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Rao v. Universal Underwriters Insurance Co.

Decided: November 4, 1988.


On appeal from the Superior Court of New Jersey, Law Division, Essex County.

Pressler, Scalera and Stern. The opinion of the court was delivered by Scalera, J.A.D.


In issue here is the effect to be accorded to a provision in a liability insurance policy issued to an automobile leasing company which provides automobile liability coverage to its lessees in the amount required by law but only in the event the lessee fails to maintain that coverage.

This declaratory judgment action arises from an automobile accident which occurred when Anita Rao struck Lena Paglucci, a pedestrian, while driving a car leased by her husband, Naveen Rao, from Open Road Leasing Co. Inc. Lena and her husband James filed a complaint against Anita Rao and Open Road seeking compensation for the serious personal injuries suffered by Lena.

Naveen Rao's lease agreement with Open Road required him to obtain liability insurance for the leased vehicle. Rao obtained such a policy from Allstate Insurance which provided coverage in the amount of $100,000/$300,000 and named Open Road as an "additional insured." Allstate has deposited the applicable $100,000 proceeds of this policy into court in the underlying personal injury action by the Pagluccis.

The Raos filed this suit to determine their right to coverage under the automobile liability section of the multiple coverage nationwide insurance policy issued by Universal Insurance Underwriters to Open Road. The parties brought cross-motions for summary judgment at the trial level. Universal argued against coverage because its policy specifically provided that there was no coverage for the Raos in light of their having secured insurance under the Allstate policy. The Raos asserted that the provision relied upon by Universal to escape any insurance liability to them was illegal. The trial court denied Universal's motion and granted the Raos' motion because it determined that Universal's policy contained an invalid "escape clause" and therefore the Raos are entitled to the full coverage afforded to Open Road under the Universal insurance policy.

The parties agree that there is no factual dispute in this matter and that the issue is a legal one involving the interpretation of an insurance contract, rendering it appropriate for summary judgment. Weedo v. Stone-E-Brick, Inc., 155 N.J. Super. 474, 479 (App.Div.1977).

On appeal Universal argues that the trial court erred because while its policy otherwise provides a limit of $300,000 to Open Road as lessor, Rao is not entitled to even the statutory minimum $15,000/30,000 in coverage because he had procured his own liability insurance from Allstate. Universal contends that the endorsement which sets forth the limiting language in question lawfully fulfills the purpose of providing the statutory minimum coverage and therefore it should not be deemed an illegal and invalid escape clause.

The so-called "escape clause" at issue in the policy is "Endorsement 038" to the "Auto Lessors Liability" section, which provides in pertinent part:

The portion of THE MOST WE WILL PAY condition pertaining to Insuring Agreement A is replaced by:

Under Insuring Agreement A -- Regardless of the number of INSUREDS or AUTOS insured by this Coverage Part, persons or organizations who sustain INJURY, claims made or suits brought, the most WE will pay for any one OCCURRENCE is the limit stated in the declarations subject to this endorsement.

The portion of the limit applicable to persons or organizations required by law to be an INSURED is only the amount (or amount in excess of any other insurance available to them) needed to comply with the minimum limits provision of such law in the jurisdiction where the OCCURRENCE takes place.

The plain import of the parenthetical clause within the third paragraph of this provision constitutes an attempt to provide liability coverage for lessees, such as the Raos, only when they fail to secure sufficient liability insurance to comply with the statutorily mandated minimum in New Jersey. Then and only then is coverage provided but only to the extent of the statutorily minimum requirements of New Jersey law. In other words, while Open Road has secured a higher amount of coverage for vehicles operated by its employees, when a car is leased, a lessee is only covered to the extent of the statutory

minimums and that coverage is available only when the described contingency occurs.

The pertinent mandatory omnibus liability coverage provisions of N.J.S.A. 45:21-1 et seq., regarding rental vehicles provide,


As used in this chapter:

"Owner" means any and every person engaged in the business of renting or leasing motor vehicles, without a driver, to be operated by the lessee or bailee, his agent or servant, for purposes ...

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