Split NJ Supreme Court Rules That Liability Insurer Can Rescind Policy for Doctor’s Material Misrepresentation on Application

Reversing a lower court’s ruling, in DeMarco v. Stoddard the New Jersey Supreme Court held that the Rhode Island Medical Malpractice Joint Underwriting Association (“RIJUA”) did not have to provide any defense or indemnification in a medical malpractice action to a doctor who made a material misrepresentation on his application for insurance.

Plaintiff attempted to argue that because medical malpractice insurance is mandatory in New Jersey and a minimum amount of $1,000,000 in coverage is required, then RIJUA should be required to cover the doctor for the statutory minimum, similar to the protection afforded innocent third parties when a motor vehicle liability insurance policy has been rescinded. The Court rejected that argument and found that the compulsory automobile insurance model has no relevance in the context of fraudulently obtained medical malpractice liability insurance given the well-developed body of law in New Jersey holding that a malpractice policy can be void from its inception due to material misrepresentation.

In DeMarco, the insured doctor made a material misrepresentation on his insurance application when he falsely answered that at least 51% of his practice was generated in Rhode Island. RIJUA filed a declaratory judgment action in Rhode Island and obtained a ruling that the policy could be rescinded based on the misrepresentation. Plaintiff added RIJUA as a party to the medical malpractice action in New Jersey against the doctor and sought a declaratory judgment that RIJUA was obligated to provide coverage up to $1,000,000. The lower court refused to enforce the Rhode Island judgment because it was entered without jurisdiction over the Plaintiff and found that RIJUA owed indemnification up to $1,000,000 to Plaintiff. The Appellate Division affirmed the trial court’s ruling and this appeal ensued.

The Appellate Court’s main arguments in favor of coverage focused on the fact that Plaintiff was an innocent third party and, as such, should be afforded the same protection that other innocent third parties are afforded under New Jersey’s no-fault automobile liability system, which allows third parties to obtain coverage for the statutory minimum even if the policy is subject to rescission based on material misrepresentation. In its opinion, the Supreme Court found that the lower court’s reliance on the automobile insurance system was misplaced. In so finding, the court held that the reformation of a malpractice policy to conform to statutorily created coverage minimums suggests that fraudulent conduct is condoned, which is contrary to New Jersey law. The Court also held that the legislature has not acted to create similar systems for liability insurance policies other than automobile and thus have not created any expectation that coverage will be available in malpractice actions where the policy is rescinded.