Thomas Demarco v. Sean Robert Stoddard, D.P.M.

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3924-12T1
THOMAS DEMARCO and CYNTHIA
DEMARCO, APPROVED FOR PUBLICATION
Plaintiffs-Respondents, JANUARY 22, 2014
APPELLATE DIVISION
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 October 15, 2013 – Decided January 22, 2014
Before Judges Yannotti, Ashrafi and
St. John.
On appeal from Superior Court of New Jersey,
Law Division, Ocean County, Docket No.
L-3309-11.
Todd J. Leon argued the cause for appellant
(Hill Wallack, L.L.P., attorneys; Mr. Leon
and Jonathan D. Pavlovcak, on the brief).
Michael D. Schottland argued the cause for
respondents (Lomurro, Davison, Eastman
& Munoz, P.A., attorneys; Michael J. Fasano,
on the brief).
The opinion of the court was delivered by
ASHRAFI, J.A.D.
This appeal concerns medical malpractice insurance
coverage. Defendant Medical Malpractice Joint Underwriting
Association of Rhode Island ("the JUA") appeals from summary
judgment entered by the New Jersey Superior Court, Law Division,
requiring that it provide liability coverage in the medical
malpractice lawsuit filed by plaintiffs Thomas and Cynthia
DeMarco against defendant podiatrist Sean Robert Stoddard. The
JUA contends it justifiably rescinded the malpractice policy it
had issued to Dr. Stoddard because the doctor purposely
misrepresented the nature and location of his practice.
Although the summary judgment record supports the JUA's
allegation that Stoddard gave materially false information in
his applications for the insurance policy and its annual
renewals, we affirm the Law Division's judgment that the JUA
must provide indemnification coverage for the DeMarcos'
malpractice claims in the minimum amount required by New Jersey
law.
I.
2 A-3924-12T1
Viewed most favorably to the JUA, see R. 4:46-2(c); Brill
v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995), the
summary judgment record reveals the following facts and
procedural history.
Thomas DeMarco, a resident of New Jersey, was a patient of
Dr. Stoddard from 2004 to 2011. Stoddard practiced podiatry at
the Center for Advanced Foot & Ankle Care, located in Toms River
and Lakewood, New Jersey. From 2007 through 2011, Stoddard was
insured by medical malpractice liability policies issued by the
JUA out of Rhode Island.
The Rhode Island legislature created the JUA, which is
composed of private insurance carriers, so that Rhode Island
doctors might obtain medical malpractice insurance if it is not
otherwise available. R.I. Gen. Laws § 42-14.1-1. The JUA is
required to provide coverage to qualified Rhode Island doctors.
Essentially, its underwriting rules require only that the
applicant be licensed to practice in Rhode Island and that at
least 51% of the doctor's medical practice be generated in Rhode
Island. The JUA provides policies to doctors who also practice
in the adjacent states of Massachusetts and Connecticut, but it
was not aware of any doctor it insured, other than Stoddard, who
also practiced in New Jersey.
3 A-3924-12T1
Stoddard initially applied for a JUA policy in January 2007
through an agent located in Rhode Island named Lisa O'Neil.
O'Neil was not an employee of the JUA, as plaintiffs allege; she
was an independent insurance broker. Stoddard alleged that
O'Neil was responsible for the contents of his JUA application.
According to O'Neil's deposition, the information on Stoddard's
application was provided by him, and he had an opportunity to
review the application before it was submitted to the JUA.
Stoddard's original January 2007 application stated that he
was licensed to practice podiatry in both Rhode Island and New
Jersey, that his office address was in Newport, Rhode Island,
and that he was applying for affiliation with Newport Hospital
in Rhode Island. But the office telephone numbers on the
application contained a 732 area code, which is located in New
Jersey. In response to the question: "Is at least 51% of your
practice generated in Rhode Island?" the application checked off
"yes," but that answer was false. Stoddard later admitted that
at no time was a majority of his practice generated in Rhode
Island.
Stoddard's annual renewal applications were also filed
through O'Neil out of her Rhode Island office. The first two
renewal applications, which covered the period through March 1,
2010, again contained a Newport, Rhode Island office address for
4 A-3924-12T1
Stoddard, but once again with 732 office telephone numbers. For
the policy period most relevant to the DeMarcos' malpractice
lawsuit, 2010-2011, Stoddard's renewal application contained a
Lakewood, New Jersey, office address with the same 732 telephone
number previously provided in the earlier applications. All
three renewal applications falsely answered the question "yes"
as to Stoddard generating 51% of his practice in Rhode Island.
In fact, Stoddard never had any significant practice in Rhode
Island.
In September 2010, Stoddard performed foot surgery on
Thomas DeMarco in New Jersey. In January 2011, Stoddard
informed DeMarco that he was closing his practice in New Jersey
and moving to California. DeMarco's foot condition worsened,
and he consulted another doctor. In October 2011, DeMarco and
his wife filed a medical malpractice lawsuit in New Jersey
alleging that Stoddard had negligently performed the September
2010 foot surgery.
Stoddard received the summons and complaint in California,
and submitted them to the JUA. The JUA sent a reservation of
rights letter back to Stoddard indicating it would not provide
coverage if a majority of his practice was not generated in
Rhode Island. Shortly after that, Stoddard wrote to plaintiffs'
attorney, stating: that he had moved to California and was
5 A-3924-12T1
attempting to begin a new practice there in the form of a
professional corporation; that the JUA had disclaimed coverage
for the DeMarcos' malpractice lawsuit because of the 51%
underwriting rule; that he had truthfully told the insurance
broker O'Neil that the bulk of his practice was in New Jersey
but he intended to build up a Rhode Island practice; that O'Neil
had responded that Stoddard could apply to the JUA so long as he
was making an effort to reach the 51% level of Rhode Island
practice; that he was in fact never able to generate a
significant practice in Rhode Island; and that he was currently
going through a divorce and had no assets from which a
malpractice judgment could be recovered personally from him.
On January 13, 2012, the JUA filed a complaint for a
declaratory judgment in the superior court of Rhode Island. It
sought rescission of Stoddard's last renewed policy on the
ground that he had misrepresented material information in his
application. Both Stoddard and the DeMarcos were named
defendants in the JUA's Rhode Island complaint, but the JUA was
never able to effect personal service of process on the
DeMarcos. Neither Stoddard nor the DeMarcos filed an answer or
otherwise defended the declaratory judgment action in Rhode
Island. The DeMarcos' attorney wrote to counsel for the JUA
contending that Rhode Island did not have personal jurisdiction
6 A-3924-12T1
over the DeMarcos, and that the DeMarcos had never been in and
had no other significant contacts with that state. Counsel for
the JUA forthrightly revealed that information to the Rhode
Island court.
On March 9, 2012, the DeMarcos filed an amended complaint
in their New Jersey malpractice case. They named the JUA as a
defendant and sought a declaratory judgment in New Jersey that
the JUA must provide indemnification coverage on their medical
malpractice claim against Stoddard.
On May 25, 2012, the court in Rhode Island entered default
judgment against Stoddard, declaring the 2010-2011 renewed
policy void. The judgment also stated that the JUA was not
required to defend or indemnify Stoddard in the DeMarcos' New
Jersey lawsuit. The Rhode Island court, however, did not enter
a default judgment or take any other action against the
DeMarcos.
Subsequently, the JUA and the DeMarcos filed cross-motions
in the New Jersey malpractice case for summary judgment on the
coverage question and on the effect of the Rhode Island default
judgment. The New Jersey court heard argument and granted
summary judgment in favor of the DeMarcos. It determined that
the Rhode Island judgment was not binding on the DeMarcos and
that the JUA was required to indemnify Stoddard in the DeMarcos'
7 A-3924-12T1
lawsuit. The court also granted the DeMarcos attorney's fees
arising from successful litigation of the JUA's disclaimer of
coverage.
We granted the JUA's motion for leave to appeal. The trial
court then stayed the underlying medical malpractice case
between the DeMarcos and Stoddard pending the outcome of this
appeal.
II.
We first consider whether the default judgment entered by
the Rhode Island court against Stoddard is binding on the
DeMarcos. We agree with the Law Division that it is not.
The Rhode Island court declined to grant the JUA's
application to hold the DeMarcos in default and to enter
judgment against them. The JUA now argues that the Law Division
in New Jersey erred in concluding that the Rhode Island court
lacked jurisdiction, and also that the doctrines of res judicata
and collateral estoppel bar the DeMarcos' New Jersey cause of
action against the JUA.
We need not address the JUA's argument that the New Jersey
Law Division incorrectly determined there was inadequate service
of process for the Rhode Island court to obtain personal
jurisdiction over the DeMarcos. That issue is moot because the
Rhode Island court did not exercise jurisdiction over them; it
8 A-3924-12T1
did not enter default judgment or take any other action against
the DeMarcos.
The doctrine of res judicata prevents the re-litigation of
an issue once it has been fairly litigated and there is: "(1) a
final judgment by a court of competent jurisdiction, (2)
identity of issues, (3) identity of parties and (4) identity of
the cause of action." Selective Ins. Co. v. McAllister, 327
N.J. Super. 168, 172-73 (App. Div.), certif. denied, 164 N.J.
188 (2000). Here, the first and third requirements are not
satisfied. The Rhode Island court did not exercise personal
jurisdiction over the DeMarcos, and they were never active
parties in that litigation. There is no final judgment against
the DeMarcos that can constitute res judicata.
Nor does the doctrine of collateral estoppel apply.
Collateral estoppel, which is also known as
issue preclusion, prohibits relitigation of
issues if its five essential elements are
met. Those elements are that
(1) the issue to be precluded is
identical to the issue decided in
the prior proceeding; (2) the
issue was actually litigated in
the prior proceeding; (3) the
court in the prior proceeding
issued a final judgment on the
merits; (4) the determination of
the issue was essential to the
prior judgment; and (5) the party
against whom the doctrine is
asserted was a party to or in
privity with a party to the
earlier proceeding.
9 A-3924-12T1
[Allen v. V & A Bros., Inc., 208 N.J. 114,
137 (2011) (quoting Olivieri v. Y.M.F.
Carpet, Inc., 186 N.J. 511, 521 (2006)).]
"Although mutuality of parties no longer is an essential
condition of collateral estoppel, the party against whom
collateral estoppel is to be invoked must have been in 'privity'
with a party in the first action." Zirger v. Gen. Accident Ins.
Co., 144 N.J. 327, 338 (1996) (citing Wunschel v. City of Jersey
City, 96 N.J. 651, 658 (1984)). The JUA contends that the
DeMarcos were in privity with Stoddard with respect to the
coverage issue litigated in Rhode Island. We disagree.
"Generally, one person is in privity with another and is
bound by and entitled to the benefits of a judgment as though he
was a party when there is such an identification of interest
between the two as to represent the same legal right . . . ."
Moore v. Hafeeza, 212 N.J. Super. 399, 403-04 (Ch. Div. 1986)
(cited in Zirger, supra, 144 N.J. at 339). Here, the DeMarcos
do not have such an identification of interest with Stoddard so
that he represented the same legal right as them in the Rhode
Island litigation.
The JUA's claim before the Rhode Island court was that
Stoddard procured the policy through a material misrepresent-
tation, which gave the JUA the right to rescind the policy. The
DeMarcos are innocent third parties with respect to Stoddard's
10 A-3924-12T1
misrepresentation. Although both Stoddard and the DeMarcos have
an interest in coverage of the DeMarcos' malpractice claims by
the JUA, it cannot be said that their legal rights were the same
before the Rhode Island court. As the party that admittedly
misrepresented the nature of his Rhode Island practice, Stoddard
was not in a position to argue for the validity of the JUA
policy. In fact, the Rhode Island court had personal
jurisdiction over Stoddard, but he did not defend against the
JUA's coverage action. Whether he believed he did not have an
adequate defense or he did not feel compelled to defend the case
given his personal financial circumstances, he did not represent
the DeMarcos' interests.
In sum, the DeMarcos were not in privity with Stoddard and
are not collaterally estopped from seeking a judgment contrary
to the Rhode Island judgment entered against him. The Law
Division correctly refused to enforce the Rhode Island judgment.
III.
On the merits of the DeMarcos' New Jersey judgment
requiring insurance coverage, we must decide whether the law of
New Jersey or that of Rhode Island applies. The Law Division
concluded that New Jersey law applies on the issue of whether
the JUA could disclaim coverage of the DeMarcos' claims.
11 A-3924-12T1
A.
The DeMarcos contend the JUA should not be permitted to
argue that Rhode Island law applies because it did not raise the
choice-of-law issue in its pleadings or motion for summary
judgment. A trial court, however, has discretion to permit a
party to raise a choice-of-law issue even if it was not raised
earlier. See Rowe v. Hoffman-La Roche Inc., 383 N.J. Super.
442, 450-51 (App. Div. 2006), rev'd on other grounds, 189 N.J.
615 (2007). In this case, the Law Division did not err in
undertaking to determine the threshold choice-of-law issue, and
the JUA may now appeal from that ruling.
Nor is the JUA judicially estopped from arguing that Rhode
Island law should apply on the ground that it was willing to
accept application of New Jersey law in the trial court.
"[J]udicial estoppel is an extraordinary remedy and should be
invoked only when a party's inconsistent behavior will otherwise
result in a miscarriage of justice." Ramer v. N.J. Transit Bus
Operations, Inc., 335 N.J. Super. 304, 313 (App. Div. 2000)
(internal quotation marks omitted). Judicial estoppel may be
applied when a party prevailed in an earlier proceeding on the
basis of a position that is inconsistent with its current
position. See McCurrie ex rel. Town of Kearny v. Town of
Kearny, 174 N.J. 523, 533-34 (2002).
12 A-3924-12T1
Here, the JUA has not taken inconsistent positions. It
argues before us that it is not liable to the DeMarcos under
either New Jersey or Rhode Island law. Moreover, the JUA did
not successfully assert any position that the Law Division
accepted. See Kimball Int'l, Inc. v. Northfield Metal Prods.,
334 N.J. Super. 596, 606-07 (App. Div. 2000) ("[T]o be estopped
[a party must] have convinced the court to accept its position
in the earlier litigation. A party is not bound to a position
it unsuccessfully maintained."), certif. denied, 167 N.J. 88(2001). Judicial estoppel does not bar the JUA's choice-of-law
arguments on appeal.
B.
We exercise plenary review of a trial court's ruling on a
choice-of-law issue. Bondi v. Citigroup, Inc., 423 N.J. Super.
377, 418 (App. Div. 2011), certif. denied, 210 N.J. 478 (2012);
Dolan v. Sea Transfer Corp., 398 N.J. Super. 313, 321 (App.
Div.), certif. denied, 195 N.J. 520 (2008).
The first step in a choice-of-law analysis is to "determine
whether an actual conflict exists" by comparing the potentially
applicable laws of the two jurisdictions. P.V. ex rel. T.V. v.
Camp Jaycee, 197 N.J. 132, 143 (2008). If the laws of the two
jurisdictions do not differ significantly, then there is no
choice-of-law issue to be resolved, and the forum state applies
13 A-3924-12T1
its own law. Rowe, supra, 189 N.J. at 621; Gantes v. Kason
Corp., 145 N.J. 478, 484 (1996). The party seeking application
of the foreign law must demonstrate that the laws of the two
jurisdictions differ. Pressler & Verniero, Current N.J. Court
Rules, comment 6.1 on R. 4:5-4 (2014).
The 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. We have no statutes or cases
directly on point to inform us, but we suspect that both New
Jersey and Rhode Island would protect the interests of innocent
third parties. Analogous case law of both states suggests that
both would restrict the rescission remedy available to insurance
carriers in order to provide some protection to innocent third
parties for whose benefit compulsory insurance laws were
enacted. Nevertheless, we see some differences between the laws
of the two states.
In the field of automobile insurance, New Jersey courts
have held that the rescission remedy available to insurance
carriers when a policy was procured by means of a material
misrepresentation may not infringe upon the rights of innocent
third parties who might need to rely on insurance coverage to
14 A-3924-12T1
compensate them for their injuries. See, e.g., Rutgers Cas.
Ins. Co. v. LaCroix, 194 N.J. 515, 524-31 (2008); Fisher v. N.J.
Auto. Full Ins. Underwriting Ass'n, 224 N.J. Super. 552, 557-59
(App. Div. 1988). Our courts distinguish between the wrongdoing
insured, who procured the policy fraudulently or otherwise
failed to comply with the terms of the policy, and an innocent
third party, who had nothing to do with the fraud or breach of
the policy. Dillard v. Hertz Claim Mgmt., 277 N.J. Super. 448,
450-54 (App. Div. 1994), aff'd o.b., 144 N.J. 326 (1996);
Fisher, supra, 224 N.J. Super. at 557-58.
Because New Jersey mandates auto insurance coverage,
innocent third parties who use the roadways can reasonably
expect that other motorists will comply with the law and be
covered by a liability policy. Marotta v. N.J. Auto. Full Ins.
Underwriting Ass'n, 280 N.J. Super. 525, 532 (App. Div. 1995),
aff'd o.b., 144 N.J. 325 (1996). Consequently, our courts have
refused to declare an auto policy void from its inception and in
its entirety as to injured third parties who did not benefit
from the fraud committed in procuring the policy. Instead, the
voided policies are reformed to provide the minimum liability
coverage mandated by law. See Citizens United Reciprocal Exch.
v. Perez, 432 N.J. Super. 526, 532-34 (App. Div. 2013); N.J.
15 A-3924-12T1
Mfrs. Ins. Co. v. Varjabedian, 391 N.J. Super. 253, 256-57 (App.
Div.), certif. denied, 192 N.J. 295 (2007).1
The distinction between the insured as the wrongdoer and an
innocent third party has also been significant in the context of
a legal malpractice policy. First Am. Title Ins. Co. v. Lawson,
177 N.J. 125, 143 (2003). In Lawson, two title insurance
companies sought reimbursement from a law firm's malpractice
carrier for claims they had paid when lawyers at the firm
misappropriated the firm's trust funds in real estate
transactions. Id. at 133-34. Our Supreme Court held that the
legal malpractice coverage could be voided from the inception of
the policy for two attorneys in the firm because they had
misrepresented the existence of pending claims when they applied
for the policy. The Court further held that the policy could be
voided for the law firm itself, but not with respect to an
innocent third attorney in the firm because that attorney was
not involved in any wrongdoing. Id. at 140-43.
Both sides in this appeal cite Lawson as favoring their
positions on rescission of the JUA medical malpractice policy.
1
Another way of explaining the law is that the rescission remedy
available to the defrauded insurance carrier is "molded and
shaped" by the court under equitable principles so that innocent
third parties do not lose the benefits of mandatory insurance
protection. See Citizens United Reciprocal Exch., supra, 432
N.J. Super. at 538 (Ashrafi dissenting) (quoting LaCroix, supra,194 N.J. at 528-29).
16 A-3924-12T1
The DeMarcos focus on their status as innocent parties in the
perpetration of the alleged fraud by Stoddard and his insurance
agent, O'Neil. On the other hand, the JUA points out that the
Supreme Court in Lawson allowed rescission of coverage with
respect to the wrongdoing lawyers, which necessarily included
coverage for claims of their innocent clients. Id. at 141-42.
The Court only mandated that coverage be available for any
potential claims of the innocent third attorney's clients. Id.
at 143.
A noteworthy distinction between Lawson and this case is
that the innocent clients of the wrongdoing lawyers had already
recovered their losses from the title insurance companies. The
claims against the malpractice carrier were not brought by the
law firm's clients but by the title insurance companies that
were seeking to pass on their liability on the risks to the
malpractice carrier. On the subject of innocent clients, the
Court referred only generally to the "policies underlying our
Rules of Court that seek to protect consumers of legal services
by requiring attorneys to maintain adequate insurance."2 Lawson,
supra, 177 N.J. at 143 (citing Fisher, supra, 224 N.J. Super. at
557-58). The Court emphasized that the rescission remedy
2
Rules 1:21-1B(a)(4) and 1:21-1C(a)(3) of our Court Rules
require that law firms formed as limited liability companies or
limited liability partnerships maintain malpractice insurance.
17 A-3924-12T1
depends on equitable principles — "the totality of circumstances
in a given case," including the Court's "concern for the
public." Id. at 143-44.
Because the Court ultimately did not address the question
that is before us, the JUA's reliance on Lawson is misplaced.
The reasoning of the auto insurance cases more aptly applies to
the circumstances of this case. Like auto insurance, medical
malpractice insurance is mandatory in New Jersey. N.J.S.A.
45:9-19.17(a); N.J.S.A. 45:5-5.3(a). In the same way as the
general public that uses our roadways, see Marotta, supra, 280
N.J. Super. at 532, medical patients can reasonably assume New
Jersey doctors are complying with the law and carrying
compulsory malpractice insurance. Insurance coverage in at
least the minimum compulsory amount should remain available for
the benefit of innocent patients who suffered injuries when the
policy was in effect.
The rescission remedy available to an insurance carrier may
preclude the insured doctor from demanding coverage when he gave
materially false information in his application for insurance,
but that remedy does not permit a malpractice policy to be
voided from its inception and in its entirety when an innocent
patient seeks coverage. See Dillard, supra, 277 N.J. Super. at
451. The statutory minimum coverages under our state laws are
18 A-3924-12T1
not subject to post-claim rescission by the insurance carrier
because of the insured's fraud in procuring the policy.
The Rhode Island Supreme Court has issued decisions in the
context of automobile insurance that suggest it may decide the
issue of coverage in the same way. Although the superior court
of Rhode Island in the JUA's declaratory judgment action entered
a default judgment declaring that the JUA was not obligated to
provide coverage for the DeMarcos' lawsuit, the matter was
uncontested, and the court did not issue an opinion supporting
its judgment. Moreover, the judgment addressed only Stoddard's
right to demand a defense and indemnification. In the default
situation presented, we cannot say that the Rhode Island trial
court's judgment represents the law of that state with respect
to the rights of innocent third parties such as the DeMarcos.
To our reading, the published Supreme Court case law in
Rhode Island indicates an inclination to protect the rights of
innocent parties where compulsory insurance is involved. In
Ryan v. Knoller, 695 A.2d 990, 995-96 (R.I. 1997), the holding
of the Rhode Island Supreme Court is similar to the New Jersey
auto insurance cases we have cited. In Ryan, the plaintiff was
injured by an intoxicated driver who was driving a rented car.
The rental company's insurance policy contained an "intoxication
exclusion" that absolved the carrier of an obligation to cover
19 A-3924-12T1
the driver's liability. Id. at 991. The court held that
coverage had to be provided for the innocent injured party. It
stated that in situations where "the purpose of statutorily
required insurance coverage is intended for the protection of
the public, that purpose may not be thwarted by permitting an
insurer to avail itself of technical defenses included in its
policy relating to conditions whose performance is wholly beyond
the ability of the injured person to control." Id. at 992. The
court held that the intoxication exclusion was against public
policy and not enforceable against an innocent injured third
party. Id. at 995.
In a second auto insurance case decided on the same day and
written by the same justice, Ogunsuada v. Gen. Accident Ins. Co.
of Am., 695 A.2d 996 (R.I. 1997), the Rhode Island Supreme Court
reached a result that, on the surface, may seem inconsistent
with its holding in Ryan. It declined to distinguish between
the wrongdoing insured and the innocent injured party who had no
control over the wrongdoing.
The plaintiff in Ogunsuada was injured by an insured
motorist who subsequently breached a "cooperation clause" in his
insurance policy. After the insurance carrier withdrew from
providing a defense and indemnification for its non-cooperating
insured, the injured plaintiff obtained a default judgment
20 A-3924-12T1
against the insured tortfeasor. Id. at 997-98. The plaintiff
then sought recovery of his judgment from the insurance carrier
under a Rhode Island statute that permits a direct action
against the carrier after judgment is first obtained against the
insured tortfeasor. Id. at 998 (citing R.I. Gen. Laws § 27-7-
2). The Rhode Island Supreme Court held that a judgment-
creditor, seeking to recover from a judgment-debtor's insurer,
"stands in the shoes of the defendant's insured and is subject
to any defenses that the insurer would have against its
insured." Id. at 999. The court held that the injured
"plaintiff bore the burden of proving that [the insured] had
substantially complied with the cooperation provision in his
liability insurance contract, that any failure on his part to do
so was either excused or waived, or that his failure to comply
was not prejudicial to the defendant insurer." Ibid.
Both Ryan and Ogunsuada involved wrongdoing by the insured
driver that was wholly outside the control of the innocent third
party. In Ryan the court held that the carrier could not
disclaim coverage while in Ogunsuada the court held that the
carrier could use any defense it had available against the
insured. However, in Ogunsuada the court also noted a
distinction between parts of the subject insurance policy that
pertained to a compulsory insurance law and those that pertained
21 A-3924-12T1
only to optional insurance. Id. at 1001. It did not need to,
and in fact did not, hold that compulsory insurance coverage
could be denied to the innocent third party on the ground that
the insured had breached the terms of his policy.
We read the Ryan and Ogunsuada decisions together to
conform to an underlying principle that an innocent party will
be protected in circumstances where compulsory insurance laws
require coverage, but that otherwise, the insurance carrier may
rely on defenses that are not contrary to the public policy of
the state. As far as compulsory auto insurance coverage is
concerned, New Jersey and Rhode Island law are not substantially
different. The resulting question, however, is whether New
Jersey and Rhode Island both have laws that make medical
malpractice insurance compulsory.
New Jersey requires that doctors carry malpractice
insurance of at least one million dollars coverage per
occurrence, or if insurance coverage is not available, doctors
must demonstrate their financial responsibility with a letter of
credit of at least $500,000. N.J.S.A. 45:9-19.17(a).
Podiatrists in New Jersey are required to carry either a
malpractice policy or, if one is not available, a letter of
credit in "the minimum amount required by the State Board of
Medical Examiners." N.J.S.A. 45:5-5.3(a). The New Jersey
22 A-3924-12T1
Legislature enacted these laws to "ensure the citizens of the
State that they will have some recourse for adequate
compensation in the event that a physician or podiatrist is
found responsible for acts of malpractice." S. Health Comm.
Statement to S. 267 (N.J. 1996), available at http://law.
njstatelib.org/law_files/njlh/lh1997/L1997c365.pdf.
While the Rhode Island legislature has also considered the
question of mandatory malpractice insurance, it has not directly
compelled coverage in any specific amount. Instead, its statute
requires that the state's "director of business regulation"
promulgate regulations regarding malpractice insurance coverage.
R.I. Gen. Laws § 42-14.1-2. Furthermore, the Rhode Island
statute sets a floor of $100,000 coverage, ibid., in comparison
to the million dollars of minimum coverage required by the New
Jersey statute, N.J.S.A. 45:9-19.17(a). At the time of the
summary judgment motions in this case, no regulations had been
promulgated in Rhode Island mandating malpractice insurance
coverage for doctors. See Insurance Regulation 21 — Medical
Malpractice Insurance, R.I. Gen. Laws § 42-14.1-2 (proposed
Sept. 2007).3
3
Public notice of Proposed Rule-Making, implementing minimum
medical malpractice insurance requirements, Section 5, available
at http://www.dbr.state.ri.us/documents/rules/proposed/2013-
propd21.pdf (last visited Dec. 30, 2013).
23 A-3924-12T1
Although New Jersey and Rhode Island may come to the same
conclusion on limiting the rescission remedy to protect innocent
third parties, the laws of the two states are sufficiently
different with respect to compulsory insurance coverage that a
choice-of-law analysis and ruling is required in this case.
C.
The next step in our analysis is to evaluate the facts of
the case under the proper New Jersey choice-of-law standard
since, generally, the forum state applies its own conflicts law.
Erny v. Estate of Merola, 171 N.J. 86, 94 (2002). The parties
agree that, in deciding which state's law should apply, New
Jersey no longer follows traditional concepts of lex loci
delicti4 for torts, see, e.g., Veazey v. Doremus, 103 N.J. 244,
247-49 (1986); Mellk v. Sarahson, 49 N.J. 226, 228-29 (1967),
and lex loci contractus5 for insurance contracts, see, e.g.,
State Farm Mut. Auto. Ins. Co. v. Estate of Simmons, 84 N.J. 28,
36-37 (1980). Instead, we have employed "a more flexible
'governmental-interest' standard, applying the law of the state
with the greatest interest in, or most significant connections
with, the issues raised or the parties and the transaction."
4
"The law of the place where the tort or other wrong was
committed." Black's Law Dictionary 930 (8th ed. 2004).
5
"The law of the place where a contract is executed or to be
performed." Black's Law Dictionary 930 (8th ed. 2004).
24 A-3924-12T1
Lonza, Inc. v. The Hartford Accident & Indem. Co., 359 N.J.
Super. 333, 342 (App. Div. 2003).
More recently, the New Jersey Supreme Court has referred to
the analysis as a "most significant relationship test." Camp
Jaycee, supra, 197 N.J. at 135-36; see also id. at 156-63(Hoens, J. dissenting) (describing the "most significant
relationship test" as distinct from and less preferable to the
"governmental interest test," the latter focusing on the
conflicting public policies of the two jurisdictions).
In this case, the JUA emphasizes its own expectations and
argues that the interests of Rhode Island in regulating the
JUA's insurance contracts are predominant and therefore Rhode
Island law should apply. The DeMarcos, in turn, emphasize their
expectations when they engaged Stoddard to perform surgery, and
they argue that they and New Jersey have a greater interest in
protecting those who seek medical services in this state.
In Camp Jaycee, supra, the Court started with a presumption
that the law of the state where the injury occurred applies.
197 N.J. at 136, 141. The Court then considered general
principles addressed in section 6 and other sections of the
Restatement (Second) of Conflict of Laws ("Restatement") (1971).
Camp Jaycee, supra, 197 N.J. at 140-42. In the context of
conflicting state laws on charitable immunity, the Camp Jaycee
25 A-3924-12T1
Court evaluated the specific facts of the case and concluded
that the interests and laws of the state where the injury
occurred were controlling. Id. at 151-52.
The JUA argues that Camp Jaycee does not apply here because
it was purely a tort case while this case is primarily a
contract case pertaining to either enforcement or rescission of
an insurance contract. The JUA argues that the more relevant
precedent is Simmons, supra, 84 N.J. at 37, where the Court
discussed a conflict of laws in the context of insurance
coverage as a contract case rather than as a tort case.
In Simmons, too, the Court referenced applicable sections
of the Restatement, specifically, sections 6, 188, and 193.
Simmons, supra, 84 N.J. at 34-35. Most significant, section 193
of the Restatement provides:
The validity of a contract of fire, surety
or casualty insurance and the rights created
thereby are determined by the local law of
the state which the parties understood was
to be the principal location of the insured
risk during the term of the policy, unless
with respect to the particular issue, some
other state has a more significant relation-
ship under the principles stated in § 6 to
the transaction and the parties, in which
event the local law of the other state will
be applied.
[(Emphasis added).]
Notably, the Restatement commentary to section 193 identifies
that section as applicable to "such questions as whether a false
26 A-3924-12T1
statement made by the insured to the company bars recovery upon
the policy." Comment a to Restatement § 193. The commentary
also recognizes that the "principal location of the insured
risk" may be in more than one jurisdiction, in which case,
"[t]he importance of the risk's principal location" will have
less significance in deciding a choice-of-law issue. Id.
comment b.
The Court in Simmons acknowledged the overlap of contract
and tort law in the context of liability insurance coverage. It
held that, while the place where the insurance contract was
issued "ordinarily governs the choice of law," that rule
should not be given controlling or
dispositive effect. It should not be
applied without a full comparison of the
significant relationship of each state with
the parties and the transaction. That
assessment should encompass an evaluation of
important state contacts as well as a
consideration of the state policies affected
by, and governmental interest in, the
outcome of the controversy.
[Simmons, supra, 84 N.J. at 37.]
The Supreme Court also referenced Restatement § 193 in
Gilbert Spruance Company v. Pennsylvania Manufacturers'
Association Insurance Company, 134 N.J. 96, 107 (1993), which
was an insurance coverage dispute in an environmental
contamination case. The Court stated that an insurance policy
"should be interpreted under the substantive law of the state
27 A-3924-12T1
that the parties understood to be the principal location of the
insured risk, unless another state has a more significant
relationship to the parties, the transaction, and the outcome of
the controversy." When making this determination, "courts
should rely on the factors and contacts set forth in Restatement
sections 6 and 188."6 Id. at 102-03.
6
Restatement § 6 lists the following seven factors as relevant
to the choice-of-law issue:
(a) the needs of the interstate and
international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other
interested states and the relative interests
of those states in the determination of the
particular issue,
(d) the protection of justified
expectations,
(e) the basic policies underlying the
particular field of law,
(f) certainty, predictability and uniformity
of result, and
(g) ease in the determination and
application of the law to be applied.
More specifically, with respect to contracts, section 188
provides:
[T]he contacts to be taken into account in
applying the principles of § 6 to determine
the law applicable to an issue include:
(continued)
28 A-3924-12T1
In Lonza, we followed our Supreme Court's lead and
reformulated the seven factors listed in Restatement § 6 as
follows: "(1) the competing interests of the relevant states,
(2) the national interests of commerce among the several states,
(3) the interests of the parties, [and (4)] the interests of
judicial administration." Lonza, supra, 359 N.J. Super. at 347-
48 (quoting Pfizer, Inc. v. Employers Ins. of Wausau, 154 N.J.
187, 197-98 (1998)). Contrary to the JUA's contentions, our
application of the reformulated section 6 factors and the
relevant contacts listed in section 188, leads us to conclude
that New Jersey law should apply in this case.
(1) Competing interests of the states. New Jersey has a
strong interest in ensuring that all doctors who practice in
(continued)
(a) the place of contracting,
(b) the place of negotiation of the
contract,
(c) the place of performance,
(d) the location of the subject matter of
the contract, and
(e) the domicil, residence, nationality,
place of incorporation and place of business
of the parties.
These contacts are to be evaluated according
to their relative importance with respect to
the particular issue.
29 A-3924-12T1
this state maintain malpractice insurance. It has enacted a
statute mandating malpractice coverage so that patients who use
medical services in this state can be protected. Rhode Island
has an interest in ensuring that its JUA is used for its proper
purposes — to provide malpractice insurance for Rhode Island
doctors and not for doctors who practice primarily in another
state.
The JUA, however, was in a much better position than the
DeMarcos to protect the interests of both states by ensuring
that Stoddard was qualified to receive a JUA policy. All that
was required was that the JUA examine Stoddard's applications
and follow up on any apparent discrepancies, such as the absence
of a telephone number for a Rhode Island office.
In addition, the JUA undertook to provide insurance
coverage for out-of-state patients comprising up to 49% of a
Rhode Island doctor's practice. It must therefore abide the
potential application of the laws of other jurisdictions to its
coverage obligations.
(2) The interests of commerce among the states. The
inquiry pertinent to this factor should focus on whether the
application of one state's law would frustrate the policies of
the other state. Lonza, supra, 359 N.J. Super. at 348 (quoting
Pfizer, supra, 154 N.J. at 198-99). New Jersey has a policy of
30 A-3924-12T1
protecting innocent injured parties. See, e.g., Lawson, supra,177 N.J. at 143; Fisher, supra, 224 N.J. Super. at 557-58. That
policy would be frustrated by application of Rhode Island's law,
if it is interpreted not to provide similar protection to
innocent medical patients. Since Rhode Island may also have
such a policy of protecting innocent patients, at least in
circumstances where insurance coverage is compulsory, see Ryan,
supra, 695 A.2d at 995, application of New Jersey's law in this
context is less likely to offend the public policy of Rhode
Island.
(3) The interests of the parties. The justified
expectations of the parties are of considerable importance. See
Restatement § 188 (comment b); Lonza, supra, 359 N.J. Super. at
348 (quoting Pfizer, supra, 154 N.J. at 198-99). In evaluating
the parties' expectations, the relevant contacts listed in
section 188 (see supra, footnote 6) should be analyzed, taking
account of their relative importance in these factual
circumstances.
Here, Rhode Island is the place of the insurance contract,
as well as the location of one of the contracting parties.
Significantly, all other contacts point to New Jersey.
Stoddard's practice was actually located in New Jersey. On
the last of the renewal applications, the one that the JUA
31 A-3924-12T1
rescinded, Stoddard listed his office address in Lakewood, New
Jersey. In fact, the earlier applications provided clues that
Stoddard was actually practicing in New Jersey, not in Rhode
Island. They all contained a New Jersey office telephone
number.
Furthermore, the JUA had constructive knowledge all along
that up to 49% of Stoddard's practice was located in New Jersey
and not in Rhode Island. Consequently, the place of performance
of activities covered by the insurance contract included a
significant level of practice in New Jersey. The location of
the risk the JUA undertook to cover was not just in Rhode
Island.
The JUA nevertheless entered into the insurance contract
and agreed to cover all of Stoddard's medical practice, in both
Rhode Island and New Jersey. When an insurance contract
protects against a localized risk, the state where the risk is
located has a significant interest in application of its own
laws. Comment e to Restatement § 188. The JUA had ample
information that it was subjecting its insurance contract to the
laws of a jurisdiction other than Rhode Island when it accepted
premium payments from Stoddard and provided him with liability
coverage for his New Jersey practice as well as his purported
32 A-3924-12T1
51% or more practice in Rhode Island. The JUA's interests were
not tied exclusively to Rhode Island and its laws.
On the other hand, the DeMarcos never ventured outside New
Jersey in seeking medical services from Stoddard. They are
residents of New Jersey who sought the care of a doctor in this
State. The allegedly negligent surgery was performed in New
Jersey. The DeMarcos have a strong interest in the application
of this State's laws to their claims against Stoddard and the
insurance carrier that provided him with liability coverage as
mandated by New Jersey law. Their interests in application of
New Jersey laws clearly predominate over those of the JUA in
application of Rhode Island laws.
(4) The interests of judicial administration. The inquiry
for this factor is whether choosing either competing state's law
will foster or hinder a fair, just, and timely disposition of
the controversy. Lonza, supra, 359 N.J. Super. at 348 (quoting
Pfizer, supra, 154 N.J. at 198-99). This factor is particularly
important when there are numerous parties and the issues before
the court are complex. Ibid. In this case, there are only
three parties, and the issues do not reach the complexity of
insurance coverage in an environmental contamination or similar
multi-state, multi-party case. We give this factor minimal
weight.
33 A-3924-12T1
Our analysis of the factors and contacts derived from the
Restatement leads us to conclude that New Jersey has a more
significant relationship, and a greater governmental interest,
in the application of its laws to this coverage dispute than
does Rhode Island. To the extent there are differences in the
laws of the two states, New Jersey law shall apply to the
coverage dispute.
We have already determined in the prior section of this
opinion that New Jersey law requires the JUA's rescission remedy
be limited so that it does not apply to the DeMarcos' claims.
We conclude that the Law Division correctly granted summary
judgment to the DeMarcos requiring liability coverage in the
minimum amount mandated by New Jersey statute, one million
dollars, N.J.S.A. 45:9-19.17. If the DeMarcos prevail in their
malpractice case against Stoddard, the JUA must indemnify
Stoddard up to that amount.
IV.
Finally, the JUA challenges the award of attorney's fees to
the DeMarcos for prevailing on the coverage issue.
Rule 4:42-9(a)(6) allows a court to award attorney's fees
"[i]n an action upon a liability or indemnity policy of
insurance, in favor of a successful claimant." The rule
includes an action brought by a third-party beneficiary of a
34 A-3924-12T1
liability insurance contract. Myron Corp. v. Atlantic Mut. Ins.
Corp., 407 N.J. Super. 302, 311 (2009), aff’d o.b., 203 N.J. 537(2010).
The JUA argues that the granting of attorney's fees is not
mandatory and that its defense of the DeMarcos' complaint was
not a "groundless disclaimer" of insurance coverage. It argues
further that attorney's fees are not warranted because the case
involved a "novel" issue "worthy of consideration." See Messec
v. USF&G Ins. Co., 369 N.J. Super. 61, 64 (App. Div.), certif.
denied, 181 N.J. 287 (2004). While we do not disagree factually
with these contentions, they do not preclude the award of
attorney's fees.
First, although not mandatory, a court can grant attorney's
fees when such an award is authorized and the court finds it
appropriate to do so. Shore Orthopaedic Grp. v. Equitable Life
Assur. Soc'y of U.S., 397 N.J. Super. 614, 623 (App. Div. 2008),
aff’d o.b., 199 N.J. 310 (2009). "The decision to award counsel
fees rests within the sound discretion of the trial court."
Ibid. Second, bad faith is not a prerequisite to an attorney's
fee award under Rule 4:42-9(a)(6). Sears Mortg. Corp. v. Rose,
134 N.J. 326, 356 (1993); Myron Corp., supra, 407 N.J. Super. at
310-11. Finally, unlike Messec, supra, 369 N.J. Super. at 64,
this was not a coverage dispute between two insurance carriers
35 A-3924-12T1
and in which we were affirming the trial court's discretionary
decision to deny attorney's fees. Rather, "the insurer ha[d]
refused to provide coverage or to indemnify or defend its
insured," ibid., and we are reviewing the trial court's decision
to award fees.
Where a trial court has authority to grant attorney's fees,
we grant it broad discretion and will not disturb its decision
unless there has been a clear abuse of that discretion. Furst
v. Einstein Moomjy, Inc., 182 N.J. 1, 25 (2004); Rendine v.
Pantzer, 141 N.J. 292, 317 (1995). Here, the DeMarcos
successfully litigated the action and prevailed on a judgment
declaring that the JUA is obligated to provide coverage for
their malpractice claims against Stoddard. The Law Division did
not abuse its discretion in granting them attorney's fees.
Affirmed.
36 A-3924-12T1