Thomas DeMarco v. Sean Robert Stoddard, D.P.M

In this appeal, we consider whether the Rhode Island

Medical Malpractice Joint Underwriting Association (RIJUA) must

defend and indemnify a podiatrist in a medical malpractice

action pending in New Jersey following rescission of the

podiatrist’s medical malpractice liability policy. The policy

had been rescinded due to material misrepresentations concerning

the state in which the insured podiatrist maintained his primary

practice. The trial court and the Appellate Division, applying

New Jersey law, held that in a medical malpractice action

pending in this State, the insurer had the duty to defend and

indemnify the insured podiatrist up to $1 million, the amount of

professional liability insurance physicians and podiatrists are

required to maintain in this State. We granted leave to appeal, and now reverse. The critical

inquiry in this case is whether a rescinded policy of medical

malpractice liability insurance provides any coverage to the

insured for claims that arose prior to rescission. Although the

Appellate Division correctly determined that New Jersey law

applies, we conclude that the Appellate Division erred when it

referred to the compulsory automobile liability model as the

guidepost for fashioning a remedy for third-party claimants

whose claims arose prior to rescission. The appellate panel

further erred by reforming the rescinded policy to require the

insurer to defend and indemnify its insured up to the mandatory

minimum amount of coverage required in this State.

We conclude that resolution of the question of what, if

any, coverage is available to an insured to respond to third

party claims following rescission of a policy is governed by the

rule announced in First American Title Insurance Co. v. Lawson,

177 N.J. 125 (2003), and its progeny. Applying that rule, the

RIJUA owed neither a duty to defend nor a duty to indemnify its

insured, who had misrepresented the proportion of his practice

generated in Rhode Island, which was a fact that formed the

basis for his eligibility for insurance through the RIJUA. We

therefore reverse the judgment of the Appellate Division.

Plaintiff Thomas DeMarco, a New Jersey resident, sought

treatment for chronic plantar fasciitis from defendant Sean

Robert Stoddard, D.P.M. Dr. Stoddard practiced podiatry at the

Center for Advanced Foot & Ankle Care, Inc., which had offices

in Toms River and Lakewood. Dr. Stoddard diagnosed DeMarco with

a split peroneal tendon and performed three surgical procedures

on DeMarco between 2004 and January 2011. The third surgery,

which forms the basis of DeMarco’s complaint, occurred in

September 2010.

In 2007, Dr. Stoddard applied to the RIJUA for medical

malpractice liability insurance. He submitted his application

through Linda O’Neill, an agent located in Rhode Island. The

application listed Dr. Stoddard’s office at a Rhode Island

address, but the office phone number had a New Jersey area code.

The application also provided that Dr. Stoddard was “currently

applying” for affiliation with a Rhode Island hospital. The

“Licensure” section of the application asked whether at least

fifty-one percent of the applicant’s practice was generated in

Rhode Island. The application had “Yes” checked off, but that

answer was false. The application then stated, partly in bold

letters: “IF YOUR ANSWER IS NO, DO NOT CONTINUE. You are not

eligible for coverage under the Rhode Island MMJUA.” The agent

claims that Dr. Stoddard provided all of the information

required in his initial application.



5

Through the same Rhode Island agent, Dr. Stoddard submitted

renewal applications each year from 2008 through 2011. Each of

the renewal forms stated that at least fifty-one percent of Dr.

Stoddard’s practice was generated in Rhode Island. In addition,

the renewal application for the 2010-2011 coverage year -- when

Dr. Stoddard performed the surgery that forms the basis of

DeMarco’s malpractice claim -- listed an office address in

Lakewood.

In January 2011, Dr. Stoddard told DeMarco that he was

moving to California. DeMarco’s condition worsened, and he

sought treatment from an orthopedic surgeon. The surgeon

performed two additional surgeries on DeMarco.

In October 2011, DeMarco and his wife, Cynthia DeMarco (the

DeMarcos) filed a medical malpractice complaint in New Jersey

against Dr. Stoddard and the Center for Advanced Foot & Ankle

Care, Inc., alleging that Dr. Stoddard negligently performed the

September 2010 surgery. Dr. Stoddard forwarded the DeMarcos’

complaint to the RIJUA, which responded with a reservation of

rights letter. The letter indicated that the RIJUA only

provides coverage for physicians who maintain fifty-one percent

of their “professional time and efforts” in Rhode Island and

that the RIJUA was “in the process of securing facts concerning

whether [Dr. Stoddard] . . . met the fifty-one percent (51%)



6

requirement for the provision of insurance coverage from the

[RI]JUA.”

Less than a week later, Dr. Stoddard wrote a letter to the

attorney representing the DeMarcos, advising that he “has no

malpractice coverage in regards to [their] claim.” Dr. Stoddard

also stated that he tried to build his practice in Rhode Island

but failed and that an agent told him he could enroll with the

RIJUA even though the bulk of his practice was in New Jersey.

Additionally, Dr. Stoddard stated that he had no assets, his new

practice -- a professional corporation in California -- was

struggling, he was in the midst of a divorce, he had defaulted

on his student loans, and he had “a significant amount of debt.”

Dr. Stoddard conceded that he could not prove that he satisfied

the RIJUA’s fifty-one percent requirement, and stated that “it

would be a waste of time to pursue this claim against me based

on these facts.”

II.

In January 2012, the RIJUA filed a complaint for a

declaratory judgment in Rhode Island, naming both Dr. Stoddard

and the DeMarcos as defendants. The RIJUA sought a judgment

declaring that Dr. Stoddard misrepresented material information

in his four applications to the RIJUA. It also sought a

judgment permitting rescission of the policy. In February 2012,

the DeMarcos’ attorney sent a letter to the RIJUA’s general



7

counsel, indicating that he did not believe his clients were

subject to personal jurisdiction in Rhode Island.

In March 2012, the DeMarcos amended their medical

malpractice complaint. They added the RIJUA as a defendant and

sought a declaratory judgment that the RIJUA was required to

defend Dr. Stoddard and indemnify him up to $1 million in the

event that the DeMarcos were awarded damages for their claims

against Dr. Stoddard.

In May 2012, the Rhode Island court entered a default

judgment against Dr. Stoddard, declaring his renewal policy from

2010 to 2011 void and holding that the RIJUA had no duty to

defend or indemnify Dr. Stoddard for the DeMarcos’ claims.

Thereafter, the RIJUA and the DeMarcos filed cross-motions

for summary judgment in the New Jersey malpractice case. The

motions addressed whether the RIJUA was required to defend and

indemnify Dr. Stoddard and the effect of the default judgment in

Rhode Island against Dr. Stoddard. The trial court applied a

choice of law analysis and determined that New Jersey law should

apply. The court held that the Rhode Island judgment was not

entitled to full faith and credit and could not be enforced in

the New Jersey action because it was entered without

jurisdiction over the DeMarcos. Finally, the trial court denied

the RIJUA’s motion for summary judgment and granted the

DeMarcos’ motion, concluding that the DeMarcos were entitled to



8

summary judgment “because compulsory insurance cannot be voided

as to an innocent third party.” The court also awarded the

DeMarcos attorneys’ fees for successfully litigating the RIJUA’s

disclaimer of coverage.

The Appellate Division granted the RIJUA’s motion for leave

to appeal. In a published opinion, DeMarco v. Stoddard, 434

N.J. Super. 352 (App. Div. 2014), the Appellate Division

affirmed the trial court order.

The Appellate Division determined that “[t]he precise

question before us is whether a medical malpractice insurance

carrier may rescind a policy so that the carrier has no duty to

indemnify the insured doctor for injuries suffered by an

innocent third party who made a malpractice claim before the

policy was rescinded.” Id. at 367. The panel predicted that

this State would permit rescission of a compulsory medical

malpractice liability insurance policy due to misrepresentations

of material facts in the policy application but would protect an

innocent third party, such as a patient whose claim arose prior

to rescission, up to the minimum amount of required coverage.

Ibid. The panel also determined that Rhode Island might protect

innocent third parties. Ibid.

In addition, the panel concluded that “[a]nalogous case law

of both states suggests that both would restrict the rescission

remedy . . . in order to provide some protection to innocent



9

third parties for whose benefit compulsory insurance laws were

enacted.” Ibid. In reaching this conclusion, the panel

compared medical malpractice liability insurance to the

protection afforded to innocent third parties when a motor

vehicle liability insurance policy has been rescinded. Id. at

368-73. The Appellate Division determined, however, that Rhode

Island had “not directly compelled coverage in any specific

amount,” while New Jersey requires $1 million of coverage,

necessitating a choice-of-law analysis. Id. at 373-74. The

Appellate Division determined that New Jersey law should apply

and concluded that innocent third parties should be protected

for a claim arising before rescission. Id. at 380. Applying

that rule to plaintiffs, the panel concluded that the RIJUA owed

a duty to indemnify Dr. Stoddard up to $1 million, the amount of

medical malpractice liability insurance that a physician

licensed to practice medicine and performing medical services in

this State is required to maintain, even though the record

demonstrated that Dr. Stoddard provided materially false

information to the RIJUA in his applications for insurance

coverage. Ibid.

We granted the RIJUA’s motion for leave to appeal. 218

N.J. 270 (2014). We also granted motions to appear as amicus

curiae by five entities: New Jersey Civil Justice Institute

(NJCJI), New Jersey Physicians United Reciprocal Exchange



10

(NJPURE), Property Casualty Insurers Association of America

(Property Casualty Insurers), Insurance Council of New Jersey

(Insurance Council), and New Jersey Association for Justice

(NJAJ).

III.

A.

The RIJUA raises three points of error in the Appellate

Division’s decision. First, it argues that Rhode Island law

should apply to the coverage dispute. Although the RIJUA agrees

that Rhode Island and New Jersey law conflict, it disputes that

a conflict of law analysis results in the application of New

Jersey law. In particular, the RIJUA argues that the Appellate

Division erroneously viewed the coverage dispute as a first

party claim by the DeMarcos against the RIJUA. Instead, the

RIJUA submits that the dispute consisted of a third-party claim

by the DeMarcos, which addressed whether the RIJUA must defend

and indemnify Dr. Stoddard in response to their claims.

Accordingly, the RIJUA maintains that the Appellate Division

focused on the DeMarcos’ interests when it should have focused

on the interests of the parties to the insurance contract -- the

RIJUA and Dr. Stoddard. The RIJUA thus argues that

consideration of those interests would have led to the proper

conclusion that Rhode Island law applies.



11

Second, the RIJUA argues that the reformation remedy

fashioned by the Appellate Division was inequitable under New

Jersey law. Citing the dissent in Citizens United Reciprocal

Exchange v. Perez (CURE), 432 N.J. Super. 526, 538 (App. Div.

2013), rev’d, 223 N.J. 143 (2015), the RIJUA asserts that while

courts must protect innocent third parties, they must also

provide some relief to the defrauded insurance provider. Under

the Appellate Division judgment, even though the policy is void

due to Dr. Stoddard’s misrepresentations, the RIJUA is made

liable for the same amount of coverage -- $1 million -- as it

would if the policy was valid. In other words, the RIJUA argues

that the Appellate Division’s decision is inequitable because it

failed to provide any relief whatsoever to the RIJUA. It also

states that such a result fails to provide any disincentive for

an applicant to lie to an insurance provider.

The RIJUA also contends that “mandatory [professional]

malpractice coverage can and will be voided, in full and ab

initio, as a result of fraud in the application by an insured.”

In particular, the RIJUA relies on Lawson, supra, 177 N.J. 125.

Last, the RIJUA argues that attorneys’ fees were improperly

awarded to the DeMarcos under Rule 4:42-9(a) because its

position was not a “groundless disclaimer” of coverage.

B.



12

The DeMarcos argue that this case does not present a

significant conflict of law issue because both New Jersey and

Rhode Island have laws requiring compulsory medical malpractice

insurance and both states protect innocent third parties seeking

to recover under a statutorily mandated insurance policy.

Nevertheless, the DeMarcos assert that the Appellate Division

resolved the conflict of law question correctly by ruling that

New Jersey law applied.

Additionally, the DeMarcos assert that the Appellate

Division decision was fair and equitable. Plaintiffs contend

that the RIJUA was in a better position to detect Dr. Stoddard’s

misrepresentations and reject his renewal applications.

Accordingly, they contend it would not be equitable to force the

DeMarcos to bear the loss.

The DeMarcos also assert that the Appellate Division’s

determination is consistent with New Jersey law. They contend

that it is universally recognized that an insurer cannot escape

liability to a third party even if the insured procured coverage

through fraud or misrepresentation. The DeMarcos distinguish

Lawson on the grounds that the insured party here is a private

citizen, as opposed to an insurance company. Moreover, the

misrepresentation in Lawson related to a presently existing

claim against the law firm, whereas the misrepresentation in

this case related to the likelihood of potential future claims



13

arising outside of Rhode Island. They assert that the RIJUA

knew that Dr. Stoddard could potentially face a claim outside of

Rhode Island, as the policy only required fifty-one percent of

the practice to be in Rhode Island. Therefore, the RIJUA

knowingly assumed the risk that it might become involved in

litigation in New Jersey. In contrast, the DeMarcos contend

that the misrepresentation in Lawson induced an agreement by

concealing a risk unknown to the insurer.

Finally, the DeMarcos assert that the trial court properly

awarded attorneys’ fees.

C.

Amici NJCJI, NJPURE, Property Casualty Insurers, and

Insurance Council urge reversal of the Appellate Division

judgment. Each argues that the appellate panel misperceived the

breadth of the rule protecting innocent third parties following

rescission of an insurance policy. Each notes that compulsory

automobile insurance policies occupy a unique place in the law

of this State, and each emphasizes that well-established

authority addressing compulsory professional liability insurance

coverage permits rescission of a fraudulently induced policy

with no protection to innocent third parties, such as clients or

patients.

Amicus NJPURE also asserts that the appellate panel opinion

“incentivizes applicants to commit fraud.” Amici Property



14

Casualty Insurers and Insurance Council urge that the rule

announced by the Appellate Division will hinder proper

underwriting and diminish the availability of professional

liability insurance coverage.

Amicus NJAJ urges affirmance of the Appellate Division

judgment. It contends that the opinion upholds the public

policy of this State to protect the rights of innocent third

parties when an insurer seeks to void ab initio a policy of

insurance.

IV.

A.

In New Jersey, the Legislature first instituted mandatory

malpractice insurance for physicians and podiatrists in 1998.

L. 1997, c. 365, § 1 (physicians); L. 1997, c. 365, § 2

(podiatrists). N.J.S.A. 45:5-5.3, which codified L. 1997, c.

365, § 2, mandates that podiatrists must obtain and maintain

malpractice liability insurance, or if coverage is unavailable,

a letter of credit for at least the minimum amount prescribed by

the Board of Medical Examiners (BME).1 The BME promulgated a

regulation setting the minimum amount of malpractice insurance

for physicians and podiatrists at $1 million per occurrence and

$3 million per policy year. N.J.A.C. 13:35-6.18.

1 The minimum amount required for the letter of credit is $500,000. N.J.A.C. 13:35-6.18(b).



15

In 2004, the Legislature amended L. 1997, c. 365, § 1.

N.J.S.A. 45:9-19.17; L. 2004, c. 17, § 25. The 2004 amendment

codified the 1999 regulation and set the minimum amount of

malpractice insurance for physicians at $1 million per

occurrence and $3 million per policy year. L. 2004, c. 17, §

25. Notably, the 2004 statutory amendment addressed only

physicians. Nevertheless, the 1999 regulation applies to both

physicians and podiatrists, and sets the floor for both at $1

million per occurrence and $3 million per policy year. N.J.A.C.

13:35-6.18. In addition, N.J.S.A. 45:9-19.17 requires

physicians to maintain an insurance policy specifically “by a

carrier authorized to write medical malpractice liability

insurance policies in this State,” but N.J.S.A. 45:5-5.3 does

not include a similar requirement for podiatrists.

There is scant case law interpreting the statutes and

regulations requiring physicians and podiatrists to obtain and

maintain medical malpractice liability insurance. In Jarrell v.

Kaul, ___ N.J. ___, ___ (2015) (slip op. at 2), the Court

reviewed the compulsory medical malpractice liability insurance

scheme adopted by the Legislature in the context of a multi

count complaint filed by a patient injured by a physician who

did not have the statutorily mandated medical malpractice

liability coverage. Only one of the issues before the Court in

Jarrell implicated the consequences to a patient with a pending



16

negligence claim when a policy is rescinded. Ibid. The Court

opined that the statute requiring a physician practicing

medicine in this State to obtain and maintain medical

malpractice liability insurance does not give rise to a direct

cause of action by an injured patient to enforce that

requirement. Id. at ___ (slip op. at 21). The only other case

addressing the consequences to an injured third party due to the

absence of medical malpractice liability insurance is the

opinion under review.

In the context of compulsory legal malpractice insurance,2

however, there is a well-developed body of law holding that a

legal malpractice insurance policy may be declared void from its

inception due to a misrepresentation of material fact by the

insured in an application for insurance. Liberty Surplus Ins.

Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 446-49 (2007);

Lawson, supra, 177 N.J. at 129. Upon rescission, the insurer

owes no duty to defend or indemnify the law firm or any

2 In 1997, the Court adopted rules that require firms organized to practice law as professional corporations pursuant to The Professional Service Corporation Act, N.J.S.A. 14A:17-1 to -18, as limited liability companies pursuant to the New Jersey Limited Liability Company Act, N.J.S.A. 14A:2B-1 to -70 (now repealed), or as limited liability partnerships pursuant to the Uniform Partnership Act, N.J.S.A. 42:1A-1 to -56, to obtain and maintain professional liability insurance. R. 1:21-1A(a)(3), – 1B(a)(4), and -1C(a)(3). Rhode Island has a similar requirement, although the minimum mandatory amount of coverage is different from that in New Jersey. R.I. Gen. Laws § 7-5.1-8.



17

defalcating attorney of the firm for any complaints pending or

claims that accrued at the time of rescission. Lawson, supra,

177 N.J. at 129.

In Lawson, one of three members of a law firm applied for

professional liability insurance for the firm and its members.

Id. at 131. At the time, the member had been engaged in a

scheme in which he improperly transferred funds between client

accounts and the firm business account to meet the firm’s

financial obligations. Id. at 130-31. A second member of the

firm had previously discovered the scheme but took no action to

cease the practice. Ibid. In the insurance application, the

member who initiated the scheme falsely stated that he knew of

no “acts, errors or omissions in professional services that may

reasonably be expected to be the basis of a professional

liability claim,” and warranted that all information in the

application was accurate. Id. at 131. At about the same time,

the Office of Attorney Ethics (OAE), acting on three grievances

filed against the firm, notified the firm that it would conduct

an audit. Id. at 132. The attorney who had filed the original

application later provided a new warranty as to the accuracy of

the information in the application. Ibid.3

3 Soon thereafter, the OAE sought and obtained the temporary suspension of the member who had discovered but did not curtail the scheme. Id. at 132.



18

As a result of numerous improper transfers, title insurers

that paid claims to various individuals represented by the firm

sought recovery against the firm and its members, who in turn

sought coverage from their professional liability insurer. Id.

at 132-33. The insurer obtained a declaratory judgment allowing

it to rescind coverage in respect to the two defalcating members

but not the third member or the firm. Id. at 134. In reviewing

this judgment,4 this Court held that the insurer had “the clear

right to rescind [a defalcating attorney’s] coverage in the face

of his blatant and direct misrepresentations.” Id. at 140. The

Court expressly rejected the contention of the title insurers --

injured third parties -- that the remedy for such

misrepresentations should only be prospective rescission of the

policy. Ibid. In doing so, the Court recognized that two of

the firm’s three attorneys would be without insurance coverage

to respond to malpractice claims filed against them by injured

clients and the title insurer. Id. at 143. The Court reasoned

that the harsh result was warranted because “[p]ermitting the .

. . coverage to survive [the member’s] defalcations would, in

essence, condone . . . fraudulent conduct.” Id. at 141.

Later, in Liberty Surplus Insurance, supra, this Court

upheld the entry of summary judgment in favor of the insurer in

4 On appeal, the Appellate Division held that the coverage was void as to all three members and the firm. Id. at 134.



19

a declaratory judgment action seeking rescission ab initio of a

legal malpractice liability insurance policy due to

misrepresentations of material fact in the policy application.

189 N.J. at 450. The firm therefore faced the legal malpractice

claim filed by the injured client without coverage. Ibid.; see

also Liebling v. Garden State Indem., 337 N.J. Super. 447, 450

51 (App. Div.) (affirming summary judgment rescinding legal

malpractice policy and denying coverage for professional

negligence action filed and served on firm before application

for and issuance of policy), certif. denied, 169 N.J. 606

(2001).

Thus, it is well established in this State that an attorney

will not have access to insurance coverage to respond to claims

from injured third parties, clients, or title companies, if the

professional liability insurance policy has been rescinded due

to the attorney’s misrepresentations of material fact in the

policy application. We discern no basis to treat other

professionals required to obtain and maintain professional

liability insurance, including physicians and podiatrists, in a

different manner.

Rather, the same reasons that permit rescission of a legal

malpractice insurance policy pertain to medical malpractice

liability insurance. A policy will be issued following an

analysis of the risk to be assumed. A misrepresentation of a



20

material fact in an application undermines the risk assessment

and ultimately the decision to provide coverage by an insurer.

Moreover, all forms of professional liability insurance serve

the same purpose -- to defend when claims are filed against a

professional and to serve as a source of funds to compensate

injured patients or clients. Permitting reformation of a

medical malpractice liability policy to conform to statutorily

mandated minimum amounts also suggests that fraudulent conduct

is condoned. Finally, reformation runs counter to our recent

decision in Jarrell, which denied a direct action for

compensation by an injured patient against an uninsured

physician. Jarrell, supra, ___ N.J. at ___ (slip op. at 43).

B.

In reaching this determination, we also conclude that the

compulsory automobile insurance model has no relevance to the

remedial response to a fraudulently obtained policy of

professional liability insurance and the effect of rescission on

innocent third parties.

Recently, in CURE, supra, we explained that the long

established and comprehensive no-fault automobile insurance

system, which is “designed to ensure that persons injured in

motor vehicle accidents are compensated promptly for their

injuries and financial losses,” centers on compulsory automobile

liability insurance. 223 N.J. at 152 (internal quotations



21

omitted). In order to preserve the benefits of that insurance,

N.J.S.A. 39:6-48(a) provides that an automobile liability policy

may not be “cancelled or annulled . . . after the insured has

become responsible for the loss or damage” to an innocent third

party. Thus, a fraudulently obtained policy of insurance is

subject to rescission by the insurer, but an innocent third

party injured by the insured before discovery of the fraud may

look to the liability coverage in place at the time of injury up

to the minimum mandatory insurance required by law. Palisades

Safety & Ins. Ass’n v. Bastien, 175 N.J. 144, 148-49 (2003);

Marotta v. N.J. Auto. Full Ins. Underwriting Ass’n, 280 N.J.

Super. 525, 530 (App. Div. 1995), aff’d o.b., 144 N.J. 325

(1996).

Our no-fault automobile liability system provides further

protection to insureds. For example, any person required to

obtain automobile liability insurance acquires uninsured and

underinsured motorist coverage. N.J.S.A. 17:28-1.1(b). Such

coverage ameliorates the financial harm that may arise if a

driver has no or insufficient coverage. In addition, an injured

person may be able to obtain a financial recovery through the

New Jersey Property-Liability Insurance Guaranty Association

(PLIGA) for losses inflicted by financially irresponsible or



22

unknown owners or operators of motor vehicles.5 N.J.S.A. 39:6-61

to -91. An injured, insured motorist may also obtain prompt

medical treatment through the personal injury protection (PIP)

benefits of an individual automobile liability insurance policy.

N.J.S.A. 39:6A-4. An injured person with no recourse to any

insurance coverage may obtain damages for noneconomic loss,

property damage, and PIP benefits through PLIGA. N.J.S.A. 39:6

61 to -90.1.

The web of interrelated provisions attending the no-fault

automobile liability model, including the compulsory automobile

liability provisions, may minimize the number and amount of the

claims of injured third parties. Moreover, the compulsory

automobile liability insurance model has created an expectation

among those operating motor vehicles that every individual who

may be in an accident will be insured. By contrast, the

Legislature has not constructed a similar matrix of alternate

remedies for any other type of liability insurance, including

compulsory professional liability insurance, or created an

expectation that insurance coverage will be available to redress

an injury even in the face of a fraudulently obtained policy.

5 Prior to 2003, such recovery was obtained through the Unsatisfied Claim and Judgment Fund (UCJF). See N.J.S.A. 39:664(c). In 2003, the Legislature abolished the UCJF and transferred its claims to PLIGA, which was already administering other types of claims in this State. L. 2003, c. 89, §§ 1, 2, 7.



23

Furthermore, the vast differences in the amount of

liability insurance that a driver and a physician must carry

counsels against utilizing the compulsory automobile liability

insurance model to devise a remedy for an injured patient whose

physician is uninsured by virtue of a rescission. The

compulsory automobile liability insurance model also does not

account for the fact that some physicians may have to procure

professional liability insurance through a joint underwriting

association due to market forces in the place where they

practice. Such associations function essentially as mandatory

assigned risk pools in order to permit physicians to obtain

medical malpractice insurance and to provide essential medical

services to patients. In order to maintain affordable rates,

some associations have amassed operating losses. See Patricia

M. Danzon, Medical Malpractice: Theory, Evidence, and Public

Policy 93, 112 (1985). Indeed, unlike many other states’ joint

underwriting associations, the RIJUA remains in effect despite

operating losses over the years. See Med. Malpractice Joint

Underwriting Ass’n v. Paradis, 756 F. Supp. 669, 671 (D.R.I.

1991).

For those reasons, we conclude that the Appellate

Division’s reference to and reliance on the compulsory

automobile liability insurance model was misplaced. Its

reliance on that model also ignored this State’s longstanding



24

rule that an insured professional cannot expect insurance

coverage to respond to third-party claims when the professional

liability insurance has been rescinded due to misrepresentations

of material fact in the application.

V.

Finally, we address the purported conflict of laws

identified by the Appellate Division. The panel declared a

difference in the manner in which each state addressed

compulsory medical malpractice insurance and determined that the

difference constituted a conflict of laws. We conclude that

such a determination was unfounded. As we have explained,

resolution of the issue presented in this appeal begins and ends

with the judicial response to a misrepresentation of material

fact on an application for professional liability insurance. In

this State, a court may rescind a policy ab initio, in which

case the insured is without insurance coverage to respond to a

claim by a third party. Based on our research, it appears that

Rhode Island courts would do the same.

Our research has identified no case in Rhode Island that

has addressed the issue presented in this appeal other than the

judgment entered in the declaratory judgment action commenced by

the RIJUA against Dr. Stoddard. There, due to his ineligibility

for coverage through the RIJUA, the trial court rescinded the

policy ab initio and declared that the RIJUA owed no obligation



25

to defend or indemnify Dr. Stoddard in the DeMarco action

pending in New Jersey. This outcome is entirely consistent with

well-established law in Rhode Island holding that an insurance

policy is subject to rescission if the insurer was induced to

insure an applicant based on a false representation of fact in

the application. Evora v. Henry, 559 A.2d 1038, 1040 (R.I.

1989) (rescinding fire insurance policy); The Guardian Life Ins.

Co. of Am. v. Tillinghast, 512 A.2d 855, 859 (R.I. 1986)

(rescinding disability insurance policy). This rule applies

broadly to a wide variety of insurance policies other than

compulsory motor vehicle liability insurance. See, e.g.,

Commonwealth Land Title Ins. Co. v. IDC Props., Inc., 547 F.3d

15, 20-23 (1st Cir. 2008) (applying Rhode Island law to permit

rescission of title insurance policy); Commercial Union Ins. Co.

v. Pesante, 459 F.3d 34, 38 (1st Cir. 2006) (applying Rhode

Island law to permit rescission of marine insurance policy); see

also R.I. Gen. Laws § 27-18-16 (“The falsity of any statement in

the application for [accident and sickness insurance policies]

may not bar the right to recovery under the policy unless the

false statement materially affected either the acceptance of the

risk or the hazard assumed by the insurer.” (emphasis added)).

Focusing as we have on the broader universe of insurance

policies issued to protect an insured from a variety of risks,

including professional liability claims, we discern that New



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Jersey and Rhode Island permit rescission of an insurance policy

when that policy has been issued based on misrepresentations of

material fact. In each situation, other than the compulsory

motor vehicle liability insurance model in each state, a third

party who has asserted a claim or whose claim accrued prior to

rescission receives no benefit from the rescinded policy. In

short, although we cannot determine with certainty that the laws

of each state are in harmony on this issue, we are also in no

position to declare that a conflict exists between the laws of

New Jersey and Rhode Island on this issue.

Finally, to the extent that each state requires a

podiatrist to maintain medical malpractice liability insurance,

we discern no difference in the laws of each state that amounts

to a conflict of laws. To be sure, Rhode Island adopted a

statute that established minimum levels of coverage lower than

those required in New Jersey. Compare R.I. Gen. Laws § 42-14.1

2 (setting minimum amounts of $100,000 per claim and $300,000

per policy year), with N.J.S.A. 45:5-5.3 and N.J.S.A. 45:9-19.17

(requiring minimum amounts of $1 million per claim and $3

million per policy year). Furthermore, the executive agency

tasked with adopting regulations to implement the Rhode Island

statute did not do so until Fall 2013. See 02-030-021 R.I. Code

R. § 5 (requiring minimum amounts of $1 million per claim and $3

million per policy year). Indeed, the mandatory nature of such



27

insurance remained an open question as late as 2013. See

Peloquin v. Haven Health Ctr. of Greenville, L.L.C., 61 A.3d

419, 429-30 (R.I. 2013).

A conflict of laws however does not arise unless there is a

substantive difference between or among the potentially

applicable laws. Cornett v. Johnson & Johnson, 211 N.J. 362,

374 (2012); P.V. ex rel. T.V. v. Camp Jaycee, 197 N.J. 132, 143

(2008). A substantive difference between the law of one state

and another exists when the difference is offensive or repugnant

to the public policy of this State. Cornett, supra, 211 N.J. at

377. Here, the difference cannot be considered substantive.

Both states have declared that physicians and podiatrists are

required to obtain and maintain medical malpractice liability

insurance. Moreover, Dr. Stoddard had a policy of medical

malpractice liability insurance in place at all relevant times,

rendering any differences in the states’ insurance coverage

requirements irrelevant. Rather, the issue presented in this

case is whether an insurance policy is subject to rescission

based on a false representation of fact in the insurance

application. With respect to that core issue, both states agree

that rescission is the appropriate remedy.

VI.

In summary, it is well established in this State that a

professional who has made a misrepresentation of material fact



28

in an application for professional liability insurance can

expect that the policy may be rescinded on application of the

insurer. A professional in that position can also expect that

claims that arose prior to discovery of the misrepresentation

will be excluded from coverage. In other words, once the policy

has been rescinded, the professional responds to any claims from

injured third parties without coverage.

Here, the policy of professional liability issued to Dr.

Stoddard was rescinded due to misrepresentations concerning the

extent of his practice in Rhode Island. Those

misrepresentations went to his eligibility of insurance through

the RIJUA. As a result of the RIJUA’s rescission of the policy,

Dr. Stoddard stood without coverage to respond to the DeMarcos’

claim. We have not identified any sound reason to treat medical

professionals any differently than other similarly situated

professionals. We cannot identify a sound reason to permit

reformation of a rescinded professional liability policy to the

statutory minimum of $1 million.6

We therefore hold that the Appellate Division erred when it

resorted to the compulsory automobile liability insurance model

6 We also reject the suggestion that whether the RIJUA actually and reasonably relied on Dr. Stoddard’s misrepresentation of the location of his practice is an unresolved issue of fact. Dr. Stoddard had notice of and every opportunity to contest the declarative judgment action. He chose not to do so and a final judgment has been entered granting full relief to the RIJUA.



29

rather than the existing rule governing professional liability

insurance to fashion a remedy for injured third parties affected

by rescission of the medical care provider’s insurance. Having

obtained a judgment rescinding the medical malpractice liability

policy, the RIJUA owed no duty to defend Dr. Stoddard or to

indemnify him in the medical malpractice action pending against

Dr. Stoddard in this State.

The judgment of the Appellate Division is reversed.