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New Jersey Supreme Court Prohibits Step-Down clauses In Garage Policies for Dealership Customers.

by | May 6, 2021 | Uncategorized

The New Jersey Supreme Court has recently held that car dealerships involved in the business of buying, selling or dealing of automobiles must provide third-party liability insurance coverage for all drivers of their vehicles, if the vehicles are being operated with their consent.  The case has significant impacts on automobile accidents in New Jersey.  This case provides additional protection for individuals injured in a motor vehicle accident when the negligent driver is operating a loaner vehicle or test driving a vehicle. The case also serves as a strong deterrent to insurance companies that attempt to deny coverage to innocent victims by inserting illegal step-down clauses in their insurance policies.  The case is captioned Huggins v. Aquilar, 2021 WL 1555277 (April 21, 2021).

The case involved a customer who had taken her vehicle in for service and like many people obtained a loaner vehicle form the dealership while her vehicle was being repaired. When the customer obtained the vehicle she signed a loaner car agreement which included a provision indicating she would not be covered under the dealership’s insurance.

The car dealer’s insurance policy included a step-down clause that denied coverage if the customer had their own coverage that met state minimum requirements.  Several days later the customer was involved in a car accident with the loaner vehicle. The customer was at fault, and she negligently caused serious injuries to the driver of another vehicle.  New Jersey long established a rule that requires insurance companies to provide coverage to all operators of an insured vehicle if the vehicle is operated with the permission of the owner. This rule of law applies even if the driver has their own insurance coverage and is intended to protect the innocent victim to the maximum extent permitted by law.  Despite established law, the carrier denied it had any responsibility to provide insurance coverage for the negligent driver. The insurance carrier claimed the policy contained a valid step-down provision.

The negligent driver had an insurance policy with GEICO in the liability coverage amounts of $15,000 per person, and $30,000 per accident, the minimum amounts under N. J. S. A. 39:6B-1.   The dealership policy had limits of $500,000 per accident but because of the step-down clause, provided no coverage to the victim.

The issue before the Supreme Court was whether the policy contained a valid step-down clause or was an illegal escape clause.  The New Jersey Supreme Court determined the policy contained an illegal escape clause. The Supreme Court decision built on a line of cases, including Engrassia v. Uzcategui, 237 N. J. 373 (2019), a case our firm litigated before the New Jersey Supreme Court.

The New Jersey Supreme Court determined that the disputed clause was not a valid step-down clause but was an illegal escape clause which may not be used to evade third-party liability coverage required by the New Jersey Motor Vehicle Commission.  Those standards require dealerships to maintain a minimum of $100,000 in coverage for all permissive users, and apply to loaners and test driven vehicles.  The Supreme Court also announced that while the step-down provision versus illegal escape clause was arguably not settled law, in the future insurance companies should reasonably expect that the full policy limits of $500,000 would be available to the customer.

The lawyers at Starkey, Kelly, Kenneally, Cunningham & Turnbach will continue to monitor developments in the law to keep our clients advised of their rights.

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