A Rare Narrowing Of The Consumer Fraud Act’s Scope: Medical Malpractice Insurance Not Covered

 by:  Peter J. Gallagher (@pjsgallagher)

It is not every day that a New Jersey court limits the scope of the New Jersey Consumer Fraud Act (“CFA”), so when one does, it is worth writing about. Anyone who litigates in New Jersey knows about the CFA and, depending on whether you are on the plaintiff’s side or the defendant’s side, either loves it or hates it. (I am mostly on the defendant’s side, but occasionally find myself representing a plaintiff, so my relationship with the CFA is “complicated.”) Because it is remedial legislation, the CFA is liberally construed to afford the greatest protection to consumers. This philosophy has led courts to apply the CFA (and its treble damages and prevailing party’s attorney fees) to a seemingly ever growing, and very rarely contracting, variety of disputes. In fact, many years ago, the New Jersey Supreme Court observed that: “The history of the Act is one of constant expansion of consumer protection.”

With this in mind, we turn to the Law Division’s published decision in Khan v. Conventus Inter-Insurance Exchange. That case was a putative class action in which plaintiff, a doctor, alleged that defendant violated the CFA in connection with the sale of medical malpractice insurance and the administration of the policy after it was purchased. Plaintiff purchased a policy from defendant and, as part of her initial membership, was required to make a one-time contribution, equal to the first year’s premium, to defendant’s surplus fund. (Defendant is not a traditional insurance carrier, but is instead a “non-profit physician member-owned risk sharing exchange.”) Plaintiff elected to make this contribution in installments over a ten-month period, with the understanding that if she cancelled her policy before the final payment was made, she would still be responsible for the full surplus fund contribution. Plaintiff eventually cancelled her policy before the ten-month period passed and defendant demanded that she immediately pay her entire surplus fund contribution rather than allowing her to pay it off in installments as originally agreed upon by the parties. Plaintiff sued alleging that this attempt to accelerate the surplus fund payment was a breach of contract and a violation of the CFA. She sought to bring her claims as a class action.

Before addressing whether plaintiff could sustain a class action and be appointed class representative, the court first had to decide whether the CFA applied to “transactions involving the purchase and sale of medical malpractice insurance.” Because the court held that it did not, it never had to reach the class certification issues.



The court acknowledged the history and purpose of the CFA, but noted that its reach was not unlimited. It held that the key factor in determining whether the CFA applies is not the nature of the parties to the transaction, but rather the “underlying nature of the transaction itself.” The CFA only applies to “merchandise,” which is defined as something that is “offered, directly or indirectly to the public for sale.” Therefore, if an underlying transaction does not involve “merchandise,” the transactions does not implicate the CFA.

This is the key distinction on which the trial court in Khan relied. The court held that insurance products offered to the general public were subject to the CFA. But, it held that medical malpractice is not offered to the general public. It is only offered to doctors, who, according to the court, make up only 0.27 percent of New Jersey’s population. (In case you are wondering, lawyers make up a little over 1% of the State’s population.) Moreover, “it is a prerequisite to the purchase of medical malpractice insurance that one complete a lengthy education and training process spanning many years and then obtain licensure from the state as a physician, a highly regulated profession.” As the court held, “[t]hese requirements, by their very nature, distinguish and separate physicians from the public at large.” Therefore, because medical malpractice insurance is not offered to the public at large, it is not “merchandise” as that term is defined in the CFA, and is not subject to the CFA.

The court rejected plaintiff’s argument that many types of insurance that are covered by the CFA – credit insurance, credit life and disability insurance, automobile insurance, business interruption insurances, etc. – are not purchased, or even needed, by the general public. The court held that this argument confused “the concept of availability to the general public with degree of use by the general public.” While those types of insurance might be utilized by a small segment of the public, they are available for purchase by the general public. In contrast, medical malpractice insurance is only available for purchase by “a tiny fraction of the population, a population that requires one to meet strict licensure and ongoing regulatory requirements.” Accordingly, medical malpractice insurance is not “merchandise” as that term is defined in the CFA.

Finally, the court observed that its holding did not “suggest that the sale of medical malpractice insurance exists in an unregulated environment.” Rather, the court held that it is not subject to the strictures of the CFA because it is not available to the general public.

Stay tuned for more on this case because I suspect that an appeal may be forthcoming and the Appellate Division, or even the Supreme Court, may have the last word.

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