In a recent Appellate Court decision, a workers compensation carrier was permitted to rescind a policy it issued but also found the carrier liable for benefits to an injured worker despite the rescission.  In American Millennium Insurance v. Berganza, 2006 WL 1971646, the trial court found that the employer, Berganza, committed fraud in the application it submitted to American Millennium.  One day after the application was submitted, an employee was injured.  Id.  The carrier issued a policy ten days later with a retroactive date that made the policy effective one day prior to when the employer submitted its application.

The employer attempted to submit the claim to American Millennium three days after the accident but since no policy had been issued yet, there was a delay in Millennium getting actual notice of the claim until approximately a month after the accident. American Millennium then declined coverage and filed a suit for rescission.  The court permitted the rescission but held that the employee was entitled to benefits under the policy.

The reasoning employed by the court was similar to that used in a case involving fraud in an application for automobile insurance and a claim for PIP benefits.  Fisher v. New Jersey Full Underwriting et al, 224 N.J. Super 552, (App. Div. 1988).  In Fisher the court held that the carrier could not deny PIP benefits to an injured passenger even though the insured committed fraud in the application for the policy.

In both Fisher and American Millennium the court voided the policy “ab initio” as to the insured but not to an “innocent third party”.  In Fisher the court found that the compulsory nature of automobile insurance superseded the right of a carrier to rescind the policy as to the passenger.  In American Millennium, the court held that the compulsory nature of the workers compensation statute created a direct relationship between the worker and the carrier.

-David D. Blake, Esq.