(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
Argued January 31, 1995 -- Decided June 8, 1995
POLLOCK, J., writing for a unanimous Court.
The issue on appeal is whether Theresa Aubrey, a purchaser under contract of an automobile from
Chris Koch Toyota (Koch), is covered under the underinsured motorist (UIM) provisions of a garage policy
issued to Koch by Harleysville Insurance Companies (Harleysville), for injuries Aubrey sustained while
operating a loaned automobile with Koch's permission.
On January 5, 1991, Aubrey signed a contract with Koch to buy a new 1991 Toyota Tercel. As part
of the agreement, Aubrey traded in her 1989 Hyundai. Koch retained title to the Tercel, but gave Aubrey
permission to drive it pending approval of her car loan application.
Aubrey was insured under an automobile liability policy issued by the Policy Management
Corporation Insurance Company (PMC). That policy provided UIM limits of $15,000 and liability limits of
$15,000 for injury to one person and $30,000 for injuries to more than one person.
Aubrey's loan application was rejected on January 9, 1991; however, Koch let her use the Tercel
until another lender could be found. Two days later, Aubrey was driving the Tercel when she was seriously
injured in a three-car accident. The insurers for the other drivers settled Aubrey's claim by paying their
policy limits, totalling $40,000.
Because the $40,000 received from the other insurance carriers exceeded Aubrey's $15, 000 UIM
limits, she was not entitled to recover UIM benefits under her own insurance policy. Her damages, however,
were over $40,000. Therefore, Aubrey sought recovery under the UIM provisions of the Harleysville policy,
which insured Koch for $1,000,000 in liability and UIM coverage.
Harleysville denied coverage, noting that Aubrey was not underinsured as defined in the UIM
statute. Section 11(a) of the Harleysville policy, dealing with liability coverage, generally excludes car-dealership customers from coverage. The "step-down" clause in subsection 11(a)(2)(d), however, provides
liability coverage for customers to the minimum required by law. It provides higher coverage limits for the
Koch dealership and its employees, but reduces coverage for Koch's customers. The Harleysville UIM
endorsement, on the other hand, does not contain a "step-down" clause. That endorsement defines "insured"
to include any person "occupying a covered auto."
Under the parity provision of the UIM statute, an insured's UIM coverage cannot exceed the
insured's motor vehicle liability policy limits. Thus, it had to be determined whether Aubrey's right to
recover, if any, would extend to the $1,000,000 limit of the UIM clause or would be limited, because of the
parity provision and the step-down clause, to $15,000. Aubrey instituted suit seeking, in part, a determination
that, under the Harleysville UIM clause, she was a "covered person." Harleysville filed a cross-motion
seeking dismissal.
The Law Division granted Harleysville's motion, holding that the step-down clause in the liability
section of the insurance policy denied coverage to Aubrey.
On appeal, the Appellate Division reversed, finding that the UIM clause, not the liability clause,
governed. As such, the court found that under the UIM endorsement, Aubrey could recover up to
$1,000,000. The Appellate Division reasoned that Aubrey was an insured and that the step-down clause did
not apply. Lastly, the Appellate Division dismissed Harleysville's claim that UIM coverage is personal to the
insured and that Aubrey could seek recovery only under her PMC policy.
The Supreme Court granted certification.
HELD: Because her $40,000 recovery from the other drivers involved in the accident would exceed the
$15,000 available to her under the Harleysville insurance policy issued to Chris Koch Toyota,
Theresa Aubrey is not an underinsured and is not entitled to recover under that policy.
1. In effect, the UIM statute states that the determination whether a vehicle is underinsured requires
ascertaining whether the liability limits of the person against whom recovery is sought are less than the
amount of UIM coverage held by the person seeking the recovery. (pp. 7-8)
2. UIM coverage, which is limited to the amount contained in the insured's policy, is "personal" to the
insured. Coverage is linked to the injured person, not the covered vehicle. Limiting UIM coverage to the
amount chosen by the insured comports with the insured's reasonable expectations. The amount of UIM
coverage held by Aubrey was $15,000; therefore she could reasonably expect UIM coverage in that amount.
The Court disagrees with the holding in Landi v. Gray because recovery does not depend on the limits of
other UIM policies. Recovery depends on the UIM limits chosen by the insured. (pp. 8-11)
3. The UIM statute mandates parity between UIM coverage and an insured's motor vehicle liability policy
limits. Aubrey's own policy provides for liability coverage of $15,000; therefore, her UIM coverage cannot
exceed that amount. In addition, the step-down clause limits liability coverage for a customer to the
statutory minimum, $15,000. Under the parity provision, Aubrey's right to recover UIM benefits would be
limited to that amount. Furthermore, Aubrey's own policy meets the $15,000 statutory minimum and,
therefore, does not exceed her liability limits. As such, she is not covered under the liability section of the
Harleysville policy. Moreover, her $40,000 recovery exceeds the $15,000 available under the Harleysville
policy. Thus, Aubrey is not "underinsured" and is not entitled to recover under the Harleysville policy. (pp.
11-12)
4. Aubrey contends that the blanket exclusion of customers in the Harleysville policy renders the liability
section invalid as a matter of law. The Court disagrees. Consistent with Rao v Universal Underwriters Ins.
Co., the Harleysville policy, which merely limits coverage, is valid. (pp. 12-15)
Judgment of the Appellate Division is REVERSED.
CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, O'HERN, GARIBALDI, STEIN and
COLEMAN join in JUSTICE POLLOCK'S opinion.
SUPREME COURT OF NEW JERSEY
A-
88 September Term 1994
THERESA AUBREY,
Plaintiff-Respondent,
v.
THE HARLEYSVILLE INSURANCE
COMPANIES,
Defendant-Appellant.
Argued January 31, 1995 -- Decided June 8, 1995
On certification to the Superior Court,
Appellate Division, whose opinion is reported
at
274 N.J. Super. 237 (1994).
J. Robert McGroarty argued the cause for
appellant.
Robert A. Porter argued the cause for
respondent (Friedman, Bafundo & Porter,
attorneys).
The opinion of the Court was delivered by
POLLOCK, J.
The issue is whether plaintiff, Theresa Aubrey, a purchaser under contract of an automobile from Chris Koch Toyota (Koch), is covered under the underinsured motorist (UIM) provisions of a garage policy issued to Koch by defendant, The Harleysville Insurance Companies (Harleysville), for injuries Aubrey sustained while operating a loaned automobile with Koch's permission. The Law Division granted Harleysville's motion for summary judgment, finding that "the step-down" clause in the liability section of
the Harleysville policy denied coverage to Aubrey. The Appellate
Division reversed, holding that Aubrey was covered under the UIM
provision of the Harleysville policy and that the step-down
clause did not apply.
274 N.J. Super. 237 (1994). We granted
Harleysville's petition for certification,
138 N.J. 266 (1994),
and now reverse and reinstate the judgment of the Law Division.
On January 5, 1991, Aubrey signed a contract with Koch to purchase a new 1991 Toyota Tercel. As part of the agreement, Aubrey traded in her 1989 Hyundai. Koch retained title to the Toyota, but gave Aubrey permission to drive it pending approval of her application for a car loan.
Aubrey was insured under an automobile liability policy
issued by the Policy Management Corporation Insurance Company
(PMC). The PMC policy provided UIM limits of $15,000 and
liability limits of $15,000 for injury to one person and $30,000
for injuries to more than one person.
Aubrey's loan application was rejected on January 9, 1991, but Koch told her to "keep using the car" while it tried to find another lender. On January 11, 1991, while driving the Tercel, Aubrey sustained serious personal injuries in a three-car accident. The insurers for the other drivers settled Aubrey's
claim by paying their policy limits, $25,000 and $15,000,
respectively, or a total of $40,000.
N.J.S.A. 17:28-1e states in part that a motor vehicle is
underinsured when the "sum of the limits of liability
. . . available to a person against whom recovery is sought
. . . is, at the time of the accident, less than the applicable
limits for underinsured motorist coverage afforded under the
motor vehicle insurance policy held by the person seeking that
recovery." The $40,000 that Aubrey received from the insurance
carriers of the other drivers exceeded her $15,000 UIM limits.
Hence, she was not "underinsured" under N.J.S.A. 17:28-1e and
could not recover UIM benefits under her own policy. Her
damages, however, exceeded $40,000. Consequently, Aubrey sought
recovery under the UIM provisions of the Harleysville policy,
which insured Koch for $1,000,000 in liability and UIM coverage.
In a letter to Aubrey's lawyers, Harleysville denied
coverage:
It is the position of this company that UIM
coverage is personal to the claimant and the
tortfeasor's coverage is measured against the
UIM coverage which the claimant has purchased
in the policy held by the claimant
personally. Since in this case, [the
tortfeasor's] policy was $25,000.00 and your
client's UM/UIM coverage was $15,000.00, it
follows that the [tortfeasor] was not
underinsured as that term is defined in the
New Jersey Statute.
Section 11(a) of the Harleysville policy, dealing with
liability coverage, generally excludes car-dealership customers
from coverage. The "step-down" clause in subsection 11(a)(2)(d),
however, provides liability coverage for customers to the
minimum required by law. It provides higher coverage limits for
the Koch dealership and its employees, but reduces coverage for
Koch's customers.
The liability section of the policy states in relevant part:
WHO IS AN INSURED
a. The following are "insureds" for covered
"autos:"
(1) You for any covered "auto."
(2) Anyone else while using with
your permission a covered "auto"
you own, hire or borrow except:
(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 an "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 limit of their other
insurance.
In contrast, the Harleysville UIM endorsement does not
contain a "step-down" clause. That endorsement defines "insured"
to include any person "occupying a covered auto." The parity
provision of N.J.S.A. 17:28-1.1b, however, states that an
insured's UIM coverage "shall not exceed the insured's motor
vehicle liability policy limits . . . ." Thus, the question
arose whether Aubrey's right to recover, if any, would extend to
the $1,000,000 limit of the UIM clause or would be limited,
because of the parity provision and the step-down clause, to
$15,000.
To resolve that question, Aubrey instituted an action in the
Law Division seeking, in part, a determination that under the
Harleysville UIM clause she was a "covered person." Harleysville
filed a cross-motion seeking dismissal.
The Law Division granted Harleysville's cross-motion,
stating that the step-down clause in the liability section of the
Harleysville policy limited Aubrey's UIM claim "to the amount of
insurance required by the state wherein the vehicle is garaged or
operated, the minimum amount which is 15/30 in New Jersey."
In reversing, the Appellate Division held that the UIM
clause, not the liability clause, governed. 274 N.J. Super. at
241. It concluded that under the UIM endorsement Aubrey was
entitled to recover up to $1,000,000.
The Appellate Division reasoned that the UIM endorsement
explicitly states that "anyone . . . occupying a covered auto" is
insured. As the court stated, "[Harleysville] admitted that the
Toyota was a `covered auto.' Thus, [Aubrey] is an insured." Id.
at 240.
For two reasons, the court found that the step-down clause
in the liability section did not apply. First, the court
emphasized that the step-down clause is "contained solely in the
liability provisions of the policy. It is neither repeated in
the UIM endorsement nor cross-referenced thereto in anyway." Id.
at 241. The court noted that Harleysville could have limited its
UIM exposure by including a step-down clause in the UIM
endorsement; "it simply did not do so and the step-down clause in
its liability provisions do not apply to [Aubrey]." Id. at 243.
Second, the court held that even if the step-down clause
could limit the UIM coverage, the limitation did not apply to
Aubrey "on its face." Id. at 241. According to the court, the
step-down clause applied only to those customers who had no
insurance or inadequate insurance. The court reasoned that
Aubrey was insured and that her policy limits satisfied the
statutory minimum. Thus, the step-down clause did not apply to
her.
Lastly, the Appellate Division dismissed Harleysville's
claim that UIM coverage is personal to the insured and that
Aubrey could seek recovery only under her PMC policy. The court
relied on two statutory provisions. First, it looked to N.J.S.A.
17:28-1.1b, which states that UIM coverage shall not "exceed the
insured's motor vehicle policy limits for bodily injury and
property damage." Second, it turned to N.J.S.A. 17:28-1.1e,
which states that whether a vehicle is underinsured depends on
determining the "applicable limits for underinsured motorist
coverage afforded under the motor vehicle insurance policy held
by the person seeking that recovery." The court construed "held
by the person" to include "policies pursuant to which the person
is an insured, regardless of who may have purchased the policy."
274 N.J. Super. at 243.
Stated in full, the UIM statute, N.J.S.A. 17:28-1.1e, provides:
A motor vehicle is underinsured when the sum of the limits of liability under all bodily injury and property damage liability bonds and insurance policies available to a person against whom recovery is sought for bodily injury or property damage is, at the time of
the accident, less than the applicable limits
for underinsured motorist coverage afforded
under the motor vehicle insurance policy held
by the person seeking that recovery.
In effect, the statute states that the determination whether
a vehicle is underinsured requires ascertaining whether the
liability limits of the person "against whom recovery is sought"
are "less than" the amount of UIM coverage "held by the person
seeking that recovery."
Unlike the Appellate Division, we conclude that UIM
coverage, which is limited to the amount contained in the
insured's policy, is "personal" to the insured. Coverage is
linked to the injured person, not the covered vehicle. Fernandez
v. Selected Risks Ins. Co.,
82 N.J. 236, 241 (1980). UIM
coverage provides "as much coverage as the insured is willing to
purchase, for his or her protection subject only to the owner's
policy liability limits for personal injury and property damages
to others." Prudential Property & Casualty Ins. Co. v. Travelers
Ins. Co.,
264 N.J. Super. 251, 259-60 (App. Div. 1993); see also
Clegg v. New Jersey Automobile Full Underwriting Ass'n,
254 N.J.
Super. 634, 638 (App. Div. 1992) (stating that UIM coverage is
linked to insured); Nikiper v. Motor Club of America Cos.,
232 N.J. Super. 393, 399 (App. Div.) (stating that "[t]he purchase
determines the amount of the coverage; the number of tortfeasors
does not"), certif. denied,
117 N.J. 139 (1989).
Generally speaking, courts construe insurance policies
consistent with the objectively reasonable expectations of the
insured. Werner Indus., Inc. v. First State Ins. Co.,
112 N.J. 30, 35 (1988). Limiting UIM coverage to the amount chosen by the
insured comports with the insured's reasonable expectations.
Under N.J.S.A. 17:28.1.1b, UIM coverage is discretionary, not
mandatory. The statute merely requires that UIM coverage "shall
be provided as an option . . . ." Consequently, a "purchaser
would reasonably and objectively expect that he is buying such
protection up to the declared limits primarily for himself and
his resident spouse." Clegg, supra, 254 N.J. Super. at 640; see
also Prudential Ins. Co., supra, 264 N.J. Super. at 260 (holding
that purchaser of UIM coverage would reasonably expect such
coverage to protect to declared limits and, thus, policies could
not be prorated); 8C John A. Appleman & Jean Appleman, Insurance
Law and Practice § 5067.45 at 48 (1981) (Appleman) (stating that
policy behind UIM insurance is to protect those insureds with
foresight to protect themselves).
Here, Aubrey purchased UIM coverage in the amount of $15,000. Thus, the amount of UIM coverage "held" by her, as "the person seeking recovery," was $15,000. Accordingly, she could reasonably expect UIM coverage in that amount. When she purchased her UIM coverage, Aubrey could not reasonably have anticipated the possibility of receiving benefits under UIM endorsements issued in favor of Koch. To allow her to recover
under Koch's UIM policy would distort the meaning of an insured's
"reasonable expectations."
Thus, we disagree with the Appellate Division's conclusion
that UIM insurance is not personal to the insured. The Appellate
Division construed the statutory phrase "held by the person
seeking that recovery" to "include policies pursuant to which the
person is an insured, regardless of who may have purchased the
policy." 274 N.J. Super. at 243. To support its construction,
the Appellate Division relied on Landi v. Gray,
228 N.J. Super. 619 (App. Div. 1988).
In Landi, the plaintiff, Dawn Landi, was a passenger in a
car owned by her brother and insured under a policy issued to
him. Landi had her own liability policy with a limit of $15,000.
She borrowed her brother's car and was injured when the car,
while driven by a friend, went off the road. Landi's friend did
not own an automobile and was not covered for automobile
liability except under the brother's policy. The brother's
insurer paid to Landi its policy limits. As a member of her
mother's household, Landi then sought to recover under her
mother's $1,000,000 policy. Her mother's insurer denied recovery
based on an exclusion in its policy: "Neither `uninsured motor
vehicle' nor `underinsured motor vehicle' includes any vehicle
. . . [o]wned by or furnished or available for the regular use of
you or any family member."
The Appellate Division held that Landi could recover as an
underinsured motorist under her mother's policy and was not
limited by her own policy's $15,000 limit. The court wrote: "A
motor vehicle may be underinsured when compared to the
underinsured motorist coverage afforded under one policy, yet not
be underinsured when compared to the underinsured motorist
coverage of another." Id. at 624. We disagree with that
statement and disapprove of the holding in Landi.
The right to recover UIM benefits depends on the UIM limits
chosen by the insured. Recovery does not depend on the limits of
other UIM policies, such as the mother's policy in Landi or
Koch's policy in the instant case. See Harden v. Monroe Guaranty
Ins. Co.,
625 N.E.2d 814, 818 (Ind. Ct. App. 1993) (holding that
prospective buyer of used car could not recover under dealer's
UIM endorsement because UIM insurance is not for protection of
vehicles, but of persons).
We also disagree with the Appellate Division's construction of the step-down clause in the liability section of the Harleysville policy. Our analysis begins with N.J.S.A. 17:28-1.1b, which mandates parity between the underinsured motorist coverage and an insured's motor liability policy limits. Aubrey's own policy provides for liability coverage of $15,000.
Under the clear terms of the statute, her UIM coverage cannot
exceed her
liability coverage.
To determine whether Aubrey is "underinsured" under the
Harleysville UIM endorsement, we turn to the Harleysville step-down clause, which defines an insured to include a customer who
has liability insurance, but only for the "amount by which the
compulsory or financial-responsibility law limits exceed the
limit of [the customer's liability] insurance." Thus, the step-down clause limits liability coverage for a customer to the
statutory minimum, $15,000. Under the parity provision of
N.J.S.A. 17:28-1.1b, Aubrey's right to recover underinsured
benefits would be limited to that amount. Aubrey's own policy,
moreover, meets the statutory minimum by providing $15,000 of
liability coverage. Consequently, the $15,000 statutory minimum
does not "exceed" Aubrey's liability limits. Aubrey, therefore,
is not covered under the liability section of the Harleysville
policy. Her $40,000 recovery from the other drivers would exceed
the $15,000 available to her under the Harleysville policy. In
sum, Aubrey is not "underinsured" and is not entitled to recover
under the Harleysville policy.
Aubrey also claims that Harleysville's blanket exclusion of customers (except for those with no or legally inadequate coverage) violates public policy. Relying on the absence of previous dealings with Koch, Aubrey claims she is not Koch's
"customer." We disagree. Common sense compels the conclusion
that the first-time purchaser of something as costly as a new car
is the dealer's customer.
She also contends that the exclusion renders the liability
section, including the step-down clause, invalid as a matter of
law, and that she is entitled to the full liability coverage of
$1,000,000. In making that contention, she relies on Keystone
Ins. Co. v. Atlantic Chrysler Plymouth, Inc.,
167 N.J. Super. 353
(Law Div. 1979). In Keystone, a customer was injured while test
driving an automobile. The dealer's policy provided $1,000,000
in liability coverage for garage owners and employees, but
limited the coverage available to customers who had no or
insufficient insurance. For such customers, the policy further
limited the coverage to the statutory minimum. In invalidating
the customer exclusion, the Law Division stated that "any
restriction in omnibus coverage would contravene statutory
policy, whether that restriction be one of scope or monetary
limits." Id. at 361. Thus, the dealer's limitation of customer
coverage to the statutory minimum was void.
Rao v. Universal Underwriters Ins. Co., 228 N.J. Super. 396, 408 n.3 (App. Div. 1988), rejected Keystone. In Rao, Naveen Rao leased a car and, pursuant to the lease agreement, purchased liability insurance with $100,000/$300,000 limits. While Rao's wife was driving the leased car, she struck a pedestrian. The
Raos filed suit, claiming they were entitled to coverage under
the leasing company's policy. That policy provided liability for
lessees, but only in the amount "needed to comply with the
minimum limits provision of such law in the jurisdiction where
the occurrence takes place." Id. at 399. The Law Division
declared the limitation on coverage invalid because it made
coverage "contingent upon a lessee's failure to obtain their
[sic] own coverage . . . ." Id. at 403. The Appellate Division
reversed.
In sustaining the limitation, the Appellate Division
distinguished between an exclusion from the class of covered
permissive users and a limitation on the coverage. The
invalidity of the exclusion, according to the court, did not
affect the policy limits. As the court stated, "[t]he
requirement of providing broad minimum coverage . . . does not
necessarily lead to the conclusion that the broadest full policy
coverage is required where the insurer unsuccessfully attempts to
limit its liability under an invalidated section of an otherwise
acceptable escape clause." Id. at 405-06. The court continued
that if an illegal exclusion compelled an amendment to the
policy, the policy "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.
Consistent with Rao, Harleysville's policy, which merely
limits coverage, is valid.
The judgment of the Appellate Division is reversed.
Chief Justice Wilentz and Justices Handler, O'Hern, Garibaldi, Stein, and Coleman join in Justice Pollock's opinion.
NO. A-88 SEPTEMBER TERM 1994
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
THERESA AUBREY,
Plaintiff-Respondent,
v.
THE HARLEYSVILLE INSURANCE
COMPANIES,
Defendant-Appellant.
DECIDED June 8, 1995
Chief Justice Wilentz PRESIDING
OPINION BY Justice Pollock
CONCURRING OPINION BY
DISSENTING OPINION BY