Rescission of an insurance policy, by definition, means the policy never existed and the parties are returned to the status quo. The insured gets the premium back and the insurer gets the policy back with no obligation under the policy.
In Citizens United Reciprocal Exchange v. Perez, 432 N.J.Super. 526, 75 A.3d 1233, N.J.Super.A.D., September 13, 2013 a New Jersey Appellate court proved the truth of the prediction made by George Orwell in his classic “Animal Farm” that all litigants in the United States are equal but some are more equal than others. Insurers, even when victims of fraud, must pay more than they would have been required to pay had they not voided the policy and the fraud perpetrators profit from their fraud by having their obligation to an injured person paid by the defrauded insurer.
Plaintiff Citizens United Reciprocal Exchange (CURE) filed a civil complaint seeking a declaration that an automobile insurance policy it issued based on a fraudulent application was void from its inception and that it had no financial obligation under the policy. The trial judge affirmed the voiding of the policy but found that, for purposes of innocent third parties, the voided policy should be reformed to the mandatory minimum liability insurance coverage under New Jersey statutes of $15,000 per person and $30,000 per occurrence.
The parties stipulated to the underlying facts giving rise to the controversy here. Defendant Luis Machuca, while driving with defendant Jonathan Quevedo in a car owned by defendant Sabrina A. Perez, was involved in an auto accident with a car driven by defendant Dexter Green. Green claimed he was injured as a result of the accident and made a personal injury claim against Perez’s policy.
Perez insured her automobile under a basic policy with the optional $10,000 liability coverage. When she applied for insurance, she did not list Machuca, the father of her two children, as a resident of her household. In a recorded statement five days after the accident, Perez acknowledged that Machuca lived with her. After a fraud investigation by the Bureau of Fraud Deterrence, Perez entered into a consent order admitting that she “knowingly presented false and misleading information to  CURE by failing to disclose her boyfriend, Luis Machuca, on her application . . . .”
Due to Machuca’s extremely poor driving record, CURE would not have issued Perez a policy if she had disclosed that Machuca was a household member. CURE also denied Green’s personal injury claim, and by letter dated May 27, 2010, informed Perez that the insurance policy was being retroactively voided ab initio (from inception) due to the fraudulent information supplied in the application.
CURE filed a declaratory action seeking an order that the policy was void ab initio due to a material misrepresentation, that Perez and Machuca were liable to CURE for compensatory damages due to the fraudulent application, and that the reformed voided policy provided no liability coverage to innocent third parties.
The trial judge granted CURE’s first two requests for relief. In reference to the issue of the mandatory minimum liability amount, the judge, relying on New Jersey Manufacturers Insurance Co. v. Varjabedian, 391 N.J.Super. 253 (App. Div.), certif. denied, 192 N.J. 295 (2007), held: “I conclude that the only mandated or compulsory liability coverage limits in our statutes are the $15,000 per injury and $30,000 per accident. I conclude as well that the alternative coverage provided by the basic policy … mandates no minimum amount of liability coverage. It simply provides for optional liability coverage. Accordingly, this Court finds that the amount of CURE’s policy limits available to Dexter Green with regard to his personal injury claim is a compulsory minimum liability coverage limits in our statutes of $15,000 per injury, $30,000 per accident as prescribed…” under New Jersey statutes.
On appeal, CURE argues that in determining that the liability coverage for an innocent third party under a voided policy was $15,000/$30,000, the court’s reasoning in Varjabedian, supra, 391 N.J.Super. at 258-60, was flawed. Instead, CURE urged the appellate court to adopt the reasoning in Mannion v. Bell, 380 N.J.Super. 259 (Law Div. 2005), which Varjabedian specifically overruled. CURE maintains that, as the court held in Mannion, because the basic policy had no mandatory minimum liability coverage, an innocent third party is not entitled to any liability coverage under any automobile insurance policy.
Both CURE and amicus curiae The Insurance Council of New Jersey argue that compelling any amount of liability coverage to innocent third parties rewards insurance fraud violators and frustrates the 1998 legislative reform of automobile insurance that led to the creation of the basic policy. Amicus further argues that the fallacious reasoning in Varjabedian can be seen here where under the basic policy the insured only opted for $10,000 liability coverage, but, by committing fraud, the insurer must pay claims up to $15,000.
New Jersey’s no-fault system of first-party recovery for injuries sustained in automobile accidents encourages the prompt distribution of personal injury protection (PIP) benefits to accident victims. The no-fault legislation is designed to provide a minimum amount of protection to the public for injuries caused by automobiles. The protection of innocent third parties is a primary concern of New Jersey’s personal injury no-fault system.
The appellate court noted that when the named insured makes affirmative misrepresentations or material omissions in an application for insurance coverage, the insurer has the right to void an automobile insurance policy ab initio. The appellate court concluded, however incongruously, even when a policy is rescinded, PIP benefits may nevertheless remain payable to innocent third parties. The court of appeal concluded that to hold otherwise would undermine the legislative purpose of the No-Fault Law.
Where an insurance policy is void as to the maker of the fraud, the potential recovery under a retroactively revoked policy is the minimum compulsory insurance required by law. New Jersey’s insurance scheme of mandating automobile insurance expresses a legislative policy of assuring at least some financial protection for innocent accident victims. The New Jersey Supreme Court has consistently followed the principle of reforming an auto insurance contract to protect innocent third parties up to the minimum compulsory limits.
We recognize that the automobile insurance law continues to provide for mandatory minimum liability coverage and also provide for optional liability coverage. To the extent that this creates an anomalous situation, it may be appropriate for the Legislature to address.
New Jersey is not alone in making the victim of insurance fraud – the insurance company – who would never have issued an insurance policy had it been told the truth, must be punished by the courts and made to pay the innocent victim of the fraud perpetrators more than it agreed to pay had it not been defrauded. This reasoning is the height of sophistry.
The appellate court concluded that protection of innocent third parties is a primary concern of New Jersey’s personal injury no-fault system. In this case there were two innocent third parties:
Mr. Green, injured in the automobile accident, and CURE, forced to pay Mr. Green on a void policy obtained by fraud reformed to add $5,000 in coverage more than they agreed to pay. This case reaches the ridiculous result that asserting its right to void the policy for fraud cost more than accepting liability and ignoring the fraud. The only person who profits from the fraud are the fraud perpetrators.
Florida’s Anti-Assignment of Benefits Statute
Is the Cure Worse than the Disease
Because of abuse by contractors, public insurance adjusters, and lawyers in the state of Florida by taking assignments of claims from an insured whose claims were not paid as demanded, the state has created a new statute that is designed to eliminate the abuse. Whether it will work depends on how individuals and courts will deal with the new statute since every person has the right, under the common law, to assign the benefits of an insurance contract to anyone the person owed the benefits desires.
Some of the Proposals by the new Statute that the Governor Has Agreed to Sign
The statute attempts to control the issue by requiring that every assignment agreement:
1. Be in writing and executed by and between the assignor and the assignee.
2. Contain a provision that allows the assignor to rescind the assignment agreement without a penalty or fee by submitting a written notice of rescission signed by the assignor to the assignee within 14 days after the execution of the agreement, at least 30 days after the date work on the proeprty is scheduled to commence if the assignee has not substantially performed…
3. Contain a provision requiring the assignee to provide a copy of the executed assignment agreemen to the insurer within 3 business days after the date on which the assignment agreement is executed …
* * *
4. Contain a written, itemized, per-unit cost estimate of the services to be performed by the assignee.
5. Relate only to work to be performed by the assignee…
6. Contain the following notice in 18-point uppercase and boldfaced type:
YOU ARE AGREEING TO GIVE UP CERTAIN RIGHTS YOU HAVE UNDER YOUR 111 INSURANCE POLICY TO A THIRD PARTY, WHICH MAY RESULT IN LITIGATION AGAINST YOUR INSURER. PLEASE READ AND UNDERSTAND THIS DOCUMENT BEFORE SIGNING IT. YOU HAVE THE RIGHT TO CANCEL THIS AGREEMENT WITHOUT PENALTY WITHIN 14 DAYS AFTER THE DATE THIS AGREEMENT IS EXECUTED, AT LEAST 30 DAYS AFTER THE DATE WORK ON THE PROPERTY IS SCHEDULED TO COMMENCE IF THE ASSIGNEE HAS NOT SUBSTANTIALLY PERFORMED, OR AT LEAST 30 DAYS AFTER THE EXECUTION OF THE AGREEMENT IF THE AGREEMENT DOES NOT CONTAIN A COMMENCEMENT DATE AND THE ASSIGNEE HAS NOT BEGUN SUBSTANTIAL WORK ON THE PROPERTY. HOWEVER, YOU ARE OBLIGATED FOR PAYMENT OF ANY CONTRACTED WORK PERFORMED BEFORE THE AGREEMENT IS RESCINDED. THIS AGREEMENT DOES NOT CHANGE YOUR OBLIGATION TO PERFORM THE DUTIES REQUIRED UNDER YOUR PROPERTY INSURANCE POLICY.
7. Contain a provision requiring the assignee to indemnify and hold harmless the assignor from all liabilities, damages, losses, and costs, including, but not limited to, attorney fees, should the policy subject to the assignment agreement probit, in whole or in part, the assignment of benefits.
The statute also contains prohibitions against an agreement that contains a penalty or fee for rescission, a check or mortgage processing fee, a penalty or fee for cancellation or an administrative fee.
As a precondition to filing suit, the assignee must provide the named insured, insurer, and the assignor, if not the named insured, a detailed written invoice or estimate of services, including itemized information on equipment, materials, and supplies; the number of labor hours; and, in the case of work performed, proof that the work has been performed in accordance with accepted industry standards. An insurer must respond in writing to the notice within 10 business days after receiving the notice specified in paragraph (a) by making a presuit settlement offer or requiring the assignee to participate in appraisal or other method of alternative dispute resolution under the policy. An insurer must have a procedure for the prompt investigation, review, and evaluation of the dispute stated in the notice and must investigate each claim contained in the notice in accordance with the Florida Insurance Code.
The statute also allows an insurer to restrict the assignment of benefits pursuant to section 627.7153. To do so it must charge less for the policy than one that allows assignment of benefits and include on its face the following warning:
THIS POLICY DOES NOT ALLOW THE UNRESTRICTED ASSIGNMENT OF POST-LOSS INSURANCE BENEFITS. BY SELECTING THIS POLICY, YOU WAIVE YOUR RIGHT TO FREELY ASSIGN OR TRANSFER THE POST-LOSS PROPERTY INSURANCE BENEFITS AVAILABLE UNDER THIS POLICY TO A THIRD PARTY OR TO OTHERWISE FREELY ENTER INTO AN ASSIGNMENT AGREEMENT AS THE TERM IS DEFINED IN SECTION 627.7152 OF THE FLORIDA STATUTES.
I’m not sure this is a cure. It includes a great deal of busy work for both the insured, the assignee and the insurer. It does not penalize fraudulent assignments nor fraudulent conduct since they are already part of Florida’s law. I would prefer serious investigations by the insurer’s SIU and the state’s fraud investigators who can then prosecute those who abuse the right to obtain an assignment of benefits. Further, section 627.7152 and 627.7153 require the insurer to give a discount to the insured who waives its right to assign benefits.
The Zalma on Insurance blog has posted over 2550 digests of insurance appellate decisions and other important insurance materials and articles published five days or more a week and are available at http://zalma.com/blog
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