On April 21, 2021, the Supreme Court of New Jersey issued its opinion in Huggins v. Aquilar, No. 084200, 2021 WL 1555277, --- A.3d --- (N.J. Apr. 21, 2021). The Court affirmed the trial court’s decision to strike a provision in the garage policy issued by Federal Insurance Company (“Federal”) that fully eliminated coverage to permissive users of the car dealership’s vehicles that carried at least $15,000 in their own personal auto insurance. The Court explained that such “shifting of responsibility from owner to driver does not fulfill the public policy of the compulsory insurance requirement and its related permissive user doctrine.”
Huggins involved a September 2016 automobile accident. Trend Motors, Ltd. (“Trend”), provided the defendant, Mary Aquilar, a loaner auto while Trend serviced her vehicle. While using the loaner auto, Aquilar struck Plaintiff Tyrone A. Huggins’ car. Huggins sustained injuries as a result of the accident. At the time of the accident, Aquilar was insured by GEICO through an automobile policy that provided liability coverage of $15,000 per person and $30,000 per incident, the minimum statutory limits for personal auto insurance.
Federal issued a garage policy to Trend, which provided liability coverage with limits up to $1,000,000. The Federal policy contained language that included as insureds Trend’s customers only if the customers have no insurance or have insurance that is less than the minimum insurance required by law. The policy covered those customers as insureds, “only to the extent necessary to establish that unspecified minimum insurance level.” Federal disclaimed liability coverage to Aquilar, finding she did not qualify as an insured because she carried $15,000 in her own auto insurance.
The trial court granted summary judgment to Huggins, finding the definition of an insured constituted an illegal escape clause, as it did not limit the insurance but instead completely eliminated the insurance for permissive users (i.e., customers) with the $15,000 minimally required insurance. The trial court reformed the Federal policy, finding Federal liable for the full $1,000,000 policy limit.
The Supreme Court granted Federal’s subsequent motion for leave to appeal and heard oral argument on January 20, 2021. In affirming the trial court’s ruling, the Court held “that the disputed coverage provision in the garage policy at issue constitutes an illegal escape clause, which may not be used to evade the minimum liability requirements for dealership vehicles set by the Chief Administrator of the [Motor Vehicle Commission (“MVC”)].” The Court reasoned that, “this case concerns the compulsory liability insurance requirement imposed on vehicles, through their owners, in order to provide compensation for injury from accidents involving those vehicles.” The rule that every automobile be insured by its owner “not its driver, is foundational to the permissive user rule,” which provides for coverage under the standard omnibus liability clause in all auto policies in order to provide a safety net to the public. The Court continued that insurance policies that exclude coverage for whole classes of permissive drivers are often found violative of public policy because it improperly shifts the risks from owners to drivers.
To arrive to its holding, the Court found “[t]he facts and holding of” Willis v. Security Insurance Group” were “particularly instructive.” In Willis, the Court affirmed a Chancery Division decision that had invalidated a car dealership’s garage policy that “exclude[d] from its omnibus clause individuals driving the insured’s car with his permission where such persons have available valid and collectible insurance under their own policies with the minimum limits.” The Court noted, “[t]he statutory omnibus requirement at issue in Willis was not that an injured party be covered to the statutory minimums, but that the owner of a vehicle provide coverage.
Likewise, the Court cited Rao v. Universal Underwriters Insurance Co., where “the Appellate Division held that an automobile leasing company’s insurance policy, which provided coverage to lessees only to the extent that they lacked their own minimum liability coverage, was an invalid escape clause.” The court in Rao, examined “N.J.S.A. 45:21-1 to -3, which govern mandatory omnibus liability coverage of rental vehicles. Specifically, N.J.S.A. 45:21-2 requires every ‘owner’ of a vehicle for rent or lease to maintain liability insurance.”
Reviewing both Willis and Rao, the Huggins Court found that Federal’s policy created an invalid and unenforceable escape clause because it excluded a class of permissive users of the insured’s car that already had their own automobile coverage meeting minimum limits.
The Court rejected Federal’s reliance on the Court’s prior holding in Aubrey, explaining that “[w]hile a step down in coverage has been approved in the setting of eligibility for first-party UIM coverage, as in Aubrey, it has not been approved with respect to third-party liability coverage to accident victims.” The Court also differentiated Aubrey from the facts of its case, as the Aubrey court “was not tasked with construing N.J.S.A. 39:6B-1(a), which mandates liability insurance of ‘owner[s].’ Lawful exceptions to discretionary insurance coverage do not raise the same concerns as efforts to evade minimum insurance requirements set by law.” The Court emphasized that “[t]he shifting of responsibility from owner to driver does not fulfill the public policy of the compulsory insurance requirement and its related permissive user doctrine.”
The Court also concluded that it was within the MVC’s authority to promulgate N.J.A.C. 13:21-15.2(l), which requires every auto dealership possess liability insurance for all autos in the amount of $100,000 per person and $250,000 per incident for bodily injury or death. The Court reasoned that “[t]he regulation’s specific requirement that coverage extend to vehicles ‘owned or operated by the applicant, at his or her request or with his or her consent’ demonstrates a clear intent that permissive users be insured.” The Court held “Federal must comply with the applicable compulsory minimum liability coverage required by the Chief Administrator of the MVC.”
Lastly, the Court reversed the trial court’s decision declining to reform the contract to a mandatory minimum and instead holding Federal to the full amount of the policy on its face, namely $1,000,000 in liability coverage. In so holding, the Court addressed the two “most relevant cases on reformation of an insurance policy”: Proformance Ins. Co. v. Jones, 185 N.J. 406 (2005), finding where public policy of compensating accident victims precluded the enforcement of an exclusion in an auto policy, the policy should be reformed to have available only the statutory minimum limits) and Potenzone v. Annin Flag Co., 191 N.J. 147 (2007), reaching the opposite conclusion and reforming the policy to enforce the stated limit rather than the statutory minimum. There, the Court explained that in Potenzone the offending policy provision violated well-established case law decided sixteen years earlier whereas in Proformance, the Court invalidated a clause of that nature for the first time. Thus, conceding potential confusion “in light of the arguably diverging decisions in Rao and Aubrey,” the Court found it “difficult to conclude that Federal had sufficient notice to warrant imposing the full policy limit.” Therefore, the Court ordered the reformation of Federal’s policy to meet the minimum set by N.J.A.C. 13:21-15.2(l), $100,000/$250,000.
Nonetheless, the Court provided an unambiguous edict, “our decision today puts issuers of garage policies on notice that similar escape clauses are unlawful.”
Comment
The Supreme Court’s decision in Huggins provides guidance on the viability of policy provisions that seek to shift insurance requirements from owners to driver or eliminate coverage for a category of permissive users. The Court also clarified that the Motor Vehicle Commission has the authority to increase the compulsory liability insurance for vehicles as it did for auto dealership from $15,000 to $100,000 in promulgating N.J.A.C. 13:21-15.2(l).
