In the Appellate Division case of Citizens United Reciprocal Exchange v. Perez, decided on September 13, 2013, 2013 N.J. Super. LEXIS 142 (App. Div. 2013), the Court considered whether an innocent victim of an automobile accident was entitled to the statutory mandatory minimum liability coverage of up to $15,000/$30,000. CURE claimed that it had no financial obligation under the policy based upon a fraudulent application which made it void from its inception. Regardless of the insured’s purchase of only the $10,000 liability option in the basic policy, the appeals court found that the CURE policy would be reformed to the mandatory minimum policy of $15,000/$30,000.
In this case, the defendant Luis Machuca was driving a vehicle owned by Sabrina Perez and was involved in an automobile accident with Dexter Green. Green claimed he was injured as a result of the accident and made a personal injury claim against Perez’s policy.
Perez had insured her auto 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. After the accident, she acknowledged that he lived with her.
Due to his extremely poor driving record, CURE would not have issued the policy to her if it had known he was a member of her household. Hence, CURE denied Green’s personal injury claim and informed Perez that the policy was being voided ab initio due to the fraudulent information supplied in the application. Thereafter, CURE commenced this declaratory judgment action.
The carrier argued that, since the automobile reforms in 1998, when the newly created basic policy provided only optional liability coverage, there has been no minimum liability coverage in New Jersey and no necessity for the issuer of a voided policy to pay liability claims. CURE sought to overturn the prior decision of New Jersey Manufacturers Insurance Co. v. Varjabedian, 391 N.J. Super. 253 (App. Div. 2007).
The carrier asked the Court to follow the reasoning of the Law Division case, Mannion v. Bell, 380 N.J. Super. 259 (Law Div. 2005), which Varjabedian overruled. Mannion held that because the basic policy had no mandatory minimum liability coverage, an innocent third party is not entitled to any liability coverage under any auto insurance policy.
CURE argued that compelling any amount of liability coverage to innocent third parties rewards insurance fraud and frustrates the 1998 legislative reform that led to the creation of the basic policy. Further, it claimed that, here, it would be unreasonable to follow Varjabedian because the insured only opted for a $10,000 liability coverage but, by committing fraud, the insurer must pay claims up to $15,000.
The trial court granted CURE’s request to void the policy and find that Perez was responsible to CURE for compensatory damages. However, relying upon Varjabedian, the court denied CURE’s request that it owed no liability coverage.
The Appellate Division again rejected the argument that once AICRA offered the basic policy with only a non-compulsory liability option, no driver had a reasonable expectation that all other drivers had at least the statutory minimum liability coverage. This argument ignored the legislative policy of assuring at least some financial protection for innocent accident victims.
The Appellate Division reaffirmed the principles of law established in Varjabedian. The only compulsory minimum liability coverage in New Jersey statutes was $15,000/$30,000. While the legislature offered an “alternative” basic policy, it had still provided for a comprehensive standard policy with mandated provisions, including mandatory liability coverage limits. Thus, the appeals court upheld the trial court’s decision and found that, despite the insured’s election of the basic policy alternative, the CURE policy was reformed to provide coverage of $15,000/$30,000 for this accident.
However, the Court recognized that the automobile insurance law continues to provide for a mandatory minimum liability coverage but also provides for optional liability coverage. To the extent that this dichotomy creates an anomalous situation, the Court invited the Legislature to address it.