A Capehart Scatchard Blog

Insurer Liable to Innocent Third Party on a Basic Insurance Policy Rescinded Due to Fraud, But Only to the Extent of the Minimum Agreed Upon Policy Limits

By on August 28, 2015 in Blog with 0 Comments

This week’s article was written by my Litigation Department associate Charles F. Holmgren, Esq.

While an insurance company may appear to be in the clear when it has successfully rescinded an insurance policy as a result of the insured’s fraud, it may still be liable to an innocent third party under that same policy. As shown in the New Jersey Supreme Court case Citizens United Reciprocal Exch. (CURE) v. Perez, A-67-13 (N.J. Aug. 13, 2015), an insurer is still liable to an innocent third party for the minimum amount bargained for by the insured, despite the policy’s rescission by the insurer.

The Perez case arose as a result of an automobile insurance policy for which the defendant, Sabrina Perez, purchased from the plaintiff, CURE. Ms. Perez opted for the “basic” coverage policy, as well as a $10,000 limit against third party bodily injury claims. Despite the policy requiring her to name all individuals in her household of driving age, she did not include Luis Machuca. About a month after CURE issued the policy, Mr. Machuca, while driving Ms. Perez’s vehicle, was involved in an automobile accident with Dexter Green. Mr. Green filed a personal injury lawsuit against Ms. Perez’s policy. CURE denied Mr. Green’s claim and voided Ms. Perez’s policy from its outset due to her fraudulent failure to list Mr. Machuca as a household member. CURE then filed a declaratory judgment action asking the court to find it had no obligation to cover the innocent third-party claim of Mr. Green.

Though both the trial court and the Appellate Division both found that the policy could be rescinded and voided, they determined that when the policy is voided due to the insured’s fraudulent misrepresentations, innocent third parties are entitled to the state mandated minimum policy coverage of $15,000. The Supreme Court disagreed. The Supreme Court found that the insurance company can only be held liable for the minimum amount it contracted with its insured. While New Jersey law holds that an insurance policy may be rescinded due to misrepresentation, that rescission does not mean an insurer can escape liability to innocent third parties. Thus, a claimant under an automobile policy must be evaluated as if he had the status to which he would have been entitled but for the fraudulent application of the named insured.

Therefore, here, CURE is not wholly absolved of any liability to Mr. Green as a result of Ms. Perez’s fraudulent application, despite the voiding of her policy. While CURE is not liable for the state mandated minimum limits of $15,000, it is liable for Ms. Perez’s option for the policy’s third party coverage of $10,000. This determination strikes a balance between the basic policy considerations of providing innocent third parties coverage under a tortfeasor’s insurance policy and limiting the liability of an insurance company as a result of its insured’s fraudulent misrepresentations.


About the Author

About the Author:

Mr. Holmgren is a shareholder in Capehart Scatchard's Litigation Department, focusing his practice in general defense litigation throughout the federal and state courts of New Jersey and Pennsylvania, with a concentration on premises liability, products liability, construction, estates, employment and professional malpractice. His clients include large and small business owners, municipalities and governmental entities, manufacturers, and their insurers.


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