Title: Huggins v. Aquilar
Citation: N/A
Docket Number: 
State: new-jersey
Issuer: new-jersey Supreme Court
Date: April 21, 2021

Huggins v. Aquilar Annotate this Case Justia Opinion Summary In September 2016, defendant Trend Motors, Ltd. (Trend), provided defendant Mary Aquilar with a loaner vehicle for her personal use while her vehicle was being serviced. Aquilar’s negligent operation of the loaner vehicle caused it to strike plaintiff Tyrone Huggins’s car. Huggins sustained serious injuries as a result. GEICO insured Aquilar through an automobile policy. Trend held a garage policy with Federal Insurance Company (Federal) that insured Trend’s vehicles for up to $1,000,000 in liability coverage. The definition of an “insured” in the Federal policy purported to extend liability coverage to Trend’s customers using Trend’s vehicles only if the customer lacked the minimum insurance required by law. Huggins filed a complaint seeking compensation for the injuries and loss of income he suffered as a result of the accident. Federal disclaimed liability, arguing that Aquilar did not fit the policy’s definition of an insured because she held $15,000 in bodily injury coverage through GEICO. The trial court held that the Federal policy’s definition of an insured constituted an illegal escape clause and held Federal to the full policy limit of $1,000,000 in liability coverage. The Appellate Division declined to review the trial court’s ruling. The New Jersey Supreme Court concurred with the trial court’s ruling that the provision in the garage policy at issue constituted an illegal escape clause which could not be used to evade the minimum liability requirements for dealership vehicles set by the Chief Administrator of the Motor Vehicle Commission (MVC). The Court ordered the reformation of Federal’s policy to the $100,000/$250,000 dealer-licensure minimum liability coverage required by N.J.A.C. 13:21-15.2(l). Read more Want to stay in the know about new opinions from the Supreme Court of New Jersey? Sign up for free summaries delivered directly to your inbox. Learn More › You already receive new opinion summaries from Supreme Court of New Jersey. Did you know we offer summary newsletters for even more practice areas and jurisdictions? Explore them here . SYLLABUSThis syllabus is not part of the Court’s opinion. 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 Court. In the interest of brevity, portions of an opinion may not have been summarized. Tyrone A. Huggins v. Mary E. Aquilar (A-78-19) (084200)Argued January 20, 2021 -- Decided April 21, 2021LaVECCHIA, J., writing for the Court. In this appeal, the Court considers whether the insurer on a car dealership’s auto insurance policy, referred to as a garage policy, can deny coverage for an entire class of permissive users of the dealership’s loaner vehicles notwithstanding the compulsory bodily injury liability coverage required for all vehicles owned or used by a dealership. In September 2016, defendant Trend Motors, Ltd. (Trend), provided defendant Mary Aquilar with a loaner vehicle for her personal use while her vehicle was being serviced. Aquilar’s negligent operation of the loaner vehicle caused it to strike plaintiff Tyrone A. Huggins’s car. Huggins sustained serious injuries as a result. GEICO insured Aquilar through an automobile policy that provided liability coverage of $15,000 per person and $30,000 per incident, the minimum statutory limits. Trend held a garage policy with Federal Insurance Company (Federal) that insured Trend’s vehicles for up to $1,000,000 in liability coverage. The definition of an “insured” in Paragraph 3(a)(2)(d) of the Federal policy purports to extend liability coverage to Trend’s customers using Trend’s vehicles only if the customer lacks the minimum insurance required by law. Huggins filed a complaint seeking compensation for the injuries and loss of income he suffered as a result of the accident. Federal disclaimed liability, arguing that Aquilar did not fit the policy’s definition of an insured because she held $15,000 in bodily injury coverage through GEICO. The trial court held that the Federal policy’s definition of an insured constituted an illegal escape clause and held Federal to the full policy limit of $1,000,000 in liability coverage. The Appellate Division declined to review the trial court’s ruling. The Court granted Federal’s motion for leave to appeal. 242 N.J. 512 (2020).HELD: The disputed coverage provision in the garage policy at issue constitutes an illegal escape clause, which may not be used to evade the minimum liability requirements for dealership vehicles set by the Chief Administrator of the Motor Vehicle Commission (MVC). The Court orders the reformation of Federal’s policy to the $100,000/$250,000 dealer-licensure minimum liability coverage required by N.J.A.C. 13:21-15.2(l). 1 1. Per N.J.S.A. 39:6B-1(a), every owner of a motor vehicle must maintain liability insurance coverage in the amounts of at least $15,000 per person and $30,000 per accident. The statutory requirement that every automobile be insured by its owner, not its driver, is foundational to the permissive user rule, which provides liability coverage when vehicles are operated by a person, other than the named insured, who has permission to use a motor vehicle. Insurance policy provisions that exclude categories of permissive users from the policy’s mandatory minimum liability coverage constitute illegal and unenforceable escape clauses. The Court finds Willis v. Security Insurance Group, 104 N.J. Super. 410 (Ch. Div. 1968), aff’d, 53 N.J. 260 (1969), particularly instructive. In that case, the Chancery Division invalidated a provision in a car dealership’s garage policy that excluded coverage for permissive users of the insured’s car who had their own automobile coverage meeting minimum limits. That principle was followed by the Appellate Division in Rao v. Universal Underwriters Insurance Co., 228 N.J. Super. 396 (App. Div. 1988), when it held that an automobile leasing company’s insurance policy, which provided coverage to lessees only to the extent that they lacked their own minimum liability coverage, was an invalid escape clause. (pp. 10-14)2. The MVC requires, as a condition of licensure, that every automobile dealership possess liability insurance in the amount of $100,000 per person and $250,000 per incident “covering all vehicles owned or operated by the applicant, at his or her request or with his or her consent.” N.J.A.C. 13:21-15.2(l). The impact of this requirement on dealerships, with its demand for higher liability insurance coverage than is generally required under N.J.S.A. 39:6B-1(a), was known, considered, and not altered by the Chief Administrator of the MVC when the requirement was adopted. The regulation’s specific requirement that coverage extend to vehicles “owned or operated by the applicant, at his or her request or with his or her consent” demonstrates a clear intent that permissive users be insured. The Court canvasses relevant law and takes notice of other instances where certain vehicles are required to maintain higher compulsory liability insurance than is called for under N.J.S.A. 39:6B-1(a). (pp. 15-18)3. Examination of Federal’s policy provision concerning “who is an insured” reveals ineluctably that it contains an impermissible escape clause. Federal’s policy excludes liability coverage to all Trend customers who have personal insurance meeting the compulsory statutory minimum. However, because N.J.S.A. 39:6B-1(a) requires car “owner[s]” to carry insurance rather than drivers, Trend -- as owner of the loaner vehicle -- was obligated to provide compulsory liability insurance for accidents in which Trend’s car was involved when Aquilar, a permissive user, was driving it. While a step down in coverage has been approved for first-party underinsured motorist (UIM) coverage, as in Aubrey v. Harleysville Insurance Cos., 140 N.J. 397 (1995), it has not been approved with respect to third-party liability coverage to accident victims. Paragraph 3(a)(2)(d) is not a valid step-down clause because it does not merely limit the first-party coverage provided by Trend to already-insured drivers of their loaner vehicles, it “except[s]” from coverage accidents involving an owned vehicle used by such permissive users. Although 2 Aubrey found that a similarly worded liability provision was a valid step-down clause, that holding came in the context of UIM benefits. Aubrey was not tasked with construing N.J.S.A. 39:6B-1(a), which mandates liability insurance of “owner[s].” Lawful exceptions to discretionary insurance coverage do not raise the same concerns as efforts to evade minimum insurance requirements set by law. (pp. 19-21)4. On the question of remedy, the two most relevant cases on reformation of an insurance policy are Proformance Insurance Co. v. Jones, 185 N.J. 406 (2005), and Potenzone v. Annin Flag Co., 191 N.J. 147 (2007). In Proformance, the Court struck a provision in an auto insurance policy that purported to exclude liability coverage for a permissive user who caused a vehicle collision while engaged in “business pursuits.” The Court held that the policy should be reformed to the compulsory statutory minimum instead of applying the policy’s stated limit. In Potenzone, the Court reached the opposite conclusion, reforming an offending business auto insurance policy to the stated policy limit. The provision at issue in Potenzone excluded liability coverage for workplace injuries that occurred “while moving property to or from a covered auto” -- an exclusion the insurer conceded was not enforceable under case law. The Court distinguished Proformance on the basis that the offending business-pursuits clause was an otherwise valid business exclusion, and it was the first time the Court invalidated a business exclusion of that nature. In Potenzone, the offending provision violated the holding in a case that had been decided sixteen years earlier; the insurance industry had ample time to adjust its rates and policy terms but failed to do so, and so the Court imposed the policy limit. (pp. 21-24)5. The Proformance/Potenzone dichotomy requires consideration of whether case law provided sufficient notice to an insurer that its policy provision was unlawful. It is difficult to conclude that Federal had sufficient notice to warrant imposing the full policy limit in light of the arguably diverging decisions in Rao and Aubrey. The Court finds this case to be closer to Proformance than Potenzone. Rao provided notice of Paragraph 3(a)(2)(d)’s illegality when it invalidated a similar policy exclusion. Aubrey construed a liability exclusion nearly identical to Paragraph 3(a)(2)(d) to be a valid step-down clause. Although Aubrey arose in the context of first-person coverage under UIM, given Aubrey’s arguably contrary reading of a similar provision, it cannot be said that Federal should have “reasonably expected” that its provision would be found to be unlawful and that it would be held to the full limit of its coverage. Instead, Federal must comply with the minimum liability coverage required for all vehicles owned or used by a dealership: $100,000/$250,000 in bodily injury. Of course, the Court’s decision today puts issuers of garage policies on notice that similar escape clauses are unlawful. (pp. 24-26) AFFIRMED AS MODIFIED.CHIEF JUSTICE RABNER and JUSTICES ALBIN, PATTERSON, FERNANDEZ-VINA, SOLOMON, and PIERRE-LOUIS join in JUSTICE LaVECCHIA’s opinion. 3 SUPREME COURT OF NEW JERSEY A- 78 September Term 2019 084200 Tyrone A. Huggins, Plaintiff-Respondent, v. Mary E. Aquilar, Trend, Defendants, and New Jersey Manufacturers Insurance Company, Defendant-Respondent, and Federal Insurance Company, Third-Party Defendant-Appellant. On appeal from the Superior Court, Appellate Division . Argued Decided January 20, 2021 April 21, 2021Selina M. Ellis argued the cause for appellant (Walsh Pizzi O’Reilly Falanga, attorneys; Selina M. Ellis, Liza M. Walsh, and Marc D. Haefner, on the brief). 1 John V. Mallon argued the cause for respondent New Jersey Manufacturers Insurance Company (Chasan Lamparello Mallon & Cappuzzo, attorneys; John V. Mallon, of counsel and on the brief, Kelly A. Weber, of counsel, and Ryan J. Gaffney, on the brief). Joseph A. Siclari argued the cause for respondent Tyrone A. Huggins (The Law Offices of Patrick G. Patel, attorneys; Joseph A. Siclari, on the brief). JUSTICE LaVECCHIA delivered the opinion of the Court. As a condition of “engag[ing] in the business of buying, selling ordealing in automobiles” in New Jersey, a license must be obtained from theMotor Vehicle Commission (MVC) on terms established by the MVC ChiefAdministrator. N.J.S.A. 39:10-19. Among the requirements for licensureestablished by the Chief Administrator is proof “demonstrating liabilityinsurance covering all vehicles owned or operated by the applicant, at his orher request or with his or her consent” in coverage amounts for bodily injuryor death “of $100,000 per person per incident up to $250,000 per incident.”N.J.A.C. 13:21-15.2(l). In this matter, a dealership held insurance, referred to as a garage policy,that avoided that licensure requirement by eliminating coverage for a class ofits customers. One such customer was involved in an accident with a thirdparty while operating a dealership-owned vehicle. The issue is whether the 2 insurer on the garage policy can deny responsibility for an entire class ofpermissive users of the dealership’s loaner vehicles notwithstanding thecompulsory bodily injury liability coverage required for all vehicles owned bythe dealership. This issue arose and evaded review in an earlier matter brought beforethis Court. See Engrassia v. Uzcategui, 237 N.J. 373, 373 (2019). For reasonssimilar to those expressed in a dissent to the Court’s dismissal of that appeal asmooted by the parties’ post-argument resolution of the litigation, see id. at374-84 (LaVecchia, J., dissenting), the trial court in the instant matter held thatthe terms of the garage policy avoided the dealership’s obligation to providebodily injury insurance coverage for the vehicles it owned and lent to itscustomers; the relevant provision thus constituted an illegal and unenforceableescape clause. The trial court held the insurer to the full limit of contracted-forliability coverage -- an amount well in excess of the MVC’s compulsoryamount. The Appellate Division declined to review the trial court’s ruling, butwe granted leave and heard the appeal. We now hold that the disputed coverage provision in the garage policy atissue constitutes an illegal escape clause, which may not be used to evade theminimum liability requirements for dealership vehicles set by the ChiefAdministrator of the MVC. For reasons expressed herein, we affirm the 3 judgment of the trial court with modification as to the amount of compulsorycoverage required in these circumstances. I. A. On September 6, 2016, Mary Aquilar brought her car in for maintenanceby Trend Motors, Ltd. (Trend). The service required that Trend keep the carfor several days, so Trend provided Aquilar with a complimentary loanervehicle for her personal use while her vehicle was being serviced. Aquilarsigned Trend’s loaner-vehicle form agreement, which included a provisionstating that Aquilar was not covered by any insurance policy held by Trend. Several days into her use of that loaner vehicle, on September 14, 2016,Aquilar and a vehicle driven by plaintiff Tyrone A. Huggins were passingthrough the intersection of 14th Street and Garden Street in Hoboken.Aquilar’s concededly negligent operation of the loaner vehicle caused it tostrike Huggins’s car. Huggins sustained serious injuries as a result. At the time of the accident, GEICO insured Aquilar through anautomobile policy that provided liability coverage of $15,000 per person and$30,000 per incident, the minimum limits established under N.J.S.A. 39:6B-1(a). See also N.J.S.A. 39:6A-3. Huggins held an automobile insurancepolicy with defendant and third-party plaintiff New Jersey Manufacturers 4 Insurance Company (NJM) that provided uninsured motorist (UM) andunderinsured motorist (UIM) coverage up to $100,000 per incident. Trend held a garage policy with Federal Insurance Company (Federal)that insured Trend’s vehicles for up to $1,000,000 in liability coverage. As noted, the MVC requires, as a condition of licensure, that everyautomobile dealership demonstrate possession of liability insurance, in theamount of $100,000 per person and $250,000 per incident, covering “allvehicles owned or operated by the applicant, at his or her request or with his orher consent.” N.J.A.C. 13:21-15.2(l). Despite the blanket disclaimer ofinsurance coverage in Trend’s loaner agreement, the Federal policy addressedcoverage for customers in certain situations. Those provisions supplied,within the Liability Coverage Section of Trend’s Federal policy, the followingdefinition of an insured (entitled “Who Is An Insured”): a. The following are “insureds” for covered “autos”: .... (2) Anyone else while using with your permission a covered “auto” you own, hire or borrow except: .... (d) Your customers. However, if a customer of yours: (i) Has no other available insurance (whether primary, excess or contingent), they are an 5 “insured” but only up to the compulsory or financial responsibility law limits where the covered “auto” is principally garaged. (ii) Has other available insurance (whether primary, excess or contingent) less than the compulsory or financial responsibility law limits where the covered “auto” is principally garaged, they are an “insured” only for the amount by which the compulsory or financial responsibility law limits exceed the limit of their other insurance. [Hereinafter referred to as Paragraph 3(a)(2)(d) of the policy.] According to those terms, Federal’s policy purports to extend liabilitycoverage to Trend’s customers using Trend’s vehicles only if the customerlacks the minimum insurance required by law, and the policy covers thosecustomers only to the extent necessary to establish that unspecified minimuminsurance level. B. On June 14, 2017, Huggins filed a complaint in the Law Division ofSuperior Court in Hudson County seeking compensation for the injuries andloss of income he suffered as a result of the accident. Huggins’s complaintnamed Trend and Aquilar as defendants. On July 6, 2018, Huggins amendedhis complaint to name his personal insurer NJM as a defendant, seeking UIMcoverage for any damages exceeding the $15,000 in coverage provided by 6 Aquilar’s GEICO policy. GEICO accepted coverage under its automobilepolicy for Aquilar and deposited $15,000 in liability coverage with the LawDivision on behalf of its insured, Aquilar. NJM answered and filed a third-party complaint against Federal. NJM’scomplaint sought a declaration that Federal’s policy covered Aquilar’s third-party liability to Huggins. Federal and NJM filed cross-motions for summaryjudgment on whether Aquilar’s third-party liability to Huggins was coveredunder the garage policy. Federal disclaimed liability, arguing that Aquilar didnot fit the policy’s definition of an insured because she held $15,000 in bodilyinjury coverage through GEICO, meeting the minimum amount of insurancerequired under law by N.J.S.A. 39:6B-1(a). See also N.J.S.A. 39:6A-3. NJM argued that Aquilar was a permissive user under the Federal policyand that the dealership was obligated, as the owner of the vehicle, to maintainliability coverage for her when she was driving one of its vehicles. NJMmaintained that because the Federal policy’s definition of an insured excludedAquilar based on her personal coverage, it acted as an unenforceable “escapeclause” that should be voided as a matter of law -- a position with whichFederal disagreed, claiming it was a permissible step-down provision asallowed in Aubrey v. Harleysville Insurance Cos., 140 N.J. 397 (1995). 7 The trial court agreed with NJM and held that the insurance policy’sdefinition of an insured constituted an illegal escape clause because thedefinition operated to eliminate coverage for a class of permissive drivers ofthe dealership’s vehicles, namely, Trend customers who maintained personalautomobile insurance that met statutory requirements. Because the Federalpolicy entirely excluded Aquilar due to her minimum personal bodily injurycoverage, the court believed it failed to comply with the public policy ofrequiring all vehicle owners to provide the applicable minimum coverage forpermissive users. In so holding, the trial court relied on Willis v. SecurityInsurance Group, 104 N.J. Super. 410 (Ch. Div. 1968), aff’d, 53 N.J. 260(1969), as well as Rao v. Universal Underwriters Insurance Co., 228 N.J.Super. 396 (App. Div. 1988). The court’s analysis tracked the reasoningexpressed in the dissent to the dismissal of the appeal in Engrassia, 237 N.J. at 380-84, which it found persuasive. Concluding that the policy’s definition of an insured as applied toAquilar was an illegal escape clause, the court turned to the question of theamount of coverage to be provided under the policy. Reasoning that it was notthe role of the court to rewrite the policy, the trial court held that the policyprovided Aquilar with the policy limit of $1,000,000 in liability coverage.Accordingly, the court granted summary judgment to NJM and dismissed it 8 from the case because the Federal policy exceeded the $100,000 limit ofNJM’s UIM coverage. Federal filed a motion for reconsideration, arguing that the trial courterred in declining to reform the Federal policy, citing Proformance InsuranceCo. v. Jones, 185 N.J. 406 (2005), and Potenzone v. Annin Flag Co., 191 N.J. 147 (2007). In rejecting that argument, the trial court applied the standard forreformation from those cases and concluded that Federal was on notice of theillegality of the escape clause in its policy in light of the earlier decisions inWillis and Rao. Thus, interpreting Potenzone to require that the full policylimit be enforced, the court left unchanged its original order imposing the$1,000,000 insurance policy limit. Federal filed a motion for leave to appeal to the Appellate Division,which NJM and Huggins opposed. On February 11, 2020, the AppellateDivision denied the motion. Federal then filed for leave to appeal to thisCourt, and we granted the motion. 242 N.J. 512 (2020). 1 The parties’arguments before this Court are, in essence, those advanced before, exceptwhere noted in this opinion.1 This Court’s order granting Federal’s appeal incorrectly recites Ms. Aquilar’s surname as “Aguilar”. We apologize to Ms. Aquilar for this error. 9 II. A. Simply stated, this case concerns the compulsory liability insurancerequirement imposed on vehicles, through their owners, in order to providecompensation for injury from accidents involving those vehicles. 2 Thelegislative policy in this area is straightforward. Per the plain language of N.J.S.A. 39:6B-1(a), “[e]very owner orregistered owner of a motor vehicle registered or principally garaged in thisState shall maintain motor vehicle liability insurance coverage” in the amountsof at least $15,000 per person and $30,000 per accident to insure againstliability for bodily injury, death, and property damages sustained by a victimof an accident involving that vehicle. The statute’s certainty girds the strengthof the liability safety net devised by the legislative insurance scheme forvictims of automobile accidents. See Proformance, 185 N.J. at 412. Further, the statutory requirement that every automobile be insured byits owner, not its driver, is foundational to the permissive user rule. See id. at413. That rule is based on the principle that “a liability insurance contract isfor the benefit of the public as well as for the benefit of the named or2 Throughout this opinion, we draw heavily from the analysis expressed in the dissent in Engrassia, without quoting or providing express attribution each time. 10 additional insured.” Verriest v. INA Underwriters Ins. Co., 142 N.J. 401, 414(1995) (quoting Odolecki v. Hartford Acc. & Indem. Co., 55 N.J. 542, 549(1970)). The permissive user rule developed in settings where coverage undera standard automobile liability insurance policy is questioned due to thevehicle’s operation by a person other than the named insured. Small v.Schuncke, 42 N.J. 407, 412 (1964). Generally stated, the rule provides forcoverage under the standard omnibus liability clause of an auto policy,presently required under N.J.S.A. 39:6B-1(a), when a driver has “permission touse a motor vehicle in the first instance, [and] any subsequent use short oftheft or the like while it remains in his possession, though not within thecontemplation of the parties, [remains] a permissive use.” Matits v.Nationwide Mut. Ins. Co., 33 N.J. 488, 496-97 (1960). Our Court has used the permissive driver rule to prohibit circumventionof public policy -- a policy that provides a safety net of third-party coveragethrough compulsory liability insurance. Insurance policy provisions thatdisclaim whole classes of drivers are problematic, and often found violative ofpublic policy, when they exclude categories of permissive users from thepolicy’s mandatory minimum liability coverage. See Proformance, 185 N.J. at 416-17 (collecting cases); Selected Risks Ins. Co. v. Zullo, 48 N.J. 362, 366(1966). Such exclusions constitute illegal and unenforceable escape clauses. 11 The facts and holding of Willis are particularly instructive. In Willis,this Court affirmed, 53 N.J. 260, a Chancery Division decision that hadinvalidated a car dealership’s garage policy that “exclude[d] from its omnibusclause individuals driving the insured’s car with his permission where suchpersons have available valid and collectible insurance under their own policieswith the minimum limits.” 104 N.J. Super. at 412. Plaintiff Willis got into anaccident while he was test driving a car owned by a car dealership, Ruffu Ford,Inc., with the permission of the dealer’s general manager. Id. at 411. Willis’sinsurer, Allstate, contended that Willis was covered by Ruffu’s garage liabilitypolicy, issued by defendant Security Insurance Group, and that Allstate wastherefore responsible for excess coverage only. Id. at 412. But Securityclaimed it was not responsible for providing liability coverage because thegarage policy excluded coverage for permissive users of the insured’s car whohad their own automobile coverage meeting minimum limits. Ibid. The Chancery Division found the policy’s coverage exclusion invalid asa matter of public policy. Id. at 414-15. The court reasoned from the earlierdecision by this Court in Zullo “that 'there may be no departure from theomnibus coverage described in section 46 of the Security-Responsibility Act.’”Id. at 415 (quoting Zullo, 48 N.J. at 374). The court noted that N.J.S.A. 39:6-46(a), the predecessor to N.J.S.A. 39:6B-1, “specifically requires that a policy 12 shall 'insure the insured named therein and any other person using orresponsible for the use of any such motor vehicle with the express or impliedconsent of the insured.’” Ibid. Thus, the Chancery Division declared invalidthe garage policy provision excluding coverage for permissive users havingtheir own liability coverage and held defendant Security Insurance Groupprimarily liable for the coverage. Ibid. The statutory omnibus requirement at issue in Willis was not that aninjured party be covered to the statutory minimums, but that the owner of avehicle provide coverage. Id. at 414-15. Therefore, even if a provision -- likethe provision disputed in Willis -- would never leave an injured third partywithout coverage, it was still in violation of the plain language of the statute. That principle was followed by the Appellate Division in Rao. In thatcase, the Appellate Division held that an automobile leasing company’sinsurance policy, which provided coverage to lessees only to the extent thatthey lacked their own minimum liability coverage, was an invalid escapeclause. 228 N.J. Super. at 404. Plaintiff Anita Rao struck a pedestrian whiledriving a car leased by her husband, Naveen Rao, from defendant Open RoadLeasing Company (Open Road). Id. at 398. Mr. Rao had a personalautomobile liability insurance policy from Allstate, pursuant to the 13 requirements of the lease agreement with Open Road. Ibid. The Raos soughtcoverage under Open Road’s insurance policy, which stated that [t]he portion of the limit applicable to persons or organizations required by law to be an INSURED is only the amount (or amount in excess of any other insurance available to them) needed to comply with the minimum limits provision of such law in the jurisdiction where the OCCURRENCE takes place. [Id. at 399.] The Appellate Division examined N.J.S.A. 45:21-1 to -3, which governmandatory omnibus liability coverage of rental vehicles. Id. at 400-01.Specifically, N.J.S.A. 45:21-2 requires every “owner” of a vehicle for rent orlease to maintain liability insurance. Id. at 400. The court construed N.J.S.A.45:21-1 to -3 as requiring “an 'owner[]’ to 'provide’ a liability policy ofinsurance for the statutorily mandated minimum of $15,000/$30,000 regardlessof whether any 'lessee or bailee, his agent or servant’ otherwise procures andmaintains such insurance.” Id. at 403. The court found the “potential doublingof the available minimum statutory coverage because of the amount of otherinsurance carried by a lessee . . . to be irrelevant,” ibid., and held that to theextent the policy’s language “attempts to preclude coverage entirely because ofthe other . . . coverage secured by the Raos in compliance with the leasingagreement, it is contrary to the statutory mandate and constitutes an illegalescape clause,” id. at 404 (citing Zullo, 48 N.J. 362). 14 B. The instant matter is complicated by the heightened compulsory liabilityinsurance coverage imposed by the Chief Administrator of the MVC. N.J.S.A. 39:10-19 requires all persons “engage[d] in the business ofbuying, selling or dealing in motor vehicles” to first obtain a dealership licensefrom the MVC. The same statute authorizes the MVC’s Chief Administratorto license a proper person “upon application in such form as the [C]hief[A]dministrator prescribes.” ---- To implement that statutory responsibility, Ibid.the Chief Administrator promulgated N.J.A.C. 13:21-15.2, which governs theprocedures and requirements for obtaining a license. In pertinent part,subsection (l) of that regulation requires that the applicant, [a]t some time during the application process prior to licensure, . . . submit a certificate of insurance demonstrating liability insurance covering all vehicles owned or operated by the applicant, at his or her request or with his or her consent. This insurance shall be in the amount of $100,000 per person per incident up to $250,000 per incident for bodily injury or death, $25,000 per incident for property damage, and $250,000 combined personal injury and property damage per incident. This insurance shall be renewed as necessary to ensure that it remains valid for the entire prospective license term. [N.J.A.C. 13:21-15.2(l).] When proposed as a requirement of licensure, that provision was metwith objection from within the regulated industry. During the notice and 15 comment period before promulgation of N.J.A.C. 13:21-15.2(l), a commenterraised a concern that the proposed regulation would increase costs on smallauto dealers;3 the commenter also specifically questioned the alteration of theminimum liability insurance requirement terms established by N.J.S.A. 39:6A- -3 and :6B-1. The Commission responded that, while it is undisputed that automobile insurance costs . . . are still uncomfortably high, the exposure occasioned by the proliferation of dealer plates and the use of those plates by what are essentially unknown quantities requires increased protection more in line with current economic realities, which is directly related to the public welfare. If industry experience did not include claims in excess of current coverages there would be no increased cost associated with higher limits. Inasmuch as insurance costs are directly related to pay-outs, however, the fact that the risks are substantial cannot be ignored. While the Commission is not insensitive to the effect of increased costs on the dealer, as a matter of simple fairness, the costs of injuries to third parties should be borne by the commercial entity who benefits by the use and sale of the vehicle and not by the innocent victim of an accident in which that vehicle may be involved. The Commission, therefore, declines to amend the rules to impose on motor vehicle dealers the requirements of N.J.S.A. 39:6A[] and 39:6B[], which apply only to private passenger automobiles and not to dealership inventory. (See N.J.S.A. 39:6A-2 [(defining “automobile”)].) [ 38 N.J.R. 1324(a), response to cmt. 25 (Feb. 6, 2006).]3 The commenter noted, “[c]urrently dealers are required to carry insurance of only $35,000 per incident per person, at a cost of $7,500. Tripling the insurance coverage will double the cost of the coverage.” 16 It is plain that the impact of this requirement, with its demand for higherliability insurance coverage than is generally required under N.J.S.A. 39:6B-1(a), was known, considered, and not altered by the Chief Administrator whenthe requirement was adopted. The regulation’s specific requirement thatcoverage extend to vehicles “owned or operated by the applicant, at his or herrequest or with his or her consent” demonstrates a clear intent that permissiveusers be insured. It is also noteworthy that this is not the only instance of highercompulsory minimum liability coverage for certain vehicles on the road inNew Jersey. A canvassing of relevant law reveals several examples, of whichwe take notice. Some higher amounts of required liability coverage are set by statute.For example, transportation network company drivers must maintain liabilityinsurance of $50,000/$100,000. N.J.S.A. 39:5H-10(b). An owner oflimousines must maintain liability insurance of $1,500,000. N.J.S.A. 48:16-14. Motor vehicles used to carry passengers for hire must maintain liabilitycoverage in amounts set by a schedule, but far in excess of the$15,000/$30,000 limit identified in N.J.S.A. 39:6B-1(a). N.J.S.A. 48:4-47. Other required amounts of higher liability coverage have been imposedby regulation pursuant to statutory authorization. For example, N.J.S.A. 17 48:13A-7.22 authorizes the Board of Public Utilities (BPU) to establish,through rules and regulations, uniform bid specifications for municipal solidwaste collection contracts. The BPU promulgated N.J.A.C. 7:26H-6.17(a),which requires contractors with winning bids for municipal solid wastecollection contracts to maintain, among other forms of insurance, automobileliability insurance in the amount of $500,000/$1,000,000. Similarly, theDirector of the Division of Consumer Affairs is authorized to establishrequirements for movers’ and warehousemen’s services, N.J.S.A. 45:14D-6,and so adopted N.J.A.C. 13:44D-4.7(b), requiring such practitioners tomaintain automobile liability coverage in minimum amounts of$25,000/$100,000 for bodily injury. And the Commissioner of Healthpromulgated N.J.A.C. 8:40-3.3(c)(1), requiring ambulance service providers tomaintain automobile liability insurance of at least $500,000 per occurrence forcombined bodily injury/property damage coverage for each vehicle. Thus, there are numerous examples where the law requires certainvehicles to maintain higher compulsory liability insurance than is called forunder N.J.S.A. 39:6B-1(a). 18 III. Examination of the relevant parts of Federal’s policy provisionconcerning “who is an insured” reveals ineluctably that it contains animpermissible escape clause. Federal’s policy excludes liability coverage to all Trend customers whohave personal insurance meeting the compulsory statutory minimum .However, because N.J.S.A. 39:6B-1(a) requires car “owner[s]” to carryinsurance rather than drivers, Trend -- as owner of the loaner vehicle -- wasobligated to provide compulsory liability insurance for accidents in whichTrend’s car was involved when Aquilar, who was its permissive user, wasdriving it. See N.J.S.A. 39:6B-1(a); Rao, 228 N.J. Super. at 403 (construing N.J.S.A. 45:21-2 similarly); Willis, 104 N.J. Super. at 415 (construing N.J.S.A. 39:6-46(a) similarly). The Federal policy creates an exclusion from compulsory insurance forvehicles based on a class of permissive motorists to which Aquilar belongs and-- if the exclusion passed muster -- would excuse Federal from providingliability coverage to third parties injured in accidents. Yet N.J.S.A. 39:6B-1(a)imposes the obligation to provide liability coverage on owners of vehicles, anobligation animated by the Legislature’s protective intent in adopting a safety-net regime of insurance. See also N.J.S.A. 39:6A-3. While a step down in 19 coverage has been approved in the setting of eligibility for first-party UIMcoverage, as in Aubrey, it has not been approved with respect to third-partyliability coverage to accident victims. Paragraph 3(a)(2)(d), by its terms, does not merely limit the first-partycoverage provided by Trend to already-insured drivers of their loaner vehicleswho carry at least $15,000 in their own personal auto insurance. Instead, it“except[s]” from coverage accidents involving an owned vehicle used by suchpermissive users. In other words, it excuses coverage of such accidentsentirely. Accordingly, it is not a valid step-down clause but is, rather, anunlawful escape clause. See Rao, 228 N.J. Super. at 404; Willis, 104 N.J.Super. at 415. That Huggins would be able to recover the N.J.S.A. 39:6B-1(a) statutoryminimum through Aquilar’s personal automobile policy for his liability claimsdoes not relieve Trend of its duty, as the owner of the loaner vehicle, toprovide compulsory liability insurance on the vehicle when it is driven byAquilar as a permissive user of Trend’s vehicle. See N.J.S.A. 39:6B-1(a). Theshifting of responsibility from owner to driver does not fulfill the public policyof the compulsory insurance requirement and its related permissive userdoctrine. Cf. Rao, 228 N.J. Super. at 403 (finding “a potential doubling of theavailable minimum statutory coverage” to be “irrelevant” because “[N.J.S.A. 20 45:21-1 to -3] do[] not allow for any escape in coverage by such an owner”).It is significant that Rao is cited approvingly in the Aubrey decision, on whichFederal relies. See 140 N.J. at 407-08. More importantly, Aubrey is meaningfully distinguishable. AlthoughAubrey found that a similarly worded liability provision was a valid step-downclause, that holding came in the context of UIM benefits and only indirectlydiscussed liability coverage via the parity requirement of N.J.S.A. 17:28- -1.1(b). See 140 N.J. at 405-08. Aubrey was not tasked with construing N.J.S.A. 39:6B-1(a), which mandates liability insurance of “owner[s].” Ibid.Lawful exceptions to discretionary insurance coverage do not raise the sameconcerns as efforts to evade minimum insurance requirements set by law. In sum, the trial court correctly declared Paragraph 3(a)(2)(d) ofFederal’s policy an invalid escape clause because it attempts to exclude fromthe duty to provide liability coverage cars owned by Trend that are involved inaccidents when driven by Trend customers who have personal insurance of atleast $15,000. The trial court acted appropriately in striking the provision asunenforceable because it operates as an escape clause. IV. On the question of remedy, the parties advance differing positions aboutreformation of the contract. The trial court declined to reform the contract to a 21 mandatory minimum and instead held Federal to the full amount of the policyon its face, namely $1,000,000 in liability coverage. A. The two most relevant cases on reformation of an insurance policy areProformance and Potenzone, as the parties recognize in their arguments. In Proformance, we held that the “public policy” of compensatingaccident victims, which underlies N.J.S.A. 39:6B-1(a), precluded enforcing aprovision in an auto insurance policy that purported to exclude liabilitycoverage for an owner-policyholder’s permissive user who caused a vehiclecollision while engaged in “business pursuits” -- an activity not covered underthe policy. 185 N.J. at 409, 414-20. Having struck that provision, the Courtnext addressed whether the policy’s stated limit of $100,000 should apply orwhether the policy should be reformed to the compulsory statutory minimumof $15,000. See id. at 420-21. The Court held that the policy should bereformed to $15,000, reasoning, “[t]he business pursuits exclusion is contraryto public policy to the extent that it denies to an injured third party theminimum coverage required by law.” Id. at 421. In Potenzone, the Court reached the opposite conclusion, reforming anoffending business auto insurance policy to the stated policy limit rather thanthe statutory minimum. See 191 N.J. at 149, 152-56. The offending provision 22 at issue in Potenzone excluded liability coverage for workplace injuries thatoccurred “while moving property to or from a covered auto” -- an exclusionthe insurer conceded was not enforceable under case law mandating coveragefor “loading and unloading accident[s].” Id. at 154 (citing Ryder/P.I.E.Nationwide, Inc. v. Harbor Bay Corp., 119 N.J. 402, 413 (1990)). Therefore,“[t]he sole issue on appeal was whether [the insurer’s] insurance coverageshould be limited to the statutory minimum or extended to the face amount ofits insurance policy.” Id. at 150. We held that the policy should be enforced to its stated limit of$500,000, id. at 154-56, and distinguished Proformance on the basis that theoffending business-pursuits clause was an “otherwise valid businessexclusion,” and “[i]t was the first time we invalidated a business exclusion ofthat nature.” Id. at 155 (citing 185 N.J. at 410, 420-21). In contrast, inPotenzone, the offending provision violated Ryder, which had been decidedsixteen years earlier. Id. at 154-56. Ryder held “that the obligation to providecoverage in a 'loading and unloading’ accident arises from statute andtherefore cannot be limited by contract,” 119 N.J. at 407, and that “an insurerwould be required to provide coverage in a 'loading and unloading’ accident tothe limits of its policy -- often an amount greater than the statutory minimum,”id. at 413. 23 We concluded in Potenzone that, given Ryder’s holding, insurers“should have reasonably expected that the full policy limit for an accidentduring a loading or unloading operation was required.” 191 N.J. at 155.Because “the insurance industry . . . had ample time to adjust its rates andpolicy terms” but failed to do so, the Court imposed the full policy limit. Id. at155-56. B. Analyzing this matter under the Proformance/Potenzone dichotomy,which requires consideration of whether case law provided sufficient notice toan insurer that its policy provision was unlawful, see 185 N.J. at 421; 191 N.J.at 155-56, it is difficult to conclude that Federal had sufficient notice towarrant imposing the full policy limit. Some confusion must be conceded, inlight of the arguably diverging decisions in Rao and Aubrey, even thoughAubrey cites Rao approvingly. Ultimately, we find this case to be closer toProformance, which reformed the policy to meet minimums set by law, 185 N.J. at 421, than Potenzone, which imposed the full policy limit, 191 N.J. at 155-56. Rao, decided by the Appellate Division in 1988, provided notice ofParagraph 3(a)(2)(d)’s illegality when that case invalidated a similar policyexclusion that also “attempt[ed] to preclude coverage entirely because of 24 . . . other [personal] coverage secured by the [permissive users].” Rao, 228 N.J. Super. at 404. Aubrey, in reaching its holding on UIM coverage,construed a liability exclusion nearly identical to Paragraph 3(a)(2)(d) to be avalid step-down clause, notwithstanding that the provision would haverendered a permissive user “not covered” because her personal coverage metthe statutory minimum. 140 N.J. at 406. Although Aubrey arose in the context of first-person coverage underUIM, given Aubrey’s arguably contrary reading of a similar provision as astep-down provision, we are persuaded that the step-down-provision-versus-escape-clause issue was not fully settled. We cannot say that Federal shouldhave “reasonably expected” that its provision would be found to be unlawfuland that it would therefore be held to the full limit of its coverage. Instead, wehold that Federal must comply with the applicable compulsory minimumliability coverage, which is the minimum liability coverage required by theChief Administrator of the MVC for all vehicles owned or used by a dealershipas its policy purported to fulfill as a condition of the dealership’s licensure:$100,000/$250,000 in bodily injury, in pertinent part. Of course, our decisiontoday puts issuers of garage policies on notice that similar escape clauses areunlawful. 25 Accordingly, we affirm the reformation of the policy but modify the trialcourt’s imposition of the $1,000,000 policy amount and instead order thereformation of Federal’s policy to the $100,000/$250,000 dealer-licensureminimum liability coverage required by N.J.A.C. 13:21-15.2(l).4 V. The judgment of the trial court is affirmed as modified. CHIEF JUSTICE RABNER and JUSTICES ALBIN, PATTERSON, FERNANDEZ-VINA, SOLOMON, and PIERRE-LOUIS join in JUSTICE LaVECCHIA’s opinion.4 To be clear, the $100,000 in coverage available under the Federal policy is in addition to the $15,000 made available under Aquilar’s personal policy. See supra at ___ (slip op. at 20-21). 26