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VOLUME 10 August 2005 | ||||||
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WHEN CARRIERS GO BELLY-UP, WHO GETS HURT? John H. Maucher, Esq. The New Jersey Product-Liability Insurance Guaranty Association (PLIGA), N.J.S.A. 17:30A-1 to -20, established a Guaranty Association funded by assessments against insurance companies who write policies in New Jersey. PLIGA was created by the Legislature to provide "a measure of relief for policyholders and claimants in the case of insurer insolvency." New Jersey Guaranty Association v. Ciani (emphasis added). It did not intend to "substitute the Association for the defunct insurer so as to prevent all loss to affected parties." Ibid. (emphasis added). In short, the Association is a limited safety net for policy holders of carriers who become insolvent. It was not designed to put a claimant in the same position as if there had been no insolvency. Thomsen v. Mercer-Charles. PLIGA pays up to a maximum of $300,000 on covered claims, and until recently, that was the end of it. If a plaintiff was severely injured, and brought suit against a defendant, and that person (or company)’s carrier went bankrupt (i.e. Reliance, Legion, and a host of others), then the plaintiff’s only recourse was to proceed against PLIGA with the maximum recovery set at the $300,000 statutory cap. The way that scenario played out in real life was illustrated by one of my trucking cases, wherein my client had $1M in coverage with Legion Insurance Company. Unfortunately for the plaintiff, during the course of litigation Legion was declared insolvent and PLIGA stepped in to continue the defense on behalf of that trucking company. Plaintiff’s counsel settled for multiple millions of dollars with numerous defendants, but only received the statutory maximum from my client via PLIGA, with no personal exposure whatsoever to the trucking company. Although the PLIGA Act did not explicitly state that an insured of an insolvent carrier would have no liability, there was case law to that affect (See Flaherty v. Safran where the Law Division held the bus driver was not personally liable for $225,000 in excess damages over the PLIGA cap in an accident involving his bus). However, just recently the New Jersey Appellate Division was faced with this issue when the Law Division refused to grant a trucking company defendant summary judgment on the issue of excess exposure. The Appellate Division held in Johnson v. Braddy that there was no legislative intent to exempt a tortfeasor from liability for damages in excess of the $300,000 limit on PLIGA’s liability. Id. Johnson involved a trucking company and its driver who were insured by Reliance Insurance Company, which was declared insolvent in 2001, more than two years after the accident. The defendants probably believed they had nothing to worry about since they had $1M in coverage with Reliance and an additional excess policy for $25M with AIG. Under Flaherty and the established line of cases which found that an insured of an insolvent carrier had no personal exposure, the defendants had done everything they could do to protect themselves and their employees. Unfortunately for the trucking company and its driver, the Court in Johnson found that New Jersey has a “strong public policy of affording injured parties an opportunity to recover the full amount of their damages” and “where either an innocent injured party or a tortfeasor must bear the adverse financial consequences of the insolvency of the tortfeasor’s insurer and the $300,000 limit on the Association’s liability, it is more reasonable to infer a legislative intent to favor the injured party.” Id. So now, a company (and its driver), who had been insured up to $25M, was faced with a gap in coverage of $700,000 (the $1M Reliance policy replaced with the $300,000 PLIGA coverage. Excess AIG policy does not “drop down”). By simply choosing an insurance carrier who had the misfortune to go belly-up (Reliance was A- rated prior to liquidation and insolvency), an insured can be faced with a devastating gap in its coverage that could wipe it out. Although the trucking company in Johnson may be able to stand up to such a financial burden, how about its driver? Some unfortunate individual doing his job for a company with ample coverage suddenly has to go home and explain to his wife how they may be faced with a $700,000 judgment because the State of New Jersey favors the rights of an injured party over his rights. As in Johnson, any insured in New Jersey now must consider its coverage and whether or not a potential “gap” can arise which will lead to personal exposure. Johnson raises numerous questions, such as “will gap coverage become available in such circumstances?”, “will New Jersey raise the PLIGA coverage from $300,000 to $1M?”, “will Johnson stand up in light of the number of people who are now at risk when a large carrier becomes insolvent?”, and most importantly; “what’s the financial health of my carrier?” The solution may lie in the way other States, such as New York, Florida, and Kentucky, handle the problem. One of my trucking cases involved a New Jersey resident involved in an accident in New York with a New York insured truck. If that case arose in New Jersey, at the time the severely injured plaintiff would have received the $300,000 PLIGA cap coverage and nothing more. However, the New York Guaranty Association provided coverage in the same amount that the policy with the insolvent carrier would have ($5M). In essence, New York’s Statute replaces insolvent coverage and the insured is in no worse of a position and the injured party has its same recourse for damages. Through handling other cases for out of state Guaranty Associations I know the same applies with Florida and Kentucky. Until Johnson is overturned, which is unlikely, or the Legislature changes the PLIGA cap, every company or individual who is insured for over $300,000 runs the risk of facing a potential “coverage gap” if it is unlucky enough to choose coverage with a carrier that may be on shaky financial ground. |
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