On March 31, 2005 a New Jersey Appellate Division panel held that an insured under a liability insurance policy whose carrier is in liquidation is personally responsible for damages in excess of the $300,000 payable by the New Jersey Guaranty Association.  The decision in the case of Johnson v. Braddy immediately grabbed the attention of attorneys, doctors and insureds throughout the State due to its broad implications.

New Jersey’s Guaranty Act, passed in 1974, was originally designed to minimize the financial loss to claimants and policyholders occasioned by the insolvency of an insurance company.  Insurance companies doing business in the State are required to pay assessments to the Public Liability Insurance Guaranty Association (PLIGA), created under the Act, to compensate individuals with claims against insolvent insurers.  PLIGA is liable for the limits of liability stated in the policy of the insolvent insurer, subject to a maximum of $300,000.  Accordingly, if a policyholder’s coverage is less than $300,000, PLIGA’s liability is limited to the coverage amount.  If the policyholder’s coverage is more than $300,000, PLIGA’s liability is capped at $300,000.

The issue of what happens to a claimant with damages in excess of the $300,000 PLIGA cap has never been addressed by a New Jersey Appellate court.  The Guaranty Act itself does not explicitly address whether an insured would remain personally liable for damages in excess of PLIGA’s maximum liability or be entitled to the protection of the full liability limits purchased with his or her premiums.  In 2003, a New Jersey trial court held, in the case of Flaherty v. Safran, that a defendant insured by an insolvent insurer under a policy with limits in excess of PLIGA’S $300,000 maximum liability was not personally liable for any recovery above that amount.  Flaherty, thus, protected the insureds who through no fault of their own found themselves subject to damage claims due to the financial failure of their insurance company. The Appellate Division in Johnson, however, overruled Flaherty and determined the insured, not the injured claimant should bear the risk of loss occasioned by an insurer’s liquidation.

In Johnson, defendant Braddy, who owned and operated a truck while performing services for a co-defendant trucking company, was involved in an accident with the plaintiff.  The trucking company maintained a $1 million policy with Reliance Insurance Company (now in liquidation).  As a result of the liquidation, the plaintiff first pursued recovery under his personal auto policy’s underinsured motorist endorsement and received the $300,000 maximum recovery under that policy (When a plaintiff can recover monies from another source, PLIGA gets a dollar for dollar credit against its own $300,000 cap.  Thus, here there was no reason to pursue PLIGA).  Thereafter, the plaintiff believing his injuries exceeded the amount he already recovered, continued to pursue full recovery against the defendants.  The defendants argued, relying on Flaherty, that they could not be liable for damages in excess of the PLIGA cap and the trial court agreed.  The Appellate Division, however, disagreed.  Citing New Jersey’s strong public policy of affording injured parties an opportunity to recover the full amount of their damages, the appellate court reversed the decision and held the defendants personally liable for damages in excess of the PLIGA cap.

As a result of this decision, anyone holding a liability insurance policy with a financially suspect carrier is at risk of losing the full benefit of the coverage purchased with their premium dollars should the carrier go into liquidation.  Physicians insured by MIIX (the Medical Inter Insurance Exchange), presently in rehabilitation, may be compelled to satisfy judgments in excess of the $300,000 PLIGA cap if the company’s plan fails and it winds up in liquidation. 

The impact of the decision will also affect the advice both plaintiff and defense lawyers give to their clients which may now include a review of the assets of insurance carriers as well as of the individual defendants before settlement offers can be made or accepted.  If an offer is made early in a case, one may now have to consider whether the carrier will be around in the future to pay a judgment if the offer is rejected.  Insurance brokers and agents may also have to take steps to insulate themselves from liability when placing insurance with companies they either know or should know are in a precarious financial condition.  The full impact of this decision may not be known for some time.  The Johnson case will be appealed to the New Jersey Supreme Court.