New Jersey Supreme Court Takes Big Step In Protecting Insurers From Fraudulent Applications

By:  Ethan Buttner, Esq.


On December 1, 2015 the New Jersey Supreme Court issued its opinion in DeMarco v. Stoddard, reversing the Appellate Division and ruling that an insurer has no duty to provide coverage to a doctor who made a material misrepresentation on his application for insurance.  Defendant Dr. Sean Robert Stoddard practiced podiatry in New Jersey.  In 2007, Dr. Stoddard applied to RIJUA for medical malpractice liability insurance and subsequently submitted renewal applications to RIJUA from 2008 through 2011.  On each application, Dr. Stoddard represented that at least 51% of his practice was generated in Rhode Island.  That was untrue.
 
In October 2011, Plaintiff Thomas DeMarco filed a medical malpractice complaint in New Jersey alleging that Dr. Stoddard negligently performed a surgical procedure.  Dr. Stoddard subsequently forwarded the complaint to RIJUA, which responded with a reservation of rights letter, indicating that it only provides coverage for physicians who maintain 51% percent of their professional time and efforts in Rhode Island, and that it was investigating whether Dr. Stoddard met that requirement.  As a result of its investigation, RIJUA instituted a declaratory judgment action in Rhode Island, and in May 2012, RIJUA rescinded Dr. Stoddard’s policy, ab initio.  However, in the New Jersey action, the Superior Court and Appellate Division ordered RIJUA to provide Dr. Stoddard with a defense and indemnification up to $1 million. 
 
In declaring that RIJUA owed no duty to provide coverage to Dr. Stoddard for the alleged malpractice committed upon DeMarco, the New Jersey Supreme Court recognized New Jersey’s policy that a legal malpractice insurance policy may be declared void from its inception due to a material misrepresentation by the insured on its application for insurance.  The Court discerned no basis to treat physicians in a different manner.  The Court reasoned that a policy of medical malpractice liability insurance is issued following an analysis of the risk to be assumed.  However, the risk analysis is undermined when a prospective insured lies on the application.  As a result, the Court stated that it refused to condone fraudulent conduct. 
 
Furthermore, the Supreme Court differentiated New Jersey’s mandated medical malpractice liability insurance from New Jersey’s comprehensive no-fault automobile insurance system.  As it pertains to medical malpractice liability insurance, unlike automobile insurance, the Court reasoned that the Legislature has not created an expectation that insurance coverage will be available to redress an injury even in the face of a fraudulently obtained policy.  The Court held that the Appellate Division’s reference to and reliance on the compulsory automobile liability insurance model was therefore misplaced.  The Court stated that an insured professional cannot expect insurance coverage when the professional liability insurance was obtained due to material misrepresentations in the application for insurance.
 
DeMarco v. Stoddard marks a favorable outcome for professional liability insurers.  The Court’s holding reaffirms that New Jersey courts will not condone fraudulent activity and material misrepresentations.  Given this decision, it appears that physicians are now also presented with a choice; be forthcoming on an application for medical malpractice liability insurance, or face potential malpractice lawsuits and a possible disclaimer.