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Risk-Pooling with JIFs: When Self-Insurance is Not Insurance

8/3/23

By: Edward Solensky Jr.

Statewide Insurance Fund v. Star Insurance Company, 253 N.J. 119 (2023) involved an insurance coverage dispute between a public entity joint insurance fund (JIF) and Star Insurance Company (Star), a commercial general liability insurance company.

At issue was whether the JIF provided “insurance” to its members or, instead, the JIF members protect against liability through “self-insurance.”

A clause in Star’s insurance policy stated its coverage obligations began only after coverage available through “other insurance” had been exhausted; the clause, however, made no mention of “self-insurance.” Star took the position that the JIF provided insurance and, therefore, Star’s coverage was excess to the JIF; the JIF disagreed, contending that Star’s coverage was primary because its members are instead “self-insured.”

The dispute arose after a 2012 accident that led to the death of a 12-year-old boy when a sand tunnel he had built with his brothers collapsed on him at a beach in Long Branch, New Jersey. The boy’s parents filed a negligence action against Long Branch, Long Branch Beach Patrol, and seasonal beach police officers who were responsible for patrolling the area. The parties settled the underlying negligence action, but payment of the settlement required review of the sources of liability coverage available to Long Branch.

Long Branch took several steps to protect itself from the type of claims involved in this case. First, it joined the Statewide Insurance Fund (the Fund), which is a public entity JIF created under the New Jersey Joint Insurance Fund Act. As a member, Long Branch was afforded $10 million in liability coverage per occurrence in excess over other “insurance or self-insurance” coverage. Stated another way, Long Branch could recover from the Fund only after it had exhausted other insurance or self-insurance coverage to which it was entitled. Second, Long Branch purchased a commercial insurance policy from Greenwich Insurance Company (Greenwich), which provided primary insurance coverage for law enforcement liability claims. Greenwich was not involved in this appeal. Finally, Long Branch purchased a commercial general liability insurance policy from Star with $10 million in liability insurance coverage, excess to a $1 million self-insured retention (SIR). The parties agreed that Star’s insurance coverage was excess only over “other insurance.” Long Branch and Greenwich paid the SIR to the plaintiffs in the underlying negligence action, and therefore the SIR was not an issue on appeal.

After both parties moved for summary judgment, the trial judge granted the Fund’s motion and denied Star’s. The judge concluded that Long Branch’s membership in the Fund did not trigger Star’s “other insurance” clause. He determined that the Fund did not provide insurance coverage to its members, but rather Long Branch self-insured by joining the Fund. Consequently, the plaintiffs in the underlying action could look to Star’s primary policy limits, above the SIR, for the balance of their settlement with Long Branch. On appeal, the Appellate Division upheld the trial judge’s decision, finding that (1) the Fund is not an insurance company, (2) the Fund is not an insurer under New Jersey law, and (3) the Fund’s authorized activities did not amount to transacting insurance business. Additionally, the Appellate Division determined that Fund membership protected Long Branch against liability claims through “self-insurance.”

On appeal, the New Jersey Supreme Court first noted the following with respect to the plain text of the Joint Insurance Fund Act: (1) the Fund is not an insurance company; (2) the Fund’s authorized activities do not constitute either the transaction of insurance or doing the business of insurance; and, importantly, (3) the Fund is not subject to the extensive insurance laws contained in Subtitle 3 of Title 17 of the Revised Statutes and associated regulations. The Court further noted that the New Jersey Legislature has heavily regulated the insurance industry and enacted comprehensive legislation governing the business of insurance by authorized New Jersey insurers, and JIFs are not authorized insurers. According to the Court, New Jersey’s approach was consistent with that of most states which permit governmental risk-pooling. In those states, risk pools are exempted from most of the statutory requirements of the state’s insurance code. The Court noted that some of those states, in fact, have statutes nearly identical to N.J.S.A. 40A:10-48.  

The Supreme Court next pointed out that the clear and plain terms of N.J.S.A. 40A:10-48 state, “JIFs cannot insure members; instead, JIFs enable members to self-insure, spread risk, and reduce insurance costs.” The Court thus rejected Star’s argument that “general references to ‘insurance’ in the Joint Insurance Fund Act should be interpreted to mean that JIFs are ‘providing insurance to their members.’” The Court emphasized that the appearance of the word “insurance” in Title 40A did not mean JIFs provide insurance, nor did referencing the word “insurance” in the Fund’s contracting document override the Legislature’s clear mandate that “JIFs are not insurance companies, that they cannot insure members, and that their authorized activities do not constitute ‘the transaction of insurance nor doing an insurance business.’” According to the Court, Long Branch’s liability protection as a Fund member was, as a matter of law, through “self-insurance,” not “insurance.” 

The Court further also examined the differences in risk allocation between JIFs and commercial general liability carriers in concluding that JIF members are self-insured. The Court also relied on the Fund’s stated purpose to permit local units “to make a more efficient use of their powers and resources by cooperating on a basis that will be of mutual advantage.” According to the Court, “ ‘risk-pooling’ arrangements, such as JIFs, are different from typical insurance contracts in which an authorized insurer assumes the risk in exchange for a premium. JIF members decidedly retain the risk typically assumed by carriers. Public entities do not purchase insurance from JIFs; instead, they join JIFs, manage risk, and optimize taxpayer dollars by self-insuring or reducing coverage costs. A JIF ‘risk-pooling’ statutory option spreads liability risk among public entity JIF members. Here, as envisioned by the enabling statute and applying the explicit limitations of N.J.S.A. 40A:10-48, risk-bearing is therefore substantially undertaken by members. They bear substantial risk given that payment on liability claims comes from government coffers. In that sense, JIFs provide “self-insurance,” which is the opposite of insurance.” According to the Court, the “retention of risk in JIFs and the plain language of N.J.S.A. 40A:10-48 support our holding: the Fund does not provide “insurance” in any traditional or legal sense.” 

In affirming the Appellate Division’s decision, the Court concluded that Star’s “other insurance” clause was not triggered. In so holding, the Court explained that, unlike the Fund’s contracting document, which specified that the Fund’s obligations are excess over “insurance or self-insurance”, Star’s clause stated only that insurance coverage available under the Star policy was “excess over … any of the other insurance.” Thus, according to the Court, “because Star’s clause does not encompass the self-insurance available to members through the Fund, Star’s insurance policy is primary in covering the underlying plaintiffs’ settlement of the negligence action against Long Branch.” 

For more information, please contact Edward Solensky Jr. at edward.solensky@fmglaw.com or your local FMG attorney.