The Comprehensive Guide to the 2013 Auto Dealer’s Coverage Form: “Acts, Errors or Omissions” Coverage for Violations of Federal and State Consumer Protection Statutes Affecting the Auto Dealer’s F&I Department Operations.


In 2013, Insurance Services Office (“ISO”) rolled out its new Auto Dealers Coverage Form (CA 00 25) (“AD” policy) The AD policy replaces the Garage Liability (“GL”) policy which had been available for decades and retains the complexity of the GL policy. Unlike most commercial policies, the AD policy is specifically tailored to meet the insuring needs of a specific industry, auto dealers. Its liability coverages are based on, and restricted to, liability arising out of “auto dealer operations.” Because of the myriad liability risks flowing from an auto dealer’s business operations, the AD policy, like the former GL policy, rolls several different coverage forms into one. In addition to its dealer-specific coverages, the AD policy incorporates liability coverage parts typically found in a Business Auto policy, Commercial General Liability policy and Personal Injury & Advertising policy.

One of the most significant differences between the GL policy and the new AD policy is the addition of “Acts, Errors or Omissions” coverage in Section III of the policy. This optional liability coverage is primarily designed to protect the auto dealer against claims resulting from the dealer’s negligent violation of certain specified consumer protection laws that regulate the dealer’s finance and insurance (“F&I”) operations. The need for “Acts, Errors or Omissions” coverage is readily apparent. Unlike most commercial insureds, franchised auto dealers operate three discreet businesses: vehicle sales, vehicle servicing and vehicle financing and the dealer industry is one of the most heavily regulated in the nation. The auto dealer’s marketing activities, role as a “creditor” or “lessor” in connection with dealer-arranged financing transactions and use of consumer’s private financial information subject the dealer to numerous consumer protection statutes and laws. At the federal level alone, auto dealers must comply with over a dozen laws. These federal laws include, among others, the Truth in Lending Act (“TILA”) and Regulation Z, its implementing regulation, Consumer Leasing Act (“CLA”) and Regulation M, its implementing regulation, Equal Credit Opportunity Act (“ECOA”) and Regulation B, its implementing regulation, Fair Credit Reporting Act (“FCRA”), Magnusson Moss Warranty Act (“MMWA”), Federal Odometer Act (“FOA”), Gramm-Leach-Bliley Act (“GLB”) and Federal Trade Commission (“FTC”) Privacy and Safeguards Rule, Telephone Consumer Protection Act (“TCPA”), Junk Fax Prevention Act (“JFPA”), CAN-SPAM Act and various FTC rules and regulations. The 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) — an 828 page law that has thus far produced over 14,000 pages of implementing regulations — adds yet another layer of complexity to the already complicated area of consumer financing. In addition to these federal laws and regulations, auto dealers must also comply with a variety of laws and regulations at the state level which impose additional legal requirements. Prior to the passage of the federal TILA in 1968, the vast majority of states adopted their own retail installment sales acts which also require that certain credit information be provided to consumers prior to consummation of a credit transaction. Other notable state acts include the Uniform Commercial Credit Code (“UCC”) and statutes intended to prohibit deceptive trade practices such as the Uniform Deceptive Trade Practices Act (“DTPA”).

The “Acts, Errors or Omissions” coverage of the AD policy obligates the auto dealer insurer to “pay all sums that an ‘insured’ legally must pay as damages because of any ‘act, error or omission’ of the ‘insured’ to which this insurance applies and arising out of the conduct of your ‘auto dealer operations’, but only if the ‘act, error or omission’ is committed in the coverage territory during the policy period.” For purposes of the coverage, an “act, error or omission” is defined as “any actual or alleged negligent act, error or omission committed by an “insured” in the course of your “auto dealer operations” arising:

1. Out of an “insured’s” failure to comply with any local, state or federal law or regulation concerning the disclosure of credit or lease terms to consumers in connection with the sale or lease of an “auto” in your “auto dealer operations”, including, but not limited to, the Truth in Lending and Consumer Leasing Acts.

2. Out of an “insured’s” failure to comply with any local, state or federal law or regulation concerning the disclosure of accurate odometer mileage to consumers in connection with the sale or lease of an “auto” in your “auto dealer operations.”

3. In an “insured’s” capacity an insurance agent or broker in the offering, placement or maintenance of any “auto” physical damage, auto loan/lease gap, credit life or credit disability insurance sold in connection with the sale or lease of an “auto” in your “auto dealer operations”, but only if the “insured” holds a valid insurance agent or broker license at the time the “act, error or omission” is committed, in the jurisdiction in which your “auto dealer operations” is located, if required to do so by such jurisdiction; and

4. Out of a defect in title in connection with the sale or lease of an “auto” in your “auto dealer operations”.

While auto dealer insurers offered similar coverage prior to 2013 (usually referred to as “statutory errors and omissions” coverage), it was typically only available by manuscript endorsement to the GL policy and the scope of the coverage, and the extent of the insurer’s defense obligation, varied from one auto dealer insurer to another.

In subsequent articles, I will address in detail the protection afforded by the “Acts, Errors or Omissions” of the AD policy (as well as coverage which has historically been provided to auto dealers under “statutory errors and omissions” provisions). However, three general observations are in order. First, the coverage does not provide a form of “all-risk” liability coverage protecting the auto dealer against violations of all consumer protection statutes. Rather, “act, error or omission,” only provides protection against three types of consumer protection laws: truth in lending, truth in leasing and odometer disclosure. Thus, claims under the federal Truth in Lending Act (“TILA”) and Regulation Z, the federal Consumer Leasing Act (“CLA”) and Regulation M and the Federal Odometer Act (“FOA”) fall with the insuring clause. It will also protect the auto dealer against violations of state laws or regulation “concerning the disclosure of” credit or lease terms or accurate odometer mileage. Courts have interpreted similar insuring clause language to embrace state laws and regulations which have a “purpose” and “objective” similar to the federal statutes expressly mentioned. The “arising out of” language in the definition of an “act, error or omission” is sufficiently broad to also include liability under state laws which include “borrowing” provisions. Many state consumer protection statutes make the violation of another statute independently actionable under the borrowing statute. (Some auto dealer insurers have attempted to avoid this result by limiting coverage to liability resulting “solely” by operation of the specifically referenced statutes).

The “Acts, Errors or Omissions” coverage does not apply to several notable consumer protection statutes that are applicable to an auto dealer’s F&I operations. I will address the exclusions in detail in subsequent articles. However, there are several notable exclusions. The insurance does not apply to liability under the FCRA, TCPA and CAN-SPAM Act. It also excludes for “[a]ny federal, state or local statute, ordinance or regulation “that addresses, prohibits, or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information”. Further, the coverage will not apply to damages which can arise under the ECOA for “the violation of a person’s civil rights with respect to such person’s race, color, national origin, religion, gender, marital status, age, sexual orientation or preference, physical or mental condition, or any other protected class or characteristic established by any federal, state or local statutes, rules or regulations.”

There are also two types of consumer protection laws which have historically been covered but which are noticeably absent from the “Acts, Errors or Omissions” coverage. The first involves prior damage disclosure laws. Many states have enacted statutes which require auto dealers to disclose prior damage to consumers in writing before consummation of the transaction if the prior damage exceeded a certain percentage of the vehicle’s fair market value at the time it sustained the damage. The percentage is typically quite low in the case of new vehicles and much higher in the case of used vehicles. Some statutes only require disclosure if the prior damage was “material” or affected certain components. In the past, many auto dealer insurers have extended coverage for “prior damage” claims under policy provisions obligating the insurer to pay, in the event of a non-wilful violation of the law, the difference between (1) the retail price paid by the consumer, and (2) the fair market value of the vehicle in its actual (damaged) condition at the time of sale. Although claims alleging prior damage represent a significant and not infrequent liability exposure for auto dealers, the “Acts, Errors or Omissions” coverage does not cover such claims. The other law that has historically been insured by auto dealer insurers is the Federal Trade Commission (“FTC”) Used Car Rule (a/k/a “window sticker” rule). While violations of the rule are typically pursued by the FTC under its regulatory enforcement powers, as opposed to individual consumers, a violation of the Used Car Rule is actionable by consumers under the Magnusson Moss Warranty Act (“MMWA”).

Second, the “Acts, Errors or Omissions” coverage does not specify what damages are covered. Rather, the insuring clause obligates the auto dealer insurer to “pay all sums that an ‘insured’ legally must pay as damages because of any ‘act, error or omission’ of the ‘insured’ to which this insurance applies.” Generally speaking, the laws and regulations which fall within the definition of an “act, error or omission,” (thereby satisfying the insuring clause), identify the remedies available to an aggrieved consumer. While virtually all provide for the recovery of actual damages, most proscribe additional remedies because actual damages are often non-existent, difficult to prove or nominal. Many consumer protection statutes authorize a consumer to seek a variety of remedies including actual damages, statutory damages, liquidated damages, civil penalties, equitable relief such as rescission and restitution and injunctive relief, together with an award of reasonable attorney’s fees and costs. Some also authorize the recovery of treble damages or punitive damages.

The “Acts, Errors or Omissions” coverage identifies, in its exclusion section, damages that are not covered. Unlike most commercial liability policies — which obligate the insurer to defend and indemnify the insured against claims for “bodily injury” and “property damage” — the “Acts, Errors or Omissions” coverage does not. Indeed, claims for “bodily injury” and “property damage” are specifically excluded. (On occasion, a consumer will allege that the auto dealer’s violation of a covered consumer protection statute resulted in mental distress with accompanying physical manifestations (“bodily injury”). To ensure the other liability coverages of the AD policy do not likewise pick up any “bodily injury” or “property damage” or “personal injury” resulting from an “act, error or omission,” the same are specifically excluded in those separate coverage parts). Also excluded are “[c]riminal fines or penalties imposed by law or regulation, punitive or exemplary damages or demands for injunctive or equitable relief” as well as any damages “based upon, attributable to or arising in fact out of the gaining of any profit, remuneration or advantage to which [the dealer] was not entitled.”

Third, the “Acts, Errors or Omissions” coverage not only obligates the insurer to indemnify the auto dealer for all sums the dealer “legally must pay as damages,” but also requires the insurer to defend the dealer against a “suit” (which includes arbitration) asking for covered damages. Having defended auto dealers for over twenty years in consumer finance-related litigation under a host of federal and state consumer protection statutes — which are frequently alleged on a class action basis or in a regulatory enforcement context – the defense obligation provides valuable “litigation” protection. In many cases, the costs of defending the auto dealer will exceed, and sometimes dwarf, the dealer’s ultimate liability to the consumer. More often the not, the consumer has no actual damages and the litigation only involves statutory damages. Historically, and particularly during the period of 1995-2005, auto dealer insurers sought to reduce their exposure for defense costs by either limiting the defense to a stated limit or by including defense costs within the indemnity limits of liability. Absent a modifying endorsement, the “Acts, Errors or Omissions” coverage appears to obligate the insurer to defend the auto dealer on an unlimited basis.

Representing auto dealers and auto dealer insurers in coverage-related matters is a niche practice area. Among other things, coverage counsel must have extensive, in depth knowledge of the automotive retail industry and risks flowing from auto dealer operations, experience in evaluating and litigating coverage issues under a variety of commercial coverage forms and intimate familiarity with all federal, state and local laws and regulations impacting auto dealership operations, particularly those regulating the auto dealer’s consumer financing activities.

Mr. Johnson grew up in the automobile industry. His father owned an American Motors-Jeep-Chrysler dealership in Rapid City, South Dakota. He has represented auto dealers and auto dealer insurers in insurance coverage disputes and defended consumer finance litigation under the TILA, CLA, ECOA, FCRA, MMWA, FOA, MVRISA, UCC, DTPA and CFA for over 20 years. He defended all 542 Minnesota dealerships in litigation with the Minnesota Attorney General and has served as lead counsel and as a consultant to dealers and insurers on class-action litigation outside of Minnesota.

CGL Coverage: Insured’s Investigation and Overhead Expenses Not Covered


Every once in awhile a policyholder asks whether the costs it incurred in addressing a third-party property damage claim, such as inspection costs, personnel costs, overhead costs and attorneys’ fees are covered by its Commercial General Liability (“CGL”) policy.  Unless the costs qualify for coverage under the “Supplementary Payments” provisions of the policy (which typically obligate the insurer to reimburse the insured for “all reasonable expenses incurred by the insured at [the insurer's] request”) or the insurer has breached a duty to defend, these types of costs are generally not covered.   The issue was addressed in Lennar Corp. v. Great American Ins. Co., 200 S.W.3d 651, 679-680 (Tex. App. Houston, 14 Dist. 2006).   That case stemmed from the insured’s application of EIFS to residential homes.  The EIFS entrapped moisture which resulted in water damage to some of the homes. Depending on the home, the water damage included wood rot, damage to substrate, sheathing, framing, insulation, sheetrock, wallpaper, paint, carpet, carpet padding, wooden trim, and baseboards, mold damage, and termite infestation. Lennar presented three types of claims: (1) the costs to repair the damage to homes; (2) the cost to remove and replace EIFS as a preventative measure in all homes; and (3) overhead costs, inspection costs, personnel costs, and attorneys’ fees to assess damage in the homes.   Lennar claimed that its overhead costs, inspection costs, personnel costs, and attorneys’ fees constituted “damages because of” property damage within the meaning of the policy’s insuring clause and, thus, should be covered.  The court disagreed, stating:

Lennar ignores the “legally obligated to pay” language in the insuring agreement. The “insuring agreement” provides that the carrier will pay those sums that Lennar “becomes legally obligated to pay as damages because of . . . property damage.” (emphasis added). The policies do not include a definition of “legally obligated to pay.” However, giving the phrase its ordinary meaning, it means an obligation imposed by law, such as an obligation to pay pursuant to a judgment, settlement, contract, or statute. * * * While Lennar may have been legally obligated to pay the third-party EIFS claims by replacing EIFS, making repairs, and/or making cash payments, it was not legally obligated to incur its own overhead costs, inspection costs, personnel costs, and attorneys’ fees in connection with settling the claims.  Moreover, the insuring agreement clearly refers to the claimant’s damages that the insured becomes legally obligated to pay. In contrast, Lennar’s overhead costs, inspection costs, personnel costs, and attorneys’ fees are not components of the homeowners’ damages. Rather, they are Lennar’s own costs incurred in connection with settling the EIFS claims. Therefore, Lennar was not legally obligated to pay these costs as “damages because of . . . property damage.”

The situation may, of course, be different with regard to legally mandated expenses.  See e.g., Minnesota Min. and Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175, 184 (Minn.1990) (“[w]e hold that expenditures mandated by [law] . . . which are necessary to effectuate the cleanup of contamination which has already occurred to the state’s water resources, are ‘damages because of . . . property damage’ within the meaning of the comprehensive general liability insurance policies issued by these defendants”); Northern States Power Co. v. Fidelity and Cas. Co. of New York, 504 N.W.2d 240, 245-246 (Minn. Ct. App. 1993) (“mandated expenditures necessary to clean up the groundwater and the contaminated soil causing the groundwater pollution and other expenses causally related to remedying the groundwater pollution are covered”), aff’d as modified and remanded, 523 N.W.2d 657 (Minn. 1994); Aerojet-General Corp. v. Superior Court,  211 Cal.App.3d 216, 237, 257 Cal.Rptr. 621, 634 – 635 (Cal.App. 1 Dist. 1989) (“some portion of the response costs in this case will be covered as “damages,” because they will constitute legally compelled expenses for the cleanup of extant pollution”).

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Auto Claims & Self Insured Retentions (“SIR”): Does the SIR Constitute “Insurance” ?


The determination of whether a self-insured retention (SIR) constitutes “insurance” within the meaning of an “other insurance” clause of another policy generally depends on the particular circumstances presented.  See, e.g., Champlain Cas. Co. v. Agency Rent-A-Car, Inc., 716 A.2d at 813 (1998) (noting that the “parties tend to paint with a broad brush, suggesting that self-insurance is a form of insurance . . . or alternatively, the antithesis of insurance” and observing that such labels are “generally unhelpful” to resolving the issue of whether self-insurance can constitute insurance).  The determination of whether an SIR constitutes “insurance” is significant because “[m]any business liability policies contain self-insured retentions, which are, in effect, large deductibles.”  U.S. Fidelity & Guarantee Ins. Co. v. Commercial Union Midwest Ins. Co., 430 F.3d 929 (8th Cir. 2005) (quoting Allan D. Windt, Insurance Claims and Disputes, §11.31 (4th ed. 2003)).  Although at first glance cases across the country appear to be inconsistent, the answer to the question is (or should be) fairly simple, at least in the context of auto accident claims involving a permissive user. In jurisdictions which require a vehicle owner’s insurer (or self-insurance plan) to extend omnibus liability protection to permissive users, the SIR will invariably constitute “insurance” within the meaning of the permissive user’s policy.  Minnesota, as well as several other jurisdictions, requires the policy insuring the vehicle owner to extend omnibus protection to permissive users.  Minnesota also recognizes that if a vehicle owner self-insures, the self-insurance plan must provide the same “coverage” and incidents of “coverage” as an insurance policy insuring the vehicle owner. See, e.g., McClain v. Begley, 465 N.W.2d 680 (Minn. 1991) (same) (self-insurance obtained pursuant to Minn. Stat.  §65B.48, subd. 3, of the Minnesota No-Fault Automobile Insurance Act, “is the functional equivalent of an insurance policy” and “such a policy, if purchased [by the self-insured owner], would contain an omnibus clause extending coverage to permissive drivers as additional unnamed insureds” and constitutes “other insurance” within meaning of renter’s personal policy); White v. Howard, 240 N.J. Super. 427, 573 A.2d 513 (N.J. Super. A.D. 1990), cert. denied, 122 N.J. 339, 585 A.2d 354 (N.J. July 17, 1990) (“qualified self-insurance” obtained by car rental agency was the equivalent of “other collectible insurance” within the meaning of renter’s personal automobile policy); Boatright v. Spiewak, 214 Wis.2d 507, 570 N.W.2d 897 (1997) (statute requires self-insured car rental agency to “pay the same amounts that an insurer would have been obligated to pay under a motor vehicle liability policy if it had been issued” and, thus, protection extended to renter constituted “other insurance” within meaning of renter’s personal auto policy); Southern Home Ins. Co. v. Burdette’s Leasing Service, Inc., 268 S.C. 472, 234 S.E.2d 870, 872 (1977) (self-insurer is required to provide same protection to one operating self-insurer’s vehicle with consent as a statutorily required automobile liability policy must provide and, thus, protection extended to lessee constitutes “insurance” within meaning of lessee’s policy).  Thus, in jurisdictions which mandate that a vehicle owner’s policy (or self-insurance plan) extend omnibus protection to permissive users, an SIR in the vehicle owner’s policy will constitute “insurance” within the “other insurance” clause of the policy insuring the permissive user.

However, in jurisdictions which do not require a vehicle owner’s insurance policy (or self-insurance plan) to extend omnibus protection to permissive users, an SIR should not be considered “insurance.”  See, e.g., Home Indem. Co. v. Humble Oil & Refining Co., 314 S.W.2d 861 (Tex. Ct. App.1958), writ of error and reh’g denied, 159 Tex. 224, 317 S.W.2d 515 (1958) (self-insurance does not operate for benefit of negligent driver); Farmers Ins. Co. of Oregon v. Snappy Car Rental, Inc., 128 Or. App. 516, 876 P.2d 833 (Ore. Ct. App. 1994) (same);  American Fam. Mut. Ins. Co., v. Missouri Power & Light Co., 517 S.W.2d 110 (Mo. 1974) (same).  An SIR should not be considered “insurance” in such jurisdictions because the vehicle owner, if it paid the injured party for damages caused by the negligent permissive user, would be entitled to recover its payment from the permissive user — a proposition directly contrary to the purpose of liability insurance.  See Champlain Cas. Co. v. Agency Rent-A-Car, Inc., 168, Vt. 91, 716 A.2d 810, 813 (1998) (explaining basis for distinction in case law decisions and noting that “there is far less disagreement in the cases that a superficial perusal would suggest”).

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

CGL: Economic & Intangible Losses (Lost Profits, Construction Delay, Idle Time, Increased Overhead, Liquidated Damages, Diminution in Value & Suppressed Rentals, Etc.


Faulty workmanship can produce several different types of injuries in addition to the typical claim involving physical injury to other property. Faulty or defective work can cause, and contractors may be confronted with claims alleging, numerous types of economic and intangible injuries such as construction delay damages, idle time damages, increased overhead costs, liquidated damages, lost profits, diminution in value, suppressed rental income and a host of other similar losses. Are the latter types of injury covered by the contractor’s liability policy? The short answer is: Maybe.  In Minnesota, coverage for such economic and intangible injuries will depend, in large part, on whether the contractor’s faulty work (1) caused physical injury to tangible property or loss of use of tangible property (i.e., “property damage” within the meaning of the policy); (2) the policy’s insuring clause obligates the insurer to pay “damages because of” property damage; (3) there is a “causal connection” between the economic or intangible injury and the property damage; and (4) the property damage upon which the injury is based is not excluded by one or more of the business risk exclusions in the policy.

Standing alone, economic and intangible injuries do not generally qualify as “property damage” under the standard Commercial General Liability (CGL) policy. (By “standard,” I refer to the policy issued by the Insurance Services Office (“ISO”)).  Prior to 1973, some forms of intangible injuries could qualify as “property damage.”  Prior to 1973, when ISO revised its policy form, CGL policies defined “property damage” as “injury to tangible property” rather than “physical injury to tangible property.” Under this policy language, many courts, including Minnesota, held that intangible injuries, such as diminution in value, qualified as “property damage” under the policy. See, e.g., McDowell-Wellman Eng. v. Hartford Acc. and Indem., 711 F.2d 521, 525-26 & n. 7 (3rd Cir. 1983) (and cases cited therein); Yakima Cement Products Co. v. Great American Insur. Co., 22 Wash. App. 536, 590 P.2d 371, 377 (1979), rev’d on other grounds, 93 Wash.2d 210, 608 P.254 (1980); Safeco Insur. Co. v. Munroe, 165 Mont. 185, 527 P.2d 64, 68 (1974); Hauenstein v. St. Paul-Mercury Indemnity Co., 242 Minn. 354, 65 N.W2d 122, 124-26 (1954). In Hauenstein, the Minnesota Supreme Court held that the insured’s application of defective plaster in an apartment building caused a diminution in value of the building, which constituted “property damage” under the policy.  The court noted that the measure of damages was the diminution in the market value of the building, or the cost of removing the defective plaster and restoring the building to its former condition plus any loss from deprival of use, whichever was less.  65 N.W.2d at 125.

However, in 1973, ISO revised the definition of “property damage” to require “physical” injury to tangible property. Because the injury to or destruction of tangible property must be “physical,” the majority of courts have held that claims for intangible injury, such as diminution in value, do not constitute “property damage.” See, e.g., Baywood Corp. v. Maine Bonding & Cas. Co., 628 A.2d 1029 (Me. 1993); Selective Insurance Co. v. J. B. Mouton & Sons, Inc., 954 F.2d 1075 (5th Cir. 1992); New Hampshire Ins. Co. v. Vieria, 930 F.2d 696 (9th Cir. 1991); SLA Property Management v. Angelina Casualty Co., 856 F.2d 69 (8th Cir. 1988); Hartford Accident & Indemnity Co. v. Pacific Mut. Life Ins. Co., 861 Fed.2d 250 (10th Cir. 1988) (1973 revision was intended to preclude coverage for intangible injuries such as diminution in value); Aetna Casualty and Surety Co. v. McIbs, Inc., 684 F. Supp. 246 (D. Nev. 1988) (noting that the inclusion of the word “physical” in the policy was designed to preclude recovery for consequential or intangible damages such as diminution or depreciation in value); Federated Mutual Insurance Co. v. Concrete Units, Inc., 363 N.W. 751, 757 (Minn.1985) (diminution in value does not constitute “property damage” under policy); Wyoming Sawmills v. Transportation Ins. Co., 282 Or. 401, 578 P.2d 1253 (1978) (the only reason for the addition of the word “physical” is to exclude coverage for intangible losses). In Aetna Life and Cas. Ins. Co. v. Patrick Industries, Inc., 645 N.E.2d 656 (Ct. App. Ind. 1995), the insured, a supplier, sued its CGL insurer which had refused coverage for the supplier’s settlement with a manufacturer to whom the insured supplied defective particle board. The particle board had been incorporated into the manufacturer’s campers. The court held that the CGL policy did not cover diminution in value of the campers which contained the defective components. The court recited the history of the “property damage” definition under the 1966 and 1973 versions of the ISO policy and observed that the prior version did not include the word “physical” which was added in 1973.  See also, Vasichek, Liability Coverage for “Damages Because of Property Damage” Under the Comprehensive General Liability Policy, 68 Minn. L. Rev. 795, 811‑12 (1984) (“[d]iminution in value is an economic loss. Diminution in value of tangible property is an incorporeal and intangible harm measured by market forces, not an injury to the material substance of the tangible property. Moreover, to interpret “physical injury” as encompassing diminution in value would render the word “physical” in the phrase meaningless. Diminution in value of tangible property . . .  is not synonymous with loss of use of tangible property. Although the two injuries may coexist in some fact situations, they differ in character and measurement”); Tobi Engineering, Inc. v. Nationwide Mut. Ins. Co., 214 Ill. App. 3d 692, 158 Ill. Dec. 366, 574 N.E.2d 160 (1st Dist. 1991) (delay damages incurred by contractor because of defective materials supplied by insured were not property damage losses); Hommel v. George, 802 P.2d 1156 (Colo. Ct. App. 1990) (economic loss sustained by investors in condominium development caused by contractor’s failure to complete project did not result from loss of use of tangible property and was not covered “property damage”); Lazzara Oil Co. v. Columbia Cas. Co., 683 F. Supp. 777 (M.D. Fla. 1988), judgment aff’d, 868 F.2d 1274 (11th Cir. 1989) (economic damages such as loss profits and loss of good will do not qualify as “property damage”).

Damages “Because of” Property Damage

The fact that economic and intangible injuries do not qualify as “property damage” does not, however, mean that such losses can never be covered under a CGL policy.  The insuring clause of the standard CGL policy obligates the insurer to pay both covered “property damage” and “damages because of” property damage. A loss resulting from “property damage” can be recoverable, whether or not the loss itself is tangible. The inclusion of the “because of” language obligates the insurer to indemnify the insured against economic and intangible injuries to the extent such injuries result from, or were due to, covered “property damage.” See, e.g., Federated Mutual Ins. Co. v. Concrete Units, 363 N.W.2d 751, 756 (Minn. 1985) (“the most sensible reading of the phrase ‘damages because of . . . property damage’ requires the insurer to pay all damages which are causally related to an item of ‘property damage’ which satisfies either of the policy’s definitions”); National Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., 532 F.3d 398, 403 (5th Cir. 2008) (applying Texas law) (consequential damages consisting of lost profits and diminution in value resulting from the insured’s damage to water heaters was covered by policy); Insurance Company of North America v. Aberdeen Insurance Services, Inc., 253 F.3d 878 (5th Cir. 2001) (applying Texas law) (where the insured’s negligence resulted in the breach of an oil pipeline, delaying the insured’s completion of its contract-based construction obligations, liquidated damages awarded against it were a direct consequence of its tortious conduct and were covered by the insurance policy); Gibraltar Casualty Co. v. Sargeant & Lundy, 574 N.E.2d 664, 671 (Ill.App.Ct.1991), (insurer had duty to defend insured against claim alleging increased costs resulting from construction delays attributable to insured’s design errors); Marley Orchard Corp. v. Travelers Indem. Co., 50 Wash. App. 801, 750 P.2d 1294, 1297 (1988), review denied, 110 Wash.2d 1037 (1988) (stress to trees constituted property damage and the resulting consequential damages were covered by the insured’s CGL policy); Am. Home Assurance Co. v. Libbey‑Owens‑Ford Co., 786 F.2d 22, 26‑27 (1st Cir.1986) (concluding that phrase “because of . . . property damage to which this insurance applies” covers consequential damages attributable to property damage covered by policy); Dimambro‑Northend Associates v. United Const., Inc., 154 Mich. App. 306, 397 N.W.2d 547 (1986) (consequential construction delay damages including lost profits, and additional overhead and labor costs following fire in tunnel under construction were covered by CGL policy); Aetna Cas. & Sur. Co. v. General Time Corp., 704 F.2d 80 (2d Cir. 1983) (lost profits resulting from insured’s defective motors were covered by policy); Todd Shipyards Corp. v. Turbine Serv., Inc., 674 F.2d 401, 418, 423 (5th Cir.1982) (finding the insurer liable for consequential damages resulting from covered property damage when the policy provides coverage for liabilities that arise “because of” property damage); Central Armature Works, Inc. v. American Motorists Ins. Co., 520 F.Supp. 283, 289 (D.D.C.1980) (lost profits stemming from loss of use of a shredder resulting from property damage inflicted by acts of the insured were covered by CGL policy); Globe Indem. Co. v. People, 43 Cal.App.3d 745, 750-51, 118 Cal. Rptr. 75, 79 (1974) (fire suppression costs expended by the state to prevent further damage to property qualified as damages “because of” property damage under CGL policy); Hartford A&I Co. v. Case Foundation Co., 294 N.E.2d 7 (Ill. 1973) (injuries consisting solely of economic loss are not covered by policy).  See also, Vasichek, Liability Coverage for “Damages Because of Property Damage” Under the Comprehensive General Liability Policy, 68 Minn. L. Rev. 795, 818‑19 (1984) (“[t]his reading of the phrase ‘because of’ limits coverage of consequential and tangible losses to situations where the insured can show a causal connection linking the losses to covered property damage and, concurrently, renders coverage highly elastic, with its scope adjusting to the causal connection with the ‘property damage’ and other injuries”); Tinker, Comprehensive General Liability Insurance-Perspectives and Overview, 25 Fed’n Ins. Counsel Q. 217, 254 (1975).

Thus, once “property damage” has been established, the insuring grant language obligating the insurer to pay “damages because of” property damage means that the insurer may also be responsible for economic or intangible losses that are causally related to that property damage. See, e.g., SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305 (Minn. 1995) (language “because of” property damage “requires the insurer to pay all damages casually related to an item of property damage under the policy definitions”); Minn. Mining & Mfg. v. Travelers, Ind. Co., 457 N.W.2d 175 (Minn. 1990) (“[t]he costs associated with cleaning up the contamination are more aptly characterized consequential damages flowing from the direct damage caused to the environment . . . [d]amages which are causally related to covered ‘property damage’ should also be covered under the language of the policy”); Atlantic Mut. Ins. Co. v. Judd Co., 367 N.W.2d 604 (Minn. Ct. App. 1985), aff’d, 380 N.W.2d 122 (Minn. 1986) (policy covered damages for labor “idle time” caused by defective pipe); Westfield Insurance Co. v. Weis Brothers, Inc., 2004 WL 1630871 (D. Minn. 2004) (“given the ‘because of’ coverage grant in the Westfield policy, the Court’s inquiry does not stop after it determines that Promenade’s claim of diminution in value is not property damage; rather, it must also determine whether such a claim is ‘causally related’ to an item of property damage, namely the damage caused by water penetration in 1997”); Reinsurance Association of Minnesota v. Timmer, 641 N.W.2d 302 (Minn. Ct. App. 2002), rev. denied (May 14, 2002) (economic losses such as lost investments, lost profits and other consequential damages are covered because “coverage is not limited to property damage, but includes other damages that flow from property damage”); Western National Mut. Ins. Co. v. Frost Paint & Oil Corp., 1998 WL 27247 (Minn. Ct. App. 1998) (language extending coverage to damages “because of” property damage, “permits coverage for Spartan’s consequential losses, including lost profits flowing from physical injury to its trailers which were caused by Frost’s defective paint”); Western World Ins. Co. v. H.D. Engineering Design & Erection Co., 419 N.W.2d 630 (Minn. Ct. App. 1988) (costs of clean-up, redesign and reconstruction were covered under CGL policy issued to subcontractor because the costs were  “causally related” to the property damage).

When addressing coverage under a CGL policy, each item of damage should be analyzed separately. See, Thermex Corp. v. Fireman’s Fund Ins. Co., 393 N.W.2d 15, 16-17 (Minn. Ct. App. 1986). Whether an item of claimed loss is “causally related” to “property damage” is generally a question for the trier of fact and Minnesota courts have yet to flesh out the precise standard to be applied in making this determination.  Some courts require the loss to be “directly related” to the property damage in order to be covered, while others have applied a “but for” or “arising out of” standard. At least one commentators has suggested that coverage should exist as long as the loss is “fairly traceable” to the property damage. See, Jeffrey W. Stempel, Law of Insurance Contract Disputes, 14-10 (2005) (“where economic damage occurs as a fairly traceable consequence of tangible physical injury, property damage coverage is available”). In Federated Mut. Ins. Co. v. Concrete Units, supra, 363 N.W.2d at 756-57 (Minn. 1985), the court held that some items of consequential damage were “simply too tenuously related” to any property damage to be recoverable as consequential damages under the policy.

In Lennar Corp. v. Great American Ins. Co., 200 S.W.3d 651, 679-680 (Tex. App. Houston, 14 Dist. 2006) addressed three items of loss in connection with the insured’s application of EIFS to residential homes.  The EIFS entrapped moisture which resulted in water damage to some of the homes. Depending on the home, the water damage included wood rot, damage to substrate, sheathing, framing, insulation, sheetrock, wallpaper, paint, carpet, carpet padding, wooden trim, and baseboards, mold damage, and termite infestation. Lennar presented three types of claims: (1) the costs to repair the damage to homes; (2) the cost to remove and replace EIFS as a preventative measure in all homes; and (3) overhead costs, inspection costs, personnel costs, and attorneys’ fees to assess damage in the homes.

The damages sustained by some of the homes constituted “physical injury to tangible property.” Accordingly, Lennar’s costs to repair the water damage was covered by Great American’s CGL policy. In some cases, Lennar had to remove some EIFS to access and repair underlying water damage or determine the areas of the underlying damage. In addition, during the repair process, some windows were broken, driveways were cracked, and landscaping was damaged.  The court held that these costs were covered as “damages because of” property damage. Lennar also claimed that it was entitled to indemnification for its costs to remove and replace EIFS on all the homes. The court held that these costs were not covered by the policy for two reasons.  First, the EIFS had not been physically injured and replacement of an initially defective product is not “property damage.” The court noted that the EIFS was not changed from a satisfactory state into an unsatisfactory state, or otherwise physically altered. The water damage to the homes damaged the “substrate and beyond,” not the EIFS itself.  The EIFS was already in an unsatisfactory state when applied to the homes because it is inherently defective. Therefore, the defective EIFS did not constitute “property damage.”  Second, the costs to fully remove and replace EIFS were not “damages because of” property damage. Even if all the homes experienced water damage, the court was unwilling to conclude that Lennar’s costs to remove and replace all EIFS on the homes were “damages because of” property damage.” The evidence reflected that Lennar had implemented a plan to remove EIFS and replace it with a traditional stucco on all the homes regardless of whether the EIFS had caused any damage.  The court noted:

[T]he evidence demonstrates Lennar’s intent was to fully remove and replace the EIFS as a preventative measure because it is defective. * * * Lennar arguably made a good business decision to remove and replace all the EIFS to prevent further damage. Nonetheless, considering the summary judgment evidence, we cannot conclude that it was necessary for Lennar to remove and replace all the EIFS in order to repair the water damage, if any, to each home. Therefore, the costs incurred by Lennar to remove and replace EIFS as a preventative measure are not “damages because of . . . property damage.” Accordingly, Lennar must apportion the EIFS-related damages between its costs to remove and replace EIFS as a preventative measure and its costs to repair water damage to the homes.

Lennar also sought indemnification for various costs it incurred in addressing the claims, including overhead costs, inspection costs, personnel costs, and attorneys’ fees. Lennar characterizes its overhead costs, inspection costs, personnel costs, and attorneys’ fees as “damages because of” property damage. The court disagreed, stating:

Lennar ignores the “legally obligated to pay” language in the insuring agreement. The “insuring agreement” provides that the carrier will pay those sums that Lennar “becomes legally obligated to pay as damages because of . . . property damage.” (emphasis added). The policies do not include a definition of “legally obligated to pay.” However, giving the phrase its ordinary meaning, it means an obligation imposed by law, such as an obligation to pay pursuant to a judgment, settlement, contract, or statute. * * * While Lennar may have been legally obligated to pay the third-party EIFS claims by replacing EIFS, making repairs, and/or making cash payments, it was not legally obligated to incur its own overhead costs, inspection costs, personnel costs, and attorneys’ fees in connection with settling the claims.  Moreover, the insuring agreement clearly refers to the claimant’s damages that the insured becomes legally obligated to pay. In contrast, Lennar’s overhead costs, inspection costs, personnel costs, and attorneys’ fees are not components of the homeowners’ damages. Rather, they are Lennar’s own costs incurred in connection with settling the EIFS claims. Therefore, Lennar was not legally obligated to pay these costs as “damages because of . . . property damage.”

As noted in Lennar Corp., it is generally recognized that costs incurred to prevent future, unknown damage (as opposed to the cost to repair property damage) are not covered by a CGL policy. In Westfield Ins. Co. v. Weis Builders, Inc., 2004 WL 1630871 (D. Minn. 2004), a Minnesota federal district court case addressed the issue in the context of a claim of water infiltration in a townhome development project.  Weis Builders contracted to build the townhome development and used several subcontractors. After the building experienced water penetration problems, the owner, Promenade Village Townhomes, LLC (“Promenade”), submitted various claims to Weis Builders. In response, Weis Builders performed a variety of repairs to address the problems.  One of the claims at issue in the case consisted of $669,022 of remedial costs relating to counter-flashing, caulking and grout work.  Westfield argued that these costs were not covered because they were aimed at preventing future, unknown damage as opposed to repairing property damage.  The federal district court rejected the argument because the “counter-flashing, caulking, and grout [was done] in response to claims made against it by Promenade relating to property damage that was occurring in various sections of the Development. In this way, the repairs were causally related to the property damage that the Development incurred.”  Weis Builders, 2004 WL 1630871 *8.

In Mattiola Const. Corp. v. Commercial Union Ins. Co., 2002 WL 434296, 2-4 (Pa. Com.Pl. 2002), the court was confronted with a claim for liquidated damages under a CGL policy. Mattiola was a company engaged in the business of saw-cutting concrete and asphalt materials in road and bridge construction. Mattiola entered into a subcontract with IA Construction whereby Mattiola agreed to perform saw-cutting work on a bridge owned and operated by the Pennsylvania Turnpike Commission. While performing this work, Mattiola employees accidentally cut certain structural steel members on the bridge, resulting in the stoppage of all work on the project. Mattiola arranged for the repair of the damage it caused but, as a result of the repairs, there was a substantial delay in the completion of the project and the project ultimately ran beyond the completion deadline by 69 days.  The Commission withheld liquidated damages of $75,900 from its payments to IA Construction. IA Construction, in turn, withheld the same amount from its payments to Mattiola.  At the time of the construction, Mattiola was insured under a CGL policy issued by Commercial Union (“CU”).  CU denied coverage claiming that the liquidated damages did not constitute “property damage” under the policy. Mattiola brought suit against CU and the court held that the liquidated damages were covered:

According to CU, the liquidated damages are not property damage and therefore are not covered by the policy. This argument fails to take into account the language of the policy, which extends coverage beyond property damage itself to damages incurred because of property damage. Clearly, the physical injury to the bridge resulting from the accident caused a substantial delay in the completion of the project. This delay can be considered a loss of use, and any resultant damages, including the liquidated damages, are attributable to the accident.  * * * In short, Mattiola caused the accident and the resulting property damage. Accordingly, the liquidated damages arose because of property damage addressed by the policy and are covered by the policy, subject to any possible exclusions.

“To Which This Insurance Applies”

The fact that causally related economic and intangible injuries can be covered under the standard post-1973 version of the CGL policy does not, of course, mean that such injuries will necessarily be covered in all cases. The insuring clause of the standard CGL policy only obligates the insurer to pay “damages because of . . . property damage to which this insurance applies. The importance of the phrase “to which this insurance applies” was reflected in the New Jersey Supreme Court’s opinion in Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979). There, in rejecting the argument that consequential damages resulting from the insured’s faulty workmanship were covered, the court stated: “[t]he qualifying phrase, ‘to which this insurance applies’ underscores the basic notion that the premium paid by the insured does not buy coverage for all property damage but only for the type of damage provided for in the policy. The limitations on coverage are set forth in the exclusion clauses of the policy, whose function it is to restrict and shape the coverage otherwise afforded.” Weedo, 405 A.2d at 790. See also, Federated Mut. Ins. Co. v. Concrete Units, Inc., 363 N.W.2d 751, 757 (Minn.1985) (interpreting phrase “property damage to which this insurance applies”). Thus, as one leading commentator has observed, a CGL policy will only cover intangible losses resulting from “property damage to which the policy applies”, Tinker, supra at 254, and therefore intangible losses arising from damage to the insured’s own work or product — property damage which is explicitly excluded from the policy’s application – is also not covered. See also, Quality Homes, Inc., v. Bituminous Casualty Corp., 355 N.W.2d 746 (Minn. Ct. App. 1985) (if “property damage” is excluded, consequential damages resulting there from are also excluded); Hartford Accident & Indemn. Co. v. Pacific Mut. Life Ins. Co., 861 F.2d 250 (10th Cir. 1988) (“[s]ince the insured’s product and installation are not property damage to which this insurance applies, any consequential damages caused by such products and installation are not covered”); Vari Builders, Inc. v. United States Fidelity & Guaranty Co., 523 A.2d 549 (Del. Ct. App. 1986) (“[o]n the present facts the property damage predicating the consequential damages is specifically excluded from coverage by the business risk provisions [and, thus] . . . damages flowing from such property damage are not covered by the policy”).

In summary, in addressing a claim which alleges economic or intangible losses, one must initially determine whether the claim also involves “property damage” as defined by the policy. The CGL policy generally defines “property damage” to include both “[physical injury to tangible property” and “loss of use of tangible property.”  Assuming one of the two prongs of the “property damage” definition have been satisfied, the economic or intangible loss may be covered as “damages because of” property damage. That determination requires a sufficient “causal connection” between the economic or intangible loss at issue and the underlying “property damage.” Finally, if a causal connection exists, one must determine whether the underlying “property damage” upon which the economic or intangible loss is based, is subject to an exclusion.  If the underlying property damage is excluded, all claimed losses based on that property damage will fail as well. If the underlying property damage is not excluded, other losses will be covered.

Of course, the fact that such losses may be covered by a CGL policy does not mean they will be proven or have merit.  The underlying construction contract may contain a waiver of some types of consequential damages and the proof necessary to prevail on intangible losses such as lost profits, suppressed rental income, etc. can be rather stringent.

Mr. Johnson is an insurance coverage attorney and has represented CGL insurers, general contractors, subcontractors and suppliers in large commercial and multi-unit residential construction defect claims for twenty years. He successfully handled the seminal construction defect case in Minnesota, Wooddale Builders, Inc. v. Maryland Cas. Co., 722 N.W.2d 283 (Minn. 2006), and has authored several articles on insurance coverage for construction defect claims including Contractual Risk Transfer, Hold Harmless and Indemnity Agreements and Additional Insured Coverages (Wells Fargo March 15, 2009) and Liability Allocation Issues: “Other Insurance” & the Wooddale Home Builder Construction Decision (Minnesota Defense Lawyers Association Insurance Law Institute, Jan. 25, 2007).

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Commercial Auto: Owner of Semi-Trailer is not Vicariously Liable for Negligent Operation of Semi-Truck.


What definition of “motor vehicle” applies when determining whether the Minnesota motor vehicle vicarious liability law applies?   The Minnesota Court of Appeals addressed the issue in late 2009.

By 2005, only eleven states imposed vicarious liability on the owner of motor vehicle (California, Connecticut, Florida, Idaho, Iowa, Maine, Michigan, Minnesota, Nevada, New York and Rhode Island) as did the District of Columbia.  Under a vicarious liability law, the vehicle owner becomes legally liable for injuries and damages caused by a permissive driver of the motor vehicle. “[V]icarious liability is the ‘imposition of liability on one person for the actionable conduct of another, based solely on a relationship between the two persons.’” Sutherland v. Barton, 570 N.W.2d 1, 5 (Minn.1997) (quoting Black’s Law Dictionary 1566 (6th ed.1990)).

The Minnesota vicarious liability law is found in Minn. Stat. § 169.09, subd. 5a (previously Minn. Stat. § 170.54), which sets forth the general rule as follows:

Whenever any motor vehicle shall be operated within this state, by any person other than the owner, with the consent of the owner, express or implied, the operator thereof shall in case of accident, be deemed the agent of the owner of such motor vehicle in the operation thereof.

The policy of the vicarious liability law is to ensure that members of the public have “an approximate certainty of an effective recovery” when injured by the operation of a motor vehicle.  Milbank Mut. Ins. Co. v. U.S. Fid. & Guar. Co., 332 N.W.2d 160, 165 (Minn. 1983). Minnesota courts have consistently reiterated that the statute must be interpreted liberally to accomplish its purpose. Id. at 165-66; Christensen v. Milbank Ins. Co., 643 N.W.2d 639, 642 -645 (Minn. Ct. App. 2002).  (As noted in previous posts to this blog, the motor vehicle vicarious liability statute is pre-empted by the federal Graves Amendment in the context of rented motor vehicles).

The vicarious liability statute only applies to statutorily defined “motor vehicles.” Prior to 2005, when the vicarious liability statute was codified at Minn. Stat. § 170.54 (and was then referred to as the Safety Responsibility Act), the statute did not contain any definition of “motor vehicle” or refer to any other statute which defined the term.  In Great Am. Ins. Co. v. Golla, 493 N.W.2d 602, 605 (Minn.App.1992), the Minnesota Court of Appeals concluded that the definition of motor vehicle found in section 65B.43 of the Minnesota No-Fault Automobile Insurance Act (No-Fault Act), as opposed to the definition found in chapter 169, applied to the vicarious liability statute. By its terms, the No-Fault Act’s section 65B.43 definitions only applied to sections 65B.41 through 65B.71 while the definitions in chapter 169 only applied to statutes within that chapter. Thus, neither definition of “motor vehicle” clearly applied to Minn. Stat. § 170.54. The Golla court had to apply some definition to the term in 170.54 and ultimately concluded that the No-Fault Act’s definition should apply to the vicarious liability statute. See also, State Automobile & Casualty Underwriters v. Runia, 363 N.W.2d 818, 820 (Minn. Ct. App.1985) (applying No-Fault Act definition and finding that a snowmobile fell outside the definition); Mularky v. Kiewel, 1996 WL 70982 (Minn. Ct. App. 1996) (applying No-Fault Act definition of motor vehicle).  The No-Fault Act defines the term in Minn. Stat. § 65B.43, subd. 2 as follows:

“Motor vehicle” means every vehicle, other than a motorcycle or other vehicle with fewer than four wheels, which (a) is required to be registered pursuant to chapter 168, and (b) is designed to be self-propelled by an engine or motor for use primarily upon public roads, highways or streets in the transportation of persons or property, and includes a trailer with one or more wheels, when the trailer is connected to or being towed by a motor vehicle.

The application of the No-Fault Acts definition to the vicarious liability statute was problematic in that some vehicles (including, among others, automobiles registered in other states) were not “required to be registered pursuant to chapter 168” giving rise to the argument that no vicarious liability would attach to the owner of an out-of-state vehicle in the event of an accident in Minnesota.  However, in 2005, the legislature repealed section 170.54 and relocated it in section 169.09, subd. 5a, thus bringing the vicarious liability statute within a chapter that contained its own definition of “motor vehicle.” Minn. Stat. § 169.011, subd. 42 (defining “motor vehicle”).  Additionally, by express description, the definitions contained in section 169.011 apply to all of the statutes in chapter 169, which would include the vicarious liability statute. Minn. Stat. § 169.011, subd. 1. In Vee v. Ibrahim,  769 N.W.2d 770, 771-775 (Minn. Ct. App. 2009) review denied (Sept. 29, 2009), the Minnesota Court of Appeals ruled that the definition of “motor vehicle” in chapter 169, as opposed to the No-Fault Act definition, applies to the vicarious liability statute:

[T]he legislature has relocated the [vicarious liability] law within the scope of a specifically defining statute. * * * The legislature was aware that “motor vehicle” was defined by section 169.011 when it relocated the vicarious liability statute to the same chapter. This is strong evidence that the legislature intended the statute to be defined accordingly. If the legislature intended for chapter 65B’s motor-vehicle definition to apply to the vicarious liability statute, it had many means to indicate that inevident intention. It could have moved the statute within the expressly stated scope of the chapter 65B definitions. It could have amended the statute to expressly refer to the 65B definition. Or it could have left things as they were, tacitly acquiescing to this court’s construction in Golla. Instead, the legislature adopted a statutory definition for “motor vehicle” where previously none existed within the chapter that assigns vicarious liability. * * * We conclude that the intent of the legislature was to abrogate Golla implicitly. We hold that the definition of motor vehicle in chapter 169 applies to the vicarious liability statute.

The determination of which statutory definition of “motor vehicle” applied was of considerable significance in Vee v. Ibrahim,  769 N.W.2d 770, 771-775 (Minn. Ct. App. 2009). In that case, a semitruck and its trailer jackknifed after rear-ending a delivery truck, causing the trailer to swing into the oncoming lane and strike and seriously injure motorcyclist Randy Vee. The semitruck and semitrailer were separately owned. Randy Vee sued the two truck drivers and their employers.  He also sued the semitrailer’s owner, American President Lines (APL).  The claim against APL depended on APL being vicariously liable for the semitruck driver’s conduct.  The definition of “motor vehicle” found in the No-Fault Act, as noted above, defined the term “motor vehicle” to include “a trailer with one or more wheels, when the trailer is connected to or being towed by a motor vehicle.”  If the No-Fault Act definition applied, the owner of the trailer, APL, would have been vicariously liable for Vee’s injuries. By contrast, the definition in chapter 169 did not include a trailer.  Rather, Minn. Stat. § 169.011, subd. 42, defines the term “motor vehicle” to mean:

“Motor vehicle” means every vehicle which is self-propelled and every vehicle which is propelled by electric power obtained from overhead trolley wires. Motor vehicle does not include an electric personal assistive mobility device or a vehicle moved solely by human power.

Because the Minnesota Court of Appeals found the definition of “motor vehicle” appearing in section 169.011 applied, the semitrailer did not qualify as a motor vehicle under the vicarious liability statute. According to the definition, a motor vehicle is “self-propelled” or “powered by trolley wires.” Minn. Stat. § 169.011, subd. 42. A semitrailer is neither. The court further noted that its holding that a semitrailer was not a motor vehicle complemented the statutory definition of “semitrailer,” which is a “[vehicle] designed [to be] used in conjunction with a truck-tractor” and “includes a trailer drawn by a truck-tractor semitrailer combination.” Minn. Stat. § 169.011, subd. 72. A semitrailer therefore remains merely a “vehicle” even when it is drawn by a “motor vehicle.”  Because the motor-vehicle vicarious liability statute does not impose vicarious liability on the owners of semitrailers, APL was not vicariously liable for the accident.

Minnesota Statute § 169.09, subd. 5a, the vicarious liability statute, only applies to accidents that occur in the State of Minnesota.  In that event, the vehicle owner will be legally responsible (along with the permissive user) for all damages caused by the permissive user’s negligent operation of the vehicle. See, Boatwright v. Budak, 625 N.W.2d 483, 488 (Minn. Ct. App. 2001) (“[e]mploying a plain-meaning approach,” court held statute only applies “to accidents that occur within Minnesota”); Avis Rent-A-Car System v. Vang, 123 F.Supp.2d 504 (D. Minn. 2000) (Minnesota statute creating liability on part of owner for damages resulting from operation of automobile by another with owner’s consent did not apply to automobile accident in Michigan); West Bend Mut. Ins. Co. v. American Family Mut. Ins. Co., 586 N.W.2d 584 (Minn. Ct. App. 1998) (garage liability policy insuring Minnesota dealership’s vehicles did not afford any liability coverage for accident occurring involving dealership vehicle in Louisiana, a jurisdiction which did not impose vicarious liability). In light of the court’s holding in Vee v. Ibrahim,  769 N.W.2d 770, 771-775 (Minn. Ct. App. 2009) review denied (Sept. 29, 2009), which held that the statutory definition of “motor vehicle” in Minn. Stat. § 169.011, subd. 42 applies to the motor vehicle vicarious liability statute (as opposed to the No-Fault Act’s definition), the owner of an out-of-state vehicle involved in an accident in Minnesota has no basis to contend that the vicarious liability law will not operate to impose vicarious liability on the owner.

======================================

Greg Johnson is an insurance coverage attorney practicing in Minnesota and has over twenty years of experience in handling insurance coverage disputes under Commercial General Liability, Garage Liability and Commercial Auto and Personal Auto policies.  He has been involved in several of the leading cases in the construction defect, rental car, dealership errors and omissions and auto insurance arenas and has authored several insurance related publications during his career, including authoring the Uninsured/Underinsured Motorist Sections of the 1991, 1994, 2000 and 2001 editions of The Minnesota Motor Vehicle Insurance Manual (a four hundred page treatise relating to BI, PD, UM/UIM and PIP claims that has been cited by Minnesota appellate courts on numerous occasions).

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Commercial & Personal Auto: Vicarious Liability not Limited to Negligent Operation of Vehicle


Every once in a while, while putting together a blog post on a particular issue, I run across a case that doesn’t fit into the post I am putting together, but is nonetheless interesting.

Here’s an oldie, but a goodie . . . involving trees:

The Minnesota vicarious liability statute, which generally operates to impose vicarious liability on the owner of a motor vehicle,  is not necessarily limited to claims involving the negligent operation of the motor vehicle. In Pluntz v. Farmington Ford-Mercury, Inc.,  470 N.W.2d 709 (Minn. Ct. App. 1991) review denied (Minn. Jul 24, 1991), Leander, a permissive user of the dealership’s vehicle, suffered a sudden and unexpected medical emergency while operating the vehicle, ran off the road and damaged plaintiff’s trees.  Although it was undisputed Leander went off the road as the result of an unforeseen medical problem and, thus, was not negligent, the statute which created liability for the damage to the trees, Minn. Stat. § 561.04, did not require a finding of negligence.  Rather, it imposed liability for injury to trees when trees were damaged without lawful authority.  Thus, whether Leander was negligent for causing the damage to the trees was irrelevant.  Because Leander did not have lawful authority to damage the trees, he was liable pursuant to section 561.04.  In addition, the dealership was liable.  The dealership was vicariously liable based on the agency relationship created by section 170.54 (now 169.09, subd. 5a). The court noted that the term  “accident” in the vicarious liability statute (which was not defined in the statute) included “an event that takes place without one’s foresight or expectation” or “an event which proceeds from an unknown cause,” (citing Webster’s Unabridged Dictionary (2d ed. 1983)), and the damage to the trees resulted from an “accident.” Id.  The court noted that while the statute “is typically used to impose liability on the owner of a car for negligent operation by the owner’s permittee . . . the statute is not restricted to negligence cases.”  Id.  Rather, the statute reflects public policy to hold owners of motor vehicles responsible for damages caused by their permittees and there was no reason to depart from that public policy in this case.   (Note that under the federal Graves Amendment, which I have addressed in a few prior posts, the owner of a rented vehicle would not be vicariously liable for the tree damage under similar circumstances).

==============================

Greg Johnson is an insurance coverage attorney practicing in Minnesota and has over twenty years of experience in handling insurance coverage disputes under Commercial General Liability, Garage Liability and Commercial Auto and Personal Auto policies.  He has been involved in several of the leading cases in the construction defect, rental car, dealership errors and omissions and auto insurance arenas and has authored several insurance related publications during his career, including authoring the Uninsured/Underinsured Motorist Sections of the 1991, 1994, 2000 and 2001 editions of The Minnesota Motor Vehicle Insurance Manual (a four hundred page treatise relating to BI, PD, UM/UIM and PIP claims that has been cited by Minnesota appellate courts on numerous occasions).

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Commercial & Personal Auto: Permissive Use, Omnibus Coverage & Split Liability Limits


Having worked with garage liability insurers, rental car companies, auto dealerships and commercial and personal auto carriers over the past 20 years (both in coverage litigation and in drafting contracts and manuscript endorsements), I often receive questions from businesses, insurers and brokers regarding the “rules” which apply to accidents involving rental vehicles, loaner vehicles, leased vehicles, demos, spot-delivered vehicles, etc.  I thought I’d take some time to update some of my seminar materials and provide an update.   The following is a portion of my updated materials.  (I will provide more “specialized” rules in subsequent posts to this blog.  You can receive future blog posts automatically via e-mail by subscribing to the blog).

In many states, the owner of a motor vehicle is required to insure the vehicle under a liability policy which, in addition to insuring the owner, extends “omnibus” protection to a permissive user of the vehicle.  “Omnibus protection is the extension of liability coverage to a permissive user of a motor vehicle owned and insured in the name of another.” Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483, 485, n.2 (Minn. Ct. App. 1994).  In the majority of jurisdictions, the omnibus coverage afforded to permissive users under the owner’s policy is deemed primary vis a vis the coverage available to the permissive user under his/her personal auto policy.  This “priority” result is often mandated by operation of the policies “other insurance” clauses or by application of common law “closeness to the risk” tests developed by the courts or by statute.  In some such jurisdictions, the limits of liability available to the permissive user under the owner’s omnibus coverage must be co-extensive with the limits available to the named insured.  See, e.g., Smith v. National Indem. Co., 205 N.W.2d 365 (Wis. 1973) (car rental coverage contract which limited liability coverage for renters to less than coverage for rental agency was held invalid); Hardware Mut. Ins. Co. v. General Accident Fire & Life Ins. Co., 188 S.E.2d 218, 221 (Va. 1972) (court held that statute’s remedial intent prohibited split-limit provisions).  In other words, if the owner’s policy affords $100,000 liability limits to the owner, the policy must also extend $100,000 of omnibus coverage to permissive users.

By contrast, the Minnesota No-Fault Act (enacted in 1975), has never contained a statute requiring the policy issued to the owner extend omnibus coverage to a permissive user of the vehicle.  See, Minn. Stat. §65B.49, subd. 3(2).  Prior to the adoption of the No-Fault Act, Minnesota law mandated omnibus liability coverage.  Minnesota Statute § 170.40, subd. 2(2) (1971) provided that the owner’s policy must “insure the person named therein and any other person, as insured, using any such motor vehicle or motor vehicles with the express or implied permission of such named insured, against loss from liability imposed by law for damages arising out of the ownership, maintenance or use of such motor vehicle or motor vehicles.” Minn. Stat. § 170.40, subd. 2(2) (1971) (emphasis added). This statute imposed an omnibus coverage requirement on the owner’s insurer; however, it did not survive passage of the No-Fault Act.

In Leegard v. Universal Underwriters Ins. Co., 255 N.W.2d 819 (Minn. 1977), the Minnesota Supreme Court stated, in dictum, that an owner’s policy is only required to protect those “insureds” identified in Minn. Stat. §65B.43, subd. 5 (i.e., the named insured and resident relatives), which was not broad enough to encompass permissive users. Consequently, there is nothing in the No-Fault Act which specifically mandates that an owner’s policy extend omnibus coverage.

Despite the absence of any omnibus coverage requirement in the No-Fault Act, the Minnesota Department of Commerce and Minnesota courts have always assumed that this obligation exists. Historically, the Minnesota Department of Commerce has refused to approve for filing any personal auto policy that does not extend omnibus coverage to permissive drivers.  In addition, in the early 1990’s, the Minnesota Department of Commerce held that rental contract provisions which purported to shift all insuring obligations to permissive users were invalid, suggesting that omnibus coverage is required.  The presence of an “implied” omnibus coverage requirement gained further traction in McClain v. Begley, 465 N.W.2d 680, 682 (Minn. 1991).  In that case, the self-insured rental car company attempted, through its rental car contracts, to shift all financial responsibility to its renters.  The rental car contract in McClain required renters to assume full responsibility to the public and hold harmless and indemnify the rental car company from all liability. In an administrative proceeding, the Minnesota Department of Commerce found the rental car contact void and unenforceable under the No-Fault Act.  On appeal to the Minnesota Supreme Court, the rental car company did not contest the Department of Commerce’s ruling that the rental contract was void. Rather, it only argued that it could only be required to extend minimum limits of omnibus coverage to the renter (i.e., $30,000 per person/$60,000 per accident) despite having filed a self-insured certificate with the Minnesota Department of Commerce identifying a self-insured retention (SIR) of $500,000.  The Supreme Court, observed that “[s]elf insurance is the functional equivalent of a commercial insurance policy,” and went on to estop the rental car company from denying coverage in any amount less than the SIR.  In other words, the self-insured rental car company was required to extend $500,000 of omnibus liability coverage to the renter.  In a concurring opinion, which was considerably more thoughtful than the majority analysis, Justice Simonett concluded that a self-insured entity should be treated “as if it had purchased a policy of auto liability insurance for each of its vehicles with itself as the named insured.  Such a policy, if purchased, would contain an omnibus clause extending coverage to permissive drivers as additional unnamed insureds.”  Id. at 684.  Justice Simonett noted that a vehicle owner could limit the amount of coverage available to permissive users by contract, but in this case, the rental car contract was void.  Justice Simonett, thus, concluded that there was no contractual provision which served to limit the omnibus coverage and, consequently, the renter was entitled to receive the full $500,000 SIR.

Thus, the Minnesota Supreme Court’s decision in McClain superseded prior decisions that the presumptive amount of a self insurer’s omnibus liability insurance, absent any evidence of limits, was the statutory no-fault minimum. See, e.g. Anderson v. Northwest Bell Tel. Co., 443 N.W.2d 546, 549 (Minn. Ct. App.1989).

The leading case and most-often cited rental car case in Minnesota is Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994), a case the author handled for Agency-Rent-A-Car. In Agency Rent-A-Car, the rental car company (Agency) had a self-insured retention (SIR) of $500,000 and a $5 million excess policy.  The rental car contract provided that Agency would afford minimum limits ($30,000 per person/$60,000 per accident) of liability protection to its renters. At the time of the accident, Gruett (the renter) was insured with American Family under a personal auto policy affording $50,000 limits.  Gruett caused an accident and the other driver sustained $87,000 in damages. American Family argued that Agency was obligated to extend its entire $500,000 SIR to Gruett on a primary basis, such that American Family’s policy would not come into play – the damages, as noted, were only $87,000.  Agency argued that neither the No-Fault Act nor public policy required an owner of a vehicle, such as a rental car company, to afford liability protection to renters which is co-extensive with the level of protection the owner selected for itself.  Agency acknowledged that it was obligated to pay $30,000 of omnibus coverage on behalf of the customer pursuant to the rental car contract, but contended that American Family was obligated to pay the next $50,000 of damages and Agency was then liable for the remaining $7,000 based on its vicarious liability under Minn. Stat. § 170.54.  (Agency contended that it was legally entitled to indemnification for this $7,000 from Gruett, but agreed to waive the claim.

The trial court agreed with Agency on all grounds and the Minnesota Court of Appeals affirmed. The Court of Appeals noted that Agency was vicariously liable under Minn. Stat. § 170.54 (now § 169.09, subd. 5a) because it owned the rental vehicle that caused the accident and it had given the renter, the alleged tortfeasor, permission to drive it.   However, the dispositive issue was not whether Agency and Gruett were jointly liable for the plaintiff’s damages of $87,000 (they were by operation of Minn. Stat. § 170.54), but rather whether and to what extent Agency or American Family, or both, were obligated to pay that liability.  The Minnesota Court of Appeals agreed with Agency that it was obligated to pay the first $30,000 of damages, American Family was liable for the next $50,000 and Agency was responsible for the $7,000 balance (subject to its right of indemnification against the customer).  The Court of Appeals noted:

[T]he dispositive determination in this case is [whether] the limit of [Agency’s] . . . omnibus coverage per person was $50,000 and not $500,000.  * * * [American Family] argues that the liability limits a self-insurer reports to the Commissioner in the form of its self-insured retention must necessarily be coextensive with its omnibus liability limits per person per accident.  * * * We agree with [Agency] that even if its insurance obligation was primary over that of [American Family], it successfully contracted to limit that primary insurance to $30,000, the statutory minimum.  * * * Here, [Agency] executed a valid contract outlining the amount of omnibus liability coverage that it made available to lessees.  * * * Courts in other states differ on whether a vehicle owner may carry one level of liability insurance for itself and a different level of omnibus coverage for permissive users. * * * Minnesota has no omnibus insurance statute.  Courts in other states lacking such legislation have held that coverage for the named insured need not be coextensive with omnibus coverage. * * * We conclude that subject to the statutory minimum amount, an automobile rental company may limit its omnibus liability coverage to less than its own personal liability coverage, and it may do so in the rental contract. * * * We conclude that respondent has not unlawfully circumvented its duties as a self-insured no-fault reparation obligor.  * * * And limited coverage does not defeat the purpose of the Act, as long as there are no uncompensated victims.

The Agency Rent-A-Car case was thus the first Minnesota case to specifically hold that the limits of liability available to a permissive user under the owner’s omnibus coverage need not be co-extensive with the limits available to the named insured.  The insurer of the vehicle owner can limit the omnibus coverage it provides to permissive users to the statutory minimum limits while affording greater limits to the named insured owner.   The McClain case, which was distinguished in Agency Rent-A-Car, stands for the narrow proposition that in the absence of any agreement or other evidence to the contrary, and where the only evidence of insurance protection for accident victims is found in the self-insured obligor’s representations to the Commissioner in its application for self-insurance, then those representations shall constitute the limit of the obligor’s liability coverage to the accident victims. (The case also recognized that the insurer of the vehicle would have a right of indemnification against the permissive user if the damages exceeded the omnibus coverage afforded to the permissive user under the owner’s policy).

In 1994, a week or so before the Court of Appeals issued its decision in Agency Rent-A-Car, the Minnesota legislature enacted a priority statute for automobile liability coverage (referred to as “residual liability coverage” in the No-Fault Act).  Minnesota Statute § 65B.49, subd. 3(3)(d) provides in part that “a residual liability insurance policy shall be excess of a nonowned vehicle policy whether the nonowned vehicle is borrowed or rented, or used for business or pleasure.” The statute is not a model of clarity.  According to the Minnesota Department of Commerce and Minnesota courts, the statute is to be interpreted from the standpoint of the permissive user.  When viewed from this perspective, the statute requires the insurer of the vehicle owner (the insurer of the “nonowned vehicle”) to afford primary liability coverage to the permissive user vis a vis the coverage afforded to the permissive user under his/her personal auto policy.  This priority statute essentially codified the order of payment which resulted under common law. Prior to enactment of Minn.Stat. § 65B.49, subd. 3(3)(d) in 1994, priority was determined by a “closest to the risk” analysis. See, e.g., Interstate Fire & Cas. Co. v.. Auto-Owners Ins. Co., 433 N.W.2d 82, 86 (Minn.1988); State Farm Mutual Auto. Insurance Co. v. Budget Rent-A-Car, Inc., 359 N.W.2d 673 (Minn. Ct. App. 1984).

Following enactment of § 65B.49, subd. 3(3)(d), Minnesota courts held that contractual provisions which attempted to shift the obligation to afford primary liability coverage from the insurer of the vehicle owner to the permissive driver’s insurer were void and unenforceable. See, e.g., Hertz Corp. v. State Farm Mut. Ins. Co., 573 N.W.2d 686, 689 (Minn. 1998) (rental contract which obligated renter to assume all liability if renter had personal auto policy was void under No-Fault Act); Mutual Service Cas. Ins. Co. v. West Bend Mut. Ins. Co., 599 N.W.2d 585 (Minn. Ct. App. 1999) (holding that garage liability policy defining an “insured” to exclude a customer who had personal auto coverage contravened the No-Fault Act).  According to the Minnesota Court of Appeals, the Hertz and Mutual Service decisions, “on the basis of Minn. Stat. § 65B.49, subd. 3(3)(d), found an attempt to provide liability coverage only to permissive drivers who did not have liability coverage arising from his or her own automobile policy violated the policy of the No-Fault Act.” State Farm Mut. Ins. Co. v. Universal Underwriters Co., 625 N.W.2d 160 (Minn. Ct. App. 2001), rev. denied (Minn. June 21, 2001). The contractual provisions at issue were held void and unenforceable because the vehicle owner was “thrusting upon the renter its responsibility to provide liability coverage.” Id. (The Hertz and Mutual Service decisions are debatable. As noted by the Minnesota Court of Appeals in two other cases, “limited coverage does not defeat the purpose of the Act, so long as there are no uncompensated victims.” Agency Rent-A-Car, Inc. v. American Family Mutual Insurance Co., 519 N.W.2d 483 (Minn. Ct. App. 1994). See also American Family Mut. Ins. Co. v. Universal Underwriters Ins. Co., 438 N.W.2d 701 (Minn. Ct. App. 1989). In neither Hertz nor Mutual Service would the injured party have been affected had the contract provisions at issue been upheld.  The insurance would have simply been shifted between the insurers.  Minnesota Supreme Court Justice Alan Page correctly analyzed the issue in his dissenting opinion in Hertz, but the same is beyond the scope of this post).

There are three important principles for garage insurers, rental car companies and personal auto insurers to keep two things in mind when addressing claims. First, it is important to recognize that the priority statute, § 65B.49, subd. 3(3)(d), has no effect on the Agency Rent-a-Car decision and its authorization for “split-limits” policies.  The priority statute only requires (subject to the exceptions identified below) that the first layer of coverage – the omnibus coverage available under the owner’s policy, come first.  The priority statute does not mandate the limits of that omnibus coverage or require that those limits be co-extensive with the limits available to the named insured vehicle owner.  In State Farm Mut. Ins. Co. v. Universal Underwriters Co., 625 N.W.2d 160 (Minn. Ct. App. 2001), a customer of an automobile dealership insured by Universal caused an accident while operating a loaner vehicle.  The driver of the other vehicle was injured in the accident.  The Universal garage liability policy afforded $500,000 in liability limits for the named insured dealership and its employees, but contained a split-limit, step down provision limiting liability coverage for customers (omnibus insureds) to the “limit needed to comply with the minimum limits provision law in the jurisdiction where the occurrence took place.” Id. at 162.  Universal, represented by the author, acknowledged that it was required to afford the first $30,000 of liability coverage (the minimum limits required by Minnesota law) on behalf of the permissive user/customer, after which State Farm (which insured the customer under a personal auto policy) would apply. Finally, Universal contended that if the injured plaintiff still had uncompensated damages, the coverage Universal afforded to the dealership would be available for the balance of the injuries.  State Farm, on the other hand, argued that Minn. Stat. § 65B.49, subd. 3(3)(d) prohibited an insurer from contractually providing different liability limits for a permissive driver and motor vehicle owner.  State Farm contended that Universal was obligated to extend its full $500,000 liability limits as omnibus coverage to the renter.

The district court did not err in concluding that the policy clearly limits coverage for permissive drivers to the statutory minimum and that the higher limit continues to apply to the owner’s vicarious liability for such use. * * *  This court has previously held that a self-insured owner of a motor vehicle may contractually limit liability coverage for a permissive user to the statutory minimum, while providing a higher coverage limit for the owner. See Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483, 487 (Minn. Ct. App. 1994).  The decision in Agency involved a self-insured car-rental agency and the contractual limitation was contained in the rental agreement, but the analysis is not limited to self-insureds. * * * We noted in Agency that Minnesota does not have an “omnibus statute” requiring coverage of the named insured to be coextensive with coverage of any other person using the insured’s vehicle . . . Nothing in Minn. Stat. § 65B.49, subd. 3(3)(d) shows a clear intent by the legislature to restrict an insurer’s right to freely contract for different liability limits for permissive drivers and owners so long as the minimum statutory coverage is provided.  * * * The remedial purpose of the Minnesota No-Fault Act is not impacted by allowing split limits. We find Agency controlling. Minn. Stat. § 65B.49, subd. 3(3)(d) does not void the split-limit coverages provided in Universal’s policy.

Thus, although a vehicle owner’s insurer is required to afford primary coverage by operation of the automobile liability priority statute, Minn. Stat. § 65B.49, subd. 3(3)(d), Minnesota insurers (and self-insureds) can, consistent with Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994) and State Farm Mut. Ins. Co. v. Universal Underwriters Co., 625 N.W.2d 160 (Minn. Ct. App. 2001), rev. denied (Minn. June 21, 2001), contractually limit the omnibus coverage afforded to permissive drivers to the statutory minimum, while providing a higher coverage limit for the named insured vehicle owner. “[A] policy, if purchased, would contain an omnibus clause extending coverage to permissive drivers as additional unnamed insureds.” Hertz Corp. v. State Farm Mut. Ins. Co., 573 N.W.2d 686, 689 (Minn. 1998) (quoting McClain v. Begley, 465 N.W.2d 680, 684 (Minn. 1991) (J. Simonett, concurring).  Although Minnesota has no omnibus statute, the omnibus coverage afforded under the owner’s policy is required to afford coverage to the permissive driver, at least up to the omnibus coverage limit identified in the policy (or rental car contract). Several other states have likewise found that split limits do not violate public policy. See, e.g., Bowers v. Estate of Feathers, 448 Pa.Super. 263, 671 A.2d 695, 700 (1995) (listing states which upheld split-limit provisions); Lehman Eastern Auto Rentals, Inc. v. Brooks, 370 So.2d 14, 16 (Fla.Dist.Ct.App.1979); Universal Underwriters Ins. Co. v. Hill, 24 Kan.App.2d 943, 955 P.2d 1333, 1339 (1998); Windsor Ins. Co. v. Lucas, 24 S.W.3d 151, 154-55 (Mo.Ct.App.2000); Yosemite Ins. Co. v. State Farm Mut. Auto. Ins., 98 Nev. 460, 653 P.2d 149, 150 (1982).

Second, it is important to bear in mind that the automobile liability priority statute, Minn. Stat. § 65B.49, subd. 3(3)(d),only sets forth the “general” priority rule.  The statute is subject to the exception contained in Minn. Stat. § 65B.49, subd. 5a. See, Minn. Stat. § 65B.49, subd. 3(3)(d) (“[e]xcept as provided in subdivision 5a, a residual liability insurance policy shall be excess of a nonowned vehicle policy . . .”).

In 2000, Minn. Stat. § 65B.49, subd. 5a (j) was enacted and provided as follows:

The plan of reparation security covering the owner of a rented motor vehicle is excess of any residual liability coverage insuring an operator of a rented motor vehicle if the vehicle is loaned as a replacement for a vehicle being service or repaired, regardless of whether a fee is charged for use of the vehicle, provided that the vehicle so loaned is owned by the service or repair business.

In 2007, § 65B.49, subd. 5a(j) was amended to provide:

The plan of reparation security covering the owner of a rented motor vehicle is excess of any residual liability coverage insuring an operator of a rented motor vehicle.

A vehicle is considered “rented” for purposes of the “rented motor vehicle” priority statute “(1) if the rate for the use of the vehicle is determined on a monthly, weekly, or daily basis; or (2) during the time that a vehicle is loaned as a replacement for a vehicle being serviced or repaired regardless of whether the customer is charged a fee for the use of the vehicle.” Minn. Stat. § 65B.49, subd. 5a(b). “A vehicle is not rented if the rate for the vehicle’s use is determined on a period longer than one month or if the term of the rental agreement is longer than one month or the rental agreement has a purchase or buyout option or otherwise functions as a substitute for purchase of the vehicle.” Id.

There have been no reported appellate cases construing the “rented motor vehicle” priority statute, Minn. Stat. § 65B.49, subd. 5a(j).  Presumably, under the “rented motor vehicle” priority statute, the personal auto policy insuring the operator of the “rented” vehicle is required to afford primary liability coverage up to its stated limits of liability.  (This insuring obligation is reinforced by Minn. Stat. § 65B.49, subd. 5a(a), which requires that every plan of reparation security wherever issued insuring a natural person as a named insured . . . extend the plan’s basic economic loss benefits, residual liability insurance, and uninsured and underinsured motorist coverages to the operation or use of the rented motor vehicle.” Id. (emphasis supplied)).  If uncompensated damages remain, the policy (or self-insurance) insuring the vehicle would then be required to extend at least $30,000 per person/$60,000 of liability coverage, the minimum limits required by Minnesota law, just like the owner of any motor vehicle.  To the extent uncompensated damages remain and the vehicle owner is vicariously liable (see my prior blog posts addressing the impact of the Graves Amendment which abolishes vicarious liability for rental car owners and the No-Fault Act’s statutory cap on vicarious liability for rental car owners), the policy (or self-insurance) insuring the vehicle owner would pay the balance of the damages the owner is legally obligated to pay, up to its liability limits.

In my view, the case of Johnson v. Americar Rental Sys., 613 N.W.2d 773, 776 (Minn. Ct. App. 2000), review denied (Minn. Sept. 26, 2000), involving an accident that occurred several years prior to the passage of the federal Graves Amendment in 2005 and the amendment to Minn. Stat. § 65B.49, subd. 5a(j) in 2007, was incorrectly decided. In that case, Americar owned a rental car that was involved in a one car accident.  Johnson, a passenger, was injured.  At the time of the accident, Americar was insured by National Casualty. As was the case in Agency Rent-A-Car, the National Casualty policy afforded split-limits:  $1,000,000 limits for Americar, the vehicle owner, and $30,000 per person/$60,000 per accident for permissive drivers. Johnson’s husband, the driver of the rented vehicle, was insured by American Family with limits of $100,000 per person. The parties stipulated that Johnson’s husband was responsible for causing the accident and that Johnson’s damages totaled $225,000.   The parties also agreed that National Casualty was responsible for the first $30,000 of stipulated damages and that American Family was responsible for the next $100,000 of damages, a total of $130,000.  The dispute centered on the remaining $95,000 of damages.   The trial court held that Americar was vicariously liable for the final $95,000 of damages and, thus, its insurer was obligated to pay the balance.  Thus, under the trial court’s ruling, Johnson would have been fully compensated.  However, the Minnesota Court of Appeals reversed.  The Court of Appeals determined that Americar’s maximum vicarious liability obligation was $105,000 (based on application of the vicarious liability cap statute, Minn. Stat. § 65B.49, subd. 5a(i)(2)) and Americar was entitled to deduct National Casualty’s initial payment of $30,000 against Americar’s vicarious liability. Thus, instead of Americar/National Casualty paying an additional $95,000 to Johnson, only $75,000 was paid to Johnson.  As a result, Johnson received $205,000 in liability compensation, $20,000 less than her total damages. The problem with the holding in Johnson is that the Court of Appeals viewed the initial $30,000 payment as payment for Americar’s vicarious liability when, in fact, it was paid because National Casualty was required by statute and case law to afford $30,000 of omnibus liability protection to the permissive driver/renter. See, Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483, 488 (Minn. Ct. App. 1994) (“[w]e conclude that subject to the statutory minimum amount, an automobile rental company may limit its omnibus liability coverage to less than its own personal liability coverage, and it may do so in the rental contract”).  While an insurer’s satisfaction of an omnibus coverage obligation always serves to indirectly benefit the vicariously liable vehicle owner (by serving to satisfy a portion of the injured party’s damages), the payment is made to satisfy the financial responsibility or compulsory insurance requirements of the law, not the vehicle owner’s vicarious liability. National Casualty should have paid a total of $125,000 — $30,000 omnibus coverage limits on behalf of the renter and $95,000 on behalf of Americar.  The issue is, however, moot for cases involving “rental cars” by virtue of the Graves Amendment.

Third, I have addressed the federal Graves Amendment in prior posts.  It is important to note that the Graves Amendment’s broad preemption of vicarious liability for rental-vehicle owners is subject to a “savings clause” which preserves two types of state laws: (1) laws that impose financial responsibility or insurance standards on the owner for the privilege of operating a motor vehicle, and (2) laws that impose liability on businesses that rent or lease vehicles for their failure to meet the financial responsibility or liability insurance requirements. 49 U.S.C. § 30106(b).  Thus, certain financial responsibility laws in Minnesota are preserved and not subject to the Graves Amendment. For example, Minn.Stat. § 65B.48, subd. 1, which requires the owner of a motor vehicle to maintain a “plan of reparation security [providing] for . . . residual liability coverage in amounts not less than those specified in section 65B.49, subdivision 3, clauses (1) and (2)” is not affected by the Graves Amendment.  The minimum limit for liability insurance in Minnesota is $30,000 per person and $60,000 per accident. Minn. Stat. § 65B.49, subd. 3(1). The $30,000/$60,000 liability limit is obviously not affected by the Graves Amendment. Thus, even if the rented vehicle owner has no vicarious liability, the vehicle owner, and its liability insurer, must still maintain and extend at least minimum limits coverage.

================================

Greg Johnson is an insurance coverage attorney practicing in Minnesota and has over twenty years of experience in handling insurance coverage disputes under Commercial General Liability, Garage Liability and Commercial Auto and Personal Auto policies.  He has been involved in several of the leading cases in the construction defect, rental car, dealership errors and omissions and auto insurance arenas and has authored several insurance related publications during his career, including authoring the Uninsured/Underinsured Motorist Sections of the 1991, 1994, 2000 and 2001 editions of The Minnesota Motor Vehicle Insurance Manual (a four hundred page treatise relating to BI, PD, UM/UIM and PIP claims that has been cited by Minnesota appellate courts on numerous occasions).

This blog is for informational purposes only.  By reading it, no attorney-client relationship is formed.  The law is constantly changing and if you want legal advice, please retain an attorney licensed in your jurisdiction. © All rights reserved. 2010.

Follow

Get every new post delivered to your Inbox.

Join 5,241 other followers

%d bloggers like this: