N.J. court: Intra-family step-down exclusion in a PAP was unenforceable

May 11, 2022

The Superior Court of New Jersey, Appellate Division recently ruled in the case of Dela Vega v. Travelers Insurance Co.[1]  and St. Paul Protective Insurance Company that an intra-family step-down exclusion in a personal automobile policy was unenforceable.

How did we get here?

The plaintiff, Cristina Dela Vega, was a passenger in a personal automobile, which she owned and she was the named insured, when the vehicle was involved in accident. The plaintiff was severely injured and exhausted the $250,000 limits of her personal injury protection. She attempted to access the $100,00 first-party liability benefits she had under the policy. The defendant, St. Paul Protective Insurance Co., initially offered the $100,000 limits. However, the offer was rescinded upon the discover of an intra-family step-down provision in the plaintiff’s policy. This provision reduced coverage for bodily injury liability to $15,000, the state minimum, for insureds and resident relatives. The plaintiff then sued the defendant. The plaintiff won the case at the trial level, at which the court found the step-down exclusion ambiguous, unfair, and contrary to public policy and to the plaintiff’s reasonable expectations. The defendant then appealed the decision to the Superior Court of New Jersey, Appellate Division, which rendered this decision.

What did the Appellate Court say?

The three-judge panel ruled that the step-down exclusion was unenforceable as it was contrary to the plaintiff’s reasonable expectations. In fact, the court called the exclusion a “hidden trap.” To support this ruling, the court relied on the facts that the plaintiff testified that she consciously choose $100,000 liability limits, that those limits were clearly displayed on the policy declaration page, and the policy’s statement the defendant would provide the coverages the plaintiff selected.

The court points out that it is reasonable for the plaintiff to expect she would get the limits she chose and that they were reflected on the policy declaration page. The defendant’s initial offer to the plaintiff of the $100,000 limit was proof of that for the court. What was not on the policy declaration page was any notification regarding the presence of the step-down exclusion. The court took exception to this. The court points out that the appliable exclusion is found “buried” in the policy exclusion section. The court stated that even a sophisticated reader of insurance policies would question the meaning of the step-down exclusion since it drops coverage so precipitously and without any additional notice. (As a semi-sophisticated reader of insurance policies, I agree.) Due to that, the court held the reasonable expectations of the plaintiff should be honored, even if a detailed review of the policy would have revealed the exclusion.

What does this mean?

Unfortunately, not much unless you are a party to this case. While this case has some very strong language condemning step-down exclusions, it is binding only on the parties involved in the case and is not considered precedent or binding on any other court. That means while the step-down exclusion in this case (and likely all other St. Paul auto policies) was unenforceable, it has no impact on the enforceability or lack thereof of step-down exclusions in the policies of other carriers. That’s not the end of the story though.

St. Paul Protective Insurance Company has the ability to appeal this decision to the New Jersey Supreme Court, which is the highest court in the state. While that court only hears a small fraction of the cases seeking appeal, mostly those that involve some big or novel legal issue or where there is a spilt in the Appellate Division, there may be a chance here. It is this latter point that may give this appeal that chance. The Appellate Division in this case points out in a footnote that there is currently a split at the Appellate Level on this issue of the enforceability of step-down provisions. In addition, the Supreme Court had previously granted a right of appeal to a similar case, but it was ultimately settled before the Supreme Court could issue a ruling.

What is PIANJ doing?

PIANJ has advocated for the elimination of these types of provisions for a long time. In 2007, the association was successful in getting step-down provisions banned in commercial auto policies. For the past several years, PIANJ has been advocating for a similar prohibition in personal auto policies. PIANJ is supporting legislation (A-1761) this session that would ban the type of intra-family step-downs that were found in this case.

Want to learn more about step-downs? See A brief history of ‘step-down’ provisions on PIA Northeast News & Media.

[1] Travelers was improperly named and was not a party to the suit.

Bradford J. Lachut, Esq.
PIA Northeast

Bradford J. Lachut, Esq., joined PIA as government affairs counsel for the Government & Industry Affairs Department in 2012 and then, after a four-month leave, he returned to the association in 2018 as director of government & industry affairs responsible for all legal, government relations and insurance industry liaison programs for the five state associations. Prior to PIA, Brad worked as an attorney for Steven J. Baum PC, in Amherst, and as an associate attorney for the law office of James Morris in Buffalo. He also spent time serving as senior manager of government affairs as the Buffalo Niagara Partnership, a chamber of commerce serving the Buffalo, N.Y., region, his hometown. He received his juris doctorate from Buffalo Law School and his Bachelor of Science degree in Government and Politics from Utica College, Utica, N.Y. Brad is an active Mason and Shriner.

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