A Giant Step Back For the Step-Down Provision, DD 12/07

Defense Digest

On September 10, 2007, New Jersey Governor Jon Corzine signed the amendment to Section 2 of P.L.1968, c.385 (N.J.S.A. 17:28-1.1) which reflects the New Jersey Legislature's intent to prohibit the use of "step-down" provisions in business automobile insurance policies issued to corporate or business entities. Such provisions are intended to limit uninsured and underinsured motorist coverage available to employees under their employer's business auto policy. The above legislation was recently enacted in response to the Supreme Court of New Jersey's decision in Pinto v. New Jersey Manufacturers Ins. Co., 183 N.J. 405 (2005), wherein the Court upheld the use of such a "step-down" provision.

In Pinto, the plaintiff-employee was injured in a work-related auto accident while operating a vehicle owned by his employer and insured under his employer's business automobile policy with New Jersey Manufacturers Insurance Company ("NJM"). The NJM policy only listed the employer/corporate entities as "named insureds." The policy contained an endorsement providing UIM coverage with a limit of $1 million per accident. Included in the endorsement was a "step down" provision, which limited the amount of UIM coverage available to the plaintiff to the maximum limits under his own personal automobile insurance policy because the plaintiff was not specifically named as a "named insured" on the NJM policy.

In Pinto, the plaintiff-employee was a "named insured" under his own personal automobile insurance policy, which provided UIM coverage limits of $30,000. The plaintiff applied for and received UIM coverage in the amount of $30,000 under his own personal policy. His damages, however, exceeded that amount, and he applied for additional UIM coverage under his employer's NJM policy. NJM denied his claim based upon the "step-down" provision contained in the NJM policy's UIM endorsement. NJM argued that this "step-down" provision clearly limited the plaintiff's UIM recovery to the limits provided under his own personal policy.

The plaintiff-employee brought suit against NJM, challenging NJM's coverage position. The plaintiff claimed that he was entitled to UIM coverage under the NJM policy because his employer, by designating the corporate entities as the "named insureds" on the NJM policy, intended to provide coverage for all its employees. In the alternative, the plaintiff argued that the designation of corporate entities only as "named insureds" was ambiguous and could reasonably be construed to mean that any employee qualified as an insured under the policy and would be entitled to UIM coverage, regardless if the employee was specifically identified as a "named insured" on the policy.

Ultimately, the New Jersey Supreme Court ruled in favor of NJM. Focusing upon the parties' freedom to contract, the Court held that insureds and insurers are entitled to negotiate and enter into agreements that place clear limitations on coverage for those who are not identified as "named insureds" on the policy. The Court held that if an employer wished to cover all employees as "named insureds" on the employer's policy, the employer was free to include specific language in the policy, incorporating employees as "named insureds" thereunder. In dicta, the Court in Pinto imposed a duty upon insurance carriers and their agents and brokers to advise insureds about the necessity of including such specific language in their business automobile policies.

In response to the New Jersey Supreme Court's decision in Pinto, the New Jersey Legislature recently amended N.J.S.A. 17:28-1.1 to eliminate the use of "step-down" provisions in an employer's business auto policy to limit UIM coverage available to employees not specifically named as "named insureds" under that policy to the limits available under the employee's personal auto policy. Subsection 2(f) of amended N.J.S.A. 17:28-1.1 provides:

A policy that names a corporate or business entity as a named insured shall be deemed to provide the maximum uninsured or underinsured motorist coverage available under the policy to an individual employed by the corporate or business entity, regardless of whether the individual is an additional named insured under the policy or is a named insured or is covered under any other policy providing uninsured or underinsured motorist coverage.

The amendment to N.J.S.A. 17:28-1.1 takes effect immediately. However, it is not yet clear whether it will apply retroactively. What is clear is that the New Jersey Legislature has effectively overturned the Pinto Decision and mandated that the "step-down" provisions contained in business auto policies are unenforceable and will no longer limit an employee injured in an automobile accident while working in the scope of his employment and occupying his employer's automobile to recovering UIM benefits up to the coverage limits available under the employee's personal auto policy.

*Jennifer is an associate in the Roseland, New Jersey, office. Jennifer can be reached at (973) 618-4176 or at jawatson@mdwcg.com.