A-975-86T7 on appeal from the Superior Court, Law Division, Morris County whose opinion in Longworth v. Ohio Casualty Gp. of Ins. Co. is reported at 213 N.J. Super.. 70 (Law Div. 1986). A-1981-86T7 on appeal from the Superior Court, Law Division, Burlington County.
Pressler, Muir, Jr. and Skillman. The opinion of the court was delivered by Pressler, P.J.A.D.
These appeals, which we have consolidated on our own motion, raise novel and complex questions not heretofore decided by the appellate courts of this state respecting underinsured motor vehicle coverage (UIM). Implicated here are the so-called exhaustion clause, the consent-to-settle clause, and the subrogation clause of typical UIM coverage. We are called upon to consider the interrelationship of these clauses and the extent, if any, to which they are enforceable.
Underinsured motorist coverage came into the statutory law with the passage of L. 1983, c. 65, § 5*fn1 and L. 1983, c. 362, § 1,*fn2 which amended N.J.S.A. 17:28-1.1. Prior to these amendments, that statute, adopted in 1968, required every automobile
liability policy to provide uninsured motorist coverage (UM) in the aggregate amount of $15,000/30,000. See, generally, Riccio v. Prudential Property & Cas. Ins. Co., 108 N.J. 493, 499 (1987), explaining that the mandated UM coverage was "designed to afford maximum protection to a state's residents, and to fill gaps in compulsory insurance plans," by creating a contractual right in the insured to recover from his own liability insurer at least a portion of the damages he sustained as a result of the negligence of the uninsured tortfeasor. The statute, however, then made no provision at all for UIM coverage although we understand that some carriers were in fact offering that protection to their insureds on a voluntary basis.
The predicate of the 1983 amendments was the Legislature's evident perception that in terms of obtaining an adequate recovery from a negligent driver, the victim, especially one sustaining serious injuries, is placed at financial risk not only by uninsured drivers but also by underinsured drivers, typically drivers with the minimum liability coverage of $15,000/30,000 permitted by the statute. The approach adopted by the Legislature was to require each insurer issuing an automobile liability policy not only to provide $15,000/30,000 of UM coverage but also to offer its insured the option of purchasing additional protection up to limits of his liability coverage but not exceeding $250,000/500,000 against the risk of underinsured as well as uninsured tortfeasors.*fn3 The effect of the coverage is to
require the insurer, as a matter of contractual agreement, to pay its insured, to the extent of the coverage purchased, the liability damages which the insured is entitled to from the negligent uninsured or underinsured tortfeasor less, in the case of the underinsured tortfeasor, the amount of the tortfeasor's coverage. The essential distinction between UM and UIM coverage is that if an uninsured tortfeasor is involved, his victim is able to seek initial and primary recourse from his own liability carrier. If an underinsured tortfeasor is involved, however, his victim may not pursue his contractual UIM right against his own liability insurer until he has first recovered the tortfeasor's liability limit by settlement or judgment. That recovery is then offset against the maximum UIM coverage provided for by the policy. Thus, the UIM, but not the UM, coverage has essential attributes of excess rather than primary protection. It is this distinction which creates the conceptual and practical problems presented by these cases.
We consider the facts of the cases before us against the background of this statutory development. The Longworth case arises out of an automobile accident which occurred on June 7, 1983. Plaintiff Zenta Longworth sustained serious injuries when her car, which she was driving, was struck in the rear by an automobile owned and operated by defendant Peter Van Houton. Van Houton was insured by Allstate Insurance Company, which had issued to him a minimum policy with liability limits of $15,000/30,000. Plaintiff was insured by defendant Ohio Casualty Insurance Company, whose policy
afforded her, among other benefits, liability coverage of $250,000/$500,000, UIM coverage of $50,000/100,000, and mandated personal injury protection. She instituted a negligence action against Van Houton in January 1984, and at about that time also advised Ohio that since her damages exceeded Van Houton's minimum insurance, she would be seeking further recovery under her own UIM coverage. While the precise sequence of events is unclear, it appears that in the period from late 1984 to early 1985, Allstate conceded the liability of its insured, Van Houton, and, upon plaintiff's refusal to give Van Houton a general release, deposited the policy limit into court. Plaintiff then demanded payment from Ohio of her UIM benefits, and upon Ohio's rejection of her demand, she brought a breach of contract action against it. That action was consolidated with the negligence action pending against Van Houton.
As we understand the positions taken by the parties in the consolidated litigation, Allstate, despite its concession of liability, refused to pay plaintiff its policy limits of $15,000 unless plaintiff gave its insured, Van Houton, a general release. Ohio asserted that plaintiff could not give him a general release without compromising the subrogation rights to which the policy would entitle it upon its payment of UIM benefits. Ohio also asserted that under the arbitration provision of the UIM coverage, its obligation to pay plaintiff UIM benefits could only be triggered by an arbitration award in its insured's favor. It therefore contended that the negligence action against Van Houton should be stayed and payment of the $15,000 deposited in court by Allstate held in abeyance until completion of its UIM arbitration with plaintiff. Ohio further contended that if plaintiff would not arbitrate with it before disposing of her claim against Van Houton, her only recourse would be a trial to judgment against him since any pre-judgment settlement between them would defeat its subrogation rights. Plaintiff, of course, took the position that since no party challenged the fact that her damages exceed $50,000, she had a clear and immediate right to receive both the Allstate policy limits which Allstate
had deposited into court and the full benefit of her UIM coverage. She thus asserted that the effect of Ohio's procedural maneuvers and substantive contentions was to leave her with no timely recovery at all.
Ultimately, in response to a variety of motions by the various parties, Judge Gascoyne reached a final disposition by concluding that both the consent-to-settle clause and the subrogation clause of Ohio's UIM coverage were unenforceable.*fn4 See Longworth v. Ohio Casualty Gp. of Ins. Co., 213 N.J. Super. 70 (Law Div.1986). Consequently, the court ruled that plaintiff could give Van Houton a general release, thereby enabling her to accept Allstate's $15,000, and then arbitrate her UIM claim against Ohio. Ohio appeals from the order so providing. We further note that an arbitration between plaintiff and Ohio following final judgment resulted in a maximum award to her of an additional $35,000, namely the difference between her UIM limit and Van Houton's policy limit. See N.J.S.A. 17:28-1.1(e) and note 3, supra.
These are the facts in the Nash case. Plaintiff Cecelia V. Nash sustained serious injuries on August 3, 1984, when her vehicle was struck by a vehicle owned by Anne Baumann and driven by Edward Bowers. The Baumann vehicle was insured by Hanover Valley Forge Insurance Co. under a minimum
$15,000/30,000 policy. Nash was insured by Prudential Property and Casualty Insurance Company under a policy affording her, among other benefits, personal injury protection (PIP) and UIM coverage of $50,000/100,000. About a year after the accident, by letter dated August 22, 1985, Hanover offered Nash its $15,000 policy limit in exchange for the general release of its insureds, Baumann and Bowers. On September 11, 1985, Nash's attorney wrote to Prudential's claim representative, advising of the Hanover tender, demanding payment from Prudential under the UIM coverage, and requesting that the medical information obtained by Prudential for purposes of PIP payments be turned over to whomever at Prudential would evaluate the UIM claim. On October 7, 1985, not having received a reply, Nash's attorney again wrote to Prudential requesting the favor of a response to his earlier letter. On October 29, 1985, Hanover reiterated its offer to Nash's attorney, asking to be advised of his intentions. This letter prompted another demand by Nash on Prudential, which was apparently unanswered. On February 25, 1986, Hanover wrote to Nash's attorney again, this time enclosing a general release of its insureds for Nash to sign. Finally, on March 7, 1986, a Prudential claims representative telephoned Nash's attorney with the offer itself to pay Nash the $15,000 Hanover had offered in order to protect its subrogation rights. No offer was apparently then made on its UIM obligation. Nash, with the advice of counsel, chose to reject Prudential's offer and to accept the Hanover offer, which she did on March 7, 1986 by executing the requested general release. Counsel so advised because of his concern as to the potential effect of accepting Prudential's offer on his client's UIM rights in view of the fact that neither the statute nor the policy provided for any mechanism by which the UIM carrier would so acquire its insured's rights against the minimally insured tortfeasor.
After releasing Hanover's insureds and obtaining payment of the $15,000 policy limit, Nash made demand on Prudential once again for UIM benefits. ...