The Supreme Court of New Jersey has held that a rescinded medical malpractice liability policy should not be reformed to require the insurer to defend and indemnify up to the state mandatory minimum amount of coverage in order to protect innocent third-party claimants whose claims arose prior to rescission. DeMarco v. Stoddard, 2015 WL 7722997 (N.J. Dec. 1, 2015).
After a claim was made against the insured podiatrist, the Rhode Island Medical Malpractice Joint Underwriting Association (RIJUA) rescinded the podiatrist’s professional liability policy after he conceded that he had falsely claimed compliance with an application requirement that 51% of his practice was generated in Rhode Island. The claimants amended their complaint to name RIJUA. An intermediate appellate court held that the insurer could rescind the policy based on material misrepresentations but must protect an innocent third party, such as the patient whose claim arose prior to rescission, up the minimum amount of required coverage. The lower court based its decision in part on an analogy to the protection afforded by statute to innocent third parties when a motor vehicle policy has been rescinded.
The Supreme Court reversed, holding that a professional who has made a misrepresentation of material fact in an application for professional liability insurance can expect that the policy may be rescinded even with respect to claims that arose prior to the discovery of the misrepresentation. The court held that the lower court erred in reforming the rescinded malpractice policy at issue to provide coverage up to statutorily mandated minimum. The court reasoned that medical liability insurance policies are issued following an analysis of the risk, which is undermined by a misrepresentation of material fact. To permit such reformation “suggests that fraudulent conduct is condoned.”
According to the Supreme Court, the compulsory automobile insurance model has no relevance to a fraudulently obtained professional liability insurance policy. The court noted that the legislature had not duplicated the “web of interrelated provisions attending the no-fault automobile liability model” with respect to any other type of liability insurance. According to the court, the lower court’s reliance on that model ignored the “longstanding rule” that an insured professional cannot expect insurance coverage to respond to third-party claims when the policy has been rescinded due to material misrepresentations in the application.