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Newsletter -
Fall 2007
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On September 10, 2007, Governor Corzine signed into law a bill prohibiting the use of step-down provisions in automobile liability insurance policies issued to business entities. Step-down provisions in insurance policies previously provided for different levels of coverage to different insureds based on their status or the existence of other insurance. The provisions furnished an effective tool for reducing coverage available to employees, who are not individually named to the business auto policy, thereby reducing carrier liability exposure in the event an employee was injured while in a business-owned vehicle. Such provisions were held enforceable under the Supreme Court decision in Pinto v. New Jersey Manufacturers Insurance Company, 183 N.J. 405 (2005).
In Pinto, an employee was injured in a work-related accident while operating a motor vehicle owned and insured by his employer. The vehicle was insured through a business insurance automobile policy issued by New Jersey Manufacturers Insurance Company (NJM). The policy named no natural persons, only two corporate entities as the “named insured.” The policy included an endorsement providing uninsured (UM) / underinsured (UIM) motorist coverage with $1,000,000.00 limits. The UM/UIM endorsement, however, contained two step-down provisions that lessened the available coverage in certain circumstances for persons who were not “named insureds” under the policy. In particular, if a party was not a “named insured” under the NJM policy but was a “named insured” under his own or his family member’s policy, then the most the employer’s insurance had to pay under their UM/UIM policy was the applicable limit of the personal or family member’s policy.
The employee in Pinto was severely injured in the accident and his medical bills far exceeded the limits under the tortfeasor’s policy. Therefore, the employee sought coverage under his employer’s UM/UIM endorsement. The employee, however, was a “named insured” under a family member’s policy issued by Liberty Mutual Insurance. The applicable limits under the Liberty Mutual policy were $100,000.00. Pursuant to the step-down provision, the maximum amount NJM was required to compensate the employee under the employer’s UM/UIM endorsement was the $100,000.00 limit of the Liberty Mutual policy, and not the $1,000,000.00 limit of the NJM policy. The employee challenged the provisions, but was rebuffed by a Court which recognized the legitimacy and enforceability of step-down provisions even though they may result in differential treatment based on the existence of other available insurance.
The Court found that employers could cover employees as “named insureds” provided the appropriate language is added stating such an intention. To that end, the Court imposed a duty upon insurance agents and brokers to inform employers about the necessity for such language so the employer may make an informed decision about whether to provide employees with “named insured” status.
The new law prohibiting the use of step-down provisions in business automobile insurance policies overturns the decision reached in Pinto. As a consequence, carrier use of step-down provisions as an effective method of reducing possible liability exposure for employees injured in business-owned vehicles has been invalidated. Although insurance agents will applaud the law for removing the duty imposed by Pinto, while injured employees will benefit from the availability of higher policy limits, the effect on insurance carriers, particularly those that provide business automobile policies, is far reaching. Carriers are now faced with the potential of increased litigation under policies that currently employ the now invalid step-down provisions by injured employees seeking compensation under employer policies.
Carriers should take note of the new law, and reassess and perhaps rewrite business automobile policies to eliminate the use of invalid step-down provisions. Despite the fact that the carriers are now faced with increased liability exposure, removing the provisions may provide for a decrease in litigation that may challenge existing policies.
Daniel B. McMeen
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