AUGUST 2015 BAD FAITH CASES: POLICY RESCISSION NOT A BASIS TO AVOID PAYMENT TO INNOCENT THIRD PARTY UNDER AUTOMOBILE INSURANCE LAW WHERE INSURED SELECTS MINIMUM BODILY INJURY COVERAGE (New Jersey Supreme Court)

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In Citizens United Reciprocal Exchange v. Perez, New Jersey’s Supreme Court found that even where an insurer could void an auto policy for fraud, if the insured had selected the $10,000 minimum coverage for bodily injury, an innocent third party could still recover that sum from the insurer.

Under New Jersey law, “a material factual misrepresentation made in an application for insurance may justify rescission if the insurer relied upon it to determine whether or not to issue the policy.” “The right rule of law . . . is one that provides insureds with an incentive to tell the truth. It would dilute that incentive to allow an insured to gamble that a lie will turn out to be unimportant.”

In that case, the insurer’s application required listing all household residents of driving age. The insured failed to list a resident who later caused an auto accident.  The court was clear that had the insured identified this person as a household member of driving age, the insurer would not have issued the policy due to his poor driving record.

Still, the court did not hesitate in finding that under New Jersey’s statutory scheme governing automobile insurance and the public policy behind those statutes, the insurer could still be liable to innocent third parties.  It did limit that liability to the amount of coverage selected by the insured (the $10,000 minimum here), and further stated that it “would likewise be improper to hold the insurance carrier liable for an amount in excess of that for which it had previously contracted….”

Thus, the court held that “where an insured elects to add the basic policy’s optional $10,000 coverage for third-party bodily injury in their original contract, the insurer shall be liable to innocent third parties for the contracted $10,000 amount as the minimal amount available under our compulsory system of automobile insurance coverage, even when that basic policy is later voided. ….  [However, we] further hold that when an insured elects not to add the basic policy’s optional $10,000 coverage in their original contract, the insurer shall not be held liable to any injured, innocent third-party claimants under that contract.”

Date of Decision:  August 13, 2015

Citizens United Reciprocal Exchange v. Perez, A-67 September Term 2013, 073384, 2015 N.J. LEXIS 871 (N.J. Aug. 13, 2015)

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