New Jersey Insurance Blog

A third-party liability policy provides coverage for an insured’s liability to third parties for personal injury or property damage caused by the insured’s actions.  Most liability policies are occurrence based.  In order for a loss to be covered under an occurrence-based policy, the acts giving rise to liability must “occur” during the policy period.  It does not matter when a claim is actually asserted as long as the acts causing the damage took place during the policy period.

In cases involving environmental contamination, which can take decades to manifest, claims may be asserted under policies that were issued, and expired, many decades ago.  Given the passage of time between the acts giving rise to potential liability and the assertion of a claim, the insured that purchased the policies may no longer exist at the time a claim is asserted.  Thus, a question may arise as to who has a right to assert a claim under the policies.  Another issue that occurs with some frequency is whether an insured can assign any claims it may have under its policies to another entity that assumes some or all of its liabilities.  Both of these issues were recently before the New Jersey Appellate Division in Givaudan Fragrances Corp. v. Aetna Cas. & Sur. Co., 2014 WL 10212769 (App. Div. Aug. 12, 2015).  However, the court only dealt with the latter issue (i.e., the assignment of claims under decades-old insurance policies), finding that that issue was dispositive.

The case involved claims for costs incurred to remediate environmental contamination of soil and groundwater.  The policies in question were issued between 1964 and 1986 and had been assigned to the plaintiff in 2010, long after they had expired, by the plaintiff’s predecessor corporations. The plaintiff acquired the rights under the policies through “a series of very complex corporate mergers, transfers, and re-formations . . . .”  Id. at *1.

The insurers who issued the policies refused to recognize the assignment of the policies to the plaintiff.  The policies explicitly prohibited assignment without the consent of the insurers and such consent was never obtained.  The plaintiff moved for summary judgment and the insurers cross-moved for summary judgment.  The trial judge ruled in favor of the insurers, finding, among other things, that the assignment was not valid.

On appeal, the Appellate Division reversed.  As noted by the court, since at least the 1950s, New Jersey courts have held that an insured may assign a claim or potential claim under an occurrence-based policy after a loss occurs.  The reasoning behind this rule is that liability under an occurrence-based policy attaches once the occurrence takes place even though no claim has been asserted.  Thus, the insurer becomes obligated to the insured on the date of the loss and that obligation may freely be assigned.

The court concluded that any claims under the policies could be assigned despite the existence of a non-assignment clause in the policies that requires the insurers’ consent to any assignment.  As explained by the court:

The purpose behind a no-assignment clause is to protect the insurer from having to provide coverage for a risk different from what the insurer had intended.  A no-assignment clause guards an insurer against any unforeseen exposure that may result from the unauthorized assignment of a policy before a loss.  Insurers provide policies of insurance to those individuals and entities that insurers have determined are acceptable risks.  If an insured assigns the policy to a third party without the insurer’s consent, the insured may cause the insurer to bear a risk the insurer never agreed to accept and never would have accepted.

But if there has been an assignment of the right to collect or to enforce the right to proceed under a policy after a loss has occurred, the insurer’s risk is the same because the liability of the insurer becomes fixed at the time of the loss.  Thereafter, the insurer’s risk is not increased merely because there has been a change in the identity of the party to whom a claim is to be paid.

Moreover, once the insurer’s liability has become fixed due to a loss, an assignment of rights to collect under an insurance policy is not a transfer of the actual policy but a transfer of the right to a claim of money.  It is a transfer of a chose in action as opposed to a transfer of an actual policy.

Id. at *4-5 (citations omitted).  The court went on to note:

[T]he fact that some claims may not have been asserted by those allegedly harmed by the [insured’s] actions during a policy period of one of the subject policies does not affect the validity of the assignment.  Defendants’ obligation to provide coverage to the party deemed to be an insured under the policies arose at the time of the loss.  Although the precise amount of defendants’ liability may not be known, defendants’ obligation to insure the risk in accordance with their respective policies was not altered by the assignment.

Id. at *6.

The only limitations on a post-loss assignment are that the assignment must be specific enough to apprise the parties of what is being assigned and that it must not be overbroad.  In Givaudan, the court specifically found that:

The assignment is neither so broad nor so non-specific as to render the rights conveyed unidentifiable. The schedule accompanying the assignment identifies the policies that are the subject of the assignment by policy number, insurer, and the dates of the policy period for each policy.  It is clear what was assigned . . . .

Id.

Because this case involved a post-loss assignment of liability insurance policies, the court’s holding is not surprising.  As noted, such assignments have been upheld since the 1950s.  What is somewhat surprising is that the trial court concluded that the assignment was not valid, essentially ignoring the case law on the issue.

© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.

Under New Jersey law, an insurer may rescind an insurance policy if the insured makes a material misrepresentation in connection with obtaining the policy.  An insured’s misrepresentation is material if when made a reasonable insurer would have considered the misrepresented fact relevant to its concerns and important in determining its course of action.  When a policy is rescinded, it is considered void ab initio.  In other words, it is treated as if it never existed.

Courts have held that the omission of an insured’s name from an insurance application constitutes a material misrepresentation.  For instance, an application for automobile insurance often requires a prospective insured to list all licensed and unlicensed drivers residing with the insured.  Failure to identify an individual residing with the insured may entitle the insurer to rescind the policy.

When the rescission involves a liability policy, an issue that frequently arises is what happens if an innocent third-party is injured by the insured prior to rescission of the policy.  At the time the incident occurs the policy is in effect.  Once it is rescinded, however, it is as if it never existed.

With respect to auto liability policies, the rule has long been that an insurer is still liable to innocent third parties even if the policy at issue is subject to rescission based on the insured’s misrepresentations.  That rule was once again revisited by the New Jersey Supreme Court in Citizens United Reciprocal Exchange v. Perez, which was decided on August 13, 2015.

The insured in that case, Sabrina A. Perez, applied for a “basic” automobile liability policy from Citizens United Reciprocal Exchange (“CURE”).  Prior to 1998, all New Jersey drivers were required to obtain auto insurance providing mandatory bodily injury liability coverage of at least $15,000 per person and $30,000 per accident.  Such a policy was known as a “standard” auto policy.  In 1998, however, the law was changed to allow drivers to obtain a “basic” policy of auto insurance.  The “basic” policy does not mandate bodily injury liability coverage, although applicants have the option of purchasing $10,000 in such coverage.  Ms. Perez purchased a “basic” policy with the optional $10,000 in bodily injury liability coverage.

Although the application for insurance asked Ms. Perez to list all household residents who were old enough to drive, she failed to disclose that she lived with her boyfriend and father of her two children, Luis Machuca.  Had she disclosed that he lived with her, CURE would not have issued the policy given his poor driving record.

While driving Ms. Perez’s car, Mr. Machuca was involved in an accident with Dexter Green.  Both Messrs. Green and Machuca sued Ms. Perez for the injuries they sustained in the accident.  CURE denied coverage for the claims and advised Ms. Perez that it was rescinding the policy.  CURE subsequently filed a declaratory judgment action, seeking a determination that it had no obligation to provide coverage under the policy.

Ms. Perez and Mr. Machuca failed to enter an appearance in the action and a default judgment was entered against them.  The trial court awarded CURE attorney’s fees and costs, finding that Ms. Perez violated the New Jersey Insurance Fraud Prevention Action by failing to identify Mr. Machuca as a resident of her household.  The court also concluded that Mr. Machuca was responsible for the misrepresentation and, therefore, held that he was not entitled to coverage.

Mr. Green’s auto insurance company, Progressive Garden State Insurance Company (“Progressive”), agreed to defend him and entered an appearance on his behalf.  The parties agreed to try the case on stipulated facts.  The trial court held that CURE was entitled to rescind the policy, but that it was nonetheless liable to Mr. Green.  Despite the fact that the policy limited liability to third parties to $10,000, the court held that CURE was liable to provide $15,000 in coverage.

The court determined that $15,000 was the minimum coverage mandated by law, despite the fact that Ms. Perez had purchased a “basic” and not a “standard” policy.  Surprisingly, the Appellate Division affirmed.  One judge dissented, however, correctly noting that the policy at issue was a “basic” policy that limited liability coverage to $10,000.

On further appeal, the New Jersey Supreme Court reversed.  The court framed the issue before it as “whether the issuer of a basic automobile insurance policy, voided due to a fraudulent application, must pay the liability claim of innocent third parties.”  The court held that although CURE was entitled to rescission, it was still obligated to provide coverage to Mr. Green.

However, the court held that the Appellate Division incorrectly ruled that CURE was liable in the amount of $15,000.  The court noted that “[a]n insured’s fraud should not enhance recovery by a third party.”  Rather, the court held that the insurer’s liability should be determined as it would have been had the policy not been rescinded.  Thus, liability should have been limited to $10,000.

Allowing an innocent third party to recover under an insurance policy that has been rescinded is based on the fiction that the third party relied on the fact that the other driver had insurance.  As noted, prior to 1998 every driver was required to maintain insurance providing bodily injury liability coverage of at least $15,000 per person and $30,000 per accident.  Thus, there was some basis for that “fiction.”  Things changed, however, in 1998.  Drivers are no longer required to obtain bodily injury liability coverage.  Thus, it can no longer be argued that third parties “rely” on the fact that all drivers have such coverage.

Nonetheless, the New Jersey Supreme Court refused to modify the law to reflect that fact.  Rather, it simply held that the insurer’s liability was limited to the amount of coverage actually purchased by the insured.  Because such coverage is no longer mandated, an injured party will not be entitled to recover if an insured, unlike Ms. Perez, chooses not to purchase such coverage.

As a side note, this case essentially involved a dispute between two insurance companies, CURE and Progressive.  It is somewhat surprising that the parties appealed what was at most a $15,000 case all the way to the New Jersey Supreme Court.  Legal fees alone must have far exceeded that sum.  This is a case that should have been settled early on.

© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.