In Piermont Iron Works, Inc. v. Evanston Insurance Co., the New Jersey Supreme Court held that surplus lines policies are exempt from cancellation and non-renewal regulations that are otherwise applicable to standard companies. Evanston Insurance Co. used a standard non-renewal form in a surplus lines policy, and the court ruled that the use of the standard form did not demonstrate an intent to voluntarily submit to the automatic renewal regulations underlying the form. The court's opinion highlights the fact that the Commissioner of Banking & Insurance "has underscored the policy intention that surplus lines carriers are not to be treated the same as admitted or authorized insurance carriers." 
 
The case began as a serious construction site personal injury claim occurring on March 28, 2002. Claims were made against Piermont Iron Works, which maintained an excess liability policy with Evanston that expired prior to the loss on March 13, 2002. The policy was issued prior to the deregulation of surplus lines policy forms and contained a standard ISO non-renewal clause.   Evanston did not issue a non-renewal notice and the policy lapsed. A renewal application was submitted and Evanston's surplus lines agent provided a quote on March 22, 2002. The premium quote was a fivefold increase from the prior policy. The excess policy was not bound, and the loss occurred eight days later.
 
In a previously reported Appellate Division decision, the court held that the initial policy remained in force on the date of loss because Evanston failed to issue notice of non-renewal as required by Department of Banking and Insurance regulations. In reversing, the Supreme Court noted that the particular regulation relied on by the lower court specifically exempted surplus lines insurers. Significantly, the Supreme Court recognized the public policy consideration of "helping to ensure that surplus lines coverage remains available in New Jersey," and acknowledged that the surplus lines exemption "was aimed specifically at assuring the continued availability of surplus lines coverage to fill the gap left by risks that authorized or admitted carriers would not insure." 
 
Although the court's ruling was limited to the applicability of non-renewal regulations, its opinion unequivocally explains the public policy reasons for deregulation in the surplus lines insurance industry. The opinion will no doubt provide useful ammunition when defending the unique exclusions and provisions found in surplus lines policies.

Click here for a complete copy of the Court's opinion.

Court Finds Subrogation Action Barred By Terms of Condominium By-Laws

 

The Appellate Division in New Jersey has, for the first time, addressed the consequences of a "waiver of subrogation clause" contained in an insurance policy, as mandated by a condominium association's by-laws.
 
The facts of the case are quite common. A unit owner in a condominium complex suffered extensive water damage, allegedly as a result of the negligence of the owner directly above. The condominium association, as required in the by-laws, had a master policy of liability insurance in effect. The by-laws required that the policy contain a provision that "the insurer waives its rights of subrogation as to any claims against Unit Owners, the Association and their respective employees, servants, agents and guests." The by-laws also stated that each unit owner had the right, but not the obligation, to obtain insurance for their respective personal property and personal liability, but that "all such insurance shall contain the same waiver of subrogation" that governs any insurance obtained by the Association.
 
Pursuant to this scheme, the owner of the damaged unit had, in fact, procured a separate policy of insurance. Conversely, the allegedly negligent owners of the leaking unit had not. After paying a claim of $118,000.00, the insurer attempted subrogation against the association and the other unit owner. The trial court dismissed both claims based upon the terms of the waiver clause. The subrogating insurer appealed, but quickly conceded that the clause prevented continued pursuit against the Association. Their efforts then focused on the uninsured unit owner.
 
The appellate court noted in its opinion that the issue of enforcement of such a clause in a residential condominium setting had not been previously addressed in New Jersey.  After citing some existing New Jersey precedent supporting the general right to subrogation, the court adopted the rationale in New York case law which enforced the waiver of subrogation clause. The New York case law suggested that these mandated waivers would advance the overall goals and policies of a residential community by reducing the jeopardy to collective resources and reducing overall expenses. In accepting this rationale the New Jersey court stated that the "scheme created by this residential condominium community contemplated no litigation between unit owners or between unit owners and the Association." Accordingly, the court enforced the waiver clause and the trial court dismissals were affirmed.
 
The court did, however, strongly imply that such mandated waiver clauses do not apply to the pursuit of third parties such as contractors. Although the court suggested that the by-laws were intended to create a "litigation-free" environment in the association, it failed to consider the outcome of a dispute between two unit owners who have both elected to forego individual unit insurance. Clearly, a damaged owner would then have a direct right to seek compensation from his or her neighbor for any losses not covered by the master policy.
 
The ruling, therefore, would seem to inequitably reward owners who have declined to buy insurance by limiting their liability exposure. Accordingly, it is suggested that the court's opinion would have been sounder had the underlying by-laws contained language requiring each unit owner to purchase additional coverage.

Click here for a complete copy of the Court's opinion.