Municipal joint insurance fund is not an 'insurer,' court rules in nearly $1.2M dispute
"JIFs protect members against liability through 'self-insurance.' 'Self-insurance' is not insurance," New Jersey Supreme Court Justice Douglas Fasciale wrote.
An insurance company is obligated to pay a nearly $1.2 million wrongful death settlement after the New Jersey Supreme Court ruled that it can’t compel a municipal joint insurance fund to contribute.
An insurance policy with Star Insurance Co. provides coverage to Long Branch after other insurance coverage is exhausted, but the liability protection provided by the city’s membership in Statewide Insurance Fund is self-insurance, which does not trigger that clause in the Star policy, the Supreme Court ruled.
The decision could be a cautionary tale for insurance companies about policy language seeking to share liability with entities formed under New Jersey’s joint insurance fund statute.
$1.18 million settlement
The dispute stems from a 2012 accident in Long Branch where Ezra Cornman, 12, suffocated after the collapse of a tunnel he was digging on the beach. His parents sued the city and agreed to a $1.18 million settlement in 2018. But payment of that award has been held up by the dispute between insurance companies.
Language in Star’s policy stated that its coverage obligation kicked in when coverage from other insurance was exhausted.
Star claimed that Statewide provided insurance and, therefore, Star’s coverage obligation was secondary to Statewide’s.
Justice Douglas Fasciale, writing for the court, said that Statewide is a joint insurance fund, established under a state statute to provide public entities protection from liability, but it does not provide insurance.
Joint insurance funds, or JIFs, “cannot provide insurance in exchange for premiums, as insurance companies typically do; instead, JIF members reduce insurance costs by pooling financial resources, distributing and retaining risk, and paying claims through member assessments. Therefore, JIFs protect members against liability through ‘self-insurance.’ ‘Self-insurance’ is not insurance,” Fasciale wrote.
The 7-0 decision affirms an Appellate Division ruling that likewise said Statewide is not an insurer.
At the Supreme Court, Star contended that regardless of the JIF’s statutory framework, Statewide issued what Star said was an insurance policy to Long Branch and is bound by its terms.
Star maintained that the policy provided insurance, not self-insurance, and, therefore, Statewide was obligated to pay the judgment.
Statewide asserted that it did not provide insurance to Long Branch for several reasons: lawmakers explicitly exempted JIFs from insurance statutes and regulations; precluded JIFs from acting as insurers: and declared that authorized activities of JIFs do not constitute the transaction of insurance.
Fasciale wrote that the JIF statute requires that each government entity participating in a JIF must approve the JIF’s bylaws, which further ensures that the members retain risk.
The bylaws must address procedures for member assessments, for purchase of commercial direct insurance or reinsurance, and contingency plans for paying losses if the JIF is exhausted, Fasciale wrote.
Approval of bylaws or risk management plans may be conditioned on “conformity with the rules and regulations governing the custody, investment or expenditure of public moneys,” Fasciale wrote. On approval of its bylaws and risk management plan, a JIF member may protect against liability claims by self-insurance, the purchase of commercial insurance or reinsurance, or any combination thereof, he said. ”Those provisions reinforce that JIFs are risk-pooling arrangements rather than traditional insurance contracts,” Fasciale wrote.
Fasciale cited rulings from courts in Connecticut and Washington state that distinguished between self-insurance and traditional insurance. Unlike a traditional insurance company, whose primary business is to assume risk in exchange for payment of a premium, JIF members retain significant risk by paying claims from member assessments. The retention of risk in JIFs supported the court’s holding that Statewide does not provide insurance in the traditional or legal sense, Fasciale said. Therefore, Star’s “other insurance” clause is not triggered, he said.
Thomas E. Schorr of Dilworth Paxson in Princeton, New Jersey, represented Star. Francis X. Donnelly of Turner, O’Mara, Donnelly & Petrycki in Cherry Hill, New Jersey, represented Statewide. They did not respond to requests for comment.
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