2.    If the “insured” is an individual named insured under another policy with UM/UIM coverage that is less than the coverage provided by this policy            

            3.   Then the maximum UM/UIM coverage under this policy shall not exceed the limits in the personal policy of the “insured”.                

Empire filed a motion for summary judgment seeking to dismiss the complaint. Empire argued that the step-down clause in its policy should be enforced so that the plaintiff is entitled to receive only $100,000 under his personal policy with State Farm. The plaintiff filed a cross-motion for a declaration that the step-down clause was unenforceable so that he would be entitled to $1 million of UIM coverage under his employer’s policy.            

At the outset, the court noted that the opinion of the Supreme Court in Pinto v. NJM, 183 N.J. 405 (2005) held that step-down clauses in commercial auto policies were valid; however, the Legislative recently adopted S1666 (the Scuteri Amendment) to prohibit step-down clauses in a motor vehicle policy issued to a corporate or business entity.            

The court explained that it must apply a two-prong test to determine if a new act should be applied retroactively: First, whether the Legislative intended to give the statute retroactive effect and, second, whether retroactive application will interfere with “vested rights” or will result in “manifest injustice.”            

With respect to the first prong, the court held that the Legislature’s intent was not “explicit” because the provision that the Amendment should take place “immediately” gives no clear indication. Nonetheless, the legislative intent was “implicit” because the Amendment was “curative” in nature since it was enacted “in direct response to the Court’s decision in Pinto” and “to rectify the Court’s perceived misapplication of the existing statute.”              

With respect to the second prong, the retroactive application of the Amendment would not result in “manifest injustice.” The court recognized that insurance companies would have “to bear the costs of the additional coverage that are built into the premiums of the insured;” however, as soon as the Supreme Court enforced step-down clauses in Pinto, the Legislature quickly passed legislation to reverse the opinion. Thus, “insurance companies have not relied on step-down provisions in the employment context for an extended period of time” and the expected profit from a contract is “discordant” with manifest injustice.            

Moreover, a carrier’s reliance on previous law is not “a vested right”. The State, in the exercise of police power, may enact statutes “to promote the health, safety, morals, or general welfare” of the public. In this case, the public interest in permitting employees to obtain the policy benefits for “permanent damage caused by accidents while operating automobiles owned by employers” outweighs the private rights of insurance companies.            

Finally, the court recognized that employers would expect that employees would be entitled to UM/UIM coverage when involved in an accident while occupying a company vehicle. Thus, the enforcement of a step-down clause would “defy” the reasonable expectations of the insured.            

Under the circumstances, the court held that the step-down provision in the Empire policy was unenforceable and that the full policy limit of $1 million would apply to the UIM claim of the plaintiff.    

COMMENT:        There is some confusion in the court’s opinion. The court states that “Empire has filed this summary judgment motion seeking to dismiss the complaint and argues that the step-down provision should be enforced and Plaintiff is only entitled to recovery under his personal State Farm insurance policy in the amount of $100,000” (Emphasis added). This is not a correct statement of the law.            

Even though the plaintiff owned a personal automobile, the primary source of UIM coverage is the host vehicle owned by his employer and insured by Empire. Thus, he is only entitled to recover under his employer’s Empire insurance policy. See Royal v. Rutgers, 271 N.J. Super. 409 (App. Div. 1994).            

The effect of the step-down clause would be to reduce the UIM coverage available under the Empire policy to $100,000 - - the amount of coverage on the plaintiff’s personal automobile. Nonetheless, it is Empire that is responsible to provide the UIM coverage on the policy issued to the host vehicle, not State Farm under the plaintiff’s personal policy.            

The opinion does not state the amount of liability coverage on the tortfeasor’s vehicle; however, I have been advised that the coverage was $100/300,000. Thus, it is implicit in Empire’s argument that the tortfeasor was not underinsured because his liability coverage was equal to the UIM coverage on the plaintiff’s personal vehicle. Accordingly, Empire argued that it would not be required to pay any UIM benefits due to the step-down in coverage.             

Of course, the opinion in this case invalidates the step-down clause in the Empire policy. Thus, Empire will be responsible to pay UIM benefits up to 1 million less a credit for the liability limits of the tortfeasor.