Date: 08-13-2015

Case Style: Citizens United Reciprocal Exchange v. Sabrina A. Perez

Case Number: A-67-13

Judge: Justice Faustino J. Fernandez-Vina

Court: SUPREME COURT OF NEW JERSEY

Plaintiff's Attorney: Eric S. Poe

Defendant's Attorney: Marc A. Deitch

Description: In this appeal we consider whether the issuer of a basic
automobile insurance policy, voided due to a fraudulent
application, must pay the liability claims of innocent third
parties. The insurer takes the position that it should not be
required to pay any claims to injured third parties because
N.J.S.A. 39:6A-3.1 does not mandate a minimum amount of
liability coverage under a basic automobile insurance policy.
We disagree and hold that, where a policyholder purchases the
basic policy’s optional $10,000 coverage for third-party bodily
injury in the original contract, the insurer is liable for
coverage in that contracted $10,000 amount.
I.
The facts are undisputed. In March 2010, defendant Sabrina
Perez applied for an automobile insurance policy with Citizens
United Reciprocal Exchange (“CURE” or “the company”). Perez
chose a “basic” coverage policy 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. Perez failed to disclose that defendant Luis
Machuca,1 the father of her two children, was a resident of her
household. Based on Perez’s application, CURE issued an
automobile insurance policy, effective March 23, 2010, that
1 The caption misspelled Machuca as Machuga.
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covered Perez’s 1997 Honda Accord. Had Perez identified Machuca
as a household member of driving age, CURE would not have issued
the policy to Perez due to Machuca’s poor driving record.
On April 21, 2010, Machuca, operating Perez’s automobile
with defendant Jonathan Quevedo as his passenger, was involved
in an auto accident with defendant-respondent Dexter Green.
Green sustained injuries and filed a personal-injury claim
against Perez’s policy. Machuca also filed a claim for injuries
against Perez’s policy. CURE denied both personal injury claims
and, by letter dated May 27, 2010, informed Perez that her
insurance policy was void from the outset because she had
fraudulently failed to disclose Machuca on her application.
CURE filed a complaint against Perez, Machuca, and the
remaining defendants, seeking a declaratory judgment. CURE
sought three particular findings. First, CURE requested that
the court declare the insurance policy rescinded and void.
Second, CURE asked the court to find that CURE had no obligation
to cover any claims that might arise from the accident,
including those of Green, the innocent third party. Finally,
CURE asked that the court require defendants to reimburse the
company for all expenses incurred, including court costs and
attorney fees, because Perez had violated the Insurance Fraud
Prevention Act (“IFPA”), N.J.S.A. 17:33A-1 to -34.
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Default judgments were subsequently entered against Perez,
Machuca and Quevedo, all of whom failed to respond to CURE’s
complaint. Green, through his insurance company, defendant
respondent Progressive Garden State Insurance Company
(“Progressive”), filed an answer and ultimately agreed to try
the case on stipulated facts.
After hearing arguments, the trial court determined that
Perez’s policy could be rescinded and voided. The court awarded
CURE court costs and attorney fees because Perez violated the
IFPA. The court further denied all claims asserted by Machuca
against Perez’s policy, finding that Machuca was part of the
fraudulent misrepresentations to CURE.
The trial court noted, however, that in situations where an
insurance policy is voided as a result of misrepresentations
made by the insured, innocent third parties such as Green are
nonetheless entitled to coverage. Relying on New Jersey
Manufacturers Insurance Co. v. Varjabedian, 391 N.J. Super. 253
(App. Div.), certif. denied, 192 N.J. 295 (2007), and Marotta v.
New Jersey Automobile Full Insurance Underwriting Ass’n., 280
N.J. Super. 525 (App. Div. 1995), aff’d o.b., 144 N.J. 325
(1996), the trial court determined that Green was entitled to
$15,000 per-person/$30,000 per-accident coverage
(“$15,000/$30,000 coverage”), which the court deemed to be the
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minimum coverage mandated by New Jersey law. See N.J.S.A.
39:6A-3; N.J.S.A. 39:6B-1.
CURE appealed the decision, and, in a split decision, the
Appellate Division affirmed. Citizens United Reciprocal Exch.
v. Perez, 432 N.J. Super. 526 (App. Div. 2013). The majority
held that insurance carriers may void an insurance policy for
fraud even when a claim is filed by an innocent third party.
The majority added, however, that a voided policy is to be
molded to the mandatory minimum liability coverage,
$15,000/$30,000. In its explanation, the majority applied the
principle announced in Varjabedian and concluded that a carrier
seeking to void coverage cannot rely on the basic policy’s lack
of mandated liability coverage to avoid providing the minimum
compulsory $15,000/$30,000 liability limits to innocent third
parties. Noting that the Legislature might wish to consider
revisiting the issue, the Appellate Division majority ultimately
concluded that Green was entitled to $15,000 for his injuries.
The dissenting member of the panel disagreed, instead
asserting that an innocent injured third party should not be
entitled to more coverage than that provided under the issued
policy. The dissent contended that the majority opinion was in
direct opposition to this Court’s holdings in Palisades Safety &
Insurance Ass’n v. Bastien, 175 N.J. 144 (2003), and Rutgers
Casualty Insurance Co. v. LaCroix, 194 N.J. 515 (2008). While
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the dissenting judge did not disagree with the holding in
Varjabedian, he found the case inapplicable because it addressed
a “standard policy” rather than a “basic policy” like the one at
issue here. Ultimately, the dissent concluded that CURE was
free to void the policy as it applied to Perez and Machuca, but
that the policy could not be voided as to Green, an innocent
third party. The dissent explained that Green was entitled to
only the amount of liability coverage that the original policy
provided -- the optional $10,000 liability limit.
Because a member of the Appellate Division panel dissented,
CURE filed an appeal as of right pursuant to Rule 2:2-1(a)(2).
In addition, CURE filed a petition for certification with this
Court seeking review of several other issues. We granted CURE’s
petition. Citizens United Reciprocal Exch. v. Perez,
217 N.J. 292 (2014). We also granted amicus curiae status to
the Insurance Council of New Jersey (“ICNJ”).
II.
A.
Petitioner CURE asserts that the Appellate Division’s
decision is “wide of the mark.” According to CURE, in the wake
of the Automobile Insurance Cost Reduction Act (AICRA), N.J.S.A.
39:6A-1.1 to -35, which created a “basic policy” with no
requirement of bodily injury liability coverage, automobile
drivers no longer have a basis to expect that other drivers will
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maintain bodily injury liability coverage. CURE relies on
Marotta, supra, 280 N.J. Super. at 532, for the proposition that
New Jersey requires defrauded insurance carriers to provide
benefits to injured third parties to the extent of compulsory
insurance coverage required by law on the date of the accident.
By this logic, CURE asserts, Green is owed no coverage. CURE
criticizes the trial court and Appellate Division’s reliance on
Varjabedian, which it contends incorrectly interpreted Marotta
as requiring $15,000/$30,000 coverage. According to CURE,
Marotta required only the minimum coverage mandated by law at
the time of the incident, whatever amount that may be.
CURE argues in the alternative that, even if this Court is
not persuaded by its “all-or-nothing” argument, the most it can
logically owe to Green is $10,000, the amount actually purchased
by contract. That amount, CURE contends, should be provided to
only those third parties who do not have first-party
uninsured/underinsured motorist (UM/UIM) coverage, as the UM/UIM
carrier should be the insurer chiefly liable for damages.
In sum, CURE urges this Court to clarify whether, in the
wake of AICRA, a voided basic policy permits an innocent third
party to recover (1) the minimum standard policy statutory
amount; (2) the voided policy limit; or (3) nothing at all.
B.
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Green and Progressive (collectively “respondents”) counter
that, regardless of the passage of AICRA and the creation of the
“basic policy,” a carrier seeking to retroactively void coverage
cannot rely on the basic policy’s lack of mandated liability
coverage to avoid providing the $15,000/$30,000 minimums set by
N.J.S.A. 39:6A-3 and 39:6B-1. Respondents therefore contend
that the appellate majority correctly affirmed the trial court’s
decision pursuant to Varjabedian, supra, which found that
“[f]rom the perspective of the insurers’ obligation, the
required compulsory insurance liability limits remain
$15,000/$30,000. Indeed,” respondents stress, “N.J.S.A. 39:6A-3
is titled ‘Compulsory automobile insurance coverage; limits.’”
391 N.J. Super. at 258. Respondents further contest CURE’s
reliance on Marotta because it preceded AICRA and therefore did
not address or interpret the basic policy under that Act.
C.
ICNJ, appearing as amicus curiae, supports the position
advanced by CURE. ICNJ maintains that, under N.J.S.A. 39:6A
3.1, the mandatory minimum bodily injury liability coverage
provided by the Legislature for a basic policy is $0 and that
both the appellate majority and dissent erred in concluding
otherwise. ICNJ specifically contends that, with the creation
of the basic automobile insurance policy under AICRA, the New
Jersey Legislature consciously chose to eliminate any minimum
9
compulsory bodily injury coverage so as to decrease the cost of
insurance to drivers who might otherwise have operated uninsured
vehicles. Accordingly, ICNJ argues that superimposing mandated
liability coverage in the event of policy rescission -- where no
such coverage is mandated otherwise -- increases the financial
impact on insurers and decreases their ability to make
affordable insurance coverage available in the market.
ICNJ further contends that it was unjust and inequitable
for the lower courts to rely on Varjabedian and thereby increase
CURE’s liability exposure for Green’s claims to $15,000, when
its exposure would have amounted to only $10,000 had the policy
not been invalidated due to Perez’s fraud. In support of that
argument, ICNJ cites LaCroix, supra, 194 N.J. at 526, in which
this Court declared that a party should not be permitted to
improve their claim against an insurance policy solely because a
misrepresentation was made in the application process.
III.
“It is settled that 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.” Remsden v. Dependable Ins. Co., 71 N.J. 587, 589
(1976); see also Mass. Mut. v. Manzo, 122 N.J. 104, 115 (1991)
(explaining that misrepresentation is material if it “naturally
and reasonably influence[s] the judgment of the underwriter in
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making the contract at all, or in estimating the degree or
character of the risk, or in fixing the rate of premiums”).
Indeed, we have long stated that “[t]he 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.” Bastien,
supra, 175 N.J. at 148 (quoting Longobardi v. Chubb Ins. Co. of
N.J., 121 N.J. 530, 541-42 (1990)).
It is undisputed that Perez, by failing to list Machuca as
a household member of driving age on her initial application,
made a material misrepresentation to CURE from the time of her
insurance application through the time of the automobile
accident at issue. Perez’s misrepresentation precluded CURE’s
evaluation not only of the underwriting risk of having a second
driver in the household, but also of Machuca’s driving record
and relevant claims history. CURE was therefore denied
essential information relevant to its assessment of risk and,
ultimately, to its decision to issue a policy insuring Perez.
Applying the standard we set forth in Remsden, supra, we find
that CURE was justified in revoking Perez’s policy based on her
material factual misrepresentation. 71 N.J. at 589; see also
Bastien, supra, 175 N.J. at 149.
IV.
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Although CURE was indeed able to rescind Perez’s policy,
thereby depriving her of any coverage as a named insured, “that
does not mean that it escapes liability with respect to
innocent, third-party members of the public whose protection is
a paramount concern of the PIP (Personal Injury Protection), no
fault system.” Bastien, supra, 175 N.J. at 149. Indeed, we
have repeatedly held that, “[e]ven when a policy is rescinded,
for such reason as an insured’s material misrepresentation in
respect of the policy at its inception, PIP benefits may
nevertheless remain payable to innocent third parties.”
LaCroix, supra, 194 N.J. at 524 (citation omitted); see also
Proformance Ins. Co. v. Jones, 185 N.J. 406, 420 (2005);
Bastien, supra, 175 N.J. at 149; Marotta, supra, 280 N.J. Super.
at 532.
In accordance with the well-established jurisprudence of
this State, we find CURE liable for respondents’ third-party
bodily injury claims. See LaCroix, supra, 194 N.J. at 523-24;
Proformance, supra, 185 N.J. at 420; Bastien, supra, 175 N.J. at
149. We see no compelling need to depart from the overwhelming
precedent and policy considerations supporting that position.
V.
Having determined that CURE is liable for respondents’
claims, we now consider the extent of that liability. We hold
that, as the Appellate Division dissent found, CURE is liable
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for the $10,000 coverage for which Perez opted when she
purchased her policy.
A.
New Jersey has a long-established and comprehensive
statutory no-fault insurance system “designed to ensure that
persons injured in motor vehicle accidents are compensated
promptly for their injuries and financial losses by immediate
recourse to insurance or public funds.” Craig & Pomeroy, New
Jersey Auto Insurance Law § 1:1 (2015); see Amiano v. Ohio Cas.
Ins. Co., 85 N.J. 85, 90 (1981); Potenzone v. Annin Flag Co.,
191 N.J. 147, 152 (2007). As this Court explained in Ross v.
Transport of New Jersey, the no-fault system centers on the
Compulsory Insurance Law, N.J.S.A. 39:6B-1 to -3, which requires
that owners of motor vehicles registered or principally garaged
in New Jersey maintain liability insurance for certain mandatory
minimum amounts. Ross v. Transport of New Jersey, 114 N.J. 132,
135-36 (1989); see N.J.S.A. 39:6A-3, -6B-1(a).
Prior to 1998, New Jersey automobile insurance law required
all drivers to maintain mandatory bodily injury liability
protection of at least $15,000 per individual and $30,000 per
accident. This scheme –- known as the “standard policy,”
N.J.S.A. 39:6A-2(n) -- was formerly the only way an automobile
owner in New Jersey could satisfy the compulsory insurance
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requirement set forth in N.J.S.A. 39:6A-3 and N.J.S.A. 39:6B
1(a).
In 1998, however, as part of AICRA, L. 1998, cc. 21-22, the
New Jersey Legislature authorized a “basic automobile insurance
policy” as an alternative to the mandatory liability and PIP
benefits coverage required under the standard policy. N.J.S.A.
39:6A-3.1. The legislative purpose of this alternative was to
reduce the cost of auto insurance so as to make coverage
affordable for individuals with limited income, while
maintaining a sufficient rate of return to the insurance
carriers. N.J.S.A. 39:6A-1.1; N.J.S.A. 39:6A-3.3; Sponsor’s
Statement to S. 3 (Apr. 24, 1998). Although the basic policy is
generally less expensive than the standard policy, it does not
include the same level of protection:
As an alternative to the mandatory coverages provided in sections 3 and 4 of [N.J.S.A. 39:6A-3 and 39:6A-4], any owner . . . may elect a basic automobile insurance policy providing the following coverage:
a. Personal injury protection coverage, for the payment of benefits . . . to the named insured and members of his family residing in his household . . . not to exceed $15,000 per person per accident . . . .
b. Liability insurance coverage insuring against loss resulting from liability imposed by law for property damage . . . in an amount or limit of $5,000 . . . .
c. In addition to the aforesaid coverages required to be provided in a basic automobile
14
insurance policy, optional liability insurance coverage insuring against loss resulting from liability imposed by law for bodily injury or death in an amount or limit of $10,000 . . . in any one accident.
[N.J.S.A. 39:6A-3.1 (emphasis added).]
As made clear by that statutory language, the basic policy,
by default, does not provide for or mandate personal liability
insurance like its “standard policy” counterpart. N.J.S.A.
39:6A-3.1(c). Nevertheless, the basic policy explicitly offers
applicants the option of adding personal injury liability
coverage in an amount up to $10,000. Ibid.
Our appellate courts have interpreted the relevant
statutory schemes to require $15,000/$30,000 coverage for
innocent third parties, which they have deemed to be the
mandatory minimum coverage provided under New Jersey law.
Marotta, supra, 280 N.J. Super. 525; Varjabedian, supra, 391
N.J. Super. 253. In Marotta, an appellate panel reasoned that
an injured third party “has the right to expect that all other
drivers will be insured to the extent required by compulsory
insurance.” Ibid. We affirmed that judgment “substantially for
the reasons expressed in the opinion of the Appellate Division.”
Marotta v. N.J. Auto. Full Ins. Underwriting Ass’n, 144 N.J.
325, 326 (1996). At the time Marotta was decided, however,
AICRA had not yet been enacted and the only option for auto
15
insurance was the standard policy, which required every vehicle
owner to have $15,000/$30,000 coverage.
In a post-AICRA case, the Law Division ruled that AICRA’s
basic policy, with its optional liability insurance, overrode
the minimum compulsory insurance in New Jersey. Mannion v.
Bell, 380 N.J. Super. 259, 260-61 (Law Div. 2005). Under that
ruling, the court concluded that there was no longer any
compulsory liability insurance. Ibid.
In Varjabedian, supra, the Appellate Division overturned
Mannion. 391 N.J. Super. at 260. The panel determined that the
basic policy did not displace the compulsory $15,000/$30,000
coverage called for under the policy in issue. Ibid. On the
issue of minimum liability coverage required to be provided
under the rescinded standard policy with which the panel was
grappling, the panel specifically noted:
The alternative coverage provided by a basic policy under N.J.S.A. 39:6A-3.1 mandates no minimum amount of liability coverage. It only provides for optional liability coverage. The only mandated or compulsory minimum liability coverage limits in our statutes are the $15,000 per injury and $30,000 per accident, prescribed in both N.J.S.A. 39:6A-3 and N.J.S.A. 39:6B-1. Accordingly, a carrier seeking to retroactively void coverage based upon the prior conduct of its insured tortfeasor cannot rely on the alternative basic policy’s lack of mandated liability coverage to avoid providing the minimum compulsory non-cancelable $15,000/$30,000 liability limits.
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[Id. at 260.]
The Varjabedian panel thus concluded that, “[f]rom the
perspective of the insurers’ obligation, the required compulsory
insurance liability limits remain $15,000/$30,000.” Id. at 258.
B.
The Appellate Division majority in the instant case relied
on that logic from Varjabedian in its determination that, even
under basic policies, insurers are liable to innocent third
parties for $15,000/$30,000 coverage. Perez, supra, 432 N.J.
Super. at 534.
We expressly reject the Appellate Division majority’s
conclusion that CURE must provide, on a rescinded basic policy,
up to $15,000 liability coverage based on the reasoning set
forth in Varjabedian. As the dissent determined, Varjabedian is
factually inapplicable here. That case involved a standard
policy, which, under N.J.S.A. 39:6A-3 and N.J.S.A. 39:6B-1,
requires all drivers to maintain mandatory $15,000/$30,000
coverage. This appeal involves a basic policy, which, under
N.J.S.A. 39:6A-3.1(c), mandates no minimum bodily injury
coverage but provides that the policyholder may elect to
purchase such coverage “in an amount or limit of $10,000.”
Thus, we must consider in this case what amount, if any, Green,
as an innocent third party may recover under a voided basic
17
policy that includes the optional $10,000 of coverage permitted
by N.J.S.A. 39:6A-3.1(c).
An insured’s fraud should not enhance recovery by a third
party. See Bastien, supra, 175 N.J. at 151-52 (disallowing
recovery for wife injured when driving husband’s car because
husband’s application did not disclose wife as driver and she,
as spouse, was in position to correct application and therefore
not innocent third party). Rather, as we stated in LaCroix,
supra, “a claimant [under an automobile policy] must be
evaluated as if he or she held the status to which he or she
would have been entitled had the named insured completed the
application honestly.” 194 N.J. at 526.
In LaCroix, an automobile insurance company sought to
rescind the insured’s policy because he made a material
misrepresentation by not including his teenage daughter as a
household resident in his insurance application. Id. at 519.
Ultimately, this Court determined that the daughter was an
innocent party entitled to recovery under the insurance policy.
Id. at 530. Warning that claims should be assessed as if the
policy had not been voided and that an insured’s fraud may not
enhance the coverage provided by the policy, id. at 526, this
Court confirmed that the recovery by the insured’s daughter
could not exceed the minimum compulsory benefits mandated by
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statute for standard policies like the one at issue, id. at 532
(citing Marotta, supra, 280 N.J. Super. at 532).
Here, Perez contracted for third-party bodily injury
liability coverage in the amount of $10,000. Although the
$10,000 coverage was optional rather than compulsory, it is an
option created by statute, N.J.S.A. 39:6A-3.1(c), and is part of
our comprehensive scheme of automobile insurance coverage
required of motorists on the roadways in New Jersey. Given that
the statute aims to encourage drivers to seek coverage, we find
that it would be both unjust and contrary to public policy to
invalidate and disregard this minimal amount of liability
coverage bargained for by the insured. Indeed, a contrary
result would undermine the purpose and practicality of this
State’s comprehensive statutory no-fault insurance system.
Bastien, supra, 175 N.J. at 149. It would likewise be improper
to hold the insurance carrier liable for an amount in excess of
that for which it had previously contracted, such as the $15,000
amount found appropriate in these circumstances by the appellate
majority.
Accordingly, we conclude 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
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system of automobile insurance coverage, even when that basic
policy is later voided. Thus, evaluating the amount of recovery
to which Green would have been entitled had Perez not
fraudulently completed her insurance application, we hold that
CURE is liable to Green in the amount of $10,000. 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.

Outcome: The judgment of the Appellate Division is, therefore,
reversed.

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Defendant's Experts:

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