The New Jersey Superior Court, Appellate Division recently issued an opinion highlighting the challenges of establishing liability against a policyholder for violation of the Insurance Fraud Protection Act (“IFPA”). In Continental Cas. Co. v. Hochschild, the Court addressed alleged misrepresentations made by a recreational boat owner when applying for an insurance policy. These misrepresentations were discovered after the policyholder submitted a claim for fire damage to the boat. Accordingly, the insurer denied coverage and cancelled the policy.
The insurer subsequently brought a declaratory judgment action against the policyholder, seeking to declare the policy void based upon the alternative causes of action of breach of contract, equitable fraud, and the common-law doctrine of uberrimae fidei (utmost good faith). The insurer also sought damages and other remedies from the policyholder under the IFPA. The policyholder responded by bringing an action against the insurer contending that the denial of coverage was in bad faith. After the two lawsuits were consolidated, the trial court granted summary judgment in the insurer’s favor and dismissed with prejudice the policyholder’s claims. The trial court upheld the cancellation of the policy and awarded the insurer damages under the IFPA.
On appeal, the Superior Court, Appellate Division noted that both the doctrine of uberrimae fidei and the policy language could support rescission of a policy for material misrepresentations or omissions, even if made unintentionally. However, the Court declined to resolve the dispute under either of these grounds, but instead held that the policyholder’s omissions and misrepresentations constituted equitable fraud. Equitable fraud does not require evidence that a party made misstatements with the intent to deceive, but merely requires proof of (1) a material misrepresentation, (2) the defendant’s intent that the plaintiff rely on the misrepresentation, and (3) the plaintiff’s detrimental reliance.
The Court concluded that the policyholder’s omissions and misrepresentations regarding the value of the boat, prior damage to the boat, recent claims history, the identity of prior insurers, and the policyholder’s track record of maintaining coverage were all material to the underwriting process. The evidence also demonstrated that the policyholder intended the insurer to rely on his misrepresentations, and that the insurer indeed relied to its detriment. The Court therefore upheld the trial court’s summary judgment order upholding the cancellation of the policy and denial of coverage, as well as the trial court’s order dismissing the policyholder’s bad faith claim.
However, the Court found that the trial court was not justified in granting the insurer summary judgment on the IFPA claim. The Court emphasized that establishing a violation of the IFPA requires proof that a misrepresentation was made knowingly. According to the Court, the record did not conclusively establish that the policyholder knew that his statements on the policy application were false. Rather, the policyholder attempted to explain what he had thought and intended while completing the application, in an effort to demonstrate that he did not knowingly misrepresent facts. While noting that these attempted explanations were not necessarily credible or persuasive, they were nonetheless sufficient to preclude summary judgment on the IFPA claim. The Court therefore remanded the matter for trial on the IFPA claim, limited to whether the policyholder was aware of the falsity of the representations made on his policy application.
Hochschild demonstrates the high burden that insurers will often face in pursuing an IFPA claim against a policyholder. While establishing a material misrepresentation justifying rescission may be relatively straightforward, establishing a policyholder’s state of mind may prove far more difficult. As Hochschild reflects, policyholders may frequently offer explanations for their misrepresentations that, even if questionable, are sufficient to create disputed issues of fact. Therefore, IFPA claims may often present questions that can only be resolved at trial.
