Citizens United Reciprocal Exchange v. Perez, A-3100-11T1; Appellate Division; opinion by Hayden, J.A.D.; dissent by Ashrafi, J.A.D.; decided and approved for publication September 13, 2013. Before Judges Fuentes, Ashrafi and Hayden. On appeal from the Law Division, Hudson County, L-3837-10. DDS No. 23-2-1317 [17 pp.]

Defendant Luis Machuca, while driving a car owned by defendant Sabrina Perez, was involved in an auto accident with a car driven by defendant Dexter Green. Green made a personal-injury claim against Perez's policy.

Perez insured her car with Citizens United Reciprocal Exchange under a basic policy with the optional $10,000 liability coverage. After the accident, she acknowledged that she had obtained coverage based on a fraudulent application.

CURE filed a declaratory action seeking an order that the policy was void ab initio due to Perez's material misrepresentation and that the reformed voided policy provided no liability coverage to innocent third parties.

Relying on New Jersey Manufacturers Insurance Co. v. Varjabedian, 391 N.J. Super. 253 (App. Div.), certif. denied, 192 N.J. 295 (2007), the trial judge affirmed the voiding of the policy but found that, for purposes of innocent third parties, the voided policy should be reformed to the mandatory minimum liability insurance coverage under N.J.S.A. 39:6A-3, i.e., $15,000 per person and $30,000 per occurrence.

On appeal, CURE urges adoption of the reasoning in Mannion v. Bell, 380 N.J. Super. 259 (Law Div. 2005), which Varjabedian overruled: that since the auto insurance reforms in 1998, when the newly created basic policy provided only optional liability coverage, there has been no mandatory minimum liability coverage in this state and no necessity for the issuer of a voided policy to pay liability claims of innocent third parties.

Held: Varjabedian is affirmed. An insurer seeking to retroactively void coverage based on the insured's prior conduct cannot rely on the alternative basic policy's lack of mandated liability coverage to avoid providing the minimum compulsory noncancelable $15,000/$30,000 liability limits.

The panel notes that when the named insured makes affirmative misrepresentations or material omissions in an application for insurance coverage, the insurer has the right to void the policy ab initio. However, even when a policy is rescinded, PIP benefits may nevertheless remain payable to innocent third parties. The potential recovery under a retroactively revoked policy is the minimum compulsory insurance required by law.

Under the no-fault insurance system, every owner of a motor vehicle registered or garaged in New Jersey must maintain motor vehicle liability insurance coverage with minimum limits of $15,000/$30,000. This is the "standard policy." However, in 1998, the Automobile Insurance Cost Reduction Act established a noncompulsory option — the "basic policy" — as an "alternative" to the mandatory coverage of the standard policy. That policy provided an optional liability insurance coverage with a $10,000 limit.

Mannion held that the basic policy was the minimum compulsory insurance in New Jersey, which meant that there was no longer any compulsory liability insurance in the state.

Varjabedian rejected Mannion's reasoning. It concluded that a carrier seeking to retroactively void coverage based on the insured tortfeasor's prior conduct cannot rely on the alternative basic policy's lack of mandated liability coverage to avoid providing the minimum compulsory noncancelable $15,000/$30,000 liability limits.

The panel says CURE reiterates the argument that Varjabedian rejected, and it again rejects that argument, saying it ignores the longstanding principle that New Jersey's insurance scheme of mandating auto insurance evinces a strong legislative policy of assuring at least some financial protection for innocent accident victims.

The panel says that since AICRA the Supreme Court has consistently reformed auto insurance contracts to protect innocent third parties up to the minimum compulsory limits. The Legislature has not stepped in to modify that judicial determination. Although it offered an "alternative" basic policy, it has still provided for a comprehensive standard policy with mandatory liability coverage limits. Although Perez elected the basic policy alternative, from the perspective of the insurers' obligation, the required compulsory insurance liability limits remain $15,000/$30,000.

To dispel any lingering ambiguity, the panel reaffirms the principle established in Varjabedian: a carrier seeking to retroactively void coverage based on the insured's prior conduct cannot rely on the basic policy's lack of mandated liability coverage to avoid providing the minimum compulsory noncancelable $15,000/$30,000 liability limits.

The panel suggests that to the extent that this creates an anomalous situation, the Legislature may wish to address the issue.

The dissenting judge would not depart from Varjabedian as it applies to a standard auto policy. However, he opines that in the case of a basic policy with $10,000 maximum liability coverage, an innocent injured party is not entitled to more coverage than provided by the policy that was issued. Thus as to Green, the policy should be enforced with a $10,000 policy limit.

For appellant — Eric Poe (Bright & Sponder; Chad B. Sponder on the brief). For respondents Dexter Green and Progressive Garden State Insurance Company — Marc A. Deitch. For amicus curiae The Insurance Council of New Jersey — George R. Hardin (Hardin, Kundla, McKeon & Poletto; Hardin and Arthur A. Povelones Jr. on the brief).