UM/UIM Step-Down Provisions May Not Limit Coverage to Employees (NJ)

Step-down provisions in insurance policies are not uncommon. These limitations allow an insurer to decrease the policy limits for certain insureds or risks. For example, a commercial general liability policy may have a limit of liability of $1,000,000, which is decreased to $250,000 for any claims arising out of sexual abuse or molestation. Other policies have a lesser limit of liability for suits involving family members due to the danger of collusion between the parties.

In the past, New Jersey permitted a commercial motor vehicle liability policy to provide less uninsured (UM) or underinsured (UIM) motorist coverage for anyone other than the “named insured” on the policy. In 2007, the New Jersey legislature enacted legislation that prohibited commercial auto policies from enforcing step-down provisions that limited UM/UIM benefits available to employees of the named insured. The statute was made effective on September 10, 2007.

In James, plaintiff was injured in a car accident before the enactment of the statute. After settling with the adverse driver for the limit of his insurance ($100,000), James demanded UIM coverage under his employer’s commercial auto policy. Of note, his employer’s policy had a UIM limit of $500,000, but its step-down provision reduced UIM benefits available to employees at the limit contained in the employee’s own policy or, in this case, $50,000.

James argued that the new legislation should be given retroactive application, which would void the step-down provision in his employer’s commercial auto policy and make an additional $400,000 available to him. Rejecting his argument, the New Jersey Supreme Court held that the law ordinarily favors prospective application of a new statute. Further, the statute’s plain language did not evidence any explicit intent to apply the law retroactively to accidents that occurred before its effective date. Thus, the court ruled that the statute in question only reformed policies that were in existence on the effective date of the statute but had no application to accidents that occurred earlier.

In summary, a commercial auto insurer must provide UM/UIM coverage to an employee on the same basis as provided to the named insured (employer) regardless of its policy language. Given the effective date of the remedial legislation addressing UM/UIM limits in a commercial auto policy, this key policy requirement applies to all motor vehicle accidents on or after September 10, 2007.

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