Opinion
For Opinion on Hearing, see 79 Cal.Rptr. 106, 456 P.2d 674.
Boccardo, Blum, Lull, Niland, Teerlink & Bell, by Edward J. Niland, San Jose, for appellant and cross-defendant.
Nagle, Vale & McDowall, by Vernon V. Vale, San Mateo, for respondent and cross-complainant.
MOLINARI, Presiding Justice.
Plaintiff brought this action against defendant insurance company to compel payment The original application for the insurance policy in question was prepared by agent Joe Pucci and signed by Mr. Alves on April 29, 1958. Question number 18 of that application read: 'Has license to drive or registration been suspended, revoked or refused for the applicant or any member of his household within the past five years?', to which the answer 'No' was given. In fact Alves' license had been previously suspended. The Department of Motor Vehicles placed him on probation as a negligent operator on January 16, 1955; suspended his license March 22, 1955; took possession of his license on May 2, 1955; reinstated the license but continued Mr. Alves on probation May 17, 1955; and suspended the license again for 60 days on September 20, 1957. Also, as of April 1960, Alves had a record of 39 traffic citations and convictions.
Agent Pucci did not specifically recollect asking Alves question number 18, but stated that he customarily asked this question of prospective customers before quoting rates or taking applications. In a statement given March 7, 1960, Mr. Alves stated that Pucci asked him question number 18 and he responded 'No.' On the stand, however, although Mr. Alves admitted signing the application, he stated that on that date (April 29, 1958) he did not know that his license had ever been suspended. He admitted receiving the various orders of the Department of Motor Vehicles suspending and reinstating his driving privilege, but nevertheless maintained that on April 29, 1958, he did not know of said suspension.
Plaintiff's expert witness, an insurance broker, testified that it was custom and practice in the automobile insurance business to ask if a license had been previously suspended or revoked.
Mr. Alves indicated some confusion over the meaning of a suspension of one's license. For example, he thought that the suspension of March 22, 1955 was merely temporary for the purpose of stamping the license 'Probationary.'
Mr. Alves claimed that when he executed the original application for insurance, he showed his driver's license, which was stamped 'Probationary,' to agent Pucci. Mr. Pucci testified that he did not recollect seeing such license and would not have written the coverage if he had seen it. He also testified that if he had had knowledge of Mr. Alves' driving record and suspensions he would not have forwarded the application for approval. Daniel Priest, an underwriting superintendent for defendant, testified that had the company known about the prior suspensions of Alves' license they would not have issued him the policy. Priest testified that in 1958 defendant did not check on statements made in all of the insurance applications received, but rather accepted the statements as they appeared in the applications in some cases. Since defendant did not have a safe-driving plan and its rates were not based on the applicants' driving records, it only Pursuant to his application, Alves was issued the original insurance policy, effective April 29, 1958. About nine months later, on September 6, 1958, defendant paid to Alves a claim arising out of the comprehensive provisions of the policy. Subsequently Alves traded his car in on another automobile and agent Pucci prepared a transfer application on November 21, 1959, which contained the same question number 18 as in the original application pertinent to previous license suspensions. In the transfer application said question was again answered 'No,' but Mr. Alves did not sign this application. Mr. Pucci testified that he again asked Mr. Alves if his license had been previously suspended or revoked and Mr. Alves said 'No,' but in his written statement of March 7, 1960 Mr. Pucci said that he could not specifically recall asking question number 18 when he took the transfer application, but that it was his general practice to ask this question again. According to Priest, in issuing the new policy defendant was still relying on the statements in Alves' original application.
Alves paid all premiums due on the policy through November 28, 1959, the date of the accident. Following notification of plaintiff's claim on December 4, 1959, defendant initiated, on February 4, 1960, an investigation of the Alves as insurance risks. Ultimately, on April 22, 1960, defendant wrote to Mr. Alves advising him that the insurance policy was rescinded and treated as void ab initio, and stating the reasons for the rescission. A check was enclosed for all premiums paid by Alves on the policy.
Plaintiff contends that the retroactive rescission of an automobile liability insurance policy on the basis of material misrepresentations is contrary to Insurance Code section 651 which provides as follows: 'Notwithstanding any other provision of this code, no cancellation by an insurer of an auto liability insurance policy shall be effective prior to the mailing or delivery to the named insured at the address shown in the policy, of a written notice of the cancellation stating when, not less than ten (10) days after the date of such mailing or delivery, the date the cancellation shall become effective.' Additionally plaintiff contends that defendant is guilty of laches because of its delay in inquiring into the insured's driving record and is therefore estopped from seeking retroactive rescission of the insurance policy. For reasons to be stated we have concluded that section 651 does prevent the retroactive rescission of an automobile liability insurance policy and accordingly the instant judgment must be reversed.
Unless otherwise indicated, all statutory references hereinafter made are to the Insurance Code.
Plaintiff also contends that the trial court's conclusion that the insurance policy was void from its inception is not supported by the evidence. This contention, however, is not directed to the sufficiency of the evidence to support a determination of retroactive rescission of an insurance policy on the grounds of fraud but rather is an argument that the evidence is insufficient because it does not fulfill the requirements of section 651.
Several California cases, both before section 651 was enacted (in 1957) and since, have permitted retroactive rescission for fraud of automobile liability insurance policies. (Allstate Ins. Co. v. Miller (1950) 96 Cal.App.2d 778, 782, 216 P.2d 565; Standard Accident Ins. Co. v. Pratt (1955) 130 Cal.App.2d 151, 156-157, 278 P.2d 489; Allstate Ins. Co. v. Golden (1960) 187 Cal.App.2d 506, 513, 9 Cal.Rptr. 754; Allstate Ins. Co. v. McCurry (1964) 224 Cal.App.2d 271, 274, 36 Cal.Rptr. 731; Civil Service Employees Ins. Co. v. Blake (1966) 245 Cal.App.2d 196, 198, 53 Cal.Rptr. 701.) None of the cases decided after 1957 (Golden, McCurry In Golden, supra, 187 Cal.App.2d 506, 9 Cal.Rptr. 754, after the insured under an automobile liability insurance policy was involved in a collision, the insurance company brought an action against the insured for a declaration that the policy was voidable at the company's option and therefore could be validly rescinded because of the insured's misstatement regarding a prior suspension of his driver's license. One of the persons injured in the collision appealed from a judgment permitting rescission, contending that the insurance company waived its right to rescind or was estopped from rescinding, first, because the company initially cancelled rather than rescinded; second, because of delay in taking action after the company had knowledge of the misrepresentation; and third, because of failure to comply with a company rule that an applicant for insurance should be told that his insurance might be ineffective if he was not truthful in his application. The reviewing court rejected these arguments and affirmed the declaration permitting rescission, without any discussion of section 651 or of the validity, in general, of permitting this type of retroactive rescission. In McCurry, supra, an insurer brought an action against an insured and a third party who had sued him for personal injuries, seeking a declaration that the insurer was not liable on the policy which it had cancelled because of the insured's misrepresentation as to insurability. We there held essentially that section 650, providing that 'Whenever a right to rescind a contract of insurance is given to the insurer * * * such right may be exercised at any time previous to the commencement of an action on the contract,' did not prevent the insurer from rescinding the insurance contract, because the action brought by the third party against the insured for personal injuries was not an 'action upon the contract' under that section. (224 Cal.App.2d at pp. 273-274, 36 Cal.Rptr. 731.) Blake, supra, relying upon McCurry, held that where an insured has secured a policy of automobile liability insurance through fraud, breach of warranty or material misrepresentation, the insurer can rescind the policy as of its inception, notwithstanding the existence of any rights in third parties who were injured by acts of the insured that occurred before the rescission. (245 Cal.App.2d at p. 198, 53 Cal.Rptr. 701.)
Of the three cases, Blake was the only one in which there was a petition for a hearing by the Supreme Court. That petition was denied.
Blake, supra, is the only one of the three foregoing cases to discuss the policies involved in permitting retroactive rescission. It was there argued that the public policy favoring insurance coverage for all drivers is frustrated when a driver is left without coverage upon the rescission of his policy for fraud. The reviewing court noted that this argument was for the Legislature and that 'further moves in that direction must await action of the legislature.' (245 Cal.App.2d at p. 202, 53 Cal.Rptr. at p. 706.) Plaintiff asserts that Blake erroneously did not take cognizance of section 651 and that the statute implements by legislative action the public policy favoring insurance coverage for all drivers, by abrogating the right to rescind for fraud in automobile liability insurance contracts.
The right to rescind insurance policies for fraud, breach of warranty and material misrepresentation is recognized and provided for by statute. (See §§ 331, 338, 359, 447, 650, 1904, 2030, and subd. (7) of Civ.Code, § 1689.) With the exception of section 1904, which applies to marine insurance contracts, and section 2030 applying to fire insurance contracts, these statutes apply to insurance contracts generally. Section 651, however, deals specifically with automobile liability insurance. Also, section 651 specifically provides that there shall be no cancellation of an auto liability insurance policy except as therein provided 'Notwithstanding any other provision of this code * * *.' (Emphasis added.) It is a fundamental rule of statutory con struction Brill v. County of Los Angeles,
Mitchell v. County Sanitation Dist.,In our task of construing section 651, we first note that the fact that section 651 is included under the chapter entitled 'Rescission' (div. 1, pt. 1, ch. 9) is not determinative. Section 6 of the Insurance Code provides that 'Division, part, chapter, article and section headings contained herein shall not be deemed to govern, limit, modify or in any manner affect the scope, meaning, or intent of the provisions of any division, part, chapter, article, or section hereof.' (See Farmers Ins. Exchange v. Vincent, 248 Cal.App.2d 534, 541, 56 Cal.Rptr. 775.) Moreover, we note, as pointed out by defendant, that when section 651 was first enacted in 1957 there was no chapter in the Insurance Code on 'cancellation,' since the chapter entitled 'Cancellation' was not enacted until 1965. (Ch. 10, pt. 1, div. 1, §§ 660-664.) Accordingly, argues defendant, the chapter on 'rescission' was the logical place to put section 651. It is of some significance, however, that when the new chapter entitled 'Cancellation' was enacted, section 651 was retained under the heading 'Rescission.'
We have no doubt that the term 'cancellation' is broad enough to include the concept of rescission. Defendant contends that section 651 was intended to apply to 'cancellation' in its 'normal' sense, that is, prospective or present termination of an insurance policy by the insurer without necessary relationship to the insured's conduct. Rescission, defendant argues, is a doctrine that the contract never really existed because it was secured through fraud so material that the promisor would never have entered into the agreement but for the fraud. Accordingly, defendant asserts that this doctrine has an established legal meaning that is quite distinct from the notion of cancellation of an insurance policy.
In the law of contracts 'rescission' usually refers to the state of things when the contract is made and means to restore the parties to their former position, while 'cancellation' normally refers to the state of things at the time of cancellation and means to abrogate so much of the contract as remains unperformed. (Young v. Flickinger, 75 Cal.App. 171, 174, 242 P. 516; Sanborn v. Ballanfonte, 98 Cal.App. 482, 488, 277 P. 152; Sawyer v. Sunset Mutual Life Ins. Co., 8 Cal.2d 492, 498, 66 P.2d 641.) As ordinary words of the English language, however, the terms 'cancel' and 'cancellation' have an accepted and somewhat broader meaning. To 'cancel' is 'to remove from significance or effectiveness as * * * to destroy the force, effectiveness, or validity of' * * * 'to revoke, annul, invalidate * * *.' (Webster's Third International Dictionary; see Ohran v. National Automobile Ins. Co., 82 Cal.App.2d 636, 642, 187 P.2d 66.) Accordingly, the word 'cancel' is sometimes used instead of the word 'rescind' and the two words are often used synonymously. (See Greif v. Dullea, 66 Cal.App.2d 986, 1001, 153 P.2d 581; Pearson v. Brown, 27 Cal.App. 125, 131, 148 P. 956; Brooks v. Los Angeles County Bureau of Adoptions, 218 Cal.App.2d 732, 734, 32 Cal.Rptr. 466.) Thus, in the law of insurance 'cancellation' is a much Farmers Ins. Exchange v. Vincent,
United States Fidelity & Guar. Co. v. Security Fire & Indemnity Co., Dudgeon v. Mutual Ben. Health & Accident Ass'n, 4 Cir., Teeter v. Allstate Insurance Co., State ex rel. Pacific Mutual Life Ins. Co. v. Larson, Ohran v. National Automobile Ins. Co., Allstate Ins. Co. v. Miller, Allstate Ins. Co. v. McCurry,Section 651 must be construed in light of the strong declared legislative and judicial policy in California to give monetary protection to those who, lawfully using the highways, suffer injury through negligent use of the highways by others. (Continental Cas. Co. v. Phoenix Constr. Co., 46 Cal.2d 423, 434, 296 P.2d 801, 57 A.L.R.2d 914; Interinsurance Exchange of Automobile Club v. Ohio Cas. Ins. Co., 58 Cal.2d 142, 153, 23 Cal.Rptr. 592, 373 P.2d 640; Taylor v. Preferred Risk Mut. Ins. Co., 225 Cal.App.2d 80, 82, 37 Cal.Rptr. 63.) This policy is manifested by the California Automobile Financial Responsibility Law (Veh.Code, §§ 16000-16503), concerning which a number of cases have held that the entire law must be liberally construed to the end of fostering this main objective. (Continental Cas. Co. v. Phoenix Constr. Co., supra, 46 Cal.2d at pp. 434-435, 296 P.2d 801; Interinsurance Exchange of Automobile Club v. Ohio Cas. Ins. Co., supra, 58 Cal.2d at pp. 153-154, 23 Cal.Rptr. 592, 373 P.2d 640; and see cases cited in Glens Falls Ins. Co. v. Consolidated Freightways, 242 Cal.App.2d 774, 781-782, 51 Cal.Rptr. 789.) Also, in Continental Cas. Co. v. Phoenix Constr. Co., supra, 46 Cal.2d at p. 434, 296 P.2d at p. 808, the Supreme Court observed that California's general automobile financial responsibility law covering the matter of establishing responsibility after an accident is 'designed to give monetary protection to that ever changing and tragically large group of persons who while lawfully using the highways themselves suffer grave injury through the negligent use of those highways by others.'
The strong public policy in this state against having uninsured motorists drive on the highways is evidenced not only by the Automobile Financial Responsibility Law (Veh.Code, § 16000 et seq.) but also by the uninsured motorist coverage statutes (§ 11580.2 et seq.). The trend and pattern and the continuing and growing concern of the Legislature, moreover, is discernible in the enactment in 1965 of a new chapter in the Insurance Code entitled 'Cancellation.' (Ch. 10, pt. 1, div. 1, §§ 660-664; see Farmers Ins. Exchange v. Vincent, supra, 248 Cal.App.2d 534, 56 Cal.Rptr. 775.) This enactment, although it cannot be retroactively applied, is nonetheless relevant in furnishing us by way of hindsight with some clues to what the legislative intent
The regulations promulgated pursuant to the enactment specifically provide: 'From and after the effective date of the Insurance Commissioner's Ruling, * * * no insurer shall cancel a policy of automobile insurance * * * unless the cancellation is effected pursuant to the applicable provisions of this article.' (Cal.Adm.Code, tit. 10, art. 7.5, § 2370.) This ruling became effective on September 17, 1965.
It is thus apparent that the Legislature has expressed a continuing concern with the problem of uninsured motorists driving on the highways and that it has acted in a variety of ways to alleviate or obviate the problem.
We are aware that the California Automobile Financial Responsibility Law is not a compulsory automobile insurance law since it 'does not in so many words make mandatory the procuring of a liability insurance policy prior to the first accident and judgment, * * *'(Continental Cas. Co. v. Phoenix Constr. Co., supra, 46 Cal.2d at p. 436, 296 P.2d at p. 808.) Its relevant statutes, however, do impose a standard of conduct upon those engaged in the business of writing public liability insurance for the benefit of those persons, among others, who are injured as the result of the negligent operation of automobiles. (Simmons v. Civil Service Empl. Ins. Co., 57 Cal.2d 381, 385, 19 Cal.Rptr. 662, 369 P.2d 262.) As stated in Simmons: 'Although our laws do not require as a condition of obtaining an operator's license that any showing be made by an applicant as to his financial responsibility to respond in damages if through his negligence in the operation of an automobile, he causes injuries to the persons or property of others, nevertheless provisions are contained therein whereunder, after such injuries have been inflicted through his negligence, the licensed operator is required to afford financial responsibility in favor of those who have been injured by his conduct and upon his failure to do so the statutes provide for the suspension of his operator's license and for other sanctions, all intended, through threat of the imposition of such sanctions, to result in the affording of limited financial relief to the injured.' (P. 385, 19 Cal.Rptr. p. 664, 369 P.2d p. 264.)
It is significant to note that under the California Financial Responsibility Laws a driver involved in an accident described therein (Veh.Code, § 16000) must either comply with one of the conditions of exemption specified in Vehicle Code section 16050 or must deposit a specified security with the Department of Motor Vehicles (Veh.Code, § 16020). If he fails to establish The foregoing provisions of the 'California Financial Responsibility Laws' indicate that although we do not have compulsory automobile insurance in California, our statutory scheme is very close in some respects to a nonvoluntary scheme. An analogy to nonvoluntary automobile insurance coverage is therefore apt in helping us to decide whether the California statutory scheme permits retroactive rescission of automobile insurance. It is well settled that an insurer cannot retrospectively avoid nonvoluntary automobile insurance coverage because of fraud or misrepresentations relating to the inception of the policy so as to escape liability to a third party injured by the negligent or culpable operation of the insured vehicle. (Heuer v. Truck Ins. Exch., 51 Cal.App.2d 497, 503, 125 P.2d 90; Hynding v. Home Acc. Ins. Co., 214 Cal. 743, 751, 7 P.2d 999, 85 A.L.R. 13; United States Casualty Co. v. Timmerman, 118 N.J.Eq. 563, 180 A. 629, 632; Atlantic Casualty Ins. Co. v. Bingham, 10 N.J. 460, 92 A.2d 1, 3, 34 A.L.R.2d 1293; Aetna Casualty and Surety Company v. O'Connor, 8 N.Y.2d 359, 207 N.Y.S.2d 679, 170 N.E.2d 681, 683-684, 83 A.L.R.2d 1099; Tecter v. Allstate Insurance Co., supra, 9 A.D.2d 176, 192 N.Y.S.2d at pp. 616-619.) Accordingly, under this rule, such nonvoluntary coverage as that issued in conformity with statutory schemes of compulsory liability insurance, or statutory financial responsibility or assigned risk plans, prevails in case of conflict with policy provisions or ordinary legal principles, because such coverage is controlled or affected by statutory provisions based upon considerations of public policy designed to guarantee the effectiveness of the insurance for the protection of the public at large at all times. (See Heuer v. Truck Ins. Exch. supra; Hynding v. Home Acc. Ins. Co., supra; Atlantic Casualty Ins. Co. v. Bingham, supra; Aetna Casualty and Surety Company v. O'Connor, supra; Royal Indemnity Co. v. Granite Trucking Co., 296 Mass. 149, 4 N.E.2d 809, 810-811.) As a corollary to the foregoing rule it is established that where the particular statutory scheme makes provision for prospective cancellation of the policy after fulfillment of certain notice requirements, such provisions are held to be evidence of a legislative intention to exclude retrospective cancellation or rescission, upon the rationale that the allowance of retrospective cancellation or rescission would be inconsistent with the general scheme or purpose of the statute. (Heuer v. Truck Ins. Exch., supra; Ohran v. National Automobile Ins. Co., supra, 82 Cal.App.2d at pp. 641-644, United States Fidelity & Guar. Co. v. Security Fire & Indemnity Co.,
See annotations in 34 A.L.R.2d 1297 and 83 A.L.R.2d 1104.
The effect of motor vehicle 'Financial Responsibility Laws' where a third party has been injured by the negligent or culpable operation of an automobile covered by insurance that was subject to cancellation because of material misrepresentations is demonstrated in State Farm Mutual Auto. Ins. Co. v. Wall, 92 N.J.Super. 92, 222 A.2d 282, 287-289. That case held that since the insured was in a class of those who could be called upon to furnish proof of financial responsibility, any policy subsequently issued to him was noncancellable as against injured claimants, irrespective of the fact that proof of financial responsibility had not been requested of the insured and regardless of any fraudulent misrepresentations by the insured in his application for insurance. (See also Steliga v. Metropolitan Casualty Ins. Co., 113 N.J.L. 101, 172 A. 793, affirmed o. b., 114 N.J.L. 156, 176 A. 331; Allstate Ins. Co. v. Meloni, 98 N.J.Super. 154, 236 A.2d 402, 406.)
It should be noted that in Wall and Meloni the policy provision providing for 'Financial Responsibility Laws' coverage was identical to the above quoted provision in the instant policy.
Section 651 is similar in language to that which the Legislature has employed in compulsory insurance statutes, which have been construed as permitting only prospective cancellation notwithstanding fraud in the inception. (See Pub.Util.Code, §§ 3634 and 3983; and see Ohran v. National Automobile Ins. Co., supra, 82 Cal.App.2d at p. 643, 187 P.2d 66; and Heuer v. Truck Ins. Exch., supra, 51 Cal.App.2d at p. 503, 125 P.2d 90.) Further, it is significant to note that Vehicle Code section 16433 provides that a motor vehicle policy filed as proof of ability to respond in damages following the suspension of the privilege of driving a motor vehicle (see Veh.Code, §§ 16430-16432) 'shall not be canceled except upon 10 days prior written notice to the department.' This statute is further indication of the legislative intent to exclude retrospective cancellation or rescission in this area, under the principle that to permit the termination of policies issued in conformity to financial responsibility laws would be inconsistent with the general scheme and purpose of such laws. (See Farmers Ins. Exchange v. Vincent, supra, 248 Cal.App.2d at pp. 540-542, 56 Cal.Rptr. 775; United States Casualty Co. v. Timmerman, supra, 118 N.J.Eq. 563, 180 A. 629; Atlantic Casualty Ins. Co. v. Bingham, supra, 10 N.J. 460, 92 A.2d 1.)
In Hynding v. Home Acc. Ins. Co., supra, it was observed that private voluntary forms of indemnity insurance may be regulated by statute in order to reach a particular evil and that such regulation does not make private voluntary contracts serve the purpose of compulsory insurance but merely regulates the contract to the defined extent. (214 Cal. at pp. 751-752, 7 P.2d 999.) In the instant case section 651 is, in our view, intended to reach the evil resulting from inability of uninsured motorists to respond in damages to those they injure by the culpable operation of automobiles. This evil is exacerbated in cases where a policy is sought to be rescinded ab initio for fraud, breach of warranty, or material misrepresentation. Since a policy procured by fraud or misrepresentation of material facts is not void ab initio but merely voidable, and until avoided is treated for all practical purposes as a subsisting policy (Meyer v. Johnson, 7 Cal.App.2d 604, 619, 46 P.2d 822; 27 Cal.Jur.2d Insurance, §§ 292, 303), there is ever present the element of uncertainty as to whether there is in fact insurance coverage. Accordingly, an insurance company can issue an automobile liability policy without any investigation of the applicant for insurance, sit back in indifference until an accident occurs, and then avail itself of the right to rescind. The vice inherent in such a situation is that it leaves the public unprotected for a potentially indefinite time in cases such as this one. It is probable that an insurance company will never initiate an investigation of an applicant's driving record until after an accident has occurred. Said accident may have injured an innocent third party without any insurance of his own to cover the risk, as in fact as is the case here, since the injured third party was a pedestrian.
Further, if we interpret section 651 as inapplicable to rescission, then in each instance of material misrepresentation in the procurement of a policy the insurer will have an election between cancellation and rescission. If it elects to cancel, it cannot do so retroactively under section 651 (and, since 1965, under the new cancellation provisions); but if it elects to rescind it may do so retroactively to the inception of the policy. There can be little doubt that in such cases the insurance company will always elect to rescind, and the legislative restrictions regarding cancellation will be thus set at naught. In the light of the strong public policy hereinabove alluded to, such a result is incongruous, and we do not believe that the Legislature intended that such be the law.
In view of the foregoing we conclude that by the enactment of section 651, the Legislature manifested an intent to place automobile liability insurance policies in the same status as the other types of nonvoluntary coverage provided for by statute. Although the financial responsibility laws do not in so many words provide for compulsory automobile insurance in this state, these statutes, when read in conjunction with section 651, must be liberally construed to the end of fostering their objective, since they are remedial in nature and in the public interest. As noted by Justice Schauer in Continental Cas. Co. v. Phoenix Constr. Co., supra, 46 Cal.2d at pp. 434-435, 296 P.2d at p. 808, "The rule of law in the construction of remedial statutes requires great liberality, and wherever the meaning is doubtful, it must be so construed as to extend the remedy." (Quoting from White v. Steam-tug Mary Ann, 6 Cal. 462, 470.) Accordingly, we hold that section 651 is another manifestation of a legislative policy against having uninsured motorists drive on the highways and that it specifically regulates the mode of termination of an automobile liability policy. Under the statute the insured has at least 10 days in which to get other insurance, and until the effective date of the cancellation coverage is afforded with respect to liability to a third party injured by the culpable operation of the insured vehicle.
We conclude, therefore, that there is no right to rescind the subject automobile liability policy ab initio and that the coverage of the policy cannot be terminated except as provided in section 651. This special statute takes priority over the general statute providing for rescission. This conclusion does not mean that an insurer is deprived of all recourse against the insured who misrepresented material facts to obtain the coverage, since section 651 permits cancellation under these circumstances. The effect of section 651 is that an insurer is obliged to investigate and discover the fraud as soon as possible so that the rights of innocent third parties may not intervene. By prompt investigation an insurer can minimize the risk of being held liable on the policy. If, out of an abundance of caution, the insurer prefers to avoid the risk of being held liable on a policy obtained by fraud from the date of its issuance to a date 10 days after the giving of the notice of cancellation as provided in section 651, it must make its investigation of the applicant's record and the truthfulness of his representations prior to the issuance of a covering note or binder, a certificate of insurance or an insurance policy. As stated in Aetna Casualty and Surety Company v. O'Connor, supra, the liability of an insurer when it relies upon the representations of an insured and fails to make an investigation 'is in a very real sense attributable to its We particularly note that in State Farm Mutual Auto. Ins. Co. v. Wall, supra, 92 N.J.Super. 92, 222 A.2d 282, 287-289, and Allstate Ins. Co. v. Meloni, supra, 98 N.J.Super. 154, 236 A.2d 402, 406 it was held that although an automobile liability policy was noncancellable as to persons injured, such policy could properly be held void as to the insured by reason of the material misrepresentations so as to deprive him of any benefits thereunder. Accordingly, in Wall it was held that the insurer could recover collision and medical expense losses paid to the insured before the misrepresentation was discovered; and in Meloni, it was stated that where the insurer is held liable to the third persons injured, the insured may be required to reimburse the insurer for such sums as it would be required to pay out in satisfaction of its liability to the injured parties. In Meloni, the liability of the insured to the insurer was predicated upon the obligation imposed by the Financial Responsibility Law and the terms of the policy which provided that "The insured agrees to reimburse Allstate for any payment it is required to make by such law, if it would not have had to pay except for the agreement in this paragraph." (236 A.2d p. 406.) Since we are here concerned only with defendant's liability to plaintiff, we need not decide whether a similar provision in the instant policy renders the Alves liable to defendant. Suffice it to say, it appears that an insurance company can, by apt provisions in the policy, provide for reimbursement to it by the insured where there has been fraud in the inception warranting rescission but the company has been compelled to pay damages to an injured third party whose rights have intervened.
In view of our conclusion that the policy remained in effect, it becomes unnecessary to consider the question of laches. This conclusion, moreover, requires a judgment in favor of plaintiff since it is not disputed that a notice of cancellation pursuant to section 651 was not given to the Alves and since it was stipulated that plaintiff recovered a judgment against the Alves in the sum of $10,000 with costs in the sum of $24.50 together with interest at seven percent per annum.
The judgment is reversed with directions to the trial court that the findings of fact and conclusions of law be amended consistent with this opinion and that thereupon judgment be entered in favor of plaintiff on her complaint in the stipulated amount and in plaintiff's favor on the cross-complaint.
SIMS and ELKINGTON, JJ., concur.