248 A.3d 1213
N.J.2021Background
- Trend Motors (a dealership) provided a loaner car to Mary Aquilar; while driving it she negligently collided with Tyrone Huggins, causing serious injuries.
- Aquilar had personal auto liability coverage through GEICO at the statutory minimum ($15,000/$30,000). Trend had a garage policy with Federal Insurance with $1,000,000 liability limits.
- Federal’s garage policy defined "Who Is An Insured" to exclude customers who have their own insurance at or above statutory minimums (Paragraph 3(a)(2)(d)).
- NJM (Huggins’s insurer) sued Federal seeking a declaration that the garage policy covered Aquilar; the trial court found the provision an illegal escape clause and awarded the full $1,000,000 policy limit; Federal appealed to the Supreme Court.
- The Motor Vehicle Commission regulation requires dealers to carry $100,000 per person / $250,000 per incident liability coverage for vehicles owned or operated by the dealer.
- The Supreme Court held the policy provision to be an illegal escape clause and reformed the policy to the dealer-licensure minimum of $100,000/$250,000 rather than imposing the $1,000,000 face limit.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Paragraph 3(a)(2)(d) is an unlawful "escape clause" excluding a class of permissive users | The clause unlawfully removes dealer/owner liability for permissive users who have personal minimum coverage, contravening the owner-focused compulsory-insurance scheme and permissive-user doctrine | The clause is a permissible step-down limiting coverage where the permissive driver has personal insurance (citing Aubrey) | Clause is an illegal escape clause; owners (dealerships) must provide compulsory coverage for permissive users of dealer vehicles |
| Appropriate remedy for an invalid escape clause: full policy limit vs. reformation to statutory/licensure minimum | Plaintiff/NJM favored holding insurer to full policy limits (as trial court did) | Federal urged reformation and argued it lacked clear notice that the clause was unlawful; relied on Proformance/Potenzone framework | Policy reformed to MVC dealer-licensure minimum ($100,000/$250,000). Full $1,000,000 limit not imposed because insurer lacked sufficient notice that the clause was unlawful |
Key Cases Cited
- Willis v. Security Ins. Group, 53 N.J. 260 (1969) (invalidated dealership policy excluding permissive users who have personal insurance)
- Rao v. Universal Underwriters Ins. Co., 228 N.J. Super. 396 (App. Div. 1988) (held leasing-company policy that limited coverage by lessee’s personal insurance was an illegal escape clause)
- Aubrey v. Harleysville Ins. Cos., 140 N.J. 397 (1995) (construed a similar provision as a valid step-down clause in the UIM/first-party context)
- Proformance Ins. Co. v. Jones, 185 N.J. 406 (2005) (reformed invalid policy language to statutory minimum where insurer lacked justification to fully avoid coverage)
- Potenzone v. Annin Flag Co., 191 N.J. 147 (2007) (refused reformation to statutory minimum and enforced full policy limits where prior case law gave insurers clear notice of the illegality)
- Selected Risks Ins. Co. v. Zullo, 48 N.J. 362 (1966) (establishes omnibus/permissive-user coverage obligations under the statutory scheme)