This is a case of first impression in New Jersey. The matter comes before the court by way of plaintiff's motion for partial summary judgment. Plaintiff seeks an adjudication of the validity of the "Reimbursement and Trust Agreement" clause contained in defendant-insurer's policy providing under insured motorist coverage. Defendant filed a cross-motion seeking a dismissal of the complaint on the grounds that this action is subject to arbitration. Defendant also seeks a stay of the underlying tort action pending the arbitration proceeding.
The within declaratory judgment action and separate pending liability action entitled Longworth v. Van Houten, bearing docket number L-00323-84, arise out of an automobile accident. The collision occurred on June 7, 1983. A vehicle driven by Peter Van Houten struck the vehicle driven by Zenta Longworth in the rear. Zenta Longworth is the plaintiff herein.
Peter Van Houten is insured by Allstate Insurance Co. (Allstate). Zenta Longworth is insured by defendant herein, the Ohio Casualty Group of Insurance Companies (Ohio). In her policy plaintiff has under insured motorist (UIM) coverage with limits of $50,000, in addition to no-fault coverage.
Plaintiff gave timely notice to Ohio of the aforementioned accident as to her claim for underinsured motorist coverage. Ohio admits that it provided underinsured motorist coverage to plaintiff at the time of the accident.
Longworth alleges damages in excess of the Allstate and Ohio policy limits. Ohio asserts it is not obligated to pay underinsured motorist benefits until the underlying tort action is tried to a conclusion, thereby fixing the amount of Longworth's damages. In support of its position, Ohio relies upon the language of "Endorsement 3" and "Condition 4" contained within its policy.
"Endorsement 3" provides:
The company shall not be obligated to make any payment because of bodily injury or property damage to which this insurance applies and which arises out of the ownership, maintenance or use of any underinsured highway vehicle until after the limits of liability under all bodily injury and property damage liability bonds or insurance policies respectively applicable at the time of the accident to damages because of bodily injury or because of property damage have been exhausted by payment of judgments or settlements.
The Ohio policy, "Section I. Condition 4," governs subrogation and reads as follows:
4. Reimbursement and Trust Agreement. Subject to any applicable limitations set forth in the New Jersey Automobile Reparation Reform Act, in the event of any payment to any person under this endorsement:
(a) the Company shall be entitled to the extent of such payment to the proceeds of any settlement or judgment that may result from the exercise of any rights of recovery of such person against any person or organization legally responsible for the bodily injury because of which such payment is made; and the Company shall have a lien to the extent of such payment notice of which may be given to the person or organization causing such bodily injury, his agent, his insurer or a court having jurisdiction in the matter;
(b) such person shall hold in trust for the benefit of the Company all rights of recovery which he shall have against such other person or organization because of such bodily injury;
(c) such person shall do whatever is proper to secure and shall do nothing after loss to prejudice such rights;
(d) such person shall execute and deliver to the Company such instruments and papers as may be appropriate to secure the rights and obligations of such person and the Company established by this provision.
The language implies that if the insured settles without the carrier's consent, the insured's entitlement to underinsurance proceeds will be forfeited. Ohio does not dispute this interpretation. Such a clause is known in the insurance industry as a "no-consent to settle" exclusion.
Plaintiff filed this declaratory judgment action seeking the proceeds of Ohio's UIM coverage. The case now has evolved and expanded to include the following issue: whether Ohio has, or should have, the right to subrogate any payments made to Longworth pursuant to the underinsured motorist coverage under her own automobile policy.
Oral argument of this motion for partial summary judgment was heard on March 21, 1986. Counsel stipulated to the form of the insurance policy providing UIM coverage. During the course of argument reference was made to legislative intent regarding subrogation as illustrated in the provisions of "The New Jersey Automobile Insurance Freedom of Choice and Cost Containment Act of 1984," N.J.S.A. 17:28-1.1 et seq. (cost containment act).*fn1 For purposes of this opinion, the parties request that this court incorporate the provisions of the "cost containment act" in its discussion of Ohio's subrogation rights.
The narrow issue presented is whether an underinsurer has a right of subrogation against an underinsured tortfeasor. For reasons expressed below it is this court's ultimate conclusion that the subrogation provision contained in Ohio's underinsurance policy is contrary to the purpose of New Jersey's automobile insurance statutes, against public policy and unenforceable.
Overview of Underinsurance Statutes and Decisions in Other Jurisdictions.
The question presented by this action, whether an underinsurer has a right of subrogation against an underinsured tortfeasor has not been answered by a New Jersey court. The courts in other jurisdictions that have ruled upon the effectiveness of a subrogation clause in UM/UIM provisions in automobile policies are not in agreement.*fn2
The split among the courts applying such subrogation clauses in the situation where the insured settles with an insured motorist can be attributed to several variables. Each state has a unique UM/UIM statute and UIM coverage is defined differently among the states; in some states UIM coverage is mandatory while in others (as in New Jersey) such coverage is optional;*fn3 in some decisions, the underinsured tortfeasor is one of multiple defendants; in other decisions the insured has settled with an underinsured tortfeasor without the insurer's consent or knowledge. To date, the following cases have addressed the issue with the following results: March v. Mountain States Mutual Casualty Company, 101 N.M. 689, 687 P. 2d 1040 (N.M.Sup.Ct.1984), (consent to settle clause upheld; insured settled with single underinsured tortfeasor without knowledge or consent of insurer; statute requires UIM coverage and is silent as to underinsurer's right of subrogation.); contra Niemann v. Travelers Ins. Co., 368 So. 2d 1003 (La.Sup.Ct.1979), (consent to settle clause invalidated; insured settled
with single underinsured tortfeasor without knowledge or consent of insurer; statute requires UIM coverage but defines underinsured as uninsured; statute is silent as to underinsurer's right of subrogation.); Wescott v. Allstate Ins. Co., 397 A.2d 156 (Me.Sup.Ct.1979); Rhault v. Tsagarakos, 361 F. Supp. 202 (D.Vt.1973) (in both cases consent to settle clause invalidated; insured settled with underinsured tortfeasor in multiple defendant context without insurer's consent or knowledge; statute requires UIM coverage and is silent as to underinsurer's right of subrogation); cf. Schmidt v. Clothier, 338 N.W. 2d 256 (Minn.Sup.Ct.1983) (subrogation clause valid but limited to situation where underinsurer actually pays benefits; insured notified insurer of pending claim against single insured defendant; statute requires offer of UIM and extends limited subrogation rights to insurer.); Vogt v. Schroeder, 129 Wis. 2d 3, 383 N.W. 2d 876 (Wisc.Sup.Ct. 1986) (citing with approval Schmidt, supra, subrogation clause valid but limited to situation where underinsurer actually pays benefits; insured notified insurer of pending claim against single insured defendant; opinion silent as to UM/UIM statute; issue decided upon insurance policy language.).
It is clear that in resolving this issue, this court must focus on the purpose of New Jersey's automobile reparation statutes, the construction of the statutes and relevant public policy considerations. This court believes the reasoning of those courts which reject such liability limiting clauses as the "no-consent-to-settlement" exclusion is more in line with the policy and purpose of the New Jersey automobile reparation statute.
In reaching this conclusion, this court is guided both by the purposes of the reparation statute as enunciated by the Legislature and the previous decisions by New Jersey Courts which have construed legislation involving automobile insurance.
Purpose of New Jersey's Automobile Reparation Statutes.
The objectives of the no-fault system are to "provide prompt compensation for medical costs without regard to fault"*fn4 and
to "streamline the judicial procedures involved in third-party claims."*fn5
The purpose of uninsured motorist coverage is to protect New Jersey residents from non-insured, financially irresponsible motorists. Uninsured motorist protection furthers the socially desirable policy of adequately indemnifying innocent automobile accident victims. ...