On certification to the Superior Court, Appellate Division, whose opinion is reported at 397 N.J. Super. 463 (2007).
This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
The issue in this appeal is whether Evanston Insurance Company, a surplus lines insurance carrier, must be held to N.J.A.C. 11:1-20.2(j)'s regulatory penalty of automatic renewal because it did not provide the insured, Piermount Iron Works, Inc., notice of non-renewal of its umbrella policy of excess commercial liability insurance.
To enhance the coverage provided through its primary commercial liability insurance policy, Piermount, a construction contractor, obtained excess liability insurance coverage from Evanston. The expiration date of the 2001 umbrella policy was March 13, 2002. It contained a provision stating that if Evanston decided not to renew, it would send a notice of non-renewal "not less than 30 days before the expiration date or such other period as may be required by law." It is undisputed that Evanston did not send a notice of non-renewal to Piermount.
Piermount's insurance broker, which knew when the umbrella policy was set to expire, submitted a renewal application to Evanston. The application stated that Piermount had secured primary insurance coverage with Lexington, a New Jersey domestic insurer. That was inaccurate, however, because Lexington had refused Piermount a renewal-quote offer until a premium arrearage was paid.Thus, at the time Piermount submitted its renewal application to Evanston, Piermount's primary insurer had not yet made an offer to write a renewal policy to cover the time period required for the umbrella application to Evanston. That information was not made known to Evanston.
On March 22, 2002, in response to Piermount's renewal application, Evanston sent to Piermount's surplus lines brokera renewal price quote offering excess insurance coverage to Piermount. Evanston did not receive any response, and neither Piermount nor its broker paid the renewal premium to Evanston.
On March 28, 2002, after the Evanston excess liability policy expired, a Piermount employee was injured in a construction accident. Piermount filed an action against Evanston seeking a declaration of coverage under the umbrella policy. The trial court granted summary judgment in favor of Evanston. The court determined that Evanston had no duty to provide advance notice of an expiring policy or of a conditional non-renewal of a policy. The court also noted Piermount's failure to pay the renewal premium despite Evanston's offer to renew.
The Appellate Division reversed and remanded for the entry of an order granting summary judgment to Piermount on the issue of continued coverage due to lack of notice. Piermount Iron Works, Inc. v. Evanston Ins. Co., 397 N.J. Super. 463 (2007). The panel determined that even though Evanston would not normally be subject to the automatic renewal provision of N.J.A.C. 11:1-20.2(j) because it is a surplus lines carrier, Evanston's voluntary assumption of the duty to provide non-renewal notice resulted in the application of that regulation.
The Supreme Court granted certification. 196 N.J. 86 (2008).
HELD: Evanston is not subject to N.J.A.C. 11:1-20.2(j)'s automatic renewal penalty. Surplus lines insurance policies are exempted from the regulatory cancellation and non-renewal provisions that apply to primary insurers. Further, Evanston's use of a required, standard form commercial lines policy, which contained a non-renewal provision, did not demonstrate intent to submit voluntarily to the automatic-renewal penalty regulation.
1. In New Jersey, the cancellation or non-renewal of an insurance policy is strictly controlled by the Commissioner of the Department of Banking and Insurance. Pursuant to regulations issued by the Commissioner, no policy shall be "non-renewed" upon its expiration date unless the insurer has sent notice of non-renewal to the insured, N.J.A.C. 11:1-20.2(a). The insured is entitled to continue the policy until the insurer sends appropriate notice. N.J.A.C. 11:1-20.2(j). Also, insurers in New Jersey must include in their policies boilerplate language that advises insureds of the requirements for notification of nonrenewalof an insurance policy. The purpose behind the automatic renewal penalty is to avoid a lapse in coverage for the want of a simple notice to the insured. (pp. 9-11)
2. N.J.A.C. 11:1-20.2 covers authorized carriers in New Jersey writing lines of insurance made subject to its requirements. This case concerns surplus lines coverage, which has its own public policy considerations. (pp. 11-12)
3. Surplus lines insurance involves risks that insurance companies authorized to do business in New Jersey have refused to cover. New Jersey's surplus lines law authorizes the Commissioner to determine whether an insurance coverage is eligible "for export" and to declare that an unauthorized insurer is eligible to receive New Jersey surplus lines business through specially licensed surplus lines agents. (pp. 12-13)
4. The requirement that surplus lines carriers receive all business through surplus lines agents represents a compromise affording New Jersey residents the in-state availability of this coverage when needed, while at the same time protecting residents from direct solicitation by these relatively unregulated insurers. (pp. 13-14)
5. To qualify to write a surplus lines policy, an unauthorized insurer must apply. The Commissioner's inquiry into a prospective surplus lines insurer is less rigorous than the examination that takes place for an authorized or admitted insurer. The State places less onerous conditions on surplus lines carriers in recognition that they provide coverage in areas where authorized or admitted insurers are unwilling to take on the risk. (pp. 14-17)
6. Pursuant to the non-renewal regulation, N.J.A.C. 11:1-20.1(a), the Commissioner has underscored the policy intention that surplus lines carriers are not to be treated the same as admitted or authorized insurers. Surplus lines policies are excluded from the scope of the cancellation and non-renewal provisions of N.J.A.C. 11:1-20.2(a). (p. 17)
7. The surplus lines exemption is aimed at assuring the continued availability of surplus lines coverage to fill the gap left by risks that authorized carriers do not insure. Nothing in the regulation's language or history supports an extension of the regulatory penalty of automatic renewal to an expressly exempted surplus lines carrier. (pp. 18-19)
8. The fact that Evanston's policy contained a provision informing the insured that notice of non-renewal would be provided does not alter the conclusion that the regulatory penalty of N.J.A.C. 11:1-20.2(j) should not apply to Evanston. At the time this policy was issued, surplus lines insurers were required to use policy forms approved by the Commissioner for use in the admitted market, a requirement that has since been deleted by amendment. The Court does not take Evanston's use of a form approved for use in the commercial lines market as evidence of an intent to subject itself to a regulatory penalty from which it was expressly exempt. (p. 19)
9. Moreover, the process by which surplus lines coverage could be placed with Evanston was never consummated. No response to Evanston's price quote was forthcoming and no premium payment was made. Thus, there is a lack of logic to Piermount's demand that Evanston cover a post-policy-term accident. The Court declines to impose the penalty of N.J.A.C. 11:1-20.2(j) on circumstances that are foreign to the purpose of the regulation. (pp. 20-21)
10. In sum, Evanston is not subject to the automatic renewal penalty in N.J.A.C. 11:1-20.2(j). Evanston was required to use a standard policy form that contained language reflecting a non-renewal notice requirement from which it was exempt; its use of the standard form did not demonstrate intent to submit voluntarily to the regulatory automatic-renewal penalty provision. (p. 21)
The judgment of the Appellate Division is REVERSED and the matter is REMANDED to the Law Division for any further proceedings warranted and for entry of judgment consistent with the Court's opinion.
CHIEF JUSTICE RABNER and JUSTICES WALLACE and RIVERA-SOTO, and JUDGE STERN (temporarily assigned) join in JUSTICE LaVECCHIA's opinion. JUSTICES ...