NJ Supreme Court Clarifies Amount Owed to Innocent Third Party for Bodily Injury Payment Under Voided “Basic” Auto Policy

The NJ Supreme Court recently examined the amount an insurer issuing a “basic” insurance policy, which was subsequently voided for material misrepresentation in the application for insurance, must pay for a bodily injury claim of an innocent third party.

In Citizens United Reciprocal Exchange v. Perez, the Court determined that under New Jersey’s compulsory system of auto insurance, the auto insurer is liable to the innocent third party only for the statutory minimum bodily injury payment in circumstances where the insured elects to add the “basic” policy’s $10,000.00 coverage for third-party bodily injury. Notably, the Court also held that the auto insurer is not liable in the absence of the insured’s election of the additional bodily injury coverage.

In CURE v. Perez, the insured applied for a “basic” auto policy. Under New Jersey law, there is no minimum bodily injury coverage requirement for the “basic” policy, but the insured can elect an optional $10,000.00 coverage limit. The insured elected the optional coverage. The application required that she list all household residents of driving age, but she omitted the name of her children’s father, Luis Machuca, who was a resident of her household. If she had listed him, CURE would not have issued the policy based on his poor driving record. Mr. Machuca was later involved in an accident in which a third-party driver was injured and the victims, including Mr. Machuca, filed claims for personal injury against the insured’s policy. CURE denied both claims and voided the insured’s policy for material misrepresentation.

CURE then filed a declaratory judgment action seeking a holding that it was not liable for any claims arising from the accident, including those of the innocent third-party. The trial court held that CURE properly voided the policy based on the insured’s material misrepresentation, but found that CURE was still liable to the innocent third-party. The court examined prior precedent interpreting a “standard” auto policy and determined that the minimum coverage mandated by New Jersey law for bodily injury to third parties was $15,000 per person/$30,000 per accident, which the court awarded to the third party.

CURE appealed and the Appellate Division affirmed in a split decision, finding that the third party was entitled to the mandatory minimum liability coverage of $15,000. The dissenting judges agreed with the majority’s finding of coverage, but disagreed as to the amount owed. The dissent argued that the innocent third party should not be entitled to more coverage than the policy at issue provided, which was the $10,000 optional coverage for third-party bodily injury liability.
The instant appeal followed and the Supreme Court granted review.

Recognizing well settled law in New Jersey, the Supreme Court confirmed that an insurer cannot escape liability to an innocent third-party when it rescinds a policy due to an insured’s material misrepresentation. Instead, the third party remains in the status he would have been if the policy remained in force. The Court next examined the extent of the insurer’s liability. It expressly rejected the Appellate Division’s conclusion that CURE was liable for $15,000 on the basis that the lower court relied on precedent involving the
interpretation of the “standard” auto policy rather than the “basic” policy at issue in the instant case. The Court then analyzed the extent of an insurer’s liability to a third party under a voided “basic” policy.

The Court recognized that the insured contracted for third-party liability coverage in the amount of $10,000, which was an option provided by statute and part of New Jersey’s comprehensive compulsory auto insurance program. Finding that it would be unjust and contrary to public policy to invalidate this minimal amount of liability that was bargained for by the insured, the Court held that the insurer was liable for the $10,000 to the innocent third party since the insured elected to add the additional bodily injury coverage to the “basic” policy. The Court further held no liability to third-parties exists in cases where the insured did not elect to add the optional bodily injury coverage to the “basic” policy.