The Supreme Court of New Jersey noted that the insurer wanted the court to determine whether a basic policy such as the one in this instance permits an innocent third party to recover the minimum standard policy statutory amount or the voided policy limit or nothing at all.

The court said that Citizens United was justified in revoking the policy based on Perez not disclosing material information on her application. The insurer was denied essential information relevant to its assessment of the risk, and ultimately, to its decision to issue the policy. However, the court continued, this does not mean the insurer can escape its liability with respect to innocent third parties.

As to the extent of that liability, the court decided that Citizens United was liable for the $10,000 coverage for which Perez opted when she purchased the policy. The court stated that, under state law, the basic policy with its optional liability insurance, overrode the minimum compulsory insurance amounts. The court pointed out that a basic policy, under state law, mandates no minimum bodily injury coverage but provides that the policyholder may elect to purchase such coverage in an amount or limit of $10,000.

In this instance, Perez contracted for third party bodily injury liability coverage in the amount of $10,000. That option was created by statute and it is part of the comprehensive scheme of auto insurance coverage required of motorists in New Jersey. Given that the statute aims to encourage drivers to seek coverage, the court found that it would be both unjust and contrary to public policy to invalidate and disregard the minimal amount of liability coverage bargained for by the insured. It would also be improper, continued the court, to hold the insurer liable for an amount in excess of that for which it had previously contracted. Therefore, the court ruled that where an insured elects to add the basic policy's optional $10,000 coverage for third party bodily injury in the original insurance contract, the insurer shall be liable to innocent third parties for the contracted $10,000 amount as the minimal amount available under state law, even when that basic policy is later voided.

The judgment of the lower court was reversed.

Editor's Note: The New Jersey Supreme Court rules that even when a policy is rescinded, for such reason as an insured's material misrepresentation in respect of the policy at its inception, PIP benefits may nevertheless remain payable to innocent third parties. In this case, the insured lawfully contracted to purchase $10,000 basic bodily injury liability coverage and that is the amount that is payable to the innocent third party.