NEW JERSEY MANUFACTURERS INSURANCE COMPANY v. FEDERATED MUTUAL INSURANCE COMPANY

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3.

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

NEW JERSEY MANUFACTURERS

INSURANCE COMPANY and

CHRISTINE CULVER,

Plaintiffs-Appellants/

Cross-Respondents,

v.

FEDERATED MUTUAL INSURANCE

COMPANY,

Defendant-Respondent/

Cross-Appellant,

and

THOMAS PAKRUL, BARBARA PAKRUL,

and GREEN BROOK BUICK-PONTIAC-GMC,

Defendants.

____________________________________________

November 30, 2016

Argued October 18, 2016 Decided

Before Judges Yannotti and Gilson.

On appeal from Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-0216-14.

Eugene M. Purcell argued the cause for appellants/cross-respondents(Purcell, Mulcahy, Hawkins, Flanagan & Lawless, LLC, attorneys; Mr. Purcell, on the briefs).

Michael F. Aylward (Morrison Mahoney LLP) of the Massachusetts bar, admitted pro hac vice, argued the cause for respondent/cross-appellant (Morrison Mahoney LLP, attorneys; Christopher E. Martin, of counsel and on the briefs; Lina P. Corriston, on the briefs).

PER CURIAM

Plaintiffs New Jersey Manufacturers Insurance Company (NJM) and Christine Culver (Culver) appeal from a March 2, 2015 order of the Law Division, which determined that defendant Federated Mutual Insurance Company (Federated) is only responsible for $15,000 of the indemnity for the underlying litigation, Pakrul v. Culver, Docket No. L-4291-13, and denied plaintiffs' application for attorney's fees and costs. Federated cross-appeals from the order. For the reasons that follow, we affirm on the appeal, and reverse on the cross-appeal.

I.

This dispute arises from the following facts. On March 22, 2012, Culver was driving an automobile that struck Thomas Pakrul as he was crossing a street at a corner in Metuchen. The vehicle was owned by Green Brook Buick-Pontiac-GMC (Green Brook), an automobile dealership. Green Brook had loaned the vehicle to Culver for her use while it was servicing Culver's own car. Culver signed an "Agreement for Temporary Substitute Vehicle Replacement Only," which provides, among other things, that Green Brook was not providing Culver with any insurance coverage, and she "agree[d] to pay for all loss and damage to the described vehicle and to hold [Green Brook] harmless from any liability as a result of the customer's usage thereof."

The Federated policy, which provides liability coverage of up to $500,000, defines the term "insureds" to mean Green Brook and anyone using a covered "auto" with Green Brook's permission, with certain exceptions, including Green Brook's customers. The policy states, however, that if a customer

(i) [h]as no other available insurance (whether primary, excess or contingent), [the customer is] "insured" but only up to the compulsory or financial responsibility law limits where the covered "auto" is principally garaged[; or]

(ii) [h]as other available insurance (whether primary, excess or contingent) less than the compulsory or financial responsibility law limits where the covered "auto" is principally garaged, [the customer is] an "insured" only for the amount by which the compulsory or financial responsibility law limits exceed the limit of their other insurance.

In addition, the "other insurance" endorsement in the Federated policy states, "[f]or any covered 'auto' you own or you don't own: [w]hen there is other insurance applicable, the coverage provided by this Coverage Form will apply only after such other applicable insurance has been exhausted." The Federated policy further states that

[w]hen this coverage form and any other coverage form or policy covers on the same basis, either excess or primary, we will pay only our share. Our share is the proportion that the Limit of Insurance of our coverage form bears to the total of the limits of all the coverage forms and policies covering on the same basis.

NJM's policy provides coverage for any automobile that Culver uses as a temporary substitute for her own car. In addition, the "other insurance" provision in the NJM policy states that

[i]f there is other applicable liability insurance we will pay only our share of the loss. Our share is the proportion that our limit of liability bears to the total of all applicable limits. However, any insurance we provide for a vehicle you do not own, including any vehicle while used as a temporary substitute for your covered auto, shall be excess over any other collectible insurance.

In June 2012, NJM wrote to Federated and asserted that Culver was entitled to coverage under the policy that Federated issued to Green Brook. In July 2012, Federated responded and advised that Culver was not entitled to coverage. NJM thereafter filed a declaratory judgment action in the trial court naming Federated, Green Brook, and others as defendants. NJM sought a determination that the Federated policy provided coverage to Culver for the subject accident to the full extent of the policy limits, or in the alternative, for the minimum coverages required by N.J.S.A. 39:6B-1(a). NJM also sought attorney's fees and costs for the declaratory judgment action and the underlying litigation.

In September 2014, Federated filed a motion for summary judgment, arguing that Culver was not entitled to coverage under its policy, or alternatively, any liability coverage should be limited to the statutory minimum of $15,000 per person under N.J.S.A. 39:6B-1(a). Federated argued that Culver had signed an agreement with Green Brook in which she acknowledged that Green Brook was not providing any type of insurance for the vehicle that it loaned to her.

Federated further argued that the policy expressly provided that Green Brook's customers were only insured if they had no other available insurance or available insurance less than the amounts required by the law in the jurisdiction where the covered "auto" is principally garaged. Since Culver was insured under the NJM policy, which provided coverage that exceeded the minimum required, she was not entitled to coverage under Federated's policy.

In October 2014, plaintiffs filed a cross-motion for summary judgment and argued that the provision of the Federated policy, which excluded coverage if Green Brook's customer had his or her own insurance, with coverage greater than the minimum amount required, was an illegal "escape clause." Plaintiffs maintained that under the "other insurance" provisions of both policies, the Federated policy was co-primary with NJM for the full policy limits. In addition, plaintiffs argued that it was entitled to an award of one-half of the attorney's fees and costs incurred in the underlying litigation that Pakrul and his spouse brought against Culver, and all of the attorney's fees and costs in the declaratory judgment action.

The trial court heard oral argument on the motions in November 2014, and on December 3, 2014, entered orders denying Federated's motion and granting plaintiffs' motion. In an accompanying letter opinion, the court found that Federated's "escape clause" was illegal. Thereafter, the court filed a supplemental letter opinion, clarifying its earlier decision.

The court stated that the Federated policy included an illegal "escape clause" and, as a consequence, the policy's "other insurance" endorsement applied. Because the "other insurance" endorsement was identical to the "other insurance" endorsement in the NJM policy, "the two policies are deemed co-primary and must equally provide defense costs and indemnity limits." The court added that it would address the issue of legal fees and costs "in the ordinary course."

Federated then filed a motion for reconsideration, which plaintiffs opposed. The court heard oral argument on Federated's motion, and on March 2, 2015, granted the motion in part, holding that Federated was only required to provide coverage in the amount of $15,000. In the accompanying letter opinion, the court again found that Federated's policy includes an illegal "escape clause." The court determined, however, that Culver was not entitled to the full coverage limits under the Federated policy.

Rather, Culver was only entitled to the minimum statutory coverage mandated by N.J.S.A. 39:6B-1(a), specifically $15,000. The court also found that NJM was not entitled to an award of counsel fees and costs under Rule 4:42-9(a)(6) because Federated's position in the case was "founded on good faith." The court memorialized its decision in an order dated March 2, 2015. Plaintiffs' appeal, and Federated's cross-appeal, followed.

On appeal, plaintiffs argue that: (1) the trial court erred by limiting Federated's coverage to $15,000, as opposed to its full policy limits of $500,000; (2) Federated and NJM's policies are co-primary because both policies provide coverage of $500,000, and their "other insurance" clauses both provide excess coverage; (3) Federated and NJM should share equally the defense costs in the underlying action; and (4) the trial court erred by refusing to award plaintiffs attorney's fees and costs for the declaratory judgment action.

In its cross-appeal, Federated argues: (1) the trial court erred by reconsidering its initial ruling in part; (2) the court erroneously determined that Culver is an "insured" under the Federated policy; (3) assuming Culver is an "insured," the Federated policy should only be reformed to require the minimum statutory limits of coverage; (4) there is no basis to find that the Federated and NJM policies are co-primary; and (5) the trial court correctly determined that NJM is not entitled to attorney's fees and costs in connection with the underlying and declaratory judgment actions.

We note initially that summary judgment may be granted when there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. R. 4:46-2(c); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). We apply that standard when reviewing a trial court's order granting or denying summary judgment. Davis v. Brickman Landscaping, Ltd., 219 N.J. 395, 405 (2014); Gormley v. Wood-El, 218 N.J. 72, 86 (2014).

Here, there is no dispute as to the material facts, and the coverage issues involve questions of law, on which this court exercises de novo review. Templo Fuente De Vida Corp. v. Nat. Union Fire Ins. Co. of Pittsburgh, P.A., 224 N.J. 189, 199 (2016). In exercising such review, an appellate court owes no deference to a trial court's decision on an issue of law. Ibid. (citing Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).

As noted, plaintiffs argue that the applicable provision of Federated's policy constitutes an illegal "escape clause" because it fails to provide the minimum coverage required by N.J.S.A. 39:6B-1(a). N.J.S.A. 39:6B-1(a) states in pertinent part that every owner or registrant of a motor vehicle registered or principally garaged in New Jersey must maintain motor vehicle liability insurance coverage of $15,000 per person and $30,000 per accident. Ibid.

NJM contends that the definition of "insured" in Federated's policy unlawfully excludes a Green Brook customer, who uses a vehicle covered under the policy, and has available insurance coverage that provides coverage with the minimum required by N.J.S.A. 39:6B-1(a). In response, Federated contends that this provision is not an illegal "escape clause." According to Federated, the relevant provision of its policy is a valid "step-down" clause.

We agree with Federated that the Supreme Court's decision in Aubrey v. Harleysville Insurance Companies, 140 N.J. 397 (1995), requires reversal of the trial court's order. In Aubrey, the automobile was insured under a policy that Harleysville issued to an auto dealership. The dealership loaned the vehicle to Aubrey, who was its customer, and Aubrey sustained personal injuries in a three-car accident. Id. at 399-400. Aubrey was insured under an auto liability policy that provided underinsured motorist (UIM) coverage of $15,000 per person, $30,000 per accident. Ibid. Aubrey settled her claims against the other drivers for $40,000, which exceeded the UIM limits under her policy. Id. at 400. Since Aubrey's damages exceeded $40,000, she sought UIM coverage under the Harleysville policy, which provided liability and UIM coverage. Ibid.

The liability section of the Harleysville policy stated that customers of the dealership are insured, but coverage was limited to the minimum required by law. Id. at 400-01. The Court noted that N.J.S.A. 17:28-1.1(e) states that

[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.

[Id. at 403.]

The Court held that Aubrey was only entitled to UIM coverage of $15,000. Id. at 404. The Court observed that, under N.J.S.A. 17:28-1.1(b), the right to recover UIM benefits depends on the UIM coverage that the insured has chosen. Id. at 405. "Under the clear terms of the statute, [Aubrey's] UIM coverage cannot exceed her liability coverage." Id. at 406. The Court pointed out that Aubrey had purchased UIM coverage of $15,000, and this was the amount of UIM coverage that she "held" under her motor vehicle insurance policy. Id. at 404. The Court stated that Aubrey could not reasonably expect that she would be entitled to receive coverage under the UIM endorsements issued to the dealership. Ibid.

The Court also addressed the liability section of the Harleysville policy, which limited coverage for the dealership's customers "to the statutory minimum, $15,000." Id. at 406. The Court noted that Aubrey's own policy satisfied the statutory minimum because it provided $15,000 of liability coverage. Ibid. The Court held that because the statutory minimum was not greater than the liability limits under the Harleysville policy, Aubrey was not covered by the liability section of the policy. Ibid.

Here, the relevant provision of the Federated policy is the same as the provision addressed in Aubrey. As in Aubrey, liability coverage is provided in the minimum amounts required by law, if the dealership's customer has no other available insurance, or the customer has other available insurance that provides coverage less than the statutory minimum. As held in Aubrey, the limitation on liability in the Federated policy is not an illegal "escape clause," but is instead a valid "step-down" clause.

In concluding that Federated's policy contained an illegal escape clause, the trial court relied upon Rao v. Universal Underwriters Insurance Co., 228 N.J. Super. 396 (App. Div. 1988). There, Rao had leased a vehicle, and the lease agreement required that he obtain liability insurance for the vehicle. Id. at 398. Rao obtained a policy that provided liability insurance coverage with limits of $100,000/$300,000, and named the auto leasing company as an additional insured. Ibid. Rao's wife drove the car and struck a pedestrian. Ibid. The pedestrian and her husband filed a lawsuit, seeking damages for the injuries sustained as a result of the accident. Ibid.

The policy provided coverage for lessees, such as Rao, but only if the lessee failed to obtain sufficient liability insurance with the minimum coverage required by New Jersey law. Id. at 399. We held that under N.J.S.A. 45:21-1, which applies to persons engaged in the business of renting or leasing automobiles, the "owner" of the vehicle must provide liability insurance in the amounts required, regardless of whether the person leasing the vehicle "otherwise procures and maintains such insurance in effect to any extent." Id. at 403.

We noted that it would be permissible for an automobile lessor to have a "step-down" clause that provides higher coverage limits for the lessor and its employees, but decreases coverage limits for the lessee and his or her permissive users. Id. at 402-03 (citing General Accident Group of Ins. v. Liberty Mut. Ins. Co., 191 N.J. Super. 530, 531 (App. Div. 1983)). The lower level of coverage was permissible, but it could not be made contingent upon the lessee's failure to obtain his or her own insurance. Id. at 403.

Here, the trial court found Rao controlling, and refused to apply Aubrey because Aubrey addressed the levels of UIM coverage available under the policy, not whether the plaintiff in that case was insured. On appeal, plaintiffs make the same point. They concede that the relevant provision of the Federated policy is the same as the policy addressed in Aubrey, but maintain that Aubrey is distinguishable because it deals with the amount of UIM coverage available.

As the decision in Aubrey makes clear, however, the amount of UIM coverage available to Aubrey was dependent upon the amount of liability coverage that she held. Aubrey, supra, 140 N.J. at 404. In deciding that Aubrey was only entitled to UIM coverage of $15,000, the Court enforced the provisions of the dealership's policy, which contained a "step-down" clause that provided coverage to customers, but only if the customer did not have insurance or insurance in the amounts required by law. Id. at 406. The Court noted that the plaintiff had her own insurance, which provided coverage that exceeded the statutory minimum. Ibid.

The Court therefore held that Aubrey was not covered by the liability section of the dealership's policy. Ibid. The same conclusion applies in this case. The Federated policy provides a limitation on coverage, rather than an illegal "escape clause," and Culver is not entitled to coverage under that policy.

We therefore conclude that the trial court erred by declaring the relevant section of the Federated policy to be an illegal "escape clause," and by requiring Federated to provide the statutory minimum coverage of $15,000 to Culver. In light of our determination, we need not consider the other issues raised by plaintiffs in their appeal.

Affirmed on the appeal; reversed on the cross-appeal.