UM/UIM "Step Down" May Step Up to the NEW Jersey Supreme Court - DD 12/03

Defense Digest

UM/UIM "Step Down" May Step Up to the NEW Jersey Supreme Court

A "step down" provision in a UM/UIM insurance policy may reduce the amount of insurance coverage available to a potential claimant.  A "step down" provision comes into play where competing UM/UIM insurance policies have been triggered.  "Step down" clauses often arise in a work setting.  

Imagine this hypothetical situation.  On his way to Raceway Park in Englishtown, New Jersey for a promotional appearance for Dale Earnhardt, Inc. (DEI), an unidentified car T-Boned Dale Earnhardt, Jr. at the Airport Circle in Pennsauken. Some witnesses reported that the car bore a number 24; however, the evidence was not conclusive.  No stranger to car crashes, Junior pulled away the netting, slid out of the Monte Carlo window, and shook his fist at the phantom vehicle #24.  DEI owned the Monte Carlo.

DEI purchased a commercial auto insurance policy for the Monte Carlo from Left Turn Insurance Co. of America (LTI), with UM/UIM coverage limits of $1 million.  Junior had purchased a personal auto insurance policy from Shelbyville Property & Casualty (Shelbyville), with UM/UIM limits of only $15,000.00.  Junior filed a claim for UM benefits with Left Turn Insurance.  The LTI policy included a "step down" clause that capped the amount of UM coverage at the level of any other existing policy that also provided UM coverage to Junior.  In this hypothetical situation, the LTI step down provision, if applicable, would restrict LTI's UM coverage for Junior to $15,000.00, the amount of UM coverage available to Junior under his own Shelbyville personal auto policy.

In Aubrey v. Harleysville Insurance Co., 140 N.J. 397 (1995), the New Jersey courts already determined that "step down" provisions do not violate public policy as a matter of law.  When does a "step down" provision apply to a driver of an employer's vehicle?  New Jersey appellate court panels have split on this issue and the issue is ripe for Supreme Court review.

Who is a "named insured"?

The applicability of a "step down" clause appears to hinge upon the interpretation of the term "named insured."  The standard New Jersey UM/UIM endorsement for a commercial auto insurance policy provides:

If (1) an "insured" is not the individual named insured under this policy;(2) that "insured" is an individual named insured under one or more other policies providing similar coverage; and(3) all such other policies have a Limit of Insurance for similar coverage which is less than the Limit of Insurance for this coverage;Then the most we will pay for all damages … shall not exceed the highest applicable limit of insurance under any … policy providing coverage to that "insured" as an individual named insured.

In Araya v. Farm Family Cas. Ins. Co., 353 N.J.Super. 203 (App. Div. 2002), a business auto policy issued by Farm Family identified Mahon Landscaping as the "named insured" under the policy.  Farm Family conceded that the policy covered the plaintiff, an employee of Mahon Landscaping, as an "insured."  However, Farm Family contended that the plaintiff was not the "named insured."  The Farm Family policy contained the standard "step down" provision noted above.

The Appellate Division held that "when a business auto policy fails to designate the insured business entity's human agent or agents entitled to receive UIM benefits, we will look to the Declarations Page as the best indicator of the insured's reasonable expectations of coverage."  Because the plaintiff had been listed on the Declarations Page as an authorized operator of the business's vehicles, the Appellate Division determined that he was a "named insured," and that the "step down" provision did not apply to his claim.

Later that year, another appellate panel, in Macchi v. Connecticut General Ins. Co., 354 N.J.Super. 64 (App. Div. 2002), also broadly interpreted the term "named insured" to include an individual not specifically listed as a "named insured" on the declarations page. This panel began its discussion by accepting, without analysis, that the plaintiff was "for all intents and purposes an individual named insured under the policy" even though the policy did not identify her as a "named insured."  The policy identified a corporate entity, Innovative Packaging, as the "named insured."  The Appellate Division believed that construing the concept of a "named insured" to include only a corporate "named insured" would potentially deprive all UM/UIM claims of the full extent of coverage under the policy since a corporate entity "cannot suffer the predicate personal injury."

The Split

Earlier this year, a third appellate panel disagreed with the Araya and Macchi courts.  In Botti v. CNA Insurance Co., 361 N.J.Super. 217 (App. Div. 2003), the Appellate Division confronted the "named insured" issue head-on.  The court addressed the specific issue of "whether the step down clause limits the UM coverage afforded to an employee who is the "named insured" in another policy with lower UM limits."  The Appellate Division concluded that the employee was NOT a "named insured" under the business auto policy and, as a result, the step down clause applied to limit the UM coverage.

In Botti, an unidentified vehicle made a sudden turn which forced the plaintiff to swerve off the road.  The plaintiff was operating a Jeep owned by his employer,  J.W. Goodliffe.  Botti had a personal automobile insurance policy which had UM/UIM limits of $100,000.00.  CNA issued a commercial auto policy to J.W. Goodliffe covering nearly 40 vehicles, including the Jeep.  The CNA commercial auto policy identified J.W. Goodliffe as the "named insured" and contained UM/UIM limits of $1 million.

CNA did not dispute that the commercial auto policy covered the plaintiff as an "insured" since he occupied a covered auto at the time of the accident.  CNA contended, however, that the plaintiff was not a "named insured" under the commercial auto policy.

The CNA policy contained the standard New Jersey UM/UIM commercial auto coverage endorsement, including the standard step down clause noted above.

The Appellate Division noted that the terms "named insured" and an "insured" are entirely distinct concepts.  "[T]he term 'named insured' is self-defining.  The term refers only to the names so appearing in the declaration." (emphasis supplied.)  On the other hand, an "insured" is "anyone who is entitled to coverage … [that] may result by virtue of a person's status as an operator or occupier of a covered auto." 

Since the declarations page of the CNA policy clearly identified J.W. Goodliffe as the "named insured," and did not include the plaintiff as a "named insured," it was clear and unambiguous that the plaintiff was not a "named insured" under the CNA policy.  The plaintiff "could not have had an objectively reasonable expectation of being a 'named insured' under the CNA policy."  The standard provisions of the step down clause were also "clear and unambiguous."  Accordingly, the Appellate Division applied the step down clause to reduce the $1 million UM coverage under the CNA commercial auto policy to the $100,000.00 UM/UIM limits of the plaintiff's own personal auto insurance policy issued by State Farm.

The Appellate Division disagrees with the interpretation of the "named insured" in the context of a step down provision.  The Botti panel did not hesitate to strictly construe a corporate entity as the only "named insured," while the Macchi and Araya panels interpreted the term more broadly.  These two panels may have believed that a strict interpretation of the "named insured" would lead to the "unholy mantra" of "we collect premiums; we do not pay claims." Owens-Illinois, Inc. v. United Ins. Co., 264 N.J.Super. 460 (App. Div. 1993).  In light of this split, the New Jersey Supreme Court may ultimately step in to resolve the dispute among the appellate panels.

Returning to our hypothetical situation, under the most recent Appellate Division analysis of Botti, Junior would only be entitled to make a UM claim for $15,000.00 under the Left Turn policy.  Junior was not a "named insured" under the LTI policy and he was a "named insured" under the Shelbyville policy, which carried reduced UM coverage limits.  Therefore, the maximum amount of UM coverage available to Junior under Botti would be $30,000.00, $15,000.00 from each policy.

*Paul is a shareholder in our Cherry Hill, New Jersey office.  He can be contacted directly at 856) 414-6008 or pjohnson@mdwcg.com.