Presented by the Insurance Services Practice Group

Supreme Court of New Jersey Strikes Down “Step Down” Provision In Policy Issued to Automobile Dealership

This morning, the Supreme Court of New Jersey handed down its decision in Huggins v. Aquilar, (A-78-19). The case involved the twin questions of (1) whether the insurance company that issued a Garage policy to an automobile dealership owed liability coverage to a customer who was involved in an accident while driving a loaner vehicle provided by the dealership, and (2) if so, how much coverage the insurer owed. After examining the issues presented, the court concluded that the provision in the Garage policy purportedly limiting coverage to customers constituted an illegal escape clause, but that, at least with respect to the policy at issue, the amount of coverage available was to be reformed from the policy limits to the compulsory requirement set forth by the Motor Vehicles Commission (MVC).

The accident at issue involved a car driven by Mary Aquilar, which was loaned to her by a car dealership, Trend Motors, while the dealership serviced Aquilar’s personal vehicle. At the time of the accident, Aquilar was insured under a personal auto policy issued by GEICO, which included limits of $15,000 per person and $30,000 per accident. Trend was insured under a Garage policy issued by Federal Insurance Company, which included $1,000,000 in liability coverage.

While driving the car loaned to her by Trend, Aquilar struck a pedestrian, Tyrone Huggins. At the time of the crash, Huggins was insured under a personal auto policy issued by NJM Insurance Company, which included $100,000 in UIM benefits.

After Huggins filed a complaint against Aquilar, GEICO deposited its $15,000 policy limits into court. Huggins then sought UIM coverage from his personal auto insurer, NJM, which asserted that it did not owe UIM coverage because Huggins was entitled to $1,000,000 in liability coverage under the Garage policy issued by Federal to Trend.

The dispute between NJM and Federal focused upon a provision of Federal’s policy, which, in short, provided that Trend’s customers were only entitled to coverage from Federal for their use of Trend’s vehicles if the customer lacked the minimum insurance coverage required by law. In that instance, the Federal policy would provide coverage, but only up to the statutorily required amount.

NJM contended that the provision of the Federal policy constituted an “illegal escape” clause. For its part, Federal countered that the provision was permissible under the applicable New Jersey statutes since Aquilar carried the statutorily-required minimum amount of liability coverage.

The Supreme Court of New Jersey, in an opinion written by Justice LaVecchia and joined in by all of the other six Justices, held that Federal’s “customer” provision violated the statutory requirement that all owners of motor vehicles provide compulsory liability insurance for accidents in which their cars are involved. As such, the court determined that the provision was an invalid escape clause since it attempted to exclude from coverage cars that Trend owned but were driven by customers that had personal automobile insurance of at least the statutory minimum of $15,000. In so holding, the court also acknowledged the requirement set forth by the MVC that, as a condition of obtaining a dealership license, automobile dealers are required to secure $100,000 in coverage for all owned vehicles.

That said, the court did not end its inquiry by simply concluding that the “customer” provision was an invalid step-down clause. Rather, the court moved to the next step of the analysis, which was the question of “how much” coverage Federal owed. In this regard, NJM and Huggins contended that the full policy limits ($1,000,000) should be available, while Federal argued that its coverage was limited to the amount of coverage mandated by the MVC ($100,000).

Examining two previous decisions with similar issues, the court concluded that Federal should be obligated to provide coverage up to the $100,000 requirement and reformed the limits accordingly. In so holding, the court focused upon the fact that Federal had no reason to expect that its provision would be deemed to be invalid. However, the court also cautioned, future insurers would not have the benefit of the argument that they were unaware that the provision would be considered to be an illegal step-down clause, and implied that reformation would not be an available remedy in the future.


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