Thomas Demarco v. Sean Robert Stoddard, D.P.m(073949)

SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the
interest of brevity, portions of any opinion may not have been summarized.)
Thomas DeMarco v. Sean Robert Stoddard, D.P.M. (A-104-13) (073949)
Argued April 27, 2015 -- Decided December 1, 2015
CUFF, P.J.A.D. (temporarily assigned), writing for a majority of the Court.
In this appeal, the Court considers whether the Rhode Island Medical Malpractice Joint Underwriting
Association (RIJUA) must defend and indemnify a podiatrist in a medical malpractice action pending in New Jersey
following rescission of the podiatrist’s malpractice liability policy.
Defendant Sean Robert Stoddard, D.P.M. practiced podiatry at a clinic with offices in Toms River and
Lakewood. In 2007, he applied to the RIJUA for medical malpractice liability insurance. Among other
representations, the application indicated that at least fifty-one percent of Dr. Stoddard’s practice was generated in
Rhode Island; that answer was false. Dr. Stoddard submitted renewal applications from 2008 through 2011, each of
which stated that at least fifty-one percent of Dr. Stoddard’s practice was generated in Rhode Island.
Dr. Stoddard performed three surgeries on plaintiff Thomas DeMarco, a New Jersey resident. The third
surgery occurred in September 2010. In October 2011, DeMarco and his wife filed a medical malpractice complaint
in New Jersey alleging that Dr. Stoddard negligently performed the September 2010 surgery. Dr. Stoddard
forwarded the complaint to the RIJUA, which responded with a reservation of rights letter stating that the RIJUA
only provides coverage for physicians who maintain fifty-one percent of their “professional time and efforts” in
Rhode Island, and that the RIJUA was “in the process of securing facts concerning whether [Dr. Stoddard] . . . met
the fifty-one percent (51%) requirement for the provision of insurance coverage from the [RI]JUA.”
In January 2012, the RIJUA filed declaratory judgment action in Rhode Island, naming both Dr. Stoddard
and the DeMarcos as defendants. The RIJUA sought a declaration that Dr. Stoddard misrepresented material
information in his insurance applications and a judgment permitting rescission of the policy. In March 2012, the
DeMarcos named the RIJUA as a defendant in their medical malpractice action, and sought a declaratory judgment
that the RIJUA was required to defend Dr. Stoddard and indemnify him up to $1 million. In May 2012, the Rhode
Island court entered a default judgment against Dr. Stoddard, declaring his 2010-2011 renewal policy void and
holding that the RIJUA had no duty to defend or indemnify him for the DeMarcos’ claims. Thereafter, the RIJUA
and the DeMarcos filed cross-motions for summary judgment in the New Jersey malpractice case. The court
determined that New Jersey law should apply, and held that the Rhode Island judgment could not be enforced in the
New Jersey action because it was entered without jurisdiction over the DeMarcos. The trial court went on to grant
the DeMarcos’ motion for summary judgment and deny the RIJUA’s motion.
The Appellate Division granted the RIJUA’s motion for leave to appeal, and affirmed the trial court order
in a published opinion. 434 N.J. Super. 352 (App. Div. 2014). The panel determined that New Jersey law should
apply and concluded that innocent third parties should be protected for a claim arising before rescission. Id. at 380.
Comparing medical malpractice liability insurance to the protection afforded to innocent third parties when a motor
vehicle liability insurance policy has been rescinded, the panel concluded that the RIJUA owed a duty to indemnify
Dr. Stoddard up to $1 million -- the amount of medical malpractice liability insurance that a physician licensed to
practice medicine and performing medical services in this State is required to maintain.
The Court granted RIJUA’s motion for leave to appeal. 218 N.J. 270 (2014).
HELD: The RIJUA owed neither a duty to defend nor a duty to indemnify its insured, who had misrepresented the
proportion of his practice generated in Rhode Island, which was a fact that formed the basis for his eligibility for
insurance through the RIJUA.
1
1. In New Jersey, malpractice insurance is mandatory for physicians and podiatrists. The mandated minimum
amount of coverage is $1 million per occurrence and $3 million per policy year. There is scant case law interpreting
the statutes and regulations requiring medical malpractice liability insurance. However, in Jarrell v. Kaul, ___ N.J.
___, ___ (2015) (slip op. at 2), the Court reviewed the medical malpractice liability insurance scheme in the context
of a complaint against a physician who did not have the statutorily mandated coverage. There, only one issue
implicated the consequences to a patient with a pending negligence claim when a policy is rescinded. The Court
opined that the statute requiring a physician to obtain and maintain medical malpractice liability insurance does not
give rise to a direct cause of action by an injured patient to enforce that requirement. (pp. 14-16)
2. In the context of compulsory legal malpractice insurance, there is a well-developed body of law holding that a
malpractice insurance policy may be declared void from its inception due to a misrepresentation of material fact in
an application for insurance. Upon rescission, the insurer owes no duty to defend or indemnify a firm or defalcating
attorney for any complaints pending or claims that accrued at the time of rescission. An attorney will not have
access to insurance coverage to respond to claims from injured third parties, clients, or title companies, if the policy
has been rescinded due to the attorney’s misrepresentations of material fact in the policy application. See Liberty
Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 446-49 (2007); First American Title Insurance Co. v.
Lawson, 177 N.J. 125, 192 (2003). The Court discerns no basis to treat other professionals required to maintain
professional liability insurance, including physicians and podiatrists, in a different manner. All professional liability
insurance serves the same purpose -- to defend when claims are filed against a professional and to serve as a source
of funds to compensate injured patients or clients. Reformation of a medical malpractice liability policy to conform
to statutorily mandated minimum amounts suggests that fraudulent conduct is condoned, and runs counter to Jarrell,
where the Court denied a direct action for compensation by a patient against an uninsured physician. (pp. 16-20)
3. In reaching this determination, the Court concludes that the compulsory automobile insurance model has no
relevance to the remedial response to a fraudulently obtained policy of professional liability insurance and the effect
of rescission on innocent third parties. In contrast to the web of interrelated provisions attending the no-fault
automobile liability model, the Legislature has not constructed a matrix of alternate remedies for other types of
liability insurance, including compulsory professional liability insurance. Nor has the Legislature created an
expectation that insurance coverage will be available to redress an injury even in the face of a fraudulently obtained
policy. Furthermore, the vast differences in the amount of liability insurance that a driver and a physician must
carry, and the fact that some physicians procure professional liability insurance through a joint underwriting
association, counsel against utilizing the compulsory automobile liability insurance model to devise a remedy for an
injured patient whose physician is uninsured by virtue of a rescission. The Court, thus, concludes that the Appellate
Division’s reliance on the compulsory automobile liability insurance model was misplaced. (pp. 20-24)
4. Finally, the Court addresses the panel’s determination that a conflict of laws arose from the difference in the
manner in which New Jersey and Rhode Island address compulsory medical malpractice insurance. The Court finds
that on the critical inquiry in this appeal -- whether a rescinded policy of medical malpractice liability insurance
provides any coverage to the insured for claims that arose prior to rescission -- both New Jersey and Rhode Island
courts would rescind a policy ab initio, in which case the insured is without insurance coverage to respond to a claim
by a third party. To the extent that each state requires a podiatrist to maintain medical malpractice liability
insurance, the Court discerns no difference in the laws that amounts to a conflict of laws. (pp. 24-27)
The judgment of the Appellate Division is REVERSED.
ALBIN, J., DISSENTING, joined by CHIEF JUSTICE RABNER, agrees with the majority’s conclusion
that New Jersey law applies to the DeMarsos’ lawsuit, but disagrees that under this State’s law, the medical-
malpractice carrier can retroactively cancel insurance to deny an innocent patient coverage for a physician’s
professional negligence. Justice Albin expresses the view that New Jersey’s compulsory medical malpractice
insurance law exists to ensure that patients can secure financial compensation in the event of a doctor’s professional
negligence. He would require the insurer to provide coverage up to $500,000 to DeMarco and his wife.
JUSTICES LaVECCHIA, PATTERSON, FERNANDEZ-VINA, and SOLOMON join in JUDGE
CUFF’s opinion. JUSTICE ALBIN filed a separate, dissenting opinion in which CHIEF JUSTICE RABNER
joins.
2
SUPREME COURT OF NEW JERSEY
A-104 September Term 2013
073949
THOMAS DEMARCO and CYNTHIA
DEMARCO,
Plaintiffs-Respondents,
v.
SEAN ROBERT STODDARD, D.P.M.,
Individually and t/a CENTER
FOR ADVANCED FOOT & ANKLE
CARE, INC.,
Defendant,
and
MEDICAL MALPRACTICE JOINT
UNDERWRITING ASSOCIATION OF
RHODE ISLAND,
Defendant-Appellant.
Argued April 27, 2015 – Decided December 1, 2015
On appeal from the Superior Court, Appellate
Division, whose opinion is reported at 434
N.J. Super. 352 (App. Div. 2014).
Todd J. Leon argued the cause for appellant
(Hill Wallack, attorneys; Mr. Leon and
Gerard H. Hanson, on the briefs).
Michael D. Schottland argued the cause for
respondents (Lomurro, Davison, Eastman &
Munoz, attorneys; Mr. Schottland, Christina
Vassiliou Harvey, and Michael J. Fasano, on
the briefs).
Hugh P. Francis argued the cause for amici
curiae (Francis & Berry, attorneys for
Property Casualty Insurers Association of
1
America and Insurance Council of New Jersey;
Brown Moskowitz & Kallen, attorneys for New
Jersey Civil Justice Institute; Fox
Rothschild, attorneys for New Jersey
Physicians United Reciprocal Exchange; Mr.
Francis, Joanna Huc, Shalom D. Stone,
Jeffrey M. Pollock and Abbey True Harris, on
the briefs).
E. Drew Britcher argued the cause for amicus
curiae New Jersey Association for Justice
(Britcher, Leone & Roth, attorneys; Mr.
Britcher and Jessica E. Choper, on the
brief).
JUDGE CUFF (temporarily assigned) delivered the opinion of
the Court.
In this appeal, we consider whether the Rhode Island
Medical Malpractice Joint Underwriting Association (RIJUA) must
defend and indemnify a podiatrist in a medical malpractice
action pending in New Jersey following rescission of the
podiatrist’s medical malpractice liability policy. The policy
had been rescinded due to material misrepresentations concerning
the state in which the insured podiatrist maintained his primary
practice. The trial court and the Appellate Division, applying
New Jersey law, held that in a medical malpractice action
pending in this State, the insurer had the duty to defend and
indemnify the insured podiatrist up to $1 million, the amount of
professional liability insurance physicians and podiatrists are
required to maintain in this State.
2
We granted leave to appeal, and now reverse. The critical
inquiry in this case is whether a rescinded policy of medical
malpractice liability insurance provides any coverage to the
insured for claims that arose prior to rescission. Although the
Appellate Division correctly determined that New Jersey law
applies, we conclude that the Appellate Division erred when it
referred to the compulsory automobile liability model as the
guidepost for fashioning a remedy for third-party claimants
whose claims arose prior to rescission. The appellate panel
further erred by reforming the rescinded policy to require the
insurer to defend and indemnify its insured up to the mandatory
minimum amount of coverage required in this State.
We conclude that resolution of the question of what, if
any, coverage is available to an insured to respond to third-
party claims following rescission of a policy is governed by the
rule announced in First American Title Insurance Co. v. Lawson,
177 N.J. 125 (2003), and its progeny. Applying that rule, the
RIJUA owed neither a duty to defend nor a duty to indemnify its
insured, who had misrepresented the proportion of his practice
generated in Rhode Island, which was a fact that formed the
basis for his eligibility for insurance through the RIJUA. We
therefore reverse the judgment of the Appellate Division.
I.
3
Plaintiff Thomas DeMarco, a New Jersey resident, sought
treatment for chronic plantar fasciitis from defendant Sean
Robert Stoddard, D.P.M. Dr. Stoddard practiced podiatry at the
Center for Advanced Foot & Ankle Care, Inc., which had offices
in Toms River and Lakewood. Dr. Stoddard diagnosed DeMarco with
a split peroneal tendon and performed three surgical procedures
on DeMarco between 2004 and January 2011. The third surgery,
which forms the basis of DeMarco’s complaint, occurred in
September 2010.
In 2007, Dr. Stoddard applied to the RIJUA for medical
malpractice liability insurance. He submitted his application
through Linda O’Neill, an agent located in Rhode Island. The
application listed Dr. Stoddard’s office at a Rhode Island
address, but the office phone number had a New Jersey area code.
The application also provided that Dr. Stoddard was “currently
applying” for affiliation with a Rhode Island hospital. The
“Licensure” section of the application asked whether at least
fifty-one percent of the applicant’s practice was generated in
Rhode Island. The application had “Yes” checked off, but that
answer was false. The application then stated, partly in bold
letters: “IF YOUR ANSWER IS NO, DO NOT CONTINUE. You are not
eligible for coverage under the Rhode Island MMJUA.” The agent
claims that Dr. Stoddard provided all of the information
required in his initial application.
4
Through the same Rhode Island agent, Dr. Stoddard submitted
renewal applications each year from 2008 through 2011. Each of
the renewal forms stated that at least fifty-one percent of Dr.
Stoddard’s practice was generated in Rhode Island. In addition,
the renewal application for the 2010-2011 coverage year -- when
Dr. Stoddard performed the surgery that forms the basis of
DeMarco’s malpractice claim -- listed an office address in
Lakewood.
In January 2011, Dr. Stoddard told DeMarco that he was
moving to California. DeMarco’s condition worsened, and he
sought treatment from an orthopedic surgeon. The surgeon
performed two additional surgeries on DeMarco.
In October 2011, DeMarco and his wife, Cynthia DeMarco (the
DeMarcos) filed a medical malpractice complaint in New Jersey
against Dr. Stoddard and the Center for Advanced Foot & Ankle
Care, Inc., alleging that Dr. Stoddard negligently performed the
September 2010 surgery. Dr. Stoddard forwarded the DeMarcos’
complaint to the RIJUA, which responded with a reservation of
rights letter. The letter indicated that the RIJUA only
provides coverage for physicians who maintain fifty-one percent
of their “professional time and efforts” in Rhode Island and
that the RIJUA was “in the process of securing facts concerning
whether [Dr. Stoddard] . . . met the fifty-one percent (51%)
5
requirement for the provision of insurance coverage from the
[RI]JUA.”
Less than a week later, Dr. Stoddard wrote a letter to the
attorney representing the DeMarcos, advising that he “has no
malpractice coverage in regards to [their] claim.” Dr. Stoddard
also stated that he tried to build his practice in Rhode Island
but failed and that an agent told him he could enroll with the
RIJUA even though the bulk of his practice was in New Jersey.
Additionally, Dr. Stoddard stated that he had no assets, his new
practice -- a professional corporation in California -- was
struggling, he was in the midst of a divorce, he had defaulted
on his student loans, and he had “a significant amount of debt.”
Dr. Stoddard conceded that he could not prove that he satisfied
the RIJUA’s fifty-one percent requirement, and stated that “it
would be a waste of time to pursue this claim against me based
on these facts.”
II.
In January 2012, the RIJUA filed a complaint for a
declaratory judgment in Rhode Island, naming both Dr. Stoddard
and the DeMarcos as defendants. The RIJUA sought a judgment
declaring that Dr. Stoddard misrepresented material information
in his four applications to the RIJUA. It also sought a
judgment permitting rescission of the policy. In February 2012,
the DeMarcos’ attorney sent a letter to the RIJUA’s general
6
counsel, indicating that he did not believe his clients were
subject to personal jurisdiction in Rhode Island.
In March 2012, the DeMarcos amended their medical
malpractice complaint. They added the RIJUA as a defendant and
sought a declaratory judgment that the RIJUA was required to
defend Dr. Stoddard and indemnify him up to $1 million in the
event that the DeMarcos were awarded damages for their claims
against Dr. Stoddard.
In May 2012, the Rhode Island court entered a default
judgment against Dr. Stoddard, declaring his renewal policy from
2010 to 2011 void and holding that the RIJUA had no duty to
defend or indemnify Dr. Stoddard for the DeMarcos’ claims.
Thereafter, the RIJUA and the DeMarcos filed cross-motions
for summary judgment in the New Jersey malpractice case. The
motions addressed whether the RIJUA was required to defend and
indemnify Dr. Stoddard and the effect of the default judgment in
Rhode Island against Dr. Stoddard. The trial court applied a
choice of law analysis and determined that New Jersey law should
apply. The court held that the Rhode Island judgment was not
entitled to full faith and credit and could not be enforced in
the New Jersey action because it was entered without
jurisdiction over the DeMarcos. Finally, the trial court denied
the RIJUA’s motion for summary judgment and granted the
DeMarcos’ motion, concluding that the DeMarcos were entitled to
7
summary judgment “because compulsory insurance cannot be voided
as to an innocent third party.” The court also awarded the
DeMarcos attorneys’ fees for successfully litigating the RIJUA’s
disclaimer of coverage.
The Appellate Division granted the RIJUA’s motion for leave
to appeal. In a published opinion, DeMarco v. Stoddard, 434
N.J. Super. 352 (App. Div. 2014), the Appellate Division
affirmed the trial court order.
The Appellate Division determined that “[t]he precise
question before us is whether a medical malpractice insurance
carrier may rescind a policy so that the carrier has no duty to
indemnify the insured doctor for injuries suffered by an
innocent third party who made a malpractice claim before the
policy was rescinded.” Id. at 367. The panel predicted that
this State would permit rescission of a compulsory medical
malpractice liability insurance policy due to misrepresentations
of material facts in the policy application but would protect an
innocent third party, such as a patient whose claim arose prior
to rescission, up to the minimum amount of required coverage.
Ibid. The panel also determined that Rhode Island might protect
innocent third parties. Ibid.
In addition, the panel concluded that “[a]nalogous case law
of both states suggests that both would restrict the rescission
remedy . . . in order to provide some protection to innocent
8
third parties for whose benefit compulsory insurance laws were
enacted.” Ibid. In reaching this conclusion, the panel
compared medical malpractice liability insurance to the
protection afforded to innocent third parties when a motor
vehicle liability insurance policy has been rescinded. Id. at
368-73. The Appellate Division determined, however, that Rhode
Island had “not directly compelled coverage in any specific
amount,” while New Jersey requires $1 million of coverage,
necessitating a choice-of-law analysis. Id. at 373-74. The
Appellate Division determined that New Jersey law should apply
and concluded that innocent third parties should be protected
for a claim arising before rescission. Id. at 380. Applying
that rule to plaintiffs, the panel concluded that the RIJUA owed
a duty to indemnify Dr. Stoddard up to $1 million, the amount of
medical malpractice liability insurance that a physician
licensed to practice medicine and performing medical services in
this State is required to maintain, even though the record
demonstrated that Dr. Stoddard provided materially false
information to the RIJUA in his applications for insurance
coverage. Ibid.
We granted the RIJUA’s motion for leave to appeal. 218
N.J. 270 (2014). We also granted motions to appear as amicus
curiae by five entities: New Jersey Civil Justice Institute
(NJCJI), New Jersey Physicians United Reciprocal Exchange
9
(NJPURE), Property Casualty Insurers Association of America
(Property Casualty Insurers), Insurance Council of New Jersey
(Insurance Council), and New Jersey Association for Justice
(NJAJ).
III.
A.
The RIJUA raises three points of error in the Appellate
Division’s decision. First, it argues that Rhode Island law
should apply to the coverage dispute. Although the RIJUA agrees
that Rhode Island and New Jersey law conflict, it disputes that
a conflict of law analysis results in the application of New
Jersey law. In particular, the RIJUA argues that the Appellate
Division erroneously viewed the coverage dispute as a first-
party claim by the DeMarcos against the RIJUA. Instead, the
RIJUA submits that the dispute consisted of a third-party claim
by the DeMarcos, which addressed whether the RIJUA must defend
and indemnify Dr. Stoddard in response to their claims.
Accordingly, the RIJUA maintains that the Appellate Division
focused on the DeMarcos’ interests when it should have focused
on the interests of the parties to the insurance contract -- the
RIJUA and Dr. Stoddard. The RIJUA thus argues that
consideration of those interests would have led to the proper
conclusion that Rhode Island law applies.
10
Second, the RIJUA argues that the reformation remedy
fashioned by the Appellate Division was inequitable under New
Jersey law. Citing the dissent in Citizens United Reciprocal
Exchange v. Perez (CURE), 432 N.J. Super. 526, 538 (App. Div.
2013), rev’d, 223 N.J. 143 (2015), the RIJUA asserts that while
courts must protect innocent third parties, they must also
provide some relief to the defrauded insurance provider. Under
the Appellate Division judgment, even though the policy is void
due to Dr. Stoddard’s misrepresentations, the RIJUA is made
liable for the same amount of coverage -- $1 million -- as it
would if the policy was valid. In other words, the RIJUA argues
that the Appellate Division’s decision is inequitable because it
failed to provide any relief whatsoever to the RIJUA. It also
states that such a result fails to provide any disincentive for
an applicant to lie to an insurance provider.
The RIJUA also contends that “mandatory [professional]
malpractice coverage can and will be voided, in full and ab
initio, as a result of fraud in the application by an insured.”
In particular, the RIJUA relies on Lawson, supra, 177 N.J. 125.
Last, the RIJUA argues that attorneys’ fees were improperly
awarded to the DeMarcos under Rule 4:42-9(a) because its
position was not a “groundless disclaimer” of coverage.
B.
11
The DeMarcos argue that this case does not present a
significant conflict of law issue because both New Jersey and
Rhode Island have laws requiring compulsory medical malpractice
insurance and both states protect innocent third parties seeking
to recover under a statutorily mandated insurance policy.
Nevertheless, the DeMarcos assert that the Appellate Division
resolved the conflict of law question correctly by ruling that
New Jersey law applied.
Additionally, the DeMarcos assert that the Appellate
Division decision was fair and equitable. Plaintiffs contend
that the RIJUA was in a better position to detect Dr. Stoddard’s
misrepresentations and reject his renewal applications.
Accordingly, they contend it would not be equitable to force the
DeMarcos to bear the loss.
The DeMarcos also assert that the Appellate Division’s
determination is consistent with New Jersey law. They contend
that it is universally recognized that an insurer cannot escape
liability to a third party even if the insured procured coverage
through fraud or misrepresentation. The DeMarcos distinguish
Lawson on the grounds that the insured party here is a private
citizen, as opposed to an insurance company. Moreover, the
misrepresentation in Lawson related to a presently existing
claim against the law firm, whereas the misrepresentation in
this case related to the likelihood of potential future claims
12
arising outside of Rhode Island. They assert that the RIJUA
knew that Dr. Stoddard could potentially face a claim outside of
Rhode Island, as the policy only required fifty-one percent of
the practice to be in Rhode Island. Therefore, the RIJUA
knowingly assumed the risk that it might become involved in
litigation in New Jersey. In contrast, the DeMarcos contend
that the misrepresentation in Lawson induced an agreement by
concealing a risk unknown to the insurer.
Finally, the DeMarcos assert that the trial court properly
awarded attorneys’ fees.
C.
Amici NJCJI, NJPURE, Property Casualty Insurers, and
Insurance Council urge reversal of the Appellate Division
judgment. Each argues that the appellate panel misperceived the
breadth of the rule protecting innocent third parties following
rescission of an insurance policy. Each notes that compulsory
automobile insurance policies occupy a unique place in the law
of this State, and each emphasizes that well-established
authority addressing compulsory professional liability insurance
coverage permits rescission of a fraudulently induced policy
with no protection to innocent third parties, such as clients or
patients.
Amicus NJPURE also asserts that the appellate panel opinion
“incentivizes applicants to commit fraud.” Amici Property
13
Casualty Insurers and Insurance Council urge that the rule
announced by the Appellate Division will hinder proper
underwriting and diminish the availability of professional
liability insurance coverage.
Amicus NJAJ urges affirmance of the Appellate Division
judgment. It contends that the opinion upholds the public
policy of this State to protect the rights of innocent third
parties when an insurer seeks to void ab initio a policy of
insurance.
IV.
A.
In New Jersey, the Legislature first instituted mandatory
malpractice insurance for physicians and podiatrists in 1998.
L. 1997, c. 365, § 1 (physicians); L. 1997, c. 365, § 2
(podiatrists). N.J.S.A. 45:5-5.3, which codified L. 1997, c.
365, § 2, mandates that podiatrists must obtain and maintain
malpractice liability insurance, or if coverage is unavailable,
a letter of credit for at least the minimum amount prescribed by
the Board of Medical Examiners (BME).1 The BME promulgated a
regulation setting the minimum amount of malpractice insurance
for physicians and podiatrists at $1 million per occurrence and
$3 million per policy year. N.J.A.C. 13:35-6.18.
1 The minimum amount required for the letter of credit is
$500,000. N.J.A.C. 13:35-6.18(b).
14
In 2004, the Legislature amended L. 1997, c. 365, § 1.
N.J.S.A. 45:9-19.17; L. 2004, c. 17, § 25. The 2004 amendment
codified the 1999 regulation and set the minimum amount of
malpractice insurance for physicians at $1 million per
occurrence and $3 million per policy year. L. 2004, c. 17, §
25. Notably, the 2004 statutory amendment addressed only
physicians. Nevertheless, the 1999 regulation applies to both
physicians and podiatrists, and sets the floor for both at $1
million per occurrence and $3 million per policy year. N.J.A.C.
13:35-6.18. In addition, N.J.S.A. 45:9-19.17 requires
physicians to maintain an insurance policy specifically “by a
carrier authorized to write medical malpractice liability
insurance policies in this State,” but N.J.S.A. 45:5-5.3 does
not include a similar requirement for podiatrists.
There is scant case law interpreting the statutes and
regulations requiring physicians and podiatrists to obtain and
maintain medical malpractice liability insurance. In Jarrell v.
Kaul, ___ N.J. ___, ___ (2015) (slip op. at 2), the Court
reviewed the compulsory medical malpractice liability insurance
scheme adopted by the Legislature in the context of a multi-
count complaint filed by a patient injured by a physician who
did not have the statutorily mandated medical malpractice
liability coverage. Only one of the issues before the Court in
Jarrell implicated the consequences to a patient with a pending
15
negligence claim when a policy is rescinded. Ibid. The Court
opined that the statute requiring a physician practicing
medicine in this State to obtain and maintain medical
malpractice liability insurance does not give rise to a direct
cause of action by an injured patient to enforce that
requirement. Id. at ___ (slip op. at 21). The only other case
addressing the consequences to an injured third party due to the
absence of medical malpractice liability insurance is the
opinion under review.
In the context of compulsory legal malpractice insurance,2
however, there is a well-developed body of law holding that a
legal malpractice insurance policy may be declared void from its
inception due to a misrepresentation of material fact by the
insured in an application for insurance. Liberty Surplus Ins.
Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 446-49 (2007);
Lawson, supra, 177 N.J. at 129. Upon rescission, the insurer
owes no duty to defend or indemnify the law firm or any
2 In 1997, the Court adopted rules that require firms organized
to practice law as professional corporations pursuant to The
Professional Service Corporation Act, N.J.S.A. 14A:17-1 to -18,
as limited liability companies pursuant to the New Jersey
Limited Liability Company Act, N.J.S.A. 14A:2B-1 to -70 (now
repealed), or as limited liability partnerships pursuant to the
Uniform Partnership Act, N.J.S.A. 42:1A-1 to -56, to obtain and
maintain professional liability insurance. R. 1:21-1A(a)(3), –
1B(a)(4), and -1C(a)(3). Rhode Island has a similar
requirement, although the minimum mandatory amount of coverage
is different from that in New Jersey. R.I. Gen. Laws § 7-5.1-8.
16
defalcating attorney of the firm for any complaints pending or
claims that accrued at the time of rescission. Lawson, supra,
177 N.J. at 129.
In Lawson, one of three members of a law firm applied for
professional liability insurance for the firm and its members.
Id. at 131. At the time, the member had been engaged in a
scheme in which he improperly transferred funds between client
accounts and the firm business account to meet the firm’s
financial obligations. Id. at 130-31. A second member of the
firm had previously discovered the scheme but took no action to
cease the practice. Ibid. In the insurance application, the
member who initiated the scheme falsely stated that he knew of
no “acts, errors or omissions in professional services that may
reasonably be expected to be the basis of a professional
liability claim,” and warranted that all information in the
application was accurate. Id. at 131. At about the same time,
the Office of Attorney Ethics (OAE), acting on three grievances
filed against the firm, notified the firm that it would conduct
an audit. Id. at 132. The attorney who had filed the original
application later provided a new warranty as to the accuracy of
the information in the application. Ibid.3
3
Soon thereafter, the OAE sought and obtained the temporary
suspension of the member who had discovered but did not curtail
the scheme. Id. at 132.
17
As a result of numerous improper transfers, title insurers
that paid claims to various individuals represented by the firm
sought recovery against the firm and its members, who in turn
sought coverage from their professional liability insurer. Id.
at 132-33. The insurer obtained a declaratory judgment allowing
it to rescind coverage in respect to the two defalcating members
but not the third member or the firm. Id. at 134. In reviewing
this judgment,4 this Court held that the insurer had “the clear
right to rescind [a defalcating attorney’s] coverage in the face
of his blatant and direct misrepresentations.” Id. at 140. The
Court expressly rejected the contention of the title insurers --
injured third parties -- that the remedy for such
misrepresentations should only be prospective rescission of the
policy. Ibid. In doing so, the Court recognized that two of
the firm’s three attorneys would be without insurance coverage
to respond to malpractice claims filed against them by injured
clients and the title insurer. Id. at 143. The Court reasoned
that the harsh result was warranted because “[p]ermitting the .
. . coverage to survive [the member’s] defalcations would, in
essence, condone . . . fraudulent conduct.” Id. at 141.
Later, in Liberty Surplus Insurance, supra, this Court
upheld the entry of summary judgment in favor of the insurer in
4 On appeal, the Appellate Division held that the coverage was
void as to all three members and the firm. Id. at 134.
18
a declaratory judgment action seeking rescission ab initio of a
legal malpractice liability insurance policy due to
misrepresentations of material fact in the policy application.
189 N.J. at 450. The firm therefore faced the legal malpractice
claim filed by the injured client without coverage. Ibid.; see
also Liebling v. Garden State Indem., 337 N.J. Super. 447, 450-
51 (App. Div.) (affirming summary judgment rescinding legal
malpractice policy and denying coverage for professional
negligence action filed and served on firm before application
for and issuance of policy), certif. denied, 169 N.J. 606
(2001).
Thus, it is well established in this State that an attorney
will not have access to insurance coverage to respond to claims
from injured third parties, clients, or title companies, if the
professional liability insurance policy has been rescinded due
to the attorney’s misrepresentations of material fact in the
policy application. We discern no basis to treat other
professionals required to obtain and maintain professional
liability insurance, including physicians and podiatrists, in a
different manner.
Rather, the same reasons that permit rescission of a legal
malpractice insurance policy pertain to medical malpractice
liability insurance. A policy will be issued following an
analysis of the risk to be assumed. A misrepresentation of a
19
material fact in an application undermines the risk assessment
and ultimately the decision to provide coverage by an insurer.
Moreover, all forms of professional liability insurance serve
the same purpose -- to defend when claims are filed against a
professional and to serve as a source of funds to compensate
injured patients or clients. Permitting reformation of a
medical malpractice liability policy to conform to statutorily
mandated minimum amounts also suggests that fraudulent conduct
is condoned. Finally, reformation runs counter to our recent
decision in Jarrell, which denied a direct action for
compensation by an injured patient against an uninsured
physician. Jarrell, supra, ___ N.J. at ___ (slip op. at 43).
B.
In reaching this determination, we also conclude that the
compulsory automobile insurance model has no relevance to the
remedial response to a fraudulently obtained policy of
professional liability insurance and the effect of rescission on
innocent third parties.
Recently, in CURE, supra, we explained that the long-
established and comprehensive no-fault automobile insurance
system, which is “designed to ensure that persons injured in
motor vehicle accidents are compensated promptly for their
injuries and financial losses,” centers on compulsory automobile
liability insurance. 223 N.J. at 152 (internal quotations
20
omitted). In order to preserve the benefits of that insurance,
N.J.S.A. 39:6-48(a) provides that an automobile liability policy
may not be “cancelled or annulled . . . after the insured has
become responsible for the loss or damage” to an innocent third
party. Thus, a fraudulently obtained policy of insurance is
subject to rescission by the insurer, but an innocent third
party injured by the insured before discovery of the fraud may
look to the liability coverage in place at the time of injury up
to the minimum mandatory insurance required by law. Palisades
Safety & Ins. Ass’n v. Bastien, 175 N.J. 144, 148-49 (2003);
Marotta v. N.J. Auto. Full Ins. Underwriting Ass’n, 280 N.J.
Super. 525, 530 (App. Div. 1995), aff’d o.b., 144 N.J. 325
(1996).
Our no-fault automobile liability system provides further
protection to insureds. For example, any person required to
obtain automobile liability insurance acquires uninsured and
underinsured motorist coverage. N.J.S.A. 17:28-1.1(b). Such
coverage ameliorates the financial harm that may arise if a
driver has no or insufficient coverage. In addition, an injured
person may be able to obtain a financial recovery through the
New Jersey Property-Liability Insurance Guaranty Association
(PLIGA) for losses inflicted by financially irresponsible or
21
unknown owners or operators of motor vehicles.5 N.J.S.A. 39:6-61
to -91. An injured, insured motorist may also obtain prompt
medical treatment through the personal injury protection (PIP)
benefits of an individual automobile liability insurance policy.
N.J.S.A. 39:6A-4. An injured person with no recourse to any
insurance coverage may obtain damages for noneconomic loss,
property damage, and PIP benefits through PLIGA. N.J.S.A. 39:6-
61 to -90.1.
The web of interrelated provisions attending the no-fault
automobile liability model, including the compulsory automobile
liability provisions, may minimize the number and amount of the
claims of injured third parties. Moreover, the compulsory
automobile liability insurance model has created an expectation
among those operating motor vehicles that every individual who
may be in an accident will be insured. By contrast, the
Legislature has not constructed a similar matrix of alternate
remedies for any other type of liability insurance, including
compulsory professional liability insurance, or created an
expectation that insurance coverage will be available to redress
an injury even in the face of a fraudulently obtained policy.
5 Prior to 2003, such recovery was obtained through the
Unsatisfied Claim and Judgment Fund (UCJF). See N.J.S.A. 39:6-
64(c). In 2003, the Legislature abolished the UCJF and
transferred its claims to PLIGA, which was already administering
other types of claims in this State. L. 2003, c. 89, §§ 1, 2,
7.
22
Furthermore, the vast differences in the amount of
liability insurance that a driver and a physician must carry
counsels against utilizing the compulsory automobile liability
insurance model to devise a remedy for an injured patient whose
physician is uninsured by virtue of a rescission. The
compulsory automobile liability insurance model also does not
account for the fact that some physicians may have to procure
professional liability insurance through a joint underwriting
association due to market forces in the place where they
practice. Such associations function essentially as mandatory
assigned risk pools in order to permit physicians to obtain
medical malpractice insurance and to provide essential medical
services to patients. In order to maintain affordable rates,
some associations have amassed operating losses. See Patricia
M. Danzon, Medical Malpractice: Theory, Evidence, and Public
Policy 93, 112 (1985). Indeed, unlike many other states’ joint
underwriting associations, the RIJUA remains in effect despite
operating losses over the years. See Med. Malpractice Joint
Underwriting Ass’n v. Paradis, 756 F. Supp. 669, 671 (D.R.I.
1991).
For those reasons, we conclude that the Appellate
Division’s reference to and reliance on the compulsory
automobile liability insurance model was misplaced. Its
reliance on that model also ignored this State’s longstanding
23
rule that an insured professional cannot expect insurance
coverage to respond to third-party claims when the professional
liability insurance has been rescinded due to misrepresentations
of material fact in the application.
V.
Finally, we address the purported conflict of laws
identified by the Appellate Division. The panel declared a
difference in the manner in which each state addressed
compulsory medical malpractice insurance and determined that the
difference constituted a conflict of laws. We conclude that
such a determination was unfounded. As we have explained,
resolution of the issue presented in this appeal begins and ends
with the judicial response to a misrepresentation of material
fact on an application for professional liability insurance. In
this State, a court may rescind a policy ab initio, in which
case the insured is without insurance coverage to respond to a
claim by a third party. Based on our research, it appears that
Rhode Island courts would do the same.
Our research has identified no case in Rhode Island that
has addressed the issue presented in this appeal other than the
judgment entered in the declaratory judgment action commenced by
the RIJUA against Dr. Stoddard. There, due to his ineligibility
for coverage through the RIJUA, the trial court rescinded the
policy ab initio and declared that the RIJUA owed no obligation
24
to defend or indemnify Dr. Stoddard in the DeMarco action
pending in New Jersey. This outcome is entirely consistent with
well-established law in Rhode Island holding that an insurance
policy is subject to rescission if the insurer was induced to
insure an applicant based on a false representation of fact in
the application. Evora v. Henry, 559 A.2d 1038, 1040 (R.I.
1989) (rescinding fire insurance policy); The Guardian Life Ins.
Co. of Am. v. Tillinghast, 512 A.2d 855, 859 (R.I. 1986)
(rescinding disability insurance policy). This rule applies
broadly to a wide variety of insurance policies other than
compulsory motor vehicle liability insurance. See, e.g.,
Commonwealth Land Title Ins. Co. v. IDC Props., Inc., 547 F.3d
15, 20-23 (1st Cir. 2008) (applying Rhode Island law to permit
rescission of title insurance policy); Commercial Union Ins. Co.
v. Pesante, 459 F.3d 34, 38 (1st Cir. 2006) (applying Rhode
Island law to permit rescission of marine insurance policy); see
also R.I. Gen. Laws § 27-18-16 (“The falsity of any statement in
the application for [accident and sickness insurance policies]
may not bar the right to recovery under the policy unless the
false statement materially affected either the acceptance of the
risk or the hazard assumed by the insurer.” (emphasis added)).
Focusing as we have on the broader universe of insurance
policies issued to protect an insured from a variety of risks,
including professional liability claims, we discern that New
25
Jersey and Rhode Island permit rescission of an insurance policy
when that policy has been issued based on misrepresentations of
material fact. In each situation, other than the compulsory
motor vehicle liability insurance model in each state, a third
party who has asserted a claim or whose claim accrued prior to
rescission receives no benefit from the rescinded policy. In
short, although we cannot determine with certainty that the laws
of each state are in harmony on this issue, we are also in no
position to declare that a conflict exists between the laws of
New Jersey and Rhode Island on this issue.
Finally, to the extent that each state requires a
podiatrist to maintain medical malpractice liability insurance,
we discern no difference in the laws of each state that amounts
to a conflict of laws. To be sure, Rhode Island adopted a
statute that established minimum levels of coverage lower than
those required in New Jersey. Compare R.I. Gen. Laws § 42-14.1-
2 (setting minimum amounts of $100,000 per claim and $300,000
per policy year), with N.J.S.A. 45:5-5.3 and N.J.S.A. 45:9-19.17
(requiring minimum amounts of $1 million per claim and $3
million per policy year). Furthermore, the executive agency
tasked with adopting regulations to implement the Rhode Island
statute did not do so until Fall 2013. See 02-030-021 R.I. Code
R. § 5 (requiring minimum amounts of $1 million per claim and $3
million per policy year). Indeed, the mandatory nature of such
26
insurance remained an open question as late as 2013. See
Peloquin v. Haven Health Ctr. of Greenville, L.L.C., 61 A.3d
419, 429-30 (R.I. 2013).
A conflict of laws however does not arise unless there is a
substantive difference between or among the potentially
applicable laws. Cornett v. Johnson & Johnson, 211 N.J. 362,
374 (2012); P.V. ex rel. T.V. v. Camp Jaycee, 197 N.J. 132, 143
(2008). A substantive difference between the law of one state
and another exists when the difference is offensive or repugnant
to the public policy of this State. Cornett, supra, 211 N.J. at
377. Here, the difference cannot be considered substantive.
Both states have declared that physicians and podiatrists are
required to obtain and maintain medical malpractice liability
insurance. Moreover, Dr. Stoddard had a policy of medical
malpractice liability insurance in place at all relevant times,
rendering any differences in the states’ insurance coverage
requirements irrelevant. Rather, the issue presented in this
case is whether an insurance policy is subject to rescission
based on a false representation of fact in the insurance
application. With respect to that core issue, both states agree
that rescission is the appropriate remedy.
VI.
In summary, it is well established in this State that a
professional who has made a misrepresentation of material fact
27
in an application for professional liability insurance can
expect that the policy may be rescinded on application of the
insurer. A professional in that position can also expect that
claims that arose prior to discovery of the misrepresentation
will be excluded from coverage. In other words, once the policy
has been rescinded, the professional responds to any claims from
injured third parties without coverage.
Here, the policy of professional liability issued to Dr.
Stoddard was rescinded due to misrepresentations concerning the
extent of his practice in Rhode Island. Those
misrepresentations went to his eligibility of insurance through
the RIJUA. As a result of the RIJUA’s rescission of the policy,
Dr. Stoddard stood without coverage to respond to the DeMarcos’
claim. We have not identified any sound reason to treat medical
professionals any differently than other similarly situated
professionals. We cannot identify a sound reason to permit
reformation of a rescinded professional liability policy to the
statutory minimum of $1 million.6
We therefore hold that the Appellate Division erred when it
resorted to the compulsory automobile liability insurance model
6 We also reject the suggestion that whether the RIJUA actually
and reasonably relied on Dr. Stoddard’s misrepresentation of the
location of his practice is an unresolved issue of fact. Dr.
Stoddard had notice of and every opportunity to contest the
declarative judgment action. He chose not to do so and a final
judgment has been entered granting full relief to the RIJUA.
28
rather than the existing rule governing professional liability
insurance to fashion a remedy for injured third parties affected
by rescission of the medical care provider’s insurance. Having
obtained a judgment rescinding the medical malpractice liability
policy, the RIJUA owed no duty to defend Dr. Stoddard or to
indemnify him in the medical malpractice action pending against
Dr. Stoddard in this State.
VII.
The judgment of the Appellate Division is reversed.
JUSTICES LaVECCHIA, PATTERSON, FERNANDEZ-VINA, and SOLOMON
join in JUDGE CUFF’s opinion. JUSTICE ALBIN filed a separate,
dissenting opinion in which CHIEF JUSTICE RABNER joins.
29
SUPREME COURT OF NEW JERSEY
A-104 September Term 2013
073949
THOMAS DEMARCO and CYNTHIA
DEMARCO,
Plaintiffs-Respondents,
v.
SEAN ROBERT STODDARD, D.P.M.,
Individually and t/a CENTER
FOR ADVANCED FOOT & ANKLE
CARE, INC.,
Defendant,
and
MEDICAL MALPRACTICE JOINT
UNDERWRITING ASSOCIATION OF
RHODE ISLAND,
Defendant-Appellant.
JUSTICE ALBIN, dissenting.
All physicians and podiatrists who practice medicine in New
Jersey are required to maintain at least $1,000,000 in medical
malpractice insurance or a $500,000 letter of credit. N.J.S.A.
45:9-19.17(a); N.J.S.A. 45:5-5.3; N.J.A.C. 13:35-6.18. The
purpose of this compulsory insurance law is to ensure that
patients can secure financial compensation in the event of a
doctor’s professional negligence. Every patient has a right to
presume that his physician is in compliance with the law.
In this case, defendant Dr. Sean Stoddard, a podiatrist,
1
misrepresented to his medical malpractice insurer -- the Medical
Malpractice Joint Underwriting Association of Rhode Island
(RIJUA) -- that the majority of his podiatry practice was in
Rhode Island, rather than New Jersey. During the period the
RIJUA insured him, Dr. Stoddard performed foot surgery on
plaintiff Thomas DeMarco (DeMarco). In a medical-malpractice
action, DeMarco sought damages from Dr. Stoddard for worsening
his medical condition. In addition, DeMarco’s wife filed a
loss-of-consortium claim. After the DeMarcos filed their
lawsuit, the RIJUA cancelled Dr. Stoddard’s malpractice
insurance. The RIJUA claims that its insurance contract with
Dr. Stoddard should not only be rescinded, but also that the
rescission should be backdated, thus denying the DeMarcos the
protection of the insurance coverage that was in effect at the
time of the allegedly botched surgery.
I agree with the majority’s conclusion that New Jersey law
applies to the DeMarcos’ lawsuit. I disagree that under this
State’s law, the medical-malpractice carrier in this case can
retroactively cancel malpractice insurance to deny an innocent
patient coverage for a physician’s professional negligence. The
approach taken by the majority is at complete odds with our
State’s public policy, which finds expression in our compulsory
medical malpractice insurance law. The aim of the law is to
provide financial protection to every patient in this State.
2
The RIJUA was in the best position to ferret out any
misrepresentation made by Dr. Stoddard when he applied and
reapplied for malpractice insurance coverage. The innocent
patient was in no position to do so.
I would require the insurer to provide coverage up to
$500,000 to DeMarco and his wife. After all, DeMarco underwent
surgery with Dr. Stoddard when he was lawfully insured -- that
is, before the carrier backdated the rescission. At the time of
DeMarco’s surgery, the RIJUA, in effect, represented to the
world that it was insuring Dr. Stoddard against claims of
negligence. The public had the right to rely on that
representation. By requiring coverage, the equities of all
parties are balanced, and the patient receives the benefit of
the financial security intended by the law.
Because the majority has taken the path that leaves the
innocent patient without compensation for his injuries and
rewards the insurance company for its lack of due diligence, I
respectfully dissent.
I.
In this case, Dr. Stoddard purchased medical malpractice
insurance from the RIJUA. In his application, he misrepresented
the primary location of his practice. From 2007 until 2011, Dr.
Stoddard represented to the RIJUA that at least fifty-one
percent of his podiatry practice was generated in Rhode Island -
3
- a prerequisite to receiving the RIJUA’s insurance coverage.
Dr. Stoddard’s Rhode Island practice, however, never met the
RIJUA’s fifty-one percent requirement.
In each of his insurance applications from 2007 through
2010, Dr. Stoddard indicated that his office was located in
Rhode Island, although he did list his telephone and fax numbers
as having a 732 New Jersey area code, which should have signaled
that he had a New Jersey office. In Dr. Stoddard’s renewal
application for March 2010 to March 2011, he gave 1195 Highway
70, #12, Lakewood, New Jersey as the address for his office.
Once again, he provided a New Jersey telephone number. The
RIJUA was on notice that Dr. Stoddard had a New Jersey practice
when he performed surgery on DeMarco in September 2010.
Only after October 2011, when the DeMarcos filed a medical
malpractice lawsuit alleging that Dr. Stoddard negligently
performed surgery, did the RIJUA rescind its insurance policy on
the basis that the majority of Dr. Stoddard’s podiatry practice
was not situated in Rhode Island, as represented in his
malpractice-insurance applications. The RIJUA returned Dr.
Stoddard’s premium payments for the period from March 2010 to
January 2011, but kept the premiums paid from 2007 through
February 2010. Dr. Stoddard informed DeMarco that he had no
assets. DeMarco and his wife then amended their complaint
seeking the payment of damages from the RIJUA on the malpractice
4
claim.
Both the trial court and the Appellate Division in a well-
reasoned opinion, DeMarco v. Stoddard, 434 N.J. Super. 352 (App.
Div. 2014), held that the RIJUA was required to provide coverage
of $1,000,000 should Dr. Stoddard be found liable on the
malpractice claim.
II.
A.
All physicians and podiatrists who practice medicine in New
Jersey are required to maintain medical malpractice liability
insurance. N.J.S.A. 45:9-19.17(a); N.J.S.A. 45:5-5.3.
According to N.J.S.A. 45:9-19.17(a),
[a] physician who maintains a professional
medical practice in this State and has
responsibility for patient care is required to
be covered by medical malpractice liability
insurance issued by a carrier authorized to
write medical malpractice liability insurance
policies in this State, in the sum of
$1,000,000 per occurrence and $3,000,000 per
policy year and unless renewal coverage
includes the premium retroactive date, the
policy shall provide for extended reporting
endorsement coverage for claims made policies,
also known as “tail coverage,” or, if such
liability coverage is not available, by a
letter of credit for at least $500,000.
The requirement that physicians and podiatrists maintain
$1,000,000 in coverage per occurrence or $500,000 by a letter of
credit is “to ensure the citizens of the State that they will
have some recourse for adequate compensation in the event that a
5
physician or podiatrist is found responsible for acts of
malpractice.” Assembly Health Comm., Statement to S. 267 (Sept.
19, 1996). The clear intent of the legislation is to provide
financial protection to patients who suffer preventable injuries
at the hands of their doctors.
The question in this case is whether a medical-malpractice
insurer may avoid paying damages to an innocent patient when the
rescission of the physician’s insurance policy is backdated,
thus denying the patient the benefit of the coverage in effect
at the time the malpractice occurred.
B.
“[A] material factual misrepresentation made in an
application for insurance may justify rescission if the insurer
relied upon it to determine whether or not to issue the policy.”
Remsden v. Dependable Ins. Co., 71 N.J. 587, 589 (1976); see
also Rutgers Cas. Ins. Co. v. LaCroix, 194 N.J. 515, 527-28
(2008); Mass. Mut. Life Ins. Co. v. Manzo, 122 N.J. 104, 111
(1991); N.Y. Life Ins. Co. v. Weiss, 133 N.J. Eq. 375, 379-80
(1943). Rescission of the contract prevents an insured from
directly benefitting from his misrepresentation. Bonnco Petrol,
Inc. v. Epstein, 115 N.J. 599, 612 (1989).
But different interests are in play when a scheme of
compulsory insurance is intended to protect innocent members of
the public, such as in our compulsory insurance laws for
6
automobiles, limited liability partnerships, and the practice of
medicine. In such cases, our jurisprudence draws a distinction
between the party who procures an insurance policy through
misrepresentations and the innocent party who plays no role in a
fraud on the insurer and is a victim falling within the coverage
protections of the insurance policy. LaCroix, supra, 194 N.J.
at 530-32; see also Fisher v. N.J. Auto. Full Ins. Underwriting
Ass’n, 224 N.J. Super. 552, 557 (App. Div. 1988) (“The insurance
carrier’s liability to its [in]sured who may be guilty of some
act or conduct which renders a policy void ab initio is
therefore distinct from its liability to an injured third
person.”). Thus, “an insurer cannot, on the ground of fraud or
misrepresentations relating to the inception of the policy,
retrospectively avoid coverage under a compulsory or financial
responsibility insurance law so as to escape liability to a
third party.” Fisher, supra, 224 N.J. Super. at 558 (quoting 7
Am. Jur. 2d Automobile Insurance § 37 (1980)); see also
Palisades Safety & Ins. Ass’n v. Bastien, 175 N.J. 144, 149
(2003) (noting that insurance company cannot “escape[] liability
in respect of innocent, third-party members of the public whose
protection is a paramount concern”). An example of those
equitable principles is found in our automobile insurance law.
In New Jersey, all motor vehicle owners must maintain
liability insurance coverage. N.J.S.A. 39:6B-1(a). Moreover,
7
“once its insured has become responsible for damages to third-
party judgment creditors, an insurer is precluded from
retroactively ‘cancelling’ or ‘annulling’ an automobile
liability policy based upon prior misrepresentations or fraud of
its insured.” N.J. Mfrs. Ins. Co. v. Varjabedian, 391 N.J.
Super. 253, 256 (App. Div.) (quoting N.J.S.A. 39:6-48(a)),
certif. denied, 192 N.J. 295 (2007). The principle that an
insurance company cannot void a policy to the detriment of an
innocent third party has been upheld in cases involving
compulsory insurance laws intended for the protection of the
public.
In LaCroix, supra, we determined that the insured’s
eighteen-year-old daughter could not be barred from receiving
“personal-injury-protection (PIP) benefits under her father’s
automobile insurance policy because, unbeknownst to her, her
father had not identified her as a household resident in his
insurance application.” 194 N.J. at 518-19. The father was
required to purchase PIP coverage under N.J.S.A. 39:6A-4.3.
Lacroix, supra, 194 N.J. at 532. We held that “the equitable
remedy of rescission properly was molded to require payment of
the statutorily required minimum level of PIP benefits to” the
daughter who suffered injuries in an automobile accident. Id.
at 519. We did so because the daughter was “innocent of the
deceit perpetrated by her father” and because “we have never
8
turned a deaf ear to the equities when plainly innocent parties
cry out for relief.” Id. at 530-31.
C.
No controlling precedent supports the position the majority
takes today, reversing both the trial court and the Appellate
Division and leaving the innocent patient remediless. The
majority reaches the inequitable, not the inevitable, outcome.
First, the comparison of physicians and podiatrists to
lawyers in general is not apt because lawyers are not presently
subject to a comprehensive legislative or judicial scheme
mandating the purchase of malpractice insurance. Lawyers are
required to purchase malpractice insurance only if they organize
as professional corporations or limited liability partnerships.
R. 1:21-1A(a)(3), -1B(a)(4), -1C(a)(3).
Second, none of the legal-malpractice cases cited by the
majority bear any resemblance to the facts before us. Liberty
Surplus Insurance Corp. v. Nowell Amoroso, P.A., 189 N.J. 436,
439-41 (2007), merely stands for the proposition that a law firm
forfeited coverage in a malpractice case under a claims-made
policy by misrepresenting in the insurance application that it
was unaware of a potential claim at the time the application was
completed. Liberty Surplus deals with the denial of a claim,
not the rescission of an insurance policy. Ibid.
In Liebling v. Garden State Indemnity, 337 N.J. Super. 447,
9
450-51 (App. Div.), certif. denied 169 N.J. 606 (2001), an
attorney did not disclose in an application for a claims-made
malpractice insurance policy that a potential malpractice
lawsuit was looming. The attorney knew that he would likely be
sued for failing to file a civil action within the statute of
limitations. Id. at 464-65. The Appellate Division concluded
that the attorney “could not have honestly believed that he was
secure from a claim, and, therefore, [the insurance carrier] was
justified in denying coverage.” Liberty Surplus, supra, 189
N.J. at 449 (citing Liebling, supra, 337 N.J. Super. at 464-65).
Last, First American Title Insurance Co. v. Lawson, 177
N.J. 125 (2003), engaged in a finely nuanced balancing of
equities in reviewing whether an insurance carrier was required
to provide coverage to three attorneys of a law firm organized
as a limited liability partnership. Two of the attorneys, one
of whom was unauthorized to practice law in New Jersey, were
engaged in a “‘kiting’ scheme whereby monies from one client
trust account would be transferred to pay the obligations of
another client.” Id. at 130 (quoting First Am. Title Ins. Co.
v. Lawson, 351 N.J. Super. 407, 414 (App. Div. 2002)). This
Court affirmed the forfeiture of coverage for those two
malefactors, one of whom applied for the firm’s claims-made
professional liability insurance policy with full knowledge of
their wrongdoing, id. at 129 -- wrongdoing that violated the
10
Rules of Professional Conduct.1
However, the Court took a different approach with respect
to the innocent law partner. We held that the innocent attorney
could not be stripped of insurance coverage because, unbeknownst
to him, the managing partner and another partner committed
fraudulent acts and secured malpractice insurance through
misrepresentations. Id. at 129-31. We noted that our Rule of
Court requiring a limited liability partnership to maintain
professional liability insurance, R. 1:21-1C(a)(3), “helps to
limit the public’s exposure to uninsured risks arising from the
receipt of legal services in this State.” Lawson, supra, 177
N.J. at 139. We explained that the innocent partner “had every
reason to expect that his exposure to liability would be
circumscribed in accordance with the Uniform Partnership Law,”
which “shield[s] partners from incurring liability arising
solely from the wrongful acts of fellow partners.” Id. at 136,
142. Additionally, we noted that denying coverage to the
innocent law partner “could leave members of the public, whom
[the innocent partner] had represented throughout that period,
unprotected even though the insured himself committed no fraud.”
Id. at 143.
1 Victims of such illegal schemes are financially protected up to
an amount fixed by the New Jersey Lawyers’ Fund for Client
Protection. R. 1:28.
11
Thus, in Lawson, this Court protected the innocent attorney
from a backdated rescission of an insurance policy because he
was unaware of his partner’s misrepresentations in securing the
insurance coverage. Lawson is a study in how to balance
equities. It is not a mandate to deny insurance coverage to the
innocent patient who suffered medical malpractice in this case.
III.
Here, in viewing the totality of the circumstances, equity
weighs in favor of upholding the RIJUA’s obligation to cover the
claim of DeMarco and his wife. The omitted information in Dr.
Stoddard’s application and reapplication pertained only to the
geography of his practice, not to his ability to perform his
professional duties. The issue is not whether the RIJUA has a
right to rescind Dr. Stoddard’s insurance, but whether it has
the right to backdate the rescission at the expense of the
innocent patient.
In balancing the equities, we should place great emphasis
on the fact that the RIJUA was in the best position to uncover
any inaccuracies in Dr. Stoddard’s insurance applications. By
September 2010, when the alleged malpractice occurred, Dr.
Stoddard’s practice in New Jersey was open and notorious. In
his insurance renewal application filed earlier that year, Dr.
Stoddard listed an address in Lakewood, New Jersey as the
location of his podiatry practice.
12
Had the RIJUA exercised even a minimal degree of due
diligence, it would have discovered that Dr. Stoddard’s practice
was not primarily located in Rhode Island. Only when the RIJUA
had to pay out on a potential claim -- not when it was accepting
premiums -- did it make a reasonable inquiry. Other
jurisdictions, as a matter of sound public policy, require an
insurance company to exercise due care in reviewing an insurance
application at the time it is submitted. See, e.g., Olivio v.
Gov’t Emps. Ins. Co. of Washington D.C., 362 N.Y.S.2d 873, 880
(App. Div. 1975) (requiring insurer to pay third-party victim
full policy amount -- as opposed to minimum compulsory amount --
when insurer negligently delayed investigation of fraudulent
application until after suit was filed); State Farm Mut. Auto.
Ins. Co. v. Wood, 483 P.2d 892, 893 (Utah 1971) (“An
insurer cannot neglect its duty to make a reasonable
investigation of insurability or postpone that investigation
until after it learns of a probable claim and still retain its
[premiums.]”). Dr. Stoddard’s renewal application contained the
location and telephone number of his New Jersey practice. That
was a sufficient red flag to prompt an inquiry by the RIJUA if
it did not want to continue collecting Dr. Stoddard’s premiums.
Like the innocent parties in LaCroix and Lawson, DeMarco
was entirely unaware of any misrepresentation made by Dr.
Stoddard to the RIJUA and had no ability to discover it.
13
Instead, the patient had the reasonable expectation that his
podiatrist was in compliance with the statutory requirement to
maintain medical malpractice insurance. He also had the right
to rely on the fact that, at the time of his surgery, the RIJUA
was Dr. Stoddard’s malpractice carrier.
To require the DeMarcos to bear the entire cost of damages
resulting from Dr. Stoddard’s alleged malpractice is
inconsistent with principles of equity. The RIJUA in this case
has reaped a windfall -- it pocketed three years of premiums,
backdated a rescission, and is not required to expend a single
dollar of collected premiums to compensate the innocent patient
and his wife victimized by Dr. Stoddard’s alleged medical
malpractice. That is hardly an equitable result, nor is it in
keeping with New Jersey’s public policy.
That public policy is clearly expressed in our law that
mandates insurance coverage for innocent victims of medical
malpractice, in circumstances such as we have here. The RIJUA
should be required to pay up to the minimum amount of insurance
that a patient expects a doctor to maintain -- the $500,000
necessary for a letter of credit.
In reversing the trial court and Appellate Division, the
majority has decided on an approach that leaves an innocent
patient without a source of compensation for damages suffered by
the malpractice of his insolvent doctor.
14
Because that approach is contrary to public policy, I
respectfully dissent.
15
SUPREME COURT OF NEW JERSEY
NO. A-104 SEPTEMBER TERM 2013
ON APPEAL FROM Appellate Division, Superior Court
THOMAS DEMARCO and CYNTHIA
DEMARCO,
Plaintiffs-Respondents,
v.
SEAN ROBERT STODDARD, D.P.M.,
Individually and t/a CENTER FOR ADVANCED
FOOT & ANKLE CARE, INC.,
Defendant,
and
MEDICAL MALPRACTICE JOINT
UNDERWRITING ASSOCIATION OF RHODE
ISLAND,
Defendant-Appellant.
DECIDED December 1, 2015
Chief Justice Rabner PRESIDING
OPINION BY Judge Cuff (temporarily assigned)
CONCURRING/DISSENTING OPINION BY
DISSENTING OPINION BY Justice Albin
CHECKLIST REVERSE DISSENT
CHIEF JUSTICE RABNER X
JUSTICE LaVECCHIA X
JUSTICE ALBIN X
JUSTICE PATTERSON X
JUSTICE FERNANDEZ-VINA X
JUSTICE SOLOMON X
JUDGE CUFF (t/a) X
TOTALS 5 2