Provision of Car Dealer’s Insurance Policy That Did Not Cover Loaner Car Driver Because She Had Her Own Minimum Required Insurance Was an Illegal Escape Clause

Huggins v. Aquilar, ___ N.J. ___ (2021). Rarely does a dissenting opinion in one case form the basis for a majority opinion (in fact, a unanimous opinion) in a subsequent decision by the same court. But that is essentially what happened in this opinion, issued today. Written by Justice LaVecchia, the decision draws heavily on her dissent in Engrassia v. Uzcategui, 237 N.J. 373 (2019). The majority dismissed that case as moot because the parties had settled the case after oral argument. The majority there thus did not reach the merits. But the issue there recurred in today’s case.

These were the circumstances. Among the requirements for licensure as an auto dealership, the dealership must maintain “liability insurance covering all vehicles owned or operated by the applicant, at his or her request or with his or her consent” with limits of $100,000 per person and $250,000 per incident. N.J.A.C. 13:21-15.2(l). In this case, Mary Aquilar brought her car to her dealership, Trend Motors, Ltd., for maintenance. Trend gave her a loaner car. While driving that vehicle, Aquilar negligently struck a car being driven by plaintiff Tyrone Huggins, causing his serious injury.

Trend had a “garage policy” with Federal Insurance Company, under which there was up to $1 million in coverage for permissive users of Trend’s vehicles. But Justice LaVecchia noted that the definition of “insured” in the Federal policy “purports to extend liability coverage to Trend’s customers using Trend’s vehicles only if the customer lacks the minimum insurance required by law, and the policy covers those customers only to the extent necessary to establish that unspecified minimum insurance level.” Aquilar had her own insurance with GEICO in the minimum amount, so Federal disclaimed liability, asserting that Aquilar was not an “insured” under its policy, based on the language quoted above.

Huggins sued Aquilar and Trend, as well as his own insurer, New Jersey Manufacturers Insurance Company (“NJM”). [Disclosure: I have represented NJM in certain matters, but I had no involvement in today’s case or in any case raising the issues addressed by the Court today.] NJM filed a third-party complaint against Federal, seeking a declaration that Federal’s policy created an obligation to Huggins. On cross-motions for summary judgment, the Law Division held that Federal was so obligated, and that that obligation extended to the full $1 million policy limit. The Appellate Division denied Federal’s motion for leave to appeal, but the Supreme Court granted leave.

Today, the Court affirmed, with a modification discussed below, the Law Division’s ruling against Federal. In short, relying “heavily” on Justice LaVecchia’s dissent in Engrassia, the Court held that Federal’s definition of “insured” constituted an illegal escape clause “because the definition operated to eliminate coverage for a class of permissive drivers of the dealership’s vehicles, namely, Trend customers who maintained personal automobile insurance that met statutory requirements.” Aquilar was such a customer. The Federal policy thus “failed to comply with the public policy of requiring all vehicle owners to provide the applicable minimum coverage for permissive users.” There was much more analysis and discussion of prior cases, but that was the essence of the Court’s ruling.

The question then became what the remedy should be. In ruling against Federal, the Law Division reformed the policy to hold Federal to the full amount of the policy on its face, $1 million. Federal, however, argued that if reformation were appropriate, its exposure should be limited to the mandatory minimum only.

Justice LaVecchia noted that there were two conflicting Supreme Court precedents on this issue. In Proformance Insurance Co. v. Jones, 185 N.J. 406 (2005), where the Court struck an auto insurance policy provision that purported to exclude liability coverage for a permissive user who caused a vehicle collision while engaged in “business pursuits,” the Court reformed the policy to the statutory minimum. In contrast, in Potenzone v. Annin Flag Co., 191 N.J.147 (2007), the Court reformed the policy to reflect the stated limit.

The key to deciding this issue was whether Federal had notice that its policy provision was unlawful. The Court found it “difficult to conclude that Federal had sufficient notice to warrant imposing the full policy limit.” There was “confusion” and “arguably diverging opinions” in some of the prior cases that the Court had discussed earlier in its opinion. On balance, therefore, the Court reformed the Federal policy here to the statutory minimum. As modified in that way, the Court affirmed the ruling of the Law Division.