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New Jersey Appellate Division Finds Exclusion To Be A Hidden Trap

Article by Kaavya Ramesh, Esq.

The Superior Court of New Jersey, Appellate Division, recently found that the intra-family liability step-down exclusion contained in an auto policy was unenforceable as it was contrary to the insured’s reasonable expectation of $100,000/$300,000 in bodily injury coverage as stated on the declarations sheet. In finding that the exclusion was a “hidden trap,” the Appellate Division found that the declarations sheet did not refer to the list of “Exclusions” or warn that the policy limits in the declaration pages were reduced by the policy’s “boilerplate” limiting coverage to $15,000.  Cristina Dela Vega v. The Travelers Insurance Company et al., No. A-2272-19, 2022 WL 1436461, (N.J. Super. Ct. App. Div. May 6, 2022).

In Vega, the plaintiff was sitting in the front passenger seat of an insured auto when her husband pulled out of a parking lot into the path of another car. The plaintiff was injured in the accident and exhausted the entirety of the $250,000 personal injury protection (PIP) benefits available to her under the couple’s auto policy. The insurance adjuster initially offered the plaintiff the $100,000 liability limit on the couple’s $100,000/ $300,000 policy. However, four months later, the adjuster rescinded the offer, stating that the policy only afforded a bodily injury liability benefit of up to $15,000 and not more. The insurance policy contained an intra-family exclusion which reduced the liability coverage for bodily injury from the face amount of $100,000 to the $15,000 minimum required by New Jersey law. The trial court denied the enforcement of the intra-family liability step down exclusion, deeming it “ambiguous,” “patently unfair,” “contrary to public policy,” and to “plaintiff’s reasonable expectations.” The insurer appealed from this order.

The Appellate Division found that the wording of the intra-family step-down exclusion was unambiguous. Furthermore, the plaintiff had failed to read the policy. However, the Appellate Division found that the exclusion was not mentioned on the declarations sheet that advised the plaintiff she had $100,000/$300,000 liability limits, and it was buried in the policy list of “Exclusions.”  The Appellate Division found that a clearly worded exclusion can still function as a hidden trap if the remainder of the policy, and particularly the declarations sheet, would lead a reasonable policyholder to expect different coverage.  The Appellate Division found that an average policyholder in plaintiff’s position would have reasonably believed that she had, for this accident, the $100,000/$300,000 in bodily injury liability benefits based on the language of the declarations sheet and the statement that the insurer “will provide the coverages you have selected” in return for payment of the premium “subject to all terms of this policy.”