Not So Fast: Despite Policy Rescission, New Jersey Supreme Court Holds Auto Insurer Liable to Injured Third-Party

The New Jersey Supreme Court considered whether the issuer of a basic automobile insurance policy, voided due to a fraudulent application, is still on the hook for liability claims of innocent third parties in Citizens United Reciprocal Exchange v. Sabrina Perez, et al. (A-67 September Term 2013)(073384) 2015 N.J. LEXIS 871 (N.J. Aug. 13, 2015).

Sabrina Perez applied for an automobile insurance policy with Citizens United Reciprocal Exchange (CURE), choosing a “basic” coverage policy with an optional $10,000 coverage limit for third-party bodily injury liability. Prior to 1998, New Jersey automobile insurance law required all drivers to maintain a mandatory bodily injury liability protection of at least $15,000 per individual and $30,000 per accident (“standard policy”).  However, as part of the Automobile Insurance Cost Reduction Act, the New Jersey Legislature authorized a more affordable basic policy as an alternative to the benefits covered under the standard policy, explicitly offering applicants the option of adding personal injury liability coverage in an amount up to $10,000. In her application, Perez failed to disclose all household residents of driving age. Specifically, she neglected to disclose her significant other, Luis Machuca, who had an established poor driving record. According to CURE, they would not have issued the policy based on the poor driving record had Machuca been disclosed as a secondary household resident of driving age on the application for coverage.

Machuca, operating Perez’s automobile, was involved in an accident with third party Dexter Green. Green filed a personal injury claim against Perez’s policy which CURE denied. CURE informed Perez the policy was void from the outset due to the fraudulent failure to disclose Machuca on the application. In its subsequent declaratory judgment action, CURE sought a declaration that (1) Perez’s insurance policy was rescinded and void; (2) it had no obligation to cover any claims that might arise from the accident, including Green’s as the innocent third party, and (3) it was entitled to reimbursement from the defendants of all expenses incurred including court costs and attorney fees because Perez violated the New Jersey Insurance Fraud Prevention Act. The trial court held that Perez’s policy could be rescinded and voided and that CURE was entitled to court costs and attorney fees. The trial court also held where a policy is voided as a result of misrepresentations made by the insured, innocent third parties are nonetheless entitled to coverage in the amount of the “standard” $15,000 per person / $30,000 per accident minimum. CURE appealed, and the Appellate Division affirmed, finding that Green was entitled to payment of $15,000.

CURE appealed again, taking the position that it should not be required to pay any claims to injured third parties because the New Jersey statutes do not mandate a minimum amount of liability coverage under a basic automobile policy. The New Jersey Supreme Court, reversing the Appellate Court’s decision, decided that where the policyholder elects to add the basic policy’s optional $10,000 coverage for third-party bodily injury in the original contract, the insurer is only liable to innocent third parties for the contracted $10,000 amount, i.e. the “basic policy” rather than the “standard policy,” as the minimal amount available under New Jersey’s compulsory system of automobile insurance coverage, even when that basic policy is later voided due to a fraudulent application.