SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-1031-93T3
LORRAINE AINSWORTH,
Plaintiff-Appellant/
Cross-Respondent,
v.
STATE FARM MUTUAL INSURANCE COMPANY,
Defendant-Respondent/
Cross-Appellant,
and
PRUDENTIAL PROPERTY & CASUALTY COMPANY,
Respondent.
_________________________________________
Argued January 18, 1995 -
Decided September 8, 1995
Before Judges Stern, Keefe and Humphreys.
On appeal from the Superior Court of New Jersey, Law
Division, Morris County.
John S. Hoyt, III argued the cause for appellant (Hoyt
& Smith, attorneys).
John Burke argued the cause for respondent Prudential
Property & Casualty Company (Berlin, Kaplan, Dembling &
Burke, attorneys).
Sean M. Dillon argued the cause for respondent/cross-appellant State Farm Mutual Insurance Company (Melli &
Wright, attorneys).
Peter A. Olsen argued the cause for amicus curiae New Jersey Automobile Full Insurance Underwriting Association (Francis & Berry, attorneys; Hugh P. Francis, of counsel; Mr. Olsen, on the brief).
Deborah T. Poritz, Attorney General of New Jersey,
attorney for amicus curiae New Jersey Commissioner of
Insurance (Joseph L. Yannotti, Assistant Attorney
General, of counsel; B. Stephen Finkel, Deputy Attorney
General, on the brief).
THE OPINION OF THE COURT WAS DELIVERED BY
KEEFE, J.A.D.
Two issues are presented on this appeal: 1) whether a motor
vehicle insured by the New Jersey Automobile Full Insurance
Underwriting Association (JUA) is uninsured in the context of
N.J.S.A. 17:28-1.1, thereby permitting plaintiff to proceed
directly against her uninsured motorist (UM) carrier rather than
wait for payment under the JUA deferral plan; and 2) if the first
issue is resolved against plaintiff, whether her insurer is
obligated to arbitrate plaintiff's underinsured motorist (UIM)
claim before the tortfeasor's liability limit for bodily injury
is offered in settlement or paid by judgment. We conclude for
the reasons stated herein that the JUA is an insolvent insurer in
the context of N.J.S.A. 17:28-1.1(b), and, although the second
issue is rendered moot by our conclusion on the first issue, we
hold that UIM insurance carriers are not compelled to arbitrate
until the conditions set forth in Longworth v. Van Houten,
223 N.J. Super. 174 (App. Div. 1988) are satisfied.
The facts are undisputed. Plaintiff Lorraine Ainsworth was
involved in an automobile accident on February 2, 1990, when her
vehicle was struck by a vehicle operated by Quey Cooper. Cooper
was insured under a policy issued by the JUA through one of its
servicing carriers with a combined single bodily injury limit of
$50,000. At the time of the accident, the vehicle operated by
plaintiff was insured by defendant State Farm. She also had non-owned vehicle coverage under a family auto insurance policy
issued by defendant Prudential.
Plaintiff filed a complaint against Cooper in the Law
Division on June 26, 1991. Summary judgment has since been
entered against Cooper on the issue of liability. At the present
time, injured claimants who either settle or obtain judgments
against JUA insureds must wait up to eighteen months for their
money. See N.J.S.A. 17:33B-3b(2); N.J.S.A. 11:3-2A.
Plaintiff maintains that it is unfair to make claimants,
such as herself, wait for their just compensation, and that the
Legislature has established a statutory scheme to prevent such an
unjust result. That statutory scheme, according to plaintiff, is
found in N.J.S.A. 17:28-1.1(e)(2)(b), which permits an insured
claimant to pursue a UM claim against his or her insurer where
the tortfeasor's insurer "is unable to make payment with respect
to the legal liability of its insured because the insurer has
become insolvent or bankrupt, or the Commissioner of Insurance
has undertaken control of the insurer for the purpose of
liquidation[.]"
Consequently, in September 1993, plaintiff filed a complaint
and order to show cause in the Law Division seeking to compel
State Farm and Prudential to arbitrate her alleged UM and UIM
claims.See footnote 1 After receiving briefs and entertaining oral argument,
the Law Division held that plaintiff could not pursue the UM
claim because JUA was not an insolvent insurer within the context
of N.J.S.A. 17:28-1.1(e)(2)(b), but did have a right to pursue
the UIM claim and ordered that arbitration to proceed. Plaintiff
appeals from the Law Division judgment denying her request for UM
arbitration, and defendant State Farm cross-appeals from that
part of the judgment ordering UIM arbitration.See footnote 2 The JUA was not
a party to the Law Division action but was granted leave to file
an amicus curiae brief on the issue of whether Cooper is
uninsured in the context of N.J.S.A. 17:28-1.1(e)(2)(b). At our
invitation, the Commissioner of Insurance (Commissioner) has also
filed an amicus curiae brief.
I
Plaintiff argues that the JUA is insolvent, under any
recognized definition of the term, because of its huge deficit
and the fact that it is paying settlements and judgments on a
deferral basis through a trustee. She maintains that this
conclusion is not only legally correct, but is an equitable
result for deserving claimants. Plaintiff posits that if the UM
carriersSee footnote 3 pay her UM claim, they will be subrogated to her
rights against the JUA insured, and ultimately will recoup the
money they pay her on the UM claim through settlement or
judgment. The practical effect is that the UM carriers rather
than plaintiff will have to abide the deferral period for the
money the JUA justly owes.
Although the JUA is unable to point to any negative impact
on it or its operation resulting from an adjudication that it is
insolvent, it maintains that it is not insolvent, and also argues
that the Commissioner has not undertaken control for the purpose
of liquidation. The Commissioner essentially adopts the position
taken by the JUA. Although the Commissioner contends that an
adjudication that the JUA is insolvent may have precedential
impact on the MTF, the JUA's residual market successor, he fails
to identify any adverse consequence of such a determination in
the context of a UM claim presented pursuant to N.J.S.A. 17:28-1.1(e)(2)(b).
The practical impact of plaintiff's argument, as we see it,
is on open market UM carriers. Plaintiff maintains that the
impact is minimal in view of the fact that a UM insurer will be
subrogated to a plaintiff's claim and receive full reimbursement.
Plaintiff appears to be correct in her contention that UM
insurers will be able to present subrogated claims against JUA.
Nothing in the Fair Automobile Insurance Reform Act of 1990,
N.J.S.A. 17:33B-1 et seq., (FAIRA), or the pertinent regulations,
prohibits the presentation of a subrogated claim, and neither the
JUA, the Commissioner, nor the UM insurers have argued to the
contrary. Thus, the UM insurers in this litigation, and in
similar cases, will have an advantage that they would not have
had had the JUA bailout been accomplished in the typical manner,
i.e., where the Commissioner institutes formal proceedings to
have an insurer declared insolvent. In the typical case, a UM
insurer may not present a subrogated claim for reimbursement to
the New Jersey Property Liability Guaranty Association (Guaranty
Association). N.J.S.A. 17:30A-5d.See footnote 4
However, plaintiff's argument is not complete in terms of
the practical impact a decision in her favor will have on UM
insurers. While it is true that the UM insurers are subrogated
to plaintiff's rights if they pay plaintiff's UM claim, they are
not entitled to a dollar for dollar return of their money as a
matter of law. The JUA is not bound by the arbitration
proceedings between plaintiff and the UM insurers, and may take
the position that the value of plaintiff's claim is substantially
less than that awarded to plaintiff in the UM arbitration. If
that occurs, the UM insurers may be forced to litigate the
subrogated claim against the JUA in the pending civil suit,
unless they are willing to accept from the JUA an amount less
than they paid through arbitration.
Several scenarios may flow from this result. Most UM
endorsements allow either party to reject the arbitrators' damage
award if the amount of the award exceeds the statutory minimum
liability insurance limit. See Cohen v. Allstate Ins. Co.,
231 N.J. Super. 97 (App. Div.), certif. den.,
117 N.J. 87 (1989)
(upholding the legality of such clauses). Thus, a UM insurer,
faced with the prospect of litigating the value of a plaintiff's
damage claim against the JUA, will undoubtedly elect not to
accept the award as final unless it can obtain JUA's
acknowledgement that the award represents the fair value of
plaintiff's claim. That is the best case scenario.
Alternatively, JUA may refuse to acknowledge that the award
represents the true value of the claim, in which case the UM
carrier will reject the arbitration award and request a plenary
trial. In that case a plaintiff will become involved in a
plenary trial, thereby losing the benefit of the expedited
arbitration proceeding. However, in this second scenario, the
plenary trial can involve both the UM carrier and JUA, and both
will be bound by the result. The UM carrier will be required to
pay the judgment promptly under the UM provision of its policy,
and JUA will be obligated, in due course, to reimburse the UM
carrier on its subrogated claim.
A third scenario occurs when the UM coverage is the
statutory minimum. In such cases, the UM insurer is bound by the
arbitration award. Cohen, supra. If JUA does not recognize the
award as representing the fair value of the claim, the UM insurer
will be required to litigate the damage award against JUA.
However, the insured will be required to cooperate with the UM
insurer in prosecuting the claim.
In any case, the UM carrier will be required to abide the
deferral period before it receives payment, whereas plaintiff
will be paid promptly. Notwithstanding the procedural pitfalls
that plaintiff's solution may entail, as between a plaintiff who
has purchased UM coverage, and an insurer who has sold such
coverage with the expectation that it will have to pay UM claims
where the tortfeasor's insurer is insolvent, clearly the burden
should be imposed on the UM insurer to pay the claim as promptly
as possible and abide the deferral period for reimbursement.
Regardless of plaintiff's contention that the result she
advances has a benign impact on all affected interests, the
merits of the issue presented by this appeal must be decided by
focusing on what the Legislature would have done had it
considered this issue when it was structuring the JUA
liquidation.
FAIRA abolished the JUA and provided for the liquidation of
its $3.3 billion debt. State Farm Mut. Auto Ins. Co. v. State,
124 N.J. 32, 42-43 (1991). FAIRA established the New Jersey
Automobile Insurance Guaranty Fund (Auto Fund), N.J.S.A. 17:33B-5, as a vehicle to pay JUA's debts. The Auto Fund is
administered by a trustee pursuant to a plan of operation
approved by the Commissioner. N.J.S.A. 17:33B-3b. Under the
statute, the trustee may defer the payment of claims against JUA
insureds for up to a period of four years. N.J.S.A. 17:33B-36(2). As noted earlier, the present waiting period is eighteen
months. See N.J.S.A. 17:33B-3b(2); N.J.A.C. 11:3-2A.
A motor vehicle is "uninsured" if the "liability insurer"
for that vehicle "is unable to make payment with respect to the
legal liability of its insured because the insurer has become
insolvent or bankrupt, or the Commissioner of Insurance has
undertaken control of the insurer for the purpose of
liquidation[.]" N.J.S.A. 17:28-1.1(e)(2)(b). Plaintiff concedes
in her brief that the JUA is not a bankrupt. The concession is
appropriate in view of the fact that proceedings against the JUA
under the Federal Bankruptcy Act have never been instituted.
However, plaintiff contends that the JUA is either an
insolvent insurer, or the Commissioner has undertaken control
over it for the purpose of liquidation. Legislative intent is
not relevant to the latter issue: the Commissioner either has or
has not assumed control under the Liquidation Act. We conclude
that he has clearly not done so. Two reasons compel that
conclusion. First, but for FAIRA, the "sole and exclusive method
of liquidation, rehabilitating, reorganizing or conserving an
insurer" is the commencement of delinquency proceedings by the
Commissioner pursuant to the Liquidation Act. N.J.S.A. 17:30C-3.
As the Commissioner points out in his brief, no such action has
been taken against the JUA. Secondly, as a creature of the
Legislature, the JUA's liquidation is being accomplished pursuant
to FAIRA. As will be developed further herein, the Legislature,
in passing FAIRA, specifically expressed its intent that the JUA
not be liquidated under the traditional procedure found in the
Liquidation Act.
Resolution of the first issue, i.e., whether the JUA is an
insolvent insurer within the contemplation of N.J.S.A. 17:28-1.1(e)(2)(b), requires an inquiry into what constitutes
insolvency and whether the JUA is an insurer in the context of
the relevant statute, although it may not be treated as an
insurer for all purposes.
A brief discussion of the purpose and operation of the JUA
is helpful at this juncture. As a creature of the Legislature,
it was organized as an unincorporated, non-profit entity in 1983.
N.J.S.A. 17:30E-1 to -24. Its purpose was to provide private,
passenger automobile insurance to eligible persons who could not
obtain such insurance through normal market outlets. N.J.S.A.
17:30E-2.
The Legislature anticipated from the beginning that premium
revenues would not sufficiently cover the expected costs of
operations. Consequently, the Legislature intended to supplement
the JUA's income through certain surcharges for motor vehicle
violations, flat charges, and residual market-equalization
charges (RMECs) imposed on automobile-insurance policy holders.
In re Commissioner of Ins.,
132 N.J. 209, 213 (1993). The JUA
had an "express obligation to operate on a break-even basis[.]"
In re Market Transition Facility,
252 N.J. Super. 260, 272 (App.
Div. 1991), certif. denied,
127 N.J. 565 (1992). Thus,
[t]he Commissioner had ultimate financial
control because the imposition of RMECs was
his responsibility. He had the obligation, .
. ., to set the RMECs high enough to cause
JUA to operate on a no-profit, no-loss basis.
[Id. at 273.]
However, except as to that limited but "very significant
exception, JUA was not the Commissioner's direct responsibility,"
because the Board of Directors of the JUA was primarily comprised
of insurance company representatives and insurance producers. In
re Commissioner of Ins., supra, 132 N.J. at 212.
It was painfully clear by 1988 that the JUA had not achieved
its goals. By that time, over 50" of New Jersey's drivers were
insured through the JUA. Obviously, not all of those drivers
were high risk. State Farm, supra, 124 N.J. at 42. By 1990,
despite the imposition of RMECs, the JUA had accumulated a
deficit of over 3.3 billion dollars in unpaid claims and other
losses. As noted earlier, the Legislature never contemplated
that the JUA would run at a deficit, and, in essence, "told the
Commissioner to see to it that JUA broke even." In re Market
Transition Facility, supra, 252 N.J. Super. at 273. Undoubtedly,
the Commissioner, through the imposition of RMECs, had the
ability to satisfy the legislative design, but did not do so.
The inquiry into what constitutes insolvency is straight
forward, and compels the conclusion that JUA meets all legal
definitions of the term. The Federal Bankruptcy Act defines
"insolvent" as a "financial condition such that the sum of [the]
entity's debts is greater than all of [the] entity's property[.]"
11 U.S.C.A.
§101(32)(A). Considering the JUA's statutory
structure and an operating deficit of more than $3 billion the
JUA essentially meets that definition. See N.J.S.A. 17:33B-3a.
The New Jersey Business Corporation Act provides that
insolvent means being "unable, by its available assets or the
honest use of credit, to pay debts as they become due." N.J.S.A.
14A:14-1(f). The New Jersey Uniform Commercial Code provides
that "[a] person is `insolvent' who has either ceased to pay the
person's debts in the ordinary course of business or cannot pay
the person's debts as they become due . . . ." N.J.S.A. 12A:1-201(23) (amended 1994). The JUA was and is unable to pay its
debts as they become due in the usual or ordinary course of
business.
The New Jersey Uniform Fraudulent Conveyance Act, N.J.S.A.
25:2-23, provides in pertinent part:
a. A debtor is insolvent if the sum of the debtor's
debts is greater than all of the debtor's assets,
at a fair valuation.
b. A debtor who is generally not paying his debts as
they become due is presumed to be insolvent.
The JUA easily meets the definition of a. and b.. Moreover,
under b., the JUA is "presumed to be insolvent."
More importantly, the Legislature in FAIRA found that the
JUA was "currently operating in a substantially impaired
financial state with an operating deficit . . . estimated to be
in excess of $3 billion . . . [The JUA] is not earning new
premium income or collecting subsidies in an amount sufficient to
pay its claims and expenses. . . . [The JUA,] if it were a
licensed insurer, would likely be declared financially impaired
or insolvent . . . ." N.J.S.A. 17:33B-3a.
With an operating deficit in excess of $3 billion, with an
inability to pay debts as they become due, with liquidation
required by legislation still ongoing after five years, and with
no legal or contractual requirement to pay its debts in full, the
JUA squarely fits within every one of the definitions of
insolvency. The adage surely applies that if it looks like a
duck, acts like a duck and quacks like a duck, it should be
considered a duck.
The next issue to resolve is whether the Legislature
intended JUA to be considered an "insurer" in the context of
N.J.S.A. 17:28-1.1(e)(2)(b). We agree with the UM insurers and
amici that the JUA is not an insurer in the traditional sense of
the term. Insurance companies authorized to do business in this
State must be either stock or mutual companies as defined by
statute. See e.g., N.J.S.A. 17:17-2,-6,-7. The JUA, clearly, is
neither. The Legislature recognized the JUA's unique status in
FAIRA when it observed that "if [JUA] were a licensed insurer,
[it] would likely be declared financially impaired or insolvent
pursuant to the provisions of [the Liquidation Act, N.J.S.A.
17:30C-1 et seq.]." N.J.S.A. 17:33B-3a (emphasis added). We
interpret that statement as nothing more than a recognition that
JUA is not subject to licensing, as are stock and mutual
insurance companies, and, because it is neither a stock nor a
mutual insurance company, it does not meet the definition of an
"insolvent insurer" under the New Jersey Guaranty Act. N.J.S.A.
17:30A-1 to -20. That is so because, as to domestic insurers, an
insolvent insurer is defined in the Guaranty Act as a company
that is "authorized" pursuant to N.J.S.A. 17:50-1 et seq.. See
N.J.S.A. 17:30A-5e. Further, the Supreme Court has interpreted
the Guaranty Act as evidencing the Legislature's intent "to
restrict covered insolvent insurers to domestic insurers
authorized to transact the business of insurance in this State
under N.J.S.A. 17:17-1 et seq. and foreign insurance companies
admitted to transact any class or classes of insurance in this
State under N.J.S.A. 17:32-1 et seq." Railroad Roofing & Bldg.
Supply Co., Inc. v. Financial Fire & Cas. Co.,
85 N.J. 384, 393
(1981) (emphasis in original). Consequently, because the JUA was
a legislative creation, and not a stock or mutual company, the
Legislature deemed it advisable to design a separate plan for the
JUA's liquidation.
That is not to say that the Legislature intended the JUA not
to be considered an insurer in other contexts. Except for the
fact that it is not a stock or mutual company, the JUA's
operation fits the definition of an insurer in all respects. See
N.J.S.A. 17:17-1d. Indeed, our Supreme Court recognized that the
very purpose of the JUA was to provide insurance coverage for
high risk drivers at rates equivalent to those charged in the
voluntary market. State Farm, supra. 124 N.J. at 41.
Furthermore, we have recognized that although an entity may not
fit the statutory definition of an insurer, i.e., a stock or
mutual company formed for the purposes set forth in N.J.S.A.
17:17-1, it could nonetheless be considered an insurer for the
purposes of UM claims under N.J.S.A. 17:28-1.1e(2)(b). See
Goodwin v. Rutgers Cas. Ins. Co.,
223 N.J. Super. 195 (App. Div.
1988) (holding that a UM carrier wrongfully withheld UM benefits
from its insured, on the ground that the self-insured owner of
the tortfeasor vehicle was in a bankruptcy reorganization,
because the Legislature probably intended an insolvent self-insurer to be treated the same way as a traditional insurer).
Nothing exists in the legislative history of FAIRA to
indicate that the Legislature was even aware of the effect FAIRA
might have on claims by injured parties against their UM
insurance companies. However, what is clear from FAIRA is that
the Legislature recognized that the JUA, as a practical matter,
was insolvent. See N.J.S.A. 17:33B-3a. Instead of permitting
liquidation by the Commissioner under the Liquidation Act, it
decided instead to liquidate the JUA in the manner provided by
FAIRA, i.e. by a trustee "experienced in insolvency or
bankruptcy," N.J.S.A. 17:33B-3b(1), and acting pursuant to a plan
approved by the Commissioner. N.J.S.A. 17:33B-3b. The
Legislature's determination to liquidate an insolvent insurer in
one fashion rather than in another does not alter the fact that
the JUA is insolvent, or the reality that it acted in all
respects like any other insurer. Moreover, the fact that the
Legislature has created a mechanism to satisfy claims against an
insolvent insurer does not render the insurer any less insolvent
for UM claim purposes. State Farm Mutual Auto Lia. Ins. Co. v.
Kiser,
168 N.J. Super. 230, 234 (App. Div.), certif. denied,
81 N.J. 348 (1979) (holding that UM insurance carrier wrongly
withheld UM benefits on the ground that the insured would receive
payment in due course from either the Pennsylvania or New Jersey
Guaranty Associations). Thus, simply because FAIRA is the method
by which the Legislature has chosen to liquidate the JUA and pay
its claims, does not render the JUA solvent. The liquidation
plan came after the fact of the JUA's insolvency.
Another compelling reason for our conclusion that the JUA is
an insurer is that under N.J.S.A. 17:28-1.1(e)(2)(b), an insured
is also permitted to present a UM claim where the tortfeasor's
insurer "denies coverage" to the tortfeasor. We have no doubt
that if the JUA had denied coverage to Cooper for any reason in
this case, plaintiff would be permitted to assert a UM claim
against her UM insurers on the ground that the JUA was the
"insurer" of Cooper. Any other result would be unthinkable and
indefensible. The answer to the question of whether the JUA is
an "insurer" should be no different within the context of the
same sentence of the statute simply because the focus is on the
JUA's insolvency rather than a disclaimer of coverage.
The life of a statute is not in its words but in its
meaning. Nearly a half century ago, Judge Learned Hand taught us
"[t]here is no more likely way to misapprehend the meaning of
language--be it in a constitution, a statute, a will or a
contract--than to read the words literally, forgetting the object
which the document as a whole is meant to secure." Central
Hanover Bank and Trust Co. v. Commissioner of Internal Revenue,
159 F.2d 167, 169 (2d Cir. 1947), cert. denied,
331 U.S. 836,
67 S. Ct. 1518,
91 L.Ed. 1848 (1947). The New Jersey Supreme Court
has adopted this principle. See Schierstead v. City of
Brigantine,
29 N.J. 220, 230-31 (1959); see also AMN, Inc. of New
Jersey v. South Brunswick Tp. Rent Leveling Bd.,
93 N.J. 518,
524-25 (1983).
In Kiser and Goodwin, supra, N.J.S.A. 17:28-1.1(e)(2) was
construed liberally to further the legislative intent of
affording UM policyholders the protection for which they had
contracted and paid. See Fernandez v. Selected Risks Ins. Co.,
82 N.J. 236, 240 (1980); Motor Club of America Ins. Co. v.
Phillips,
66 N.J. 277, 293 (1974). When enacting FAIRA, the
Legislature was presumably aware of the Kiser and Goodwin
decisions that liberally and broadly construed N.J.S.A. 17:28-1.1(e)(2)(b) in favor of UM policyholders. If the Legislature
had intended to bar UM suits when the JUA insured the tortfeasor,
the Legislature could have simply provided in FAIRA that the JUA
should not be considered insolvent within the meaning of N.J.S.A.
17:28-1.1(e)(2)(b). The failure of the Legislature to do so when
enacting FAIRA supports the conclusion that the Legislature did
not intend the liquidation of JUA to benefit or protect UM
insurance companies at the expense of their policyholders. See
Massachusetts Mutual Life Ins. Co. v. Manzo,
122 N.J. 104, 116
(1991) ("the Legislature's failure to modify a judicial
determination, while not dispositive, is some evidence of
legislative support for the judicial construction."). We believe
that our interpretation reaches the result probably intended by
the Legislature had it "anticipated the situation at hand."
Dvorkin v. Dover Tp.,
29 N.J. 303, 315 (1959). In short, we
construe the statute to further New Jersey's long established
policy of providing the "broadest protection" to innocent victims
of highway accidents. Motor Club of America, supra, 66 N.J. at
293; see also State Farm Mutual Auto Ins. Co. v. Zurich Am. Ins.
Co.,
62 N.J. 155, 168, 180 (1973); Selected Risks Ins. Co. v.
Zullo,
48 N.J. 362, 372-373 (1966); Matits v. Nationwide Mutual
Ins. Co.,
33 N.J. 488, 495-496 (1960).
On its cross-appeal, State Farm argues that the trial judge erred in ordering it to arbitrate the UIM claim before plaintiff's underlying action against Cooper is finalized by an offer of settlement of the policy limits or a judgment exhausting the policy limits. The issue has been rendered moot by our conclusion that plaintiff may pursue a UM claim. However, we decide the issue nevertheless because the issue can be raised in other cases. Busik v. Levine, 63 N.J. 351, 364 (1973). We agree with State Farm's contention and reverse that part of the judgment under review. In Longworth, supra, this court held that "UIM carriers may, if they choose, honor demands from their insureds to proceed to arbitration of the UIM claim prior to disposition of the claim against a tortfeasor." Longworth,
supra, 223 N.J. Super. at 195 (emphasis added). In so ruling,
the court was mindful of the UIM statute which provides:
[a] motor vehicle should not be considered an
uninsured motor vehicle under this section
unless the limits of all bodily injury
liability insurance or bonds applicable at
the time of the accident have been exhausted
by payment of settlements or judgments.
[N.J.S.A. 17:28-1.1e.]
The Longworth court stated that the exhaustion of the
tortfeasor's policy limits, triggering the availability of UIM
coverage, must be viewed in terms of "payment received" by
plaintiff. Longworth, supra, 223 N.J. Super. at 192. In that
context, the court recognized that an inherent conflict existed
between subrogation and consent-to-settle clauses of the UIM
contract with the insured's right to manage his or her
litigation, and established a procedure to reconcile the
conflict. Id. at 185.
The procedure adopted in Longworth was recently endorsed by
our Supreme Court in Rutgers Casualty Ins. Co. v. Vassas,
139 N.J. 163 (1995). The policy, as adopted by the Court, is set
forth here in detail:
[W]hen an insured under an automobile
insurance policy providing UIM benefits is
involved in an accident and undertakes legal
action against the tortfeasor, the insured
must notify the UIM insurer of that action.
If, during the pendency of the claim, the
tortfeasor's insurance coverage proves
insufficient to satisfy the insured's
damages, then the insured should again notify
the UIM insurer of that fact. (emphasis in
the original.)
If the insured receives a settlement
offer or arbitration award that does not
completely satisfy the claim, because the
tortfeasor is underinsured, the UIM insurer
then has two options: offer to pay the
insured the amount of the tortfeasor's
settlement offer or the arbitration award,
usually the tortfeasor's policy limit, in
exchange for subrogation of the insured's
rights against the tortfeasor; or, allow the
insured to settle. In either case, the UIM
insurer must further allow the insured the
benefit of the UIM coverage. If the insured
does not respond within the time allotted for
rejection of the award or settlement offer,
the insured victim may, consistent with
Longworth, supra, move for a declaratory
ruling on order to show cause concerning the
parties' rights and responsibilities. In
this manner, the insured victim is afforded
the protection and benefits of the
tortfeasor's insurance coverage in addition
to the insured's own UIM coverage. As well,
the UIM carrier is able to weigh the relative
merits of allowing its insured to settle and
paying the difference in UIM benefits
compared with paying its insured the
settlement offer plus UIM benefits and itself
maintaining a subrogation action against the
tortfeasor.
The Longworth procedure balances the
interests of insureds and insurers, injured
victims and tortfeasors. It provides the
insured victim an opportunity both to assert
liability against the tortfeasor and to
determine the liability of the UIM insurer.
In addition, it apprises the UIM insurer of
pending litigation by one of its insureds,
which may obligate it to provide UIM coverage
under the insured's policy.
[Id. at 174-175.]
Clearly, none of the conditions warranting the involvement of the
UIM insurer in this case has occurred. Thus, it is inappropriate
to compel State Farm to participate in what may very well be
meaningless arbitration.
In conclusion, the judgment under review is reversed on plaintiff's appeal and on State Farm's cross-appeal.
Footnote: 1Plaintiff sought UIM arbitration as alternative relief in the event she did not succeed in obtaining UM arbitration. Footnote: 2The trial on the damage issue has been stayed pending disposition of this appeal. Footnote: 3State Farm and Prudential are referred to herein collectively as the UM or UIM carriers. Footnote: 4 A "covered claim" under the New Jersey Property Liability Insurance Guaranty Association Act, N.J.S.A. 17:30A-1 to -20, does not include any amount due an insurer as a subrogation recovery. See Sussman v. Ostroff, 232 N.J. Super. 306 (App. Div.), certif. denied, 117 N.J. 143 (1989) (Workers Compensation claim).
Rutgers School of Law - Camden.