On certification to the Superior Court, Appellate Division, whose opinion is reported at 297 N.J. Super. 503 (1997).
The opinion of the court was delivered by: Stein, J.
This appeal, together with Magnifico v. Rutgers Casualty Insurance Co., ___ N.J. ___ (1998), and Grant v. Amica Mutual Insurance Co., ___ N.J. ___ (1998), also decided today, involves questions of underinsured motorist (UIM) coverage not specifically resolved by our decision in French v. New Jersey School Board Ass'n Insurance Group, 149 N.J. 478 (1997). The primary issue concerns the right of a family member of named insureds under a business auto policy, who was injured in an auto accident while operating her own vehicle, to receive the benefit of UIM coverage included in the business auto policy that would not have been available pursuant to the family member's personal policy. A secondary issue is whether our decision in Aubrey v. Harleysville Insurance Cos., 140 N.J. 397 (1995), should be applied only prospectively.
The claimant in this case, Ruth Breen, sought UIM benefits under a policy issued by New Jersey Manufacturers Insurance Company (NJM) to a business owned by Breen's parents. Breen claimed benefits under the business policy because the UIM limit on her personal policy was lower than the liability limit on the tortfeasor's policy and the business policy's UIM limit was higher than the liability limit on the tortfeasor's policy.
On February 7, 1991, while driving her own car, Breen was seriously injured in a car accident caused by Loni Shulman. Breen's car was insured by Liberty Mutual Insurance Company (Liberty) and that policy provided UIM coverage up to $50,000. Shulman's Allstate policy had a liability limit of $100,000. Accordingly, Shulman's car was not underinsured with respect to Breen's personal policy. See N.J.S.A. 17:28-1.1e.
Breen lived with her parents, Sally and Walter Pilcer, who ran an unincorporated family business, Cardinell Products (Cardinell). Cardinell had a "Business Auto Policy" with NJM that had a $500,000 UIM limit. Breen and her mother certified that Breen was a Cardinell employee, and that they had informed NJM annually that Breen operated company vehicles and should be insured under the policy. NJM contested Breen's status as an employee or as a person identified in the policy as an operator of the business vehicles. The vehicles covered by the NJM policy included a 1989 Honda and 1988 Mazda leased to Cardinell Products by Breen's mother. The uninsured (UM) and UIM coverage under the NJM policy expressly applied to family members of the named insureds. The named insureds included Cardinell Products and Mr. and Mrs. Pilcer.
After settling with Shulman for $95,000, Breen claimed UIM benefits under Cardinell's NJM policy and asked to arbitrate the amount of damages. Before arbitration commenced, NJM offered to settle for $300,000. Breen rejected the offer. The arbitrators heard testimony in May 1995 and suspended the proceedings to allow the parties to submit medical reports.
On June 8, 1995, this Court issued its decision in Aubrey v. Harleysville Insurance Cos., 140 N.J. 397 (1995). In July 1995, NJM filed a declaratory judgment action seeking a stay of the arbitration and an order barring Breen from collecting under Cardinell's policy because it was not "personal" to her. In September 1995, the Law Division ordered arbitration to proceed. The arbitrators entered a $325,000 award in favor of Breen in October 1995. In March 1996, the Law Division, citing Aubrey, determined that Breen was not entitled to UIM benefits under the Cardinell policy.
The Appellate Division reversed, concluding that although Aubrey barred Breen's access to the Cardinell UIM policy Aubrey should have prospective effect only. New Jersey Mfrs. Ins. Co. v. Breen, 297 N.J. Super. 503, 514-15 (App. Div. 1997). During oral argument before the Appellate Division, NJM conceded that it would have recognized Breen as an insured if Aubrey had not overruled Landi v. Gray, 228 N.J. Super. 619 (App. Div. 1988), because its policy stated that Breen's parents, and not merely Cardinell, were named insureds. Breen, supra, 297 N.J. Super. at 506. The Appellate Division agreed with that understanding of the policy, stating that "[o]nly human beings are entitled to compensation under an underinsured motorist clause." Ibid. Because NJM presumably collected premiums for the UIM coverage, the court observed that the parties reasonably expected that the policy would be interpreted as though Breen's parents were named insureds, with the result that Breen would receive coverage as a family member of named insureds. Id. at 506-07 (citing Werner Indus. v. First State Ins. Co., 112 N.J. 30, 35 (1988)). Acknowledging that the undisputed facts in Breen were analogous to the facts in Landi, the court noted that, prior to Aubrey, Breen would have been entitled to UIM benefits from Cardinell's policy. Breen, supra, 297 N.J. Super. at 511. However, the court determined that because Aubrey overruled Landi Breen was not entitled to UIM coverage under the Cardinell policy. Ibid.
The court observed that Aubrey, by overruling Landi, "effected a substantial change in the law." Ibid. It noted that prior to Aubrey the UIM form prescribed by the Department of Insurance indicated that accident victims could recover under policies purchased by other family members living in the same household, and that family members were entitled to rely on that language in planning their insurance purchases. Id. at 512. "[T]he insurance companies undoubtedly calculated and collected premiums" based on the understanding that their policies covered people other than the named insureds. Ibid. The court determined to limit Aubrey to prospective effect because "buyers and sellers of automobile insurance should have a reasonable opportunity to react to the Aubrey decision," and because State regulators and legislators might also appreciate the chance to adjust to the change. Id. at 513.
The court concluded that the conditions necessary for prospective application of Aubrey were met: Aubrey overruled past precedent on which parties may have relied; giving Aubrey prospective effect would further, not detract from, the new rule; and giving Aubrey retrospective effect would threaten to impose substantial hardship. Id. at 513-14 (citing Coons v. American Honda Motor Co., 96 N.J. 419 (1984), cert. denied, 469 U.S. 1123, 105 S. Ct. 808, 83 L. Ed. 2d 800 (1985)). We granted NJM's petition for certification. 149 N.J. 408 (1997).
Preliminarily, we note that our decision in French explained with more specificity the vulnerability of the Landi decision that Aubrey overruled. In Landi, supra, 228 N.J. Super. at 620-21, the plaintiff was seriously injured when a friend driving her brother's vehicle, in which she was a passenger, caused the vehicle to collide with a tree when it veered off the road. The plaintiff collected $15,000 from the liability portion of her brother's policy that insured the driver as a permissive user. Id. at 621. The plaintiff's personal auto policy afforded her UIM coverage of $15,000 and with respect to that policy her brother's vehicle was not underinsured. Id. at 623. However, as a resident of her mother's household, she sought the $100,000 UIM coverage available under her mother's automobile policy. Id. at 621. That policy contained the following exclusion: "Neither 'uninsured motor vehicle' nor 'underinsured motor vehicle' includes any vehicle . . . [o]wned by or furnished or available for the regular use of you or any family member." Ibid. Thus, the policy by its terms did not provide UM or UIM coverage if the vehicle driven by the tortfeasor belonged to a family member. The trial court ...