On appeal from Superior Court of New Jersey, Law Division, Camden County, L-3028-99.
Before Judges King, Coburn and Landau.
The opinion of the court was delivered by: Coburn, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Defendant, Garden State Indemnity Company ("Garden State"), issued a claims-made malpractice insurance policy to plaintiff, Scott Liebling, an attorney. When Liebling was sued by a former client for conduct occurring before he applied for the policy, Garden State denied coverage. Liebling filed an action for declaratory judgment. Garden State answered, asserting equitable fraud as an affirmative defense, and demanding rescission of the policy. Its primary allegation was that one of Liebling's answers to a subjective question posed in the insurance application was a material misrepresentation. Both sides filed motions for summary judgment. Garden State prevailed on the ground that although the question was subjective, the answer was false. Garden State had argued that the answer was false in the sense that no reasonable attorney would have so replied based on the facts known to the applicant. The judge's ruling was ambiguous: either he agreed with Garden State or he ruled for Garden State on the ground that Liebling had made a knowingly false misrepresentation. Liebling appeals, arguing that summary judgment was inappropriate because his answer could be found to be a truthful representation of the opinion he held. Although we agree that the question was subjective, and that the issue of rescission turns on Liebling's state of mind and good faith, we are nonetheless satisfied that no reasonable fact-finder could conclude that his answer truly reflected his actual opinion. Therefore, we affirm on that ground and on the additional ground that a related exclusion justified the denial of coverage.
The basis of the equitable fraud contention was Liebling's answer of "No" to this question in Garden State's application form when he applied for the insurance policy on September 3, 1997:
Is the firm aware of any circumstances, or any allegations or contentions as to any incident which may result in a claim being made against the firm . . . ?
The claim eventually arose from Liebling's representation of Anthony Barrett for injuries received in an automobile accident that occurred on June 30, 1992. Barrett was injured when the car he was driving collided with a vehicle owned by the United States Postal Service. Initially he retained an attorney named Craig R. Mitnick, who filed an administrative claim with the Postal Service in April 1994. The Postal Service denied the claim in a letter dated August 22, advising that any further legal action would have to involve a "suit against the United States of America in an appropriate United States District Court not later than six months from the date of mailing of this letter . . . ." On February 21, 1995, Mitnick filed suit in the federal court in New Jersey, naming the Postal Service and its employee-driver as defendants rather than the United States. On March 21, Mitnick filed a substitution of attorney, signed by Liebling, stating that Liebling would represent Barrett. The parties agree that as a matter of federal law, Liebling had until June 21, a period of ninety days from the date he became Barrett's attorney, to amend the complaint and serve the government, and that he did not do so.
On August 10, 1995, the federal judge filed a "Notice of Call for Dismissal for Failure to Prosecute," since there was no evidence of service of process. Liebling replied with a certification indicating that service had been made. On June 4, 1996, the judge filed a second notice of dismissal for failure to prosecute and subsequently dismissed that notice after Liebling submitted an affidavit asserting that the named defendants had been served and that he was awaiting their answer. Thereafter, the Postal Service and its employee-driver moved for dismissal of Barrett's action for lack of jurisdiction. Liebling countered with a motion to amend the complaint to name the government as a defendant. The judge denied Liebling's motion and granted the defendants' motion in an opinion dated October 4, 1996. In that opinion, the judge stated that plaintiff's attorney "[r]ecognized that his suit against [the employee] and the Postal Service is not permitted under the [Federal Tort Claims Act]" and that was why he had filed the motion to amend the complaint to name the United States as the defendant. The judge also noted Liebling's arguments with respect to certain bases in the applicable rules that he contended supported his motion despite his failure to move within the requisite 120 days from the filing of the complaint.
In opposition to Garden State's motion for summary judgment, Liebling certified the following:
At the time I completed the application for insurance with Garden State Indemnity Company, I had not received a copy of Judge Simandle's Order [and opinion] despite my request for same. The original Motion by the Deputy Attorney General and my Cross-Motion to Amend the Complaint based on the relation-back doctrine was heard by Judge Simandle "on the papers" and no oral argument was permitted by Judge Simandle.
On the day of his ruling, I contacted Judge Simandle's chambers and spoke directly with his law clerk who indicated to me that the Deputy Attorney General's Motion had been granted and that my Motion to Amend the Complaint had been denied based upon "Statute of Limitations and the naming of the improper parties" in the lawsuit originally filed by the Law Offices of Mitnick, Josselson, DePersia and DePersia.
He further certified that he "immediately reached out to Mr. Barrett on at least five occasions in order to inform him that his case had been dismissed as a result of the action/inaction of his prior attorney . . . ." The letters to which Liebling was referring merely ask that Barrett "contact my office as soon as possible so that we may schedule an appointment to discuss your case." The letters did not indicate that the complaint had been dismissed.
The last letter was mailed on January 8, 1997, some seven months before Liebling applied for defendant's insurance policy. Barrett did not respond to the letters but he did file a malpractice action against his first attorney and Liebling on July 15, 1998. That of course is the action Garden State claims it had no obligation to defend on plaintiff's behalf because of its entitlement to rescission, a remedy that would exclude any claim for insurance coverage, not just this one.
Fraud is divided into two categories: legal fraud and equitable fraud. Within equitable fraud a further distinction is made when the statement relied on is a response to a question, depending on whether the question is objective or subjective.
In general, equitable fraud requires proof of (1) a material misrepresentation of a presently existing or past fact; (2) the maker's intent that the other party rely on it; and (3) detrimental reliance by the other party. Jewish Center of Sussex Cty., 86 N.J. 619, 624 (1981). Unlike legal fraud, there need not be proof that the statement was made with knowledge that it was false. Ibid. In other words, a party seeking rescission based on equitable fraud need not prove "knowledge of the falsity and an intention to obtain an undue advantage therefrom." Bonnco Petol, Inc. v. Epstein, 115 N.J. 599, 609 (1989) (quoting Jewish Center, 86 N.J. at 624-25). "Even an innocent misrepresentation can constitute equitable fraud justifying rescission." Ledley v. William Penn Life Ins. Co., 138 N.J. 627, 635 (1995).
However, in applying the doctrine of equitable fraud to an insured's answers to questions posed in insurance applications, answers to subjective questions are treated differently from answers to objective questions. Ledley, 138 N.J. 635-637 (1995). An objective question as one calling "for information within the applicant's knowledge" and a subjective question as one that "'seek[s] to probe the applicant's state of mind.'" Id. at 636 (quoting Formosa v. Equitable Life Assurance Soc'y, 166 N.J. Super. 8, 15 (App. Div.), certif. denied, 81 N.J. 53 (1979)). The Court ...