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NJ: Insurers Still On The Hook To Pay Innocent Parties Under Fraudulent Policies

September 8, 2015

New Jersey’s Supreme Court recently held that an innocent third party can recover under an insurance policy procured by fraud up to the limits of liability selected by the fraudulent insured.

CURE vs. Perez, et. al., involved an insured who had selected a “basic” auto policy, a statutory selection that permits policyholders to forgo liability insurance or select a smaller limit for a lower premium. The insured, Ms. Perez, selected a $10,000 limit as opposed to the “standard” policy limit of $15,000 per person/$30,000 per accident. However, Ms. Perez also made a misrepresentation on her insurance application, which entitled a CURE to rescind the policy following an accident.

Nonetheless, the Supreme Court of New Jersey agreed with the ruling of the intermediate appellate court and held that an innocent third-party claimant should be permitted to recover under the policy in spite of Perez’s fraud. The Supreme Court differed only in the amount that the injured claimant would be able to recover from CURE. The lower appellate court held that the claimant would be entitled to recover up to the limits of a “standard” policy, or $15,000 per person/$30,000 per accident. CURE, on appeal, argued that because there was no minimum liability required under a basic policy, it did not owe coverage to the third-party claimant. In the alternative, which was also the opinion of the dissenting judge at the appellate level, it was argued that CURE owed a maximum of $10,000, as selected by Perez. The Insurance Council of New Jersey, via amicus curiae, supported CURE’s position, citing case law that a party should not be permitted to improve their claim against a policy solely because of a misrepresentation that was made on the application.

The highest court agreed with the alternative position, holding that an insured’s fraud should not enhance recovery by a third party. Had the policy not been rescinded, the innocent party would have been entitled to benefits in the amount of $10,000. The court went a step further, however, and also held that had Perez selected no liability coverage, CURE would not owe the third-party claimant.

The decision offers further guidance in the somewhat inconsistent world of rescission and automobile policy statutes, which – when accounting for the application misrepresentation, policy, and statutes – can be a tricky process. Typically, the courts have been inclined to find in favor of innocent third parties. So while the decision to limit the claimant to the chosen policy limits was logical, it was surprising that the Court did not limit its decision to the particular facts of the case and instead went a step further by declaring zero liability limits would equal no coverage for a third party. We will be interested to see how this decision may be applied by New Jersey courts for truly harmed third-party claimants in the face of fraudulent policyholders who select zero liability limits, as well as the other arguments surrounding this precedent.