New Jersey Supreme Court Affirms Damages Awarded Under State’s Insurance Fraud Prevention Act Against Company That Lied On Insurance Applications
February 17, 2023
By: Carl L. Engel
On February 15, 2023, the Supreme Court of New Jersey, in the case Liberty Insurance Corp. v. Techdan, LLC, affirmed awards of compensatory and punitive damages against companies that had made false statements on their insurance applications, in violation of the state’s Insurance Fraud Prevention Act (the “IFPA”). The case illustrates the risks that arise when businesses take unlawful measures to avoid paying full premiums, and business owners would be well advised not to heed the experience of the defendants in this case.
Techdan and Exterior Erecting Services (“EES”) were both companies engaged in the construction of exterior walls for commercial buildings. Techdan and EES had an arrangement whereby EES would enter into construction contracts with general contractors, Techdan would hire the workers necessary to complete the contracts, and EES would give Techdan money to pay the workers.
Liberty Insurance Corp. (“Liberty”) issued workers’ compensation policies to Techdan for the period between March 12, 2004, and March 12, 2007. Liberty contends that, during its underwriting process and audits, the companies and their owners misrepresented the relationship between the two companies, and provided Liberty’s auditors with fraudulent payroll records to reduce the premiums charged for workers’ compensation insurance. In addition to being sued by Liberty, Techdan was also indicted criminally, and agreed to plead guilty and pay restitution to Liberty.
The IFPA was enacted in 1983 to remedy high insurance premiums which insurers had claimed were caused by fraudulent insurance claims. In addition to prohibitions against making false claims, the IFPA also prohibits false statements made during the application process. Specifically, a person violates the IFPA if they “prepare or makes any written or oral statement, intended to be presented to any insurance company or producer for the purpose of obtaining an insurance policy, knowing that the statement contains any false or misleading information concerning any fact or thing material to an insurance application or contract.” As a remedy, the IFPA authorizes any insurance company “damaged as a result” of the violation to bring a lawsuit against the insured for compensatory damages and attorneys’ fees. The compensatory damages include all premiums that the insured should have paid, had they submitted accurate information with their application. If the insured is found to have “engaged in a pattern of violating” the IFPA, they may be liable for punitive damages up to triple the amount of the actual harm caused.
The issue before the New Jersey Supreme Court was whether defendants under the IFPA are jointly liable to a successful insurer for the entire amount of damages, or whether each defendant is liable only for the portion of damages attributable to their misconduct. The state’s Comparative Negligence Act (“CNA”), enacted in 1973, requires courts to apportion damages between the defendants according to the percentage of the damages attributable to their conduct. A defendant can be jointly liable for the entire award only if they are found to be at least 60% responsible for the total damages. Although the CNA applies facially to negligence claims, it consistently has been construed by courts to cover “fault” in a broader sense. Liberty argued that the CNA should not apply to violations of the IFPA, because such violations involve intentional conduct, rather than negligence. But the New Jersey Supreme Court was unpersuaded and found that, because it had applied the CNA in prior fraud cases, there was no reason not to apply it where there had been a violation of the IFPA.
As a remedy, the New Jersey Supreme Court remanded the case back to the trial court for a limited new trial on the issue of the apportionment of fault between the different defendants. It held that the original findings regarding the defendants’ liability to Liberty, their pattern of insurance fraud, and the damages amount of $681,990, would be undisturbed and not part of the new trial.
This case provides a vivid illustration of the risks that businesses assume if they fail to make accurate disclosures on their insurance applications. Not only were Techdan and EES required to pay the premiums they sought to avoid, they must also pay punitive damages for their pattern of insurance fraud. Further, in addition to civil liability, the owner of Techdan also agreed to plea guilty to criminal charges and to pay restitution. Accordingly, businesses that think they might save some money on insurance premiums by giving false information to their insurers should be guided instead by the experience of Techdan and EES. As they have demonstrated, to submit a false insurance application is “a penny wise but a pound foolish.”