In Higgins v. Aguilar, 246 N.J. 75, 248 A.3d 1213 (N.J. 2021), Federal Insurance Company insured a car dealership with $1 million of liability coverage for the dealership vehicles. The Federal policy purportedly extended liability coverage to customers using dealer vehicles only when those customers lacked their own personal auto policy with at least minimum insurance limits required by New Jersey law. The policy also purported to provide coverage for dealership customers only to the extent that would be necessary to provide the amount of minimum New Jersey automobile liability limits.
The plaintiff in Higgins was injured in a collision where the tortfeasor was driving a loaner vehicle provided by the insured car dealership while that driver’s own vehicle was being serviced by the car dealership. As part of the bailment arrangement, the borrower of the vehicle signed an agreement with the dealership, acknowledging that the driver was not covered by any insurance policy issued to the dealership. At the time that the policy was issued, New Jersey law required automobile dealerships to show proof of liability insurance covering all of the dealership’s vehicles that were owned or operated by the dealership with BI limits of $100,000 per person/$250,000 per accident.
In Higgins, the New Jersey Supreme Court affirmed the trial court’s ruling that Federal’s policy definition of an insured which only insured customers who lacked the minimum automobile liability insurance required by law or where there were insufficient minimum limits, constituted an illegal escape clause. The trial court found that the policy definition operated to eliminate coverage for an entire class of permissive users of dealership vehicles – customers who maintained personal automobile insurance that met statutory minimum limit requirements. The Court found that the policy failed to comply with New Jersey’s public policy of requiring all vehicle owners to provide minimum liability coverages for permissive users.
The New Jersey Supreme Court, in affirming the trial court’s ruling, found that the policy provisions constituted an illegal escape provision allowing escape from New Jersey law requiring dealerships to provide $100,000 per person/$250,000 per accident automobile liability coverage. As a result, the Supreme Court ordered reformation of the dealership policy to restore the statutory minimum limits.