RETROAPPLICATION OF THE PROHIBITION OF THE STEP DOWN PROVISION IN CURRENT UIM/UM CASES - WHAT’S A CARRIER TO DO?

In September of 2007,  Governor Corzine signed into law a new bill which prohibited the use of the “step down” provision in automobile liability insurance policies that were issued to business entities.  The “step down” issue commonly arose in circumstances where an employee of a business was involved in a motor vehicle accident while driving a vehicle owned by the employer.

The new legislation is in response to the New Jersey Supreme Court case of Pinto v. New Jersey Manufacturer's Ins. Co., which upheld step-down provisions and allowed insurers to limit UM/UIM coverage to the coverage amount on the employee's personal insurance policy.  In response to this result, the New Jersey Legislature added subparagraph (f) to N.J.S.A. 17:28-1.1.  The new paragraph states, in pertinent part that a commercial motor vehicle insurance policy "shall not provide less uninsured or underinsured motorist coverage for an individual [employee] . . . than the coverage provided to the named insured."   This legislation invalidates the "step-down" provision and requires insurers to provide the same coverage to employees as the amount purchased by the employer.

Recently, the New Jersey Courts have found that the new statutory amendment to the “step down” provision can be applied retroactively.  The retroapplication of the new amendment increases the exposure a carrier may face for currently pending UIM and UM matters.

In  Olkusz, et vir. v. Brown, et al., the plaintiff, an employee of a hospital was injured while a passenger on a shuttle bus owned and operated by her employer.  She presented a demand for UM coverage to her personal insurer,  Atlantic Mutual Insurance Company, whose policy had a $100,000 UM limitation and to her employer's insurer, Federal Insurance Company, whose policy provided UM coverage of $1 million.  On March 12, 2007, the Court entered partial summary judgment in favor of Federal, declaring its obligation to afford UM coverage was limited to $100,000 because of a step-down clause in its policy.  Atlantic Mutual moved for reconsideration and the plaintiffs cross-moved, citing the recent amendment to the “step down provision.”   Plaintiffs argued that the new amendment  should be applied retroactively.   Federal Insurance argued only prospective application -- at the very least, to claims only filed on or after September 11, 2007.  In the case before the court, the judge found that the factors favored pipeline retroactivity of the statute.  The Court vacated its prior order enforcing the “step down” provision and declared Federal Insurance Company’s  applicable UM coverage to be $1 million.

In Flaherty, et ux. v. Harleysville, et al., the  Court  granted Plaintiffs' motion for reconsideration invalidating the “step down” provision in the policy at issue, determining that the Legislature, in adding the new amendment "to take effect immediately," obviously intended to overrule Pinto and that the statute should have retroactive effect in light of the Legislative intent to ameliorate or cure the impact of Pinto.  Addressing the issue of reliance, the Court noted that the policy of insurance under which the Plaintiffs were seeking UIM benefits came out in 1999, and the accident occurred in 2000, when the law was even more unclear than it was when the Appellate Division issued Pinto.  In light of the unsettled state of the law at the time, the Court did not credit the insurance industry's argument that such a result was manifestly unjust to the carrier because it  now must cover risk that it did not contemplate at the time the policy was written.

In Carter v. Akhunda, the Court analyzed the Legislative intent of the new amendment and determined that it should be applied retroactively.  Although noting that the Court’s decision might be different with respect to a policy that was issued after Pinto, the Judge noted that the renewal of the policy in question occurred one month before the Supreme Court's decision in Pinto in June of 2005; therefore the insurance carrier clearly was on inquiry notice of the unsettled nature of the law, and could not claim detrimental reliance or manifest injustice.  

The likelihood of the new amendment being applied retroactively for current UIM and UM matters will likely rest upon the date the policy of insurance was issued.  In the event the policy was issued prior to the 2005 New Jersey Supreme Court decision in Pinto, when the case law regarding the “step down” provision was unsettled, it is unlikely the Court will find a carrier’s reliance on its contractual right to enforce a step down provision as valid.  Given the Court’s inclination of applying the new amendment retroactively, it is important for carriers to look at their current commercial business insurance policies and remove the use of invalid step down provisions for future UIM and UM matters.  Moreover, carrier assessments of potential liability in pending cases should be revisited to assess the impact of retroactive application upon reserves, not to mention pending settlement discussions.


Ayesha T. Rashid, Esq.