Insurers Liable Only For "Basic" Coverage Amount To Innocent Injured Third Parties In Light Of New Jersey Supreme Court Decision

By: Ryan D. Lang, Esq.

The New Jersey Supreme Court recently unanimously held in Citizens United Reciprocal Exchange v. Perez, 223 N.J. 143, 157 (2015), that when an innocent third party is injured by a driver operating under an automobile insurance policy, which is later voided due to fraud, automobile insurers are liable only for the "basic policy" contracted coverage amount, and not the minimum "standard policy" motor vehicle coverage amount required under New Jersey's standard no fault insurance provisions.

In Citizens United, (not related to the election law decision), the insured elected to add the optional $10,000 "basic policy" coverage for third-party bodily injury. When obtaining the insurance policy, however, the insured failed to include a household resident who was of driving age, the father of her two children, who had a poor driving record. A month after the automobile policy was purchased; the father of the insured's children drove the insured's vehicle and was involved in an accident with an innocent third party. The third party then filed a personal-injury claim against the insured's policy.

The insurer informed the insured that her policy was void from inception due to the misrepresentations made by the insured when she obtained the automobile policy. The insurer sought a declaratory judgment finding that it was not required to cover claims pertaining to the subject accident, including those brought by the innocent third party, due to the voided automobile policy. The New Jersey Supreme Court determined that while the automobile insurance policy could be voided and rescinded due to the plaintiff's fraud, the innocent third party was still entitled to coverage under the insured's policy. The Supreme Court then had to decide the amount that the innocent third party was entitled to from the insurer in accordance with the insured's voided policy, if any.

The Appellate Division in Citizens United Reciprocal Exch. v. Perez, 432 N.J. Super. 526, 528 (App. Div. 2013), held that the insurer was liable to the innocent third party for $15,000, in accordance with the minimum "standard policy" coverage mandated by New Jersey's no fault insurance provisions. The Supreme Court, however, in reversing the Appellate Division's decision, held, contrary to prior case law and New Jersey's standard no fault insurance provisions, that innocent third parties are entitled only to the bargained for $10,000 optional third-party "basic policy." The Supreme Court found that "it would be both unjust and contrary to public policy to invalidate and disregard this minimal amount of liability coverage bargained for by the insured." Additionally, the Supreme Court held that when an insured elects not to add the optional $10,000 "basic policy" coverage for third-party bodily injury, the insurer cannot be held liable to an innocent injured third-party under that contract.

The Supreme Court's decision in Citizens United will serve to clarify for automobile insurers across New Jersey the actual amount owed to innocent third parties for bodily injury payments under voided optional "basic policies."