court then addressed the question of what amount Green should be able to recover. The court noted that prior to 1998, New Jersey automobile insurance law required all drivers maintain mandatory bodily injury liability protection of at least $15,000 per individual and $30,000 per accident, a policy often referred to as “the standard policy.” However, in 1998, as part of the Automobile Insurance Cost Reduction Act (AICRA), the New Jersey Legislature authorized a more affordable basic policy as an alternative to the benefits covered under the standard policy. This basic policy does not mandate liability insurance for bodily injury as the standard policy requires; rather, it provides for personal injury protection benefits and property damage coverage only while offering applicants the option of adding liability coverage for personal injuries in an amount up to $10,000. The court agreed with the dissenting opinion of the appellate court and found that since Perez contracted for a basic policy with $10,000 in third party liability coverage, that amount was all that an innocent third party is entitled to even if the policy was rescinded due to a material misrepresentation at inception. The court stated that given this optional coverage is created by statute and is part of New Jersey’s comprehensive scheme of automobile insurance coverage, it would be contrary to public policy to disregard the minimum amount bargained for by Perez.

What It Means to You

This holding reinforces the standard that a material factual misrepresentation made in an application for insurance may justify rescission. This decision also reminds practitioners and carriers alike that even though a policy is rescinded, the innocent injured third party will receive the benefit of the policy. The court was very careful to point out though that the innocent third party will only receive the benefit of the insurance bargain originally contracted for such that a basic policy will not be “reformed up.” Of course, this does not change the law requiring that a standard policy be reformed to provide only the minimum statutory financial responsibility required by those policies even though the insured may have contracted for greater liability coverage.

For further information, contact Matthew K. Mitchell, Patricia W. Holden, or Peter J. Rossi at Cipriani & Werner’s New Jersey office.