Innocent Spouse Can Be Denied Coverage, Says NJ

Can an insured's resident spouse be precluded from receiving no-fault coverage if the insured has commited fraud? On January 29, 2003, the New Jersey Supreme Court decided the case of Palisades Safety & Insurance Association v. Leonel Bastien and Paule Bastien, 814 A.2d 619 (2003) and decided for the first time 'whether an insured's resident spouse is precluded from receiving no-fault coverage when the insured lies to the insurer about his marital status and represents that there were no other persons of driving age residing in his household.' Id. at 620. The court affirmed a prior decision by the Appellate Division of the New Jersey Superior Court.

In this case, Leonel Bastien applied to obtain an automobile liability insurance policy from Palisades Safety & Insurance Association. In his application, Leonel falsely represented that he was single and that he was the sole driver of the two vehicles for which he sought coverage. Based upon the information provided in the policy application, Palisades issued a policy of automobile insurance with an annual premium of $2201.00. Over the following 8 months, Bastien submitted documents to Palisades in which he again represented that he was the sole licensed driver in his household, and that there were no other residents who were over the age of 16. In July of 1997, he added a third automobile to his policy and, in doing so, repeated his prior misrepresentations.

On October 3, 1997, Bastien's wife, Paule, was involved in an automobile accident while driving the Mazda that was added to the carrier's policy in July of 1997. Mrs. Bastien's mother, Mary LaRoche, was a passenger in the vehicle at the time of the accident. Both Paule Bastien and Mary LaRoche filed a claim for no-fault benefits under the Palisades policy.

During the course of its investigation, Palisades discovered that Leonel Bastien was in fact married to Paule, and that she resided with him at all relevant times. The carrier further discovered that Paule Bastien possessed a New York driver's license at all times relevant. The carrier determined that had Bastien disclosed that he was married to Paule Bastien, that she was a licensed driver and that they resided together when he applied for coverage, it still would have issued a policy, but at a higher premium.

Thereafter, Palisades filed a declaratory judgment action seeking a declaration that it could properly rescind its policy ab initio and further declaring that it was not obligated to provide Mrs. Bastien with no-fault benefits as an additional insured under its policy. Lastly, it sought a declaration reducing its obligation to provide LaRoche with PIP benefits to the statutory minimum.

At trial, Palisades filed a motion for summary judgment seeking a declaration of its rights and obligations. The trial court found that Leonel Bastien had misrepresented material facts to Palisades, thereby entitling the carrier to rescind its policy ab initio. The trial court further found that Palisades was not obligated to provide Mrs. Bastien with no-fault coverage. The court declared that Mrs. Bastien was not an innocent third party to whom no-fault benefits must be provided despite the fact that the insurance policy was declared void ab initio. The court characterized Mrs. Bastien as an additional first-party insured who was not entitled to recover under a void policy. The Appellate Division affirmed, and the New Jersey Supreme Court granted certification.

On appeal, the New Jersey Supreme Court noted that the no-fault statute, N.J.S.A. 39:6A-1, et seq., is remedial legislation that is protective of automobile accident victims and that the no-fault statute is given 'liberal construction to provide such victims with the broadest possible coverage.' Id. at 622 citing to Svenson v. National Consumer Insurance Company, 322 N.J. Super. 410, 416 (App. Div. 1999). The court stated, however, that no-fault coverage is unavailable when it is sought 'as part of an insured's first party claim for benefits under his or her own policy of insurance declared void because of material misrepresentations made to the insurer.' Ibid. citing to Remsden v. Dependable Insurance Company, 71 N.J. 587, 589 (1976). The Court defined a material misrepresentation as one that would 'naturally and reasonably influence the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premiums.' Ibid. citing to Mass Mutual v. Manzo, 122 N.J. 104, 115 (1991). In that case, the Court declared that the carrier could rescind a life insurance policy that it issued to its insured due to misrepresentations which the insured made in his policy application despite the fact that the carrier would have issued a policy to the insured albeit at a higher premium had the insured been truthful in his policy application.

The court stated that there was no question that Leonel Bastien had misrepresented material facts to Palisades in his initial policy application and in his subsequent submissions. The Court noted that as a result of Leonel Bastien's failure to disclose his marriage to Paule Bastien and her residency in his household, the carrier was unable to 'Assess generally the underwriting cost of a second driver in the household, as well as the risks associated with the type of driving in which Paule Bastien would engage (ie, commutation or pleasure) and usage (average miles per driver). Moreover, the Company was prevented from considering specifically Paule's driving record and any relevant claim history. Thus, by denying Palisades essential information relevant to its concerns and important to its course of action, Leonel made material misrepresentations in the procurement of his automobile policy.' [Id. at 623.]

The court accordingly declared that Palisades could properly rescind Leonel Bastien's policy ab initio. Next, the court dealt with the issue as to whether the carrier could properly deny no-fault coverage to Bastien's wife who, based upon the record presented, was unaware of her husband's underwriting fraud. Paule Bastien contended that she should be treated as a third-party claimant because she did not know that her husband lied to Palisades about her, causing their policy of automobile insurance to be voided citing to the cases such as Fisher v. New Jersey Automobile Full Insurance Underwriting Association, 224 N.J. Super. 552, 557-58 (App. Div. 1988) where the Court held that the carrier was required to provide no-fault coverage to an innocent third-party passenger notwithstanding the fact that the policy providing coverage to the vehicle was declared void ab initio due to the insured's underwriting fraud. Ibid. The court rejected Mrs. Bastien's arguments. The Court noted that she was in a unique position to be aware of her husband's dealing with the plaintiff insurance carrier. The court stated that 'Responsible adults should inform themselves in respect of important insurance-related matters pertinent to their household, and should be encouraged to do so. The strong public policy against the proliferation of insurance fraud favors treating a resident spouse in Paule's position in the same manner as her husband, that is, entitled to first-party coverage only, when available.' [Id. at 623-624.]

The court noted that its position draws support from the life insurance context, 'Where it is firmly imbedded in the jurisprudence of this State that a policy may be rescinded and benefits denied to the innocent intended beneficiary based on material misrepresentations, even when the misrepresentations are innocent' [Ibid. citing Ledley v. William Penn Life Insurance Company,138 N.J. 627, 635 (1995).]

The Court concluded that 'We hold that public policy requires an insured to pay innocent third parties injured in automobileaccidents minimum PIP benefits available under our compulsory insurance requirements doesnot apply to a resident spouse in Paule's position. Our holding accords with the salutary efforts being made in this State to deter insurance fraud in all context' [Id. at 624 citing to recent amendments to the New Jersey Automobile Insurance Fraud Act, N.J.S.A. 17:33A-1, et seq.]

Thomas L. Mulvihill  is with Pringle, Quinn, Anzano, P.C., in Morristown, NJ. Mulvihill serves as the Editor-in-Chief of this newsletter.

Can an insured's resident spouse be precluded from receiving no-fault coverage if the insured has commited fraud? On January 29, 2003, the New Jersey Supreme Court decided the case of Palisades Safety & Insurance Association v. Leonel Bastien and Paule Bastien , 814 A.2d 619 (2003) and decided for the first time 'whether an insured's resident spouse is precluded from receiving no-fault coverage when the insured lies to the insurer about his marital status and represents that there were no other persons of driving age residing in his household.' Id. at 620. The court affirmed a prior decision by the Appellate Division of the New Jersey Superior Court.

In this case, Leonel Bastien applied to obtain an automobile liability insurance policy from Palisades Safety & Insurance Association. In his application, Leonel falsely represented that he was single and that he was the sole driver of the two vehicles for which he sought coverage. Based upon the information provided in the policy application, Palisades issued a policy of automobile insurance with an annual premium of $2201.00. Over the following 8 months, Bastien submitted documents to Palisades in which he again represented that he was the sole licensed driver in his household, and that there were no other residents who were over the age of 16. In July of 1997, he added a third automobile to his policy and, in doing so, repeated his prior misrepresentations.

On October 3, 1997, Bastien's wife, Paule, was involved in an automobile accident while driving the Mazda that was added to the carrier's policy in July of 1997. Mrs. Bastien's mother, Mary LaRoche, was a passenger in the vehicle at the time of the accident. Both Paule Bastien and Mary LaRoche filed a claim for no-fault benefits under the Palisades policy.

During the course of its investigation, Palisades discovered that Leonel Bastien was in fact married to Paule, and that she resided with him at all relevant times. The carrier further discovered that Paule Bastien possessed a New York driver's license at all times relevant. The carrier determined that had Bastien disclosed that he was married to Paule Bastien, that she was a licensed driver and that they resided together when he applied for coverage, it still would have issued a policy, but at a higher premium.

Thereafter, Palisades filed a declaratory judgment action seeking a declaration that it could properly rescind its policy ab initio and further declaring that it was not obligated to provide Mrs. Bastien with no-fault benefits as an additional insured under its policy. Lastly, it sought a declaration reducing its obligation to provide LaRoche with PIP benefits to the statutory minimum.

At trial, Palisades filed a motion for summary judgment seeking a declaration of its rights and obligations. The trial court found that Leonel Bastien had misrepresented material facts to Palisades, thereby entitling the carrier to rescind its policy ab initio. The trial court further found that Palisades was not obligated to provide Mrs. Bastien with no-fault coverage. The court declared that Mrs. Bastien was not an innocent third party to whom no-fault benefits must be provided despite the fact that the insurance policy was declared void ab initio. The court characterized Mrs. Bastien as an additional first-party insured who was not entitled to recover under a void policy. The Appellate Division affirmed, and the New Jersey Supreme Court granted certification.

On appeal, the New Jersey Supreme Court noted that the no-fault statute, N.J.S.A. 39:6A-1, et seq., is remedial legislation that is protective of automobile accident victims and that the no-fault statute is given 'liberal construction to provide such victims with the broadest possible coverage.' Id. at 622 citing to Svenson v. National Consumer Insurance Company , 322 N.J. Super. 410, 416 (App. Div. 1999). The court stated, however, that no-fault coverage is unavailable when it is sought 'as part of an insured's first party claim for benefits under his or her own policy of insurance declared void because of material misrepresentations made to the insurer.' Ibid . citing to Remsden v. Dependable Insurance Company , 71 N.J. 587, 589 (1976). The Court defined a material misrepresentation as one that would 'naturally and reasonably influence the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premiums.' Ibid. citing to Mass Mutual v. Manzo , 122 N.J. 104, 115 (1991). In that case, the Court declared that the carrier could rescind a life insurance policy that it issued to its insured due to misrepresentations which the insured made in his policy application despite the fact that the carrier would have issued a policy to the insured albeit at a higher premium had the insured been truthful in his policy application.

The court stated that there was no question that Leonel Bastien had misrepresented material facts to Palisades in his initial policy application and in his subsequent submissions. The Court noted that as a result of Leonel Bastien's failure to disclose his marriage to Paule Bastien and her residency in his household, the carrier was unable to 'Assess generally the underwriting cost of a second driver in the household, as well as the risks associated with the type of driving in which Paule Bastien would engage (ie, commutation or pleasure) and usage (average miles per driver). Moreover, the Company was prevented from considering specifically Paule's driving record and any relevant claim history. Thus, by denying Palisades essential information relevant to its concerns and important to its course of action, Leonel made material misrepresentations in the procurement of his automobile policy.' [Id. at 623.]

The court accordingly declared that Palisades could properly rescind Leonel Bastien's policy ab initio. Next, the court dealt with the issue as to whether the carrier could properly deny no-fault coverage to Bastien's wife who, based upon the record presented, was unaware of her husband's underwriting fraud. Paule Bastien contended that she should be treated as a third-party claimant because she did not know that her husband lied to Palisades about her, causing their policy of automobile insurance to be voided citing to the cases such as Fisher v. New Jersey Automobile Full Insurance Underwriting Association , 224 N.J. Super. 552, 557-58 (App. Div. 1988) where the Court held that the carrier was required to provide no-fault coverage to an innocent third-party passenger notwithstanding the fact that the policy providing coverage to the vehicle was declared void ab initio due to the insured's underwriting fraud. Ibid. The court rejected Mrs. Bastien's arguments. The Court noted that she was in a unique position to be aware of her husband's dealing with the plaintiff insurance carrier. The court stated that 'Responsible adults should inform themselves in respect of important insurance-related matters pertinent to their household, and should be encouraged to do so. The strong public policy against the proliferation of insurance fraud favors treating a resident spouse in Paule's position in the same manner as her husband, that is, entitled to first-party coverage only, when available.' [Id. at 623-624.]

The court noted that its position draws support from the life insurance context, 'Where it is firmly imbedded in the jurisprudence of this State that a policy may be rescinded and benefits denied to the innocent intended beneficiary based on material misrepresentations, even when the misrepresentations are innocent' [Ibid. citing Ledley v. William Penn Life Insurance Company,138 N.J. 627, 635 (1995).]

The Court concluded that 'We hold that public policy requires an insured to pay innocent third parties injured in automobileaccidents minimum PIP benefits available under our compulsory insurance requirements doesnot apply to a resident spouse in Paule's position. Our holding accords with the salutary efforts being made in this State to deter insurance fraud in all context' [Id. at 624 citing to recent amendments to the New Jersey Automobile Insurance Fraud Act, N.J.S.A. 17:33A-1, et seq.]

Thomas L. Mulvihill  is with Pringle, Quinn, Anzano, P.C., in Morristown, NJ. Mulvihill serves as the Editor-in-Chief of this newsletter.