Opinion
CIVIL NO. 97-1343 (JBS).
September 14, 1999.
Ira S. Lipsius, Esq., Jeffrey S. Rogoff, Esq., Schindel, Farman Lipsius LLP, East Brunswick, N.J., Attorneys for Plaintiff.
Christopher S. Finazzo, Esq., Rachel R. Hager, Esq., Budd Larner Gross Rosenbaum Greenberg Sade, P.C., Short Hills, N.J., Attorneys for Defendant.
OPINION
The matter now before this Court presents a rare situation in which the parties agree to all of the facts and seek from the Court a resolution of a discrete legal dispute. The permissive user of a truck that was leased out by a company for which defendant Employers Insurance of Wausau ("Wausau") provided insurance was involved in a motor vehicle accident. Two insurance companies provided $3,000,000.00 to settle an underlying case based on the accident. $2,000,000.00 of that was provided by plaintiff Royal Indemnity Company ("Royal"), which claims that it is entitled to reimbursement from Wausau because Wausau's policy provided coverage up to its policy limit for the permissive user. Wausau denied coverage based on an escape clause found in an endorsement to its insurance policy. Wausau now recognizes that the escape clause must be stricken as illegal and that similar language in the original policy must also be stricken as illegal. However, it argues that after striking the offensive language in the original policy, the policy should be construed to hold Wausau liable for $15,000, the amount mandated by New Jersey law, instead of $1,000,000.
The main issue for this Court to decide is whether, after interpreting an escape clause as illegal, an insurance policy should be read as providing coverage up to its policy limit or only up to the statutory minimum. As discussed below, this Court agrees with defendant Wausau that its coverage liability is limited to $15,000. This Court will therefore deny the plaintiff's motion for summary judgment and grant the defendant's cross-motion for summary judgment. Judgment will be entered in favor of the plaintiff in the amount of $15,000.
I. Background
On September 29, 1990, Thomas Gauntt was involved in an accident while operating a truck he leased pursuant to a written Lease Agreement from Watkins Leasing Company ("Watkins") (Stipulated Facts ¶¶ 1-2), a Pennsylvania company which utilized the Dilks Agency, a company located in New Jersey, as its insurance broker (Graziano Aff. ¶ 2). At the time of the accident, Gauntt was a permissive user of the truck. (Stipulated Facts ¶ 3.)
U.S. Fire Insurance Company ("U.S. Fire") had issued a policy of liability insurance to Gauntt's employer, Machine Interstate Transportation, Inc. ("MIT"), which provided Gauntt and MIT with liability insurance coverage for the leased truck. (Id. at ¶ 4.) Additionally, the U.S. Fire policy had been endorsed to add Watkins as an additional named insured, as required by the Lease Agreement. (Id. at ¶ 5.) When a lawsuit arose from Gauntt's accident, U.S. Fire paid $1,000,000, the limit of liability of its policy, to settle the claims. (Id. at 8.) Plaintiff Royal, MIT's and Gauntt's umbrella insurer, paid the balance of $2,000,000.00 needed to fairly and reasonably settle the claims. (Id. at ¶¶ 9-10.)
Royal filed this lawsuit against defendant Wausau in order to be reimbursed for $1,000,000 of the money it paid to settle the claims, arguing that when certain illegal language is stricken from Wausau's policy, Wausau is responsible for insuring Gauntt up to the policy limit of $1,000,000. Wausau agrees that the language is illegal but argues that once the language is stricken, the policy can be construed to comply with the minimum requirements of New Jersey law, such that Wausau is only responsible for paying $15,000. The parties have filed cross-motions for summary judgment. This Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332.
II. Discussion
A. Issues on Which the Parties Agree
Summary judgment is appropriate when the materials of record "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). Here, the parties agree that there are no genuine issues of material fact, and they additionally agree on numerous points of law. First, the parties agree that New Jersey law applies, albeit for different reasons. Plaintiff argues that New Jersey law applies because insurers that transact business in New Jersey must comply with the New Jersey Deemer Statute, N.J.S.A. 17:28-1.4, by offering policies that satisfy at least the liability insurance requirements of N.J.S.A. 39:6B-1. Defendant argues that New Jersey choice of law principles, which this Court sitting in diversity jurisdiction must apply, require the application of New Jersey law because, though Wausau and Watkins are both Pennsylvania companies, the place of contracting the policy was New Jersey, the insurance broker was in New Jersey, and New Jersey has the dominant relationship with the parties and issues. Both parties are correct, and thus New Jersey law applies.
In the insurance context, the place of contracting is the place where the parties executed and delivered the insurance policy. See Polar International Brokerage v. Investors Ins. Co . , 967 F. Supp. 135 (D.N.J. 1997). Where an insured from one state uses an insurance broker from a different state to negotiate and purchase its insurance policy, the place of contracting is deemed to be the place where the broker negotiated the policy. NL Industries, Inc. v. Commercial Union Ins. Co . , 65 F.3d 314, 319 (3d Cir. 1995). Here, Watkins used the Dilks Agency, a New Jersey company, as its insurance broker, and the policies were negotiated and purchased in New Jersey. Because the leased truck was registered and licensed in New Jersey, all parties to the accident were from New Jersey, the accident took place in New Jersey, and the underlying lawsuit based on the accident was venued in New Jersey, New Jersey has the dominant relationship to the parties and issues.
The parties also agree that certain language in the Lease Agreement is illegal. Wausau issued a Garage policy to Watkins which provided $1,000,000 coverage for "any auto" owned, hired or borrowed by Watkins. (Royal's Local Rule 56.1 Statement of Undisputed Material Facts Ex. E at B.68-139.) The Garage Policy consisted of a declarations page (B. 68-80), a Garage Coverage Form (B. 81-91), and numerous endorsements, including a Leased Autos — Contingent Endorsement (B. 126-128).
Hereinafter cited as "B.," referring to the Bates stamped pages attached to Royal's 56.1 statement.
A portion of Section II of the Garage Coverage Form excludes coverage for leased autos. (B.83 at § II.B.7) ("B. Exclusions. This insurance does not apply to any of the following. . . . 7. Any covered `auto' while leased or rented to others."). The Leased Autos — Contingent Coverage Endorsement ("Endorsement") removes the leased autos exclusion, providing excess insurance on a leased auto over a lessee's primary insurance so long as the lessee maintains a primary liability insurance policy with certain minimum limits and adds Watkins as an additional insured on that policy. (B. 127 at §§ A-C.) The Endorsement also adds an additional condition:
LIABILITY COVERAGE, and any required no-fault, uninsured motorists, or underinsured motorists coverage provided by the policy, do not afford coverage for any lessee to whom you lease one or more "leased autos."
(Id. at § D.2.)
Under the endorsement, then, the policy would provide coverage for a leased auto but not for lessees. Based on that, Wausau denied Gauntt coverage under the Policy. Royal correctly argues, and Wausau now recognizes, that § D.2 of the Endorsement constitutes an illegal escape clause. New Jersey's mandatory omnibus statutes, N.J.S.A. 39:6B-1 and 45:21-1, et seq., as interpreted by case law, see Scott v. Salerno, 297 N.J. Super. 437, 445 (App.Div. 1997), and Harleysville Ins. Co. v. Crum Forster Personal Ins., 246 N.J. Super. 503, 507 (App.Div. 1990), invalidate any insurer's attempt to deny coverage to permissive users. Thus, the language of § D.2 of the Endorsement must be stricken.
Finally, while the parties do not agree as to whether the policy limit or New Jersey's minimum insurance requirement applies in this case, they do agree that if the policy limit does not apply here, Wausau must insure Gauntt for $15,000. See N.J.S.A. 39:6B-1 (owners of motor vehicles principally garaged in New Jersey must maintain liability insurance for bodily injury, death, and property damage sustained by any person arising from the operation of the motor vehicle in the amount of $15,000 for injury or death of one person, $30,000 for injury or death or more than one person, and $5,000 for property damage).
C. Judicial Reformation of the Policy
That is where the parties' agreement comes to an end; their debate centers on how the insurance policy should be construed after § D.2 is stricken. Plaintiff argues that the Endorsement replaced language in the Garage Coverage Form which would provide for limited insurance for Watkins' customers (instead of no coverage) and that such language cannot be revived; therefore, under the more general language of § II.A.1.a.(2) of the Garage Coverage Form, Gauntt, a permissive user, is insured up to the policy limit of $1,000,000. Defendant argues that once § D.2 of the Endorsement is stricken, the Court should return to the language of § II.A.1.a.(2).(d) of the Garage Coverage Form that provides for limited insurance for Watkins customers and construe that section to comply with the law; if the Court did so, Wausau's liability would be limited to $15,000.
A portion of the "Who is an Insured" subsection of § II of the Garage Coverage Form (B. 82 at § II.A.1.a.(2).(d)) provides that any of the permissive users of the covered "autos" that Watkins owns, hires, or borrows is an "insured" for the purposes of the policy, with certain exceptions. For instance, while the policy generally insures Watkins and its employees, the policy does not cover those from whom Watkins hires or borrows a covered "auto" or Watkins employees if the covered "auto" is owned by the employee or a member of his/her household. (Id. at § II.A.1.a.(2).(a) (b).) Additionally, § II.A.1.a.(2).(d) of the Garage Coverage Form states that the following are excluded from coverage as an "insured":
(d) Your customers, if your business is shown in the Declarations as an "auto" dealership. However, if a customer of yours:
(i) Has no other available insurance (whether primary, excess or contingent), they are "insured" but only up to the compulsory or financial responsibility law limits where the covered "auto" is principally garaged.
(ii) Has other available insurance (whether primary, excess or contingent) less than the compulsory or financial responsibility law limits where the covered "auto" is principally garaged, they are an "insured" only for the amount by which the compulsory or financial responsibility law limits exceed the limits of their other insurance.
(Id.) Plaintiff argues that § D.2 of the Endorsement totally replaced § II.A.1.a.(2).(d) of the Garage Coverage Form, so that the latter remains deleted even though the former has been stricken, thus entitling plaintiff to a contribution of $1,000,000.
Plaintiff is incorrect. While the more specific language of the Endorsement would supersede and control the more general language of the standard form where both are in effect, see Buntin v. Continental Ins. Co., 583 F.2d 1201, 1205 (3d Cir. 1978), the Endorsement does not delete any portion of the "Who is an Insured" provision of the policy. This reading of the contract, read as a whole, comports with the fact that the parties obviously knew how to delete unwanted portions of the standard form: the very first line of the Endorsement reads "EXCLUSION — LEASED AUTOS is deleted." They chose not to delete here, only to use superseding language. Moreover, this reading of the policy is consistent with the general rule that an insurance policy remains in full force and effect except as altered by the words of an endorsement which do not violate any statutory provision. Lee R. Russ and Thomas F. Segalla, Couch on Insurance § 18:17(3d ed. 1997). This Court, therefore, must consider the amount of insurance to which Gauntt is entitled under the "Who is an Insured" section of the policy.
Defendant concedes that § II.A.1.a.(2).(d) of the Garage Coverage Form, like § D.2 of the Endorsement, is illegal under N.J.S.A. 39:6B-1 and 45:21-1, for it conditions coverage on a permissive user having no other insurance or not enough insurance instead of flat-out providing at least $15,000.00 of coverage. See also Ambrosio v. Affordable Auto Rental, Inc., 307 N.J. Super. 114, 124 (App.Div. 1998). Relying on the Appellate Division's 1988 decision in Rao v. Universal Underwriters Ins. Co., 228 N.J. Super. 396 (App.Div. 1988), and the Supreme Court's 1995 decision in Aubrey v. Harleysville Ins. Cos., 140 N.J. 397 (1995), however, Wausau argues that the Court should simply construe § II.A.1.a.(2).(d) to comply with New Jersey law, providing the statutory minimum of $15,000 of coverage. Plaintiff argues, in contrast, that the illegal attempt to deny coverage must be stricken in its entirety, leaving the fact that permissive users, such as Gauntt, are covered in their entirety.
The facts of Rao are similar to those here. The permissive user of a car leased by her husband struck a pedestrian; the pedestrian sued the permissive user and the leasing company for contribution. 228 N.J. Super. at 298. The lessee had his own insurance but wanted additional coverage from the leasing company's insurer, Universal Insurance Underwriters, and thus the lessee filed a lawsuit to determine its right to coverage under the automobile liability section of the Universal policy. Id. Universal denied coverage under an escape clause contained in an endorsement which read, in pertinent part,
The portion of the limit applicable to persons or organizations required by law to be an INSURED is only the amount (or amount in excess of any other insurance available to them) needed to comply with the minimum limits provision of such law in the jurisdiction where the OCCURRENCE takes place.Id. at 399 (emphasis in original). The trial court determined that the escape clause was illegal and struck the Endorsement, entitling the lessee to full coverage under the insurance policy. Id.
The Appellate Division reversed. Though it agreed that the parenthetical language in the endorsement was an illegal attempt to provide coverage only for lessees who do not otherwise obtain enough insurance to comply with the statutory minimum, id., the Appellate Division found that it could strike only the parenthetical and leave the rest of the endorsement intact. Id. at 404. The remainder of the endorsement constituted a valid "step-down" clause, id. (citing General Accident Group of Ins. v. Liberty Mut. Ins. Co., 191 N.J. Super. 530 (App.Div. 1983)), under which Universal was required to cover only the statutory minimums of $15,000/$30,000.
In making this decision, the Appellate Division relied on several things. First, said the Appellate Division, this provision involves "the level of monetary protection, rather than the range of covered drivers,"id. at 405; when "automatically amending" the policy to comply with the statutory limit, it should be amended "to the extent of the statutory limit, especially in cases such as this, where the policy language explicitly limits the lessee's coverage to such a statutory minimum."Id. at 406. Second, the Appellate Division noted that in a leasing contract case, it is unlikely that a commercial lessor would provide more coverage than it had to by law and that if such coverage was required for lessees it would be impossible or too costly to obtain, and it is therefore not unreasonable to require coverage only up to the statutory minimum. Id. at 405-406. Analogizing to the Fifth Circuit's decision inNichols v. Anderson, 837 F.2d 1372 (5th Cir. 1988), the Appellate Division held that the parenthetical was clearly severable and that the remainder of the step-down clause should be upheld. 228 N.J. Super. at 411. Therefore, the Appellate Division in Rao enforced the legislative mandate of $15,000/$30,000 of coverage.
Plaintiff argues that this Court should ignore Rao for two reasons. First, plaintiff, argues, the illegal language in Rao was in a parenthetical and was clearly and easily severable, whereas reformation of § II.A.1.a.(2).(d) in this case would involve a more complicated system of deleting and piecing together sentences. Second, plaintiff argues, the Appellate Division's more recent 1998 decision in Ambrosio, 307 N.J. Super. 114, in which the Appellate Division struck down language identical to that presented in § II.A.1.a.(2).(d) here and awarded permissive users coverage up to the policy limit, is controlling.
Wausau argues that it is not clear that Ambrosio held that the insurer had to pay the policy limit, for in that case, the policy limit of $30,000 was the exact same amount as the statutory minimum of $30,000, and thus perhaps the Appellate Division simply held that after the illegal language was stricken from the policy, the permissive users were entitled to the statutory minimum. Wausau's argument is without merit. In Ambrosio , the Appellate Division specifically noted that the minimum policy limits established by the applicable statute, N.J.S.A. 45:21-3, were $10,000/$20,000 for bodily injury or death. Id . at 123. Though the Appellate Division in Rao noted that there is a discrepancy between N.J.S.A. 39B-1's $15,000/$30,000 minimums and N.J.S.A. 45:31-3's $10,000/$20,000 minimums of $10,000/$20,000 as a result of a legislative mistake in failing to conform the latter's monetary requirements with those of the former, Rao , 228 N.J. Super. at 401 n. 2, the issue of whether the correct amount is $15,000 or $10,000 is irrelevant to the present dispute. The Appellate Division in Ambrosio assumed, correctly or incorrectly, that the statutory minimum was $20,000 and yet applied the policy limit of $30,000 after striking down an identical escape clause in its entirety. The Ambrosio case, then, clearly applied the policy limit.
Though the argument regarding the difficulty of severing the illegal language here is not without merit, and though the Ambrosio case is not without logic, both arguments fail as result of a 1995 New Jersey Supreme Court decision in Aubrey v. Harleysville Ins. Cos., 140 N.J. 397 (1995). Most of the Supreme Court's decision in Aubrey focused on a policy's coverage or lack thereof for underinsured motorists, an issue which is irrelevant to the present controversy. In that case, however, the insurance policy in question contained language identical to that inAmbrosio and that in § II.A.1.a.(2).(d) in the instant Garage Coverage Form. Despite the fact that the illegal language in the policy was not as easily severable as that in Rao, the Supreme Court adopted the reasoning of Rao, holding that the policy "should be amended to the extent of the statutory limit," 140 N.J. at 407-408 (citing Rao, 228 N.J. Super. at 405-406), and that having done so, the policy, which "merely limits coverage, is valid." Aubrey, 140 N.J. at 408.
Applying the reasoning of Rao and Aubrey, this Court holds that the language of § II.A.1.a.(2).(d) of the Garage Coverage Form should be construed to provide coverage up to the statutory minimum for Watkins' customers, including Gauntt. As Gauntt was involved in an accident involving bodily injury to one individual, Gauntt is an insured under the Wausau policy for $15,000. Were this Court to reach a contrary result, plaintiff would receive a windfall from Wausau's error. Though the actual agreement was illegal, their obvious intent was to provide no coverage for permissive users. An award of $15,000, the amount legally required, is much closer to the original contemplation of no coverage, whereas an award of $1,000,000 bears no relation to the contracting parties' expectation. Therefore, based on the case law and upon the contracting parties' intent, Wausau is responsible for reimbursing plaintiff Royal for $15,000 of the settlement of the claims based on Gauntt's accident.
III. Conclusion
For the foregoing reasons, Mr. Gauntt is an insured under the Wausau policy up to the statutory minimum of $15,000, and plaintiff entitled to receive contribution from Wausau towards the $3,000,000 settlement of claims against Mr. Gauntt. This Court will deny the plaintiff's motion for summary judgment that it is entitled to a $1,000,000 contribution, and it will grant the defendant's cross-motion for summary judgment that it is only responsible for contributing $15,000. Judgment will be entered for the plaintiff in the amount of $15,000. The accompanying Order is entered.
ORDER FOR FINAL JUDGMENT
This matter having come before the Court upon the parties' cross-motions for summary judgment; and the Court having considered the parties' submissions; and for the reasons expressed in an Opinion of today's date;
IT IS this day of September 1999 hereby
ORDERED that plaintiff's motion for summary judgment be, and hereby is, DENIED; and it is
ORDERED that defendant's cross-motion for summary judgment be, and hereby is, GRANTED, and that it is ADJUDGED that the Wausau Garage Policy be, and hereby is, reformed to provide Thomas Gauntt with $15,000 of coverage; and it is
ORDERED that JUDGMENT is entered on behalf on plaintiff Royal Indemnity Company, and against defendant Employers Insurance of Wausau, a Mutual Company, in the amount of $15,000.00.