In DeMarco v. Stoddard, the New Jersey Appellate Division held that a medical malpractice carrier must provide coverage for a physician being sued even if the physician made false statements on an insurance application.
In DeMarco, Dr. Sean Stoddard was a podiatrist who owned the Center for Advanced Foot & Ankle Care, with offices in Toms River and Lakewood, New Jersey. In 2007, Dr. Stoddard obtained medical malpractice insurance through the Medical Malpractice Joint Underwriting Association of Rhode Island (“JUA”). The JUA provided policies for physicians who also practiced outside of Rhode Island so long as 51 percent of the practice was generated in State.
Dr. Stoddard had a Rhode Island medical license and a Rhode Island office address; however, he had virtually no practice within the State. Rather, his medical practice was generated almost entirely in New Jersey. Nevertheless, Dr. Stoddard falsely stated on his insurance application to the JUA that he generated 51 percent of his practice in Rhode Island.
Dr. Stoddard performed surgery on Plaintiff, Thomas DeMarco’s, foot in New Jersey in September of 2010. After the procedure, Dr. Stoddard closed his practice and moved to California. Mr. DeMarco’s foot condition worsened, and in October of 2011, he filed a medical malpractice suit against Dr. Stoddard.
Dr. Stoddard sought a defense through the JUA. The JUA refused to provide coverage after it determined that Dr. Stoddard’s practice was generated in New Jersey, contrary to the statements he made in his insurance application. The JUA moved to rescind the policy in Rhode Island, which was granted.
The attorney for Mr. DeMarco filed a declaratory judgment against the JUA as to the carrier’s obligation to defend and indemnify Dr. Stoddard, who at the time was going through a divorce and was without any significant assets. The Trial Court granted the application. The JUA appealed the decision, which was affirmed by the Appellate Division.
New Jersey has a Statutory requirement for medical malpractice insurance. In reaching its decision, the Court viewed the requirement much like it viewed compulsory automobile insurance coverage in instances where an innocent third-party is injured. The Appellate Division held:
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 compensate them for their injuries.
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.
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. 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.
Accordingly, if Mr. DeMarco was successful in his malpractice claim, the JUA was required to indemnify him for the minimum amount mandated by New Jersey Law, which is $1,000,000.
Carriers must take note of the DeMarco decision. The Court has not only limited a carrier’s ability to rescind coverage based on material misrepresentations, but it has also opened the door to additional litigation. Plaintiffs will now seek to file declaratory actions against malpractice carriers, or counterclaims to declaratory actions filed by carriers to rescind a policy, which seek to reform policies to the minium required by Statute in instances where fraud is alleged.
By Daniel B. McMeen, Esq.