Insurance policies almost invariably contain a “fraud clause” allowing an insurer to void or deny an insurance claim if the insured misrepresents or conceals a material fact, either before or after a loss occurs. Such conduct also gives rise to a claim under the Insurance Fraud Prevention Act (IFPA), N.J.S.A. 17:33A-4(a), and is punishable as a crime, pursuant to N.J.S.A. 2C:21-4.6(a).
The decision of our Supreme Court in Longobardi v. Chubb Insurance Co. of New Jersey, 121 N.J. 530 (1990), nearly 30 years ago, made clear that, pursuant to a fraud clause, an insured’s material misrepresentation during an insurer’s post-loss investigation can serve as an affirmative defense to coverage. Left unaddressed, however, was the following question: Can an insurer cite an insured’s alleged misrepresentation made during the post-denial coverage litigation, as a basis to invoke the fraud clause and bring an IFPA claim?
Four years later in Thomas v. New Jersey Insurance Underwriting Association (NJIUA), 277 N.J. Super. 630 (Law. Div. 1994), the Law Division answered that question in the affirmative, bucking what it acknowledged to be the “overwhelming majority rule” to the contrary. Thomas has never expressly been overruled. Nonetheless, Thomas was incorrectly decided and does not accurately express the law of New Jersey on this question. An insured’s misrepresentation during coverage litigation cannot be the basis for denying coverage or bringing an IFPA claim.
In Thomas, the insured brought suit after the insurer denied her vandalism claim and misrepresented her damages in interrogatory answers. The jury found that to be a material misrepresentation and returned a verdict for the insurer on the fraud clause affirmative defense and IFPA claim. Denying the insured’s motion for a new trial, the trial court interpreted Longobardi to extend to misrepresentations made during coverage litigation. In doing so, the court recognized that its holding diverged from the majority rule that “misrepresentations made during litigation never void coverage.” Indeed, the leading case for the majority rule comes from the Third Circuit’s decision in American Paint Service Inc. v. Home Insurance Co., 246 F.2d 91 (3rd Cir. 1957), which predicted New Jersey law. To justify its novel holding, the trial court relied on three primary bases: (1) a Second Circuit decision; (2) the language of the IFPA; and (3) its interpretation of Longobardi.
In the 25 years since Thomas was decided, no court has followed or positively cited it. The only decision to substantively address it, Reliance Insurance Co. v. Keybank U.S.A., No. 1:01 CV 62, 2006 WL 2850454 (N.D. Ohio Sept. 29, 2006), rejected it in favor of the majority rule. Thomas also directly conflicts with the decision of the Supreme Court of the United States in Republic Fire Insurance Co. of North America v. Weides, 81 U.S. 375 (1871), which held that fraud clauses apply only to misrepresentations in an insured’s proofs of loss and examination under oath (EUO). Thomas is effectively an island in a vast sea of jurisprudence to the contrary. But Thomas is not wrong simply because it is outweighed. It is wrong because its reasoning is unsound, and has since been fatally undermined, if not implicitly overruled.
The first basis Thomas relies upon, the Second Circuit’s decision in Lomartira v. American Automobile Insurance Co., 371 F.2d 550 (2d Cir. 1967), is self-defeating. Lomartira predicted Connecticut law, but even Thomas recognized that the Connecticut Supreme Court subsequently rejected Lomartira, in favor of the majority rule, in Rego v. Connecticut Ins. Placement Facility, 593 A.2d 491 (Conn. 1991). Lomartira also never ultimately took a position, instead deferring to the view of the district court on Connecticut law—a procedural practice later overruled in favor of de novo review.
The second basis Thomas relied upon, the language of Section 4 of the IFPA, does not support the holding. The trial court observed that it is an IFPA violation when a person submits “any written or oral statement as part of, or in support of … a claim for payment or other benefit pursuant to an insurance policy.” Thomas incorrectly posited that nothing in that language “suggests that statements made during litigation are excluded from its scope.” The statutory language is nothing more than the legalese way of saying “insurance claim.” A lawsuit is not an insurance claim, it is the legal proceeding that occurs after denial of the claim.
Most crucially, Thomas fails to account for the New Jersey “litigation privilege,” which clothes litigants with absolute immunity from civil liability for statements made related to a lawsuit. Although litigation privilege existed at common law for centuries, our Supreme Court brought it to the forefront in Hawkins v. Harris, 141 N.J. 207 (1995), a year after the trial court decided Thomas. The insured in Thomas almost certainly never asserted litigation privilege. Our Appellate Division in Peterson v. Ballard, 292 N.J. Super. 575 (App. Div.), certif. denied, 147 N.J. 260 (1996), explained that where a claim is based on a statute, the litigation privilege applies unless there is a “clear legislative intent” to abrogate it. Analytically, then, Thomas had it backwards when it put the burden on the IFPA to affirmatively exclude statements made during litigation from its scope of liability.
But it is Commercial Insurance Co. of Newark v. Steiger, 395 N.J. Super. 109 (App. Div. 2007), that confirms the applicability of the litigation privilege to defeat an IFPA claim. In Steiger, an expert submitted a report in UM litigation in which he opined that a phantom vehicle caused the accident. The insurer later sued the expert for an IFPA violation, asserting that his expert report constituted a material misrepresentation. Affirming dismissal of the IFPA claim, the Appellate Division held that the expert was “immune from liability pursuant to the litigation privilege.” Although Thomas goes unmentioned in the opinion, the inescapable conclusion is that Steiger mortally wounds Thomas. It would be quite anomalous if an insurer was precluded from bringing an IFPA claim based on an alleged misrepresentation during litigation, yet could rely on that same misrepresentation for its affirmative defense.
There is no traction to any argument that a rule contrary to Thomas would encourage an insured to lie with impunity during coverage litigation. While the litigation privilege protects the insured from civil consequences of a misrepresentation, it does not protect him or her from a criminal perjury prosecution, a principle re-affirmed in Hawkins. The Third Circuit made sure to point this out when crafting the majority rule in American Paint. As an aside, although the privilege would also not insulate an insured from prosecution under the criminal insurance fraud statute, like the language of the IFPA, the criminal statute facially applies only to a misrepresentation made in an insurance claim, not during a coverage lawsuit.
The third basis that Thomas relies upon is a fundamental misunderstanding of the Longobardi decision. Longobardi concerned an insured’s misrepresentation during his EUO as part of his insurer’s claim investigation. The Supreme Court held that fraud clauses apply to an insured’s “material misrepresentation to the insurer while it is investigating the claim.” The court explained that it was extending the insured’s contractual duty to be truthful “beyond the inception of the policy to a post-loss investigation,” reasoning that misrepresentations during investigations “strike at the heart” of an insurer’s ability to obtain the information it needs to determine its obligations and protect itself. In its discussion that followed on the materiality of a misrepresentation, the court agreed with the reasoning of the Second Circuit that a misrepresentation is material if it was relevant to the insurer’s investigation. The court synthesized the rule that a misrepresentation is material if the misrepresented fact would have been relevant and important to its “course of action,” that course of action referring to the investigation.
Thomas’ belief that Longobardi teaches the focus is simply on “when a misrepresentation is made” finds no basis in the court’s express holding or reasoning. By its express terms, Longobardi extends the fraud clause only to cover the post-loss investigation period. The court’s reasoning does not translate to the post-claim denial litigation context. An insured’s misrepresentation during a deposition, in answers to interrogatories, or while testifying at trial, could not possibly affect an insurer’s investigation that already concluded in denial. Put another way, a misrepresentation during litigation could never satisfy the element of materiality because there is no “course of action” that the misrepresentation could have affected.
Twenty-five years after it was decided, Thomas has no legs to stand on and does not accurately reflect the state of the law in New Jersey. While Steiger severely undercuts Thomas, New Jersey law on this issue will remain unsettled until an appellate court explicitly consigns Thomas to the dustbin of jurisprudential history. In the appropriate case, New Jersey should expressly adopt the overwhelming majority rule and reject Thomas.
This is not simply a matter of being in vogue. The majority rule is based on sound policy explained long ago in American Paint. When an insurer denies coverage, “it is assumed that the insurer, in good faith, then has sound reasons based upon the terms of the policy for denying the claim of the insured.” The minority rule incentivizes insurers to deny coverage without an adequate basis and then attempt to manufacturer a basis in the ensuing lawsuit. Once an insurer repudiates coverage and the insured files suit, the insurer and insured deal with one another as plaintiff and defendant, not contractually as insurer and insured. In short, the rule must be that an insurer generally can rely only on an insured’s misrepresentation that falls between two bookends: the application for the insurance policy and the institution of a coverage lawsuit after the insurer denies the claim.
Brian M. Block is an associate in the Litigation Department of Mandelbaum Salsburg in Roseland. Michael F. Bevacqua Jr. is a member of the firm, where much of his practice is devoted to complex commercial litigation, bank litigation, and consumer finance defense.