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"Step-Down" Provision Permitted In UM/UIM Auto Context

July 23, 2008

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Several years ago, the New Jersey Supreme Court upheld a "step-down" provision in a business auto policy restricting the amount of UM/UIM coverage to the limit contained in an employee's personal auto policy. The practical effect of this provision was to deny an employee access to the UM/UIM coverage contained in the employer's auto policy. In response, the New Jersey legislature enacted a statute prohibiting a business auto policy from discriminating between a named insured and employee with regard to the limits of its UM/UIM coverage. In other words, a business auto policy could not provide a lower limit -- or "step-down" in coverage-- in the event that an employee as opposed to a named insured filed a claim for UM/UIM coverage under his employer's auto policy.

The question remained whether this legislation applied retroactively. The Appellate Division held that it did not and enforced a "step-down" provision despite the new law. The Appellate Division reasoned that the new statute did not state that it was retroactive and, more importantly, the Supreme Court already found that this provision did not violate New Jersey's public policy. Therefore, the court did not interfere with the "common law right of freedom to contract" in the absence of a public policy violation. Adding further clarity, the Appellate Division held that the prohibition against this "step-down" provision only applied to UM/UIM claims relating to accidents that occurr after September 7, 2007.

This case represents a favorable trend in New Jersey where the courts are permitting clear and unambiguous policy language to be enforced as written.

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