Fraud Victim Punished

Fraud Victim Punished

Policy Rewritten to Make Defrauded Insurer Pay

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, A-3100-11T1 (N.J.Super.App.Div. 09/13/2013) 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.

FACTS

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