In 2005, the New Jersey Supreme Court upheld the validity of step-down provisions in commercial automobile policies as they are applied to a business’s employees. Pinto v. New Jersey Manufacturers Insurance Co., 183 N.J. 405 (2005). In response to the Pinto decision, the New Jersey Legislature passed a law essentially prohibiting step-down clauses in policies issued to businesses from being applied to the business’s employees. N.J.S.A. 17:28-1.1(f). This legislation went into effect on September 10, 2007. However, left unclear was the fate of those UIM claims filed before the effective date of the legislation.
On October 7, 2013, the New Jersey Supreme Court heard oral argument in the matter of James v. New Jersey Manufacturers Insurance Co., Docket No. A-26-12. The issue in James before the Supreme Court is whether to apply the Legislature’s ban on step-down clauses in commercial auto insurance policies prospectively or retroactively. Plaintiff, Nowell James, was employed by Metric Plumbing and Heating (“Metric”). Mr. James was not a named insured on Metric’s automobile insurance policy. While driving a Metric vehicle on July 5, 2007, he was involved in an accident. Metric’s insurance policy provided UIM coverage of $500,000.00 while Mr. James’s personal insurance policy provided UIM overage of only $50,000.00. Mr. James settled with the tortfeasor for his policy limits of $100,000.00. Mr. James then sought UIM coverage through Metric’s policy with New Jersey Manufacturers Insurance Company (“NJM”). NJM determined that, pursuant to the step-down provision in the Metric policy, which was permitted at the time of the accident, the tortfeasor’s vehicle was not underinsured. Therefore, NJM denied Mr. James the UIM coverage afforded to Metric. Mr. James then sued NJM.
The trial Court granted summary judgment to NJM. In its decision, the trial Court apparently ruled that the step-down clause was enforceable as it was permitted at the time of Mr. James’s accident. The Appellate Division considered James in 2012. In an unpublished decision, the Appellate Division noted that there was conflicting caselaw on whether the legislation applied prospectively or retroactively. Notwithstanding, it determined that the legislation banning such clauses applied retroactively with respect to policies in effect at the time of the legislation’s enactment. Therefore, it reformed the NJM policy to eliminate the step-down clause. Accordingly, Mr. James was entitled to UIM coverage under the NJM policy. NJM appealed to the Supreme Court.
At oral argument, NJM’s counsel argued for a prospective application of the legislation. He cited the fact that step-down clauses are not universally banned. The legislation only banned a step-down clause in the context of providing coverage to an employee. A step-down clause remains enforceable against non-employee permissive users, for example. Counsel for Mr. James argued that as the legislation was “effective immediately,”the policies in effect at that time were reformed and had their step-down clauses eliminated.
Any decision the Court makes has obvious implications for commercial automobile policy insurers. If the Court applies the statute prospectively, then the claims arising before the legislation’s enactment will continue to be subject to a step-down clause. If the Court retroactively applies the statute, it could have a tremendous impact depending on where the Court applies it. If it is only applied to policies in effect at the time of the statute’s enactment, the impact will be limited. However, the Court could rule that it is retroactive for all claims, even for those policies which had expired at the time of the Statute’s enactment, then the universe of potential claimants could be greatly expanded. We will continue to monitor this case for further developments, including any decision made by the New Jersey Supreme Court.