The rescission of any liability policy is never easily obtained. The courts scrutinize whether the insurer has met its substantial burden of establishing that the insured made a misrepresentation of material fact. On a practical level, judges are reluctant to grant rescission where it will leave an innocent plaintiff without any source of funds to pay his claim.
How should a New Jersey court decide a professional liability insurer’s request for rescission where the insured professional admittedly made a false statement concerning the location of his practice and has no personal assets to satisfy a claim for malpractice? Does it matter that New Jersey requires physicians and podiatrists to maintain significant limits of professional liability insurance?
In DeMarco v. Stoddard the New Jersey Supreme Court held that rescission was properly granted to a Rhode Island based insurer where the insured podiatrist falsely represented in the application for insurance that at least 51% of his practice was generated in Rhode Island.
The facts of DeMarco are simple. Dr. DeMarco represented in his original and at least three renewal applications that his practice met the 51% requirement. In reality, it appears that the entirety of his practice was based in New Jersey. A malpractice claim was filed against him in New Jersey, which was promptly forwarded to his professional liability insurer to handle. The insurer responded by issuing a reservation of rights letter and filing an action for declaratory judgment in Rhode Island. The underlying plaintiff eventually amended his malpractice complaint to add the insurer and sought a declaration that the insurer was required to defend and indemnify the defendant doctor up to his policy limits of $1 million.
The legal issue was whether the insurer was entitled to rescission because of the podiatrist’s clear material misrepresentation of fact. The practical issue was who would bear the consequences of the doctor’s misrepresentation: the innocent claimant or the innocent insurer? In a 5-2 decision, the Supreme Court sided with the insurer holding that a contrary decision “suggests that fraudulent conduct is condoned.”
In Demarco, the misrepresentation was clear and conceded. The case is significant because the Supreme Court confirmed the right of a professional liability insurer to rescind a policy based on the professional’s misrepresentation of material fact even if the professional was virtually judgment proof. The court also weighed the harm to an innocent claimant against the public policy of discouraging fraudulent conduct against an insurer, and found in favor of the insurer. A rare case indeed.