• Step-Down Provisions Not Completely Dead In New Jersey
  • December 21, 2009 | Author: Walter F. Kawalec
  • Law Firm: Marshall, Dennehey, Warner, Coleman & Goggin - Cherry Hill Office
  • The recent Appellate Division case of Olkusz v. Brown, 401 N.J. Super. 496 (App. Div. 2008) has provided a last spark of life to insurance-contract step-down provisions, which were recently prohibited by statute in New Jersey.

    A step-down provision provides that persons who are "insureds" under a policy's underinsured and uninsured ("UIM/UM") coverage but who are not "named insureds," and who are covered under their own personal policy, will have their coverage limits reduced to the coverage limits provided by the personal policy. It is used in commercial policies whereby key management personnel are "named insureds" on the corporate policy and thus entitled to the full amount of the UIM/UM coverage. Employees who are driving in the course of their employment and who have personal motor-vehicle coverage, however, would only be "insureds" under the policy and not "named insureds." Their coverage limits would "step down" to the coverage provided by their personal policy.

    In 2005, the New Jersey Supreme Court decided Pinto v. Manufacturers Insurance Company, 183 N.J. 405 (2005). In Pinto, the Court held that these provisions are enforceable and, where such a provision exists and the claimant is not a "named insured," the policy limits drop to that of the other claimed insurance.

    On September 10, 2007, the New Jersey Legislature adopted N.J.S.A. 17:28-1.1, which reversed the holding of Pinto. The amendment provided that any policy issued to a corporate or business entity "shall not provide less uninsured or underinsured motorist coverage for an individual employed by the corporate or business entity than the coverage provided to the named insured under the policy." The Legislature specifically intended to overrule Pinto:

    This bill is in response to the New Jersey Supreme Court's decision in Pinto v. New Jersey Manufacturers Insurance Company, 183 N.J. 405 (2005)...

    This bill reverses the effect of the Pinto decision by prohibiting step-down provisions in these policies.

    Legis. Statement (Senate No. 1666, Assembly No. 3038.) The question arose whether this statute would apply to claims arising from accidents which occurred prior to the bill's passage, or whether it would only apply to claims which arose from accidents which occurred after the bill's passage.

    A number of trial courts found that retroactive application of the bill is appropriate. The Appellate Division took on this issue in Olkusz. The Olkusz Court first noted that, absent a clear indication that a statute was to be applied retroactively, the statute would be given prospective application. The court then discussed whether the statute met one of the "judicially crafted categories favoring retroactivity. These are: (1) the Legislature has expressed, either explicitly or implicitly, its intent that the statute apply retroactively; (2) the statute is 'curative'; or (3) the expectations of the parties warrant the retroactive application of the statute."

    The Court first found that there was no clear indication in the legislation that the statute was to be given retroactive application and is devoid of any legislative intent regarding retroactive application:

    Here, the Legislature did not provide any indication as to how to apply the step-down clause prohibition reflected in [the bill]. We are thus required to presume that the Legislature intended for its provisions to be applied prospectively. Ibid.

    ...[I]f [the Legislature] desired S-1666 to be applied retroactively, it should have expressly provided for such application in the amendment's text... [T]he Legislature's silence on the question of retroactivity here is akin to a legislative flare, signaling to the judiciary that prospective application is intended.

    Next, the Court rejected the claim that the statute was "curative": "The statutory prohibition at issue cannot be viewed as 'curative,' because the holding in Pinto was not predicated on a misapprehension of established legislative policy."

    [B]y reversing the Supreme Court's holding in Pinto, the Legislature was not correcting or "curing" a judicial misinterpretation of an existing statute. [The bill] merely disallows the use and enforceability of a contractual clause, which the Supreme Court in Pinto, supra, found to be an issue of "insurance contract interpretation."

    Finally, the Court noted that the expectations of the parties favored prospective application:

    Here, the parties' expectations must be gauged by the legal principles governing the common law right of freedom to contract prevailing during the time of the accident.

    ...In this light, Federal Insurance had a reasonable basis to believe that its contractual provisions were proper and enforceable...

    Thus, the Court concluded that the statute must apply prospectively:

    [W]e hold that this statutory amendment must be applied prospectively, commencing from the date of its passage by the Legislature. Any UM/UIM claim predicated upon an accident which predates the adoption of N.J.S.A. 17:28-1.1(f) must be governed by the legal principles articulated by the Supreme Court in Pinto...

    Thus, if a policy has a step-down provision, it is vital to determine whether the accident occurred before September 10, 2007, as that will determine the law which applies. So, existing step-down provisions are still viable in New Jersey so long as the accidents preclude passage of the amendment.

    One final question which was not directly addressed in Olkusz was whether the step-down provision would apply if the insurance policy was entered into prior to the passage of N.J.S.A. 17:28-1.1(f), but the accident post-dated it. There seems to be no reason why, given the Court's analysis in Olkusz, the statute would be given retroactive applicability, as the factors favoring prospective application would still apply. Perhaps the Appellate Division will address that question in a future case.