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Consumer First Insurance Co. v. Lee


February 24, 2009


On appeal from Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-13386-04.

Per curiam.


Argued December 1, 2008

Before Judges Lisa, Sapp-Peterson and Alvarez.

Plaintiff Consumer First Insurance Company (Consumer First) appeals the dismissal with prejudice, after a bench trial, of its declaratory judgment action against its insured Robert T. Lee (Lee), his estate and administratrix. New Jersey Manufacturers Insurance Company (NJM) and Liberty Mutual Insurance Company (Liberty) intervened in the proceeding, seeking to compel coverage by Consumer First for their insureds. The claims against the estate arise from the automobile accident that resulted in Lee's death and injuries to several other persons.*fn1 We reverse and remand.

We conclude that Lee made a material misrepresentation on his automobile insurance application regarding his lifelong epilepsy. We also conclude that as a result, Consumer First is required to extend only minimum mandatory statutory amounts of coverage to all claimants as required by the Automobile Insurance Cost Reduction Act (AICRA), N.J.S.A. 39:6A-3. Lastly, we vacate the award of counsel fees in the amount of $15,471.50, payable by Consumer First to NJM.


Consumer First filed its complaint in November 2004, alleging that when it extended automobile insurance to Lee, it relied on Lee's material misrepresentations. On his April 2003 application, Lee indicated that he had no physical or mental impairments, despite a history of epileptic seizures. The automobile accident occurred on September 19, 2003. Lee's estate submitted claims to Consumer First for his medical expenses and other benefits, as did others who suffered personal injuries and property losses as a result of the accident. Consumer First sought rescission of the policy, a declaration that Lee was not entitled to any coverage, and a declaration that it had no duty to defend or indemnify Lee for claims arising out of the accident. NJM filed a complaint to intervene because it had paid uninsured motorists (UM) benefits to its insured, Kansobi Kardan, when plaintiff failed to provide liability coverage under the policy it issued to Lee.*fn2 Other than the representation made at oral argument, it is not clear from the record which interests Liberty sought to assert in its complaint to intervene.

On March 17, 2006, the declaratory judgment proceeding was consolidated with three other lawsuits, including one brought by Kardan against Lee; his estate, and his administratrix, arising out of the automobile accident. The parties agreed, however, that the declaratory judgment action would be decided in a separate bench trial. Motions for summary judgment made by Consumer First were denied on September 22, 2006, and May 11, 2007.

After the bench trial, the written decision issued on June 5, 2007. The subsequent order, dated June 18, 2007, dismissed the complaint and compelled coverage "under [Lee's] Consumer First automobile insurance policy which was in effect on September 19, 2003, including but not limited to bodily injury liability coverage of $100,000 per person and $300,000 per accident."

NJM filed a motion for counsel fees shortly before Consumer First filed its notice of appeal. Initially, counsel fees were denied in the trial court because the matter was on appeal. On October 2, 2007, however, Judge Payne ordered a temporary remand on the issue of counsel fees only. On the remand, the trial judge awarded NJM $15,471.50 in counsel fees payable by Consumer First.


Lee applied for a driver's license renewal on April 30, 2001. The application poses the following question: "Do you suffer from any mental, physical or convulsive disorder?" Lee responded "no" to the inquiry.

On April 28, 2003, Lee completed an application for insurance for his automobile. Question number eleven in the "General Information" section of the application reads: "[Does] [a]ny driver have physical/mental impairment?" Lee's response was "no." Lee certified that his statements were true and signed a separate "Fraud Warning" acknowledging that he was subject to criminal, civil, and other penalties if he supplied false or misleading information on the application. That portion of the policy also clearly explains that false or misleading responses may result in the nullification of policy coverage. Lee purchased bodily injury limits of $100,000 per person and $300,000 per accident. Consumer First issued the personal automobile insurance policy effective May 2, 2003.


As explained by Consumer First's vice president of underwriting, Michael Bonner, the insurer relied upon Lee's responses in calculating premiums and extending coverage "consistent with Consumer First filed underwriting guidelines and New Jersey law." Consumer First does insure drivers who suffer from epilepsy, but only when the seizures are controlled by medication, and the applicant produces a doctor's note to that effect. According to Bonner, the term "impairment" as used in the application meant "[i]nability to perform an action" or "some kind of a disability or incapacity."

Wayne Reynolds, Consumer First's claims adjuster, defined the term "impairment" as a "medical condition." He explained that coverage was disallowed in Lee's case by a claims committee because of Lee's misrepresentation that he had no medical condition. Reynolds noted that although Consumer First was defending Lee's estate in the several negligence actions, it was doing so under a reservation of rights.


On September 19, 2003, while driving north on Teaneck Road in Teaneck, Lee rear-ended six different vehicles at high speed. When Lee's truck sideswiped a seventh car, it jumped the curb, hit a pole and a guard rail, became airborne, rotated onto its side, crashed into a four-foot brick wall upon landing, became airborne again, and finally came to rest when it struck a tree.


The trial judge considered Lee's medical records as well as the deposition of Dr. Ballal Raghu, one of his treating physicians, in reaching his conclusions. Dr. Raghu, who is board certified in internal medicine, first saw Lee in January 1998. Lee reported that he had a history of seizures since childhood and was taking Dilantin. Dr. Raghu asked him to return in two weeks to check his Dilantin level, but did not see Lee again until approximately eight months later. At that second visit, Dr. Raghu increased the Dilantin dosage and referred Lee to a neurologist. Approximately a year later, Lee consulted Dr. Raghu again and submitted to a Dilantin level test, but did not return until May 1999. Dr. Raghu considered Lee to be non-compliant with his medication because his Dilantin levels were so low.

The doctor testified that a patient who is subject to epileptic seizures may drive an automobile so long as the patient is "seizure free for a year on medication." Dr. Raghu advised Lee not to drive, and Lee acknowledged that he should not do so. Lee told Dr. Raghu that he bicycled to the doctor's office, took a bus to his job, and did not drive. Dr. Raghu testified that if Lee had admitted that he was driving, he would have advised Lee against it because his seizures were "not very well controlled." Dr. Raghu would also have notified the State as required by law.*fn3

In June 1999, Lee was seen by Dr. Patricia Klein, the neurologist to whom he had been referred by Dr. Raghu, and reiterated a history of seizures since childhood. He reported that although the seizures usually occurred at night, they occasionally occurred during the day at work. Dr. Klein's case file notes indicate: "Major motor seizure disorder, controlled." In a second report, based on a consultation in April 2000, Dr. Klein indicated that Lee's last major seizure occurred two months prior. The report states: "Partial seizures with secondary generalization controlled." Despite using the word, "controlled," Dr. Klein also indicated that Lee's medication likely needed to be changed.

Thereafter, Lee went to the emergency room of Holy Name Hospital in Teaneck on October 24, 2000, due to an "acute breakthrough seizure secondary to medication noncompliance." He was then counseled about the "need to take antiseizure meds as directed, the dangers of driving and indications for follow up care." Lee returned to the emergency room on May 14, 2001, and September 27, 2001, as a result of seizures. The hospital notes state that he was taking Dilantin.

In May and September of 2002, Lee saw Dr. David Marks, an associate professor in the department of neuroscience at University of Medicine and Dentistry of New Jersey (UMDNJ). In May, Dr. Marks diagnosed "recurrent complex partial seizures with secondary generalization," which were occurring one to three times monthly. Dr. Marks switched Lee from Dilantin to Tegretol and suggested surgery. In September 2002, Dr. Marks noted that Lee had had no further seizures since switching to increased dosages of Tegretol. Although he expected that Lee would follow up in four months, there are no other records of contact between him and Lee.

Lee underwent an employee health examination in November 2002. The form completed as a result of the exam states that his epilepsy was controlled on Dilantin and Tegretol. He reported that his most recent grand mal seizure occurred in October 2002, one month after his last visit with Dr. Marks.

On March 29, 2003, Lee consulted with Dr. Raghu for the last time. The visit notes indicate: "had seizure last week. But less often." The notes also state he was taking both Tegretol and Dilantin.

To summarize from our review of the medical records, at a minimum, Lee reported seizures in August or September 1998, May 1999, February 2000, October 24, 2000, May 14, 2001, September 27, 2001, October 2002, and March 2003. In May 2002, Lee reported having one to three seizures per month for some unknown prior period of time.


The trial judge found Lee's responses on his automobile insurance application to be truthful because Lee would not "consider himself physically impaired" after driving for years with epilepsy. He further found, "There were no proofs that Mr. Lee's medical condition caused him to be medically unfit to have a New Jersey driver's license or to operate a motor vehicle." He relied upon three findings that "militate[d] against Consumer First's position": Lee had been driving a vehicle prior to 2001, Dr. Raghu's testimony, including his statement that Lee said that he did not drive had to be weighed against Dr. Klein's statement that Lee's seizure disorder was "controlled," and Lee's employee health examination form indicated that his seizures were controlled by Dilantin and Tegretol. The judge determined that there was no evidence that Lee intentionally misrepresented information in order to obtain automobile insurance. Rather, he opined that the more appropriate inference to be drawn was that Lee "did not feel that his physical condition was impaired, as he had been a licensed driver for several years." The trial judge therefore concluded that no falsification or misrepresentation occurred when Lee completed the application.


Consumer First's primary contention is that the trial judge erred in finding that Lee's responses were truthful. Consumer First argues that the responses included such material misrepresentations of fact as to void the policy. NJM and Liberty counter that the question on the automobile insurance application was so subjective and ambiguous that there is no evidence on the record that Lee intentionally lied, and that his denial of any physical impairments was reasonable.

A trial judge's findings of fact "are considered binding on appeal when supported by adequate, substantial and credible evidence." Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974). They are not disturbed unless they are "so wholly insupportable as to result in a denial of justice." Id. at 483-84 (quoting Greenfield v. Dusseault, 60 N.J. Super. 436, 444 (App. Div.), aff'd o.b., 33 N.J. 78 (1960)).

When an insured makes a misrepresentation to an insurer, the policy can be rescinded or voided ab initio due to equitable fraud. The misrepresentation must be material to the risk assumed by the insurer, and the insurer must reasonably rely upon it in issuing the policy. First Am. Title Ins. Co. v. Lawson, 177 N.J. 125, 137 (2003). When the insurance application, as in this case, "calls for subjective information, there is an additional inquiry, i.e., whether the insured knew that the information was false when completing the application." Ibid. If a question seeks to determine the applicant's state of mind and knowledge, and the applicant sets forth a correct statement of his knowledge and belief, the representation is not equitable fraud. Ibid.

It is undisputed that the question on this insurance application form called for a subjective response. In determining questions of insurance policy interpretation, a subjective standard must be applied based on the principle that the policy will be construed against the insurer. Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 446 (2007). Even where a subjective standard is employed, however, the responses given by an insured must accord with external realities. In other words, the subjective intent of the insured "may not be controlling when the undisputed facts reveal otherwise." Id. at 447.

This is such an instance. Lee was suffering from recurring seizures on a regular basis. Despite the administration of a combination of drugs, which were initially effective, Lee suffered a seizure in March 2003, just weeks before he submitted his April 18, 2003 insurance application. He had been repeatedly advised not to drive because of his condition. Lee's statement on the automobile insurance application that he did not suffer from any physical impairment was simply false. The trial judge's conclusion that Lee would not have considered himself impaired because he "had been driving a vehicle for several years with epilepsy" cannot be supported by the evidence.

Furthermore, N.J.S.A. 39:3-10.5 provides that each person subject to epileptic seizures "shall at the time of his initial application for a driver's license or any subsequent application for a renewal thereof . . . report the existence of such conditions to the Director of the Division of Motor Vehicles in a manner to be prescribed by the director." Failure to make such disclosures subjects the person to a fine and suspension or revocation of his or her driving privileges. N.J.S.A. 39:3-10.8.

When asked on his license renewal form on April 30, 2001, whether he suffered from any convulsive disorder, Lee denied that he did so, despite having gone to an emergency room six months prior in October 2000, due to a major seizure. While at the emergency room, he was counseled on "the dangers of driving." Clearly, Lee knew that he suffered from a convulsive disorder, was impaired, and was not supposed to be driving.

In Nowell Amoroso, supra, 189 N.J. at 439, the Court affirmed summary judgment granted to a plaintiff insurer in its effort to disclaim legal malpractice coverage for a defendant insured, a law firm. When the defendant completed its malpractice application, it stated that there was no reasonable basis to believe that it had breached any professional duty, or to anticipate that a professional claim would be made against it. Id. at 440. A month prior to the application being submitted, the Appellate Division had affirmed a trial court ruling dismissing a complaint that the defendant had filed on behalf of a client because it was beyond the statute of limitations. Id. at 442-43. The Nowell Amoroso Court concluded that there were ample proofs that despite the subjective nature of the question, the attorneys clearly knew that a claim was going to be made against their firm. Id. at 450.

Similarly, in Lawson, supra, 177 N.J. at 139-40, an attorney who was misappropriating client funds was obviously aware of existing circumstances that could result in a claim against him. Coverage was denied because even applying a subjective test, the defendant's answers were not truthful. Id. at 140.

The trial judge and counsel rely upon statements in Klein's report and Lee's employee health examination that his seizures were "controlled." Despite that characterization, it is apparent that during the period for which medical records were supplied, the seizures recurred anywhere from once every six months to as much as three times a month. The use of the term "controlled" in the medical records should be accorded no legal consequence. Lee's misrepresentations were intended to conceal his disorder when he renewed his driver's license and obtained his automobile insurance, regardless of whether doctors described his seizure activity as "controlled."

There was ample evidence that Lee's condition caused him to be medically unfit to obtain a New Jersey driver's license and to operate a motor vehicle. N.J.A.C. 13:19-5.1 provides:

Any person 16 years of age or older who suffers or who has suffered from recurrent convulsive seizures . . . due to conditions such as, but not limited to, epilepsy, in any of its forms, shall as a prerequisite to the issuance of a . . . driver's license or retention of a driver's license establish to the satisfaction of the Chief Administrator [of the Motor Vehicle Commission] that he or she has been free from recurrent convulsive seizures . . . for a period of one year with or without medication and that he or she is physically qualified to operate a motor vehicle.

The rebuttable presumption that a person may not be qualified to drive unless he or she is seizure-free for one year has been found to be fair. Div. of Motor Vehicles v. Granziel, 236 N.J. Super. 191, 202 (App. Div. 1989). As we have previously said, it is not "unreasonable to conclude that if a person is not seizure-free for a year, the lack of control over the disorder so evidenced renders him a probable driving risk." Ibid.

When Lee applied for his driver's license renewal on April 30, 2001, he had suffered from a seizure the prior month. Similarly, when he completed his insurance application on April 28, 2003, he had suffered a seizure in October 2002, approximately six months prior to his obtaining coverage. Because Lee was not seizure-free for one year before submitting his driver's license renewal application, or at any time thereafter for that matter, he was clearly not physically qualified to operate a motor vehicle. N.J.A.C. 13:19-5.1.

Lee's substantial misrepresentation was material to the issuance of the policy. Although Consumer First does issue coverage to insureds subject to seizure disorders, they only do so when the applicant produces a physician's note to prove that his or her seizures truly are "controlled" or, in other words, that he or she is seizure-free. Had Consumer First been made aware of Lee's condition, no policy would have issued. The misrepresentation was patently material, as Consumer First relied upon it in extending coverage.

Even if Lee had been able to obtain a doctor's note to corroborate that he was seizure-free, the automobile premium would have been adjusted in order to factor in the increased risk attributable to his disorder. The misrepresentation was material in this respect as well, because Consumer First was unable to properly calculate the amount due given the nature of the risk.

It is our view, based on our independent review of the record, that the trial judge's findings of fact are not supported by adequate, substantial evidence. Rova Farms, supra, 65 N.J. at 484. Lee had to be seizure-free for one year to be qualified to drive pursuant to N.J.A.C. 13:19-5.1, but was not. He knew that he was impaired when he completed his application for automobile insurance and nonetheless misrepresented his physical condition. This substantial misrepresentation was material and was relied upon by Consumer First to its detriment.


In light of our finding that Lee's policy is void because of the material misrepresentation on his application, Consumer First's liability for damages sustained by innocent third-parties asserting tort claims against Lee must be limited pursuant to AICRA. The statutory minimums are $15,000 per person and $30,000 per occurrence. N.J.S.A. 39:6A-3. As we have previously said, "[A] carrier is not entitled to retroactively void a policy after its insured becomes liable to an innocent third party for damages. Rather, the insurer's policy is reduced to the minimum limits prescribed by statute." N.J. Mfrs. Ins. Co. v. Varjabedian, 391 N.J. Super. 253, 256 (App. Div.), certif. denied, 192 N.J. 295 (2007). Accordingly, Consumer First's exposure is limited by N.J.S.A. 39:6A-3.


In Tooker v. Hartford Accident & Indemnity Co., 136 N.J. Super. 572, 576 (App. Div. 1975), certif. denied, 70 N.J. 137 (1976), the court approved a counsel fee award to an insurance company that was a successful claimant against a primary carrier that had wrongfully refused to defend its insured. The court explained that the award "accords with the purpose of Rule 4:42-9(a)(6) to discourage groundless disclaimers by carriers by assessing against them the expenses incurred in enforcing coverage for their assureds." Ibid.

Where, such as here, the disclaimer was justified, no counsel fee need be assessed. Selective Ins. Co. v. Hojnoski, 317 N.J. Super. 331, 338 (App. Div. 1998). Rule 4:42-9(a)(6) authorizes an award only when "an insurer unsuccessfully refuses to indemnify, defend or provide benefits to its insured, not when an insurer loses a dispute with another insurer." Ibid. Because we find the refusal to indemnify to be warranted given our conclusion that Lee made a material misrepresentation on his insurance application, we vacate the award of counsel fees.

We hereby reverse and remand for entry of a judgment in favor of plaintiff, requiring it to provide only third-party liability coverage pursuant to AICRA of $15,000 per injury and $30,000 per occurrence. We vacate the counsel fee award.


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