CGL Coverage: “Known Injuries or Damages” in Construction Defect Litigation


There has been a tremendous amount of construction defect litigation in Minnesota over the past fifteen years which has had a major impact on both the construction and insurance industries. In an effort to slow the tide, commercial general liability (“CGL”) insurers introduced a series of coverage restricting endorsements and provisions which either eliminate coverage for certain types of construction defect claims or significantly reduce the coverage that had generally been since the late 1980’s. This article addresses one such policy provision, the “Known Injury or Damage” exclusion.  Originally introduced by way of endorsement, it was later built into the basic CGL coverage form.  With regard to property damage claims, the Known Injury or Damage provision states that insurance will only apply to “property damage” if:

Prior to the policy period, no insured … knew that … “property damage” had occurred in whole or in part. If such a listed insured … knew prior to the policy period, that … “property damage” occurred, then any continuation, change or resumption of such … “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

…“[P]roperty damage” will be deemed to have been known to have occurred at the earliest time when any insured …:

1.  Reports all, or any part, of the … “property damage” to us or any other insurer;

2. Receives a written or verbal demand or claim for damages because of the … “property damage”; or

3. Becomes aware by any other means that … “property damage” has occurred or has begun to occur.

Before addressing case law interpreting the Known Injury or Damage provision, some history is necessary.  The Known Injury or Damage provision is, to a large extent, a policy codification of two common law doctrines — “known loss” and “loss in progress”. Establishing a known loss or loss in progress under Minnesota common law has been difficult. Absent proof the insured was on actual notice that a loss had already occurred (“the house burned down”) or a loss was virtually certain to occur (“the house is on fire”), the common law doctrines rarely provide a viable policy defense. Whether insurers will fare better under the Known Injury or Damage provision remains to be seen.  The “deemed to have been known” language suggests somewhat of an objective standard of knowledge, as opposed to the common law’s purely subjective standard, which may be pro-insurer. However, there has been only one reported Minnesota appellate decision addressing the Known Injury or Damage provision, which is discussed at the end of this article.

Common Law Known Loss & Loss in Progress Doctrines

A “known loss” is a loss that has already occurred while a “loss in progress” is one involving an ongoing, progressive loss. In Minnesota, the common law doctrine of “known loss,” and its counterpart, the “loss in progress” doctrine, is a fraud-based defense. Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724 (Minn. 1997) (citing Franklin v. Carpenter, 309 Minn. 419, 424-25, 244 N.W.2d 492, 496 (1976); Waseca Mut. Ins. Co. v. Noska, 331 N.W.2d 917, 924-25, n. 6 (Minn. 1983); Oster v. Riley, 276 Minn. 274, 280-81, 150 N.W.2d 43, 48-49 (1967)). “The known loss doctrine has been described as ‘a compilation of practical concepts intended to prevent a windfall for insureds and manifest unfairness for the insurance industry.’” Domtar, Inc., v. Niagara Fire Ins. Co., 563 N.W.2d 724 (Minn. 1997) (quoting Buckeye Ranch, Inc. v. Northfield Ins. Co., 134 Ohio Misc.2d 10, 839 N.E.2d 94, 104 (Ct. Common Pleas 2005)). Commentators have noted that “losses which exist at the time of the insuring agreement, or which are so probable or imminent that there is insufficient ‘risk’ being transferred between the insured and insurer, are not proper subjects of insurance.” 7 Lee R. Russ & Thomas F. Segalla, Couch on Insurance, § 102:8 at 20 (3d ed.1997). The common law doctrine focuses on the insured’s actual knowledge prior to the application for liability insurance. Domtar, 563 N.W.2d at 731 (Minn. 1997).

The known loss and loss in progress doctrines are two variants of the principle of fortuity. Insurance is intended to insure against unknown, future events. Thus, the known loss defense bars coverage when the putative insured seeks insurance after knowing that the house has burned down while the loss in progress doctrine will bar coverage when the putative insured seeks insurance knowing that the house is in the process of burning down. In either situation there is insufficient risk to transfer to an insurer; the risk or contingency of the house burning down has already taken place.   As noted, the common law known loss and loss in progress defenses are considered to be part of the fortuity requirement that runs throughout insurance law.  As such, the circumstances in which they arise usually give rise to other policy defenses such as the “expected or intended” exclusion.  In fact, this exclusion has been described as the contractual version of the known loss doctrine.  Domtar, 563 N.W.2d at 735.

Given its basis in the prevention of fraud, a fundamental requirement of the loss in progress doctrine is that the insured must know that a progressive loss is occurring prior to the inception of the policy. See e.g., Inland Waters Pollution Control, Inc. v. Nat’l Union Fire Ins. Co., 997 F.2d 172, 175-88 (6th Cir.1993) (rejecting argument that doctrine applies regardless of insured’s knowledge, and holding instead that the loss in progress doctrine “operates only where the insured is aware of the threat of loss so immediate that it might fairly be said that the loss was in progress and that the insured knew it at the time the policy was issued or applied for”).

Common Law: Subjective Standard of Knowledge

Under Minnesota common law, the insured’s knowledge will generally be judged by a subjective standard (what the insured actually knew) rather than an objective standard (what a reasonable insured should have known under the circumstances or have reason to know). Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 735 (Minn. 1997) (holding whether damages are “expected” by an insured requires a certainty of harm on the part of the insured that is greater than general standards of foreseeability used to impose liability on the insured). This standard does not preclude the use of circumstantial evidence, but proof of “objective indicia” is only permitted in exceptional circumstances. Id. (citing Morton Int’l, Inc. v. General Accident Ins. Co. of Am., 134 N.J. 1, 85-87, 90-95, 629 A.2d 831, 879-80, 882-84 (1993)).

Under the subjective standard, a finding that the insured “reasonably should have known” of an ongoing, progressive loss is insufficient to defeat coverage. Rather, the insured must have had actual knowledge of the ongoing loss for the loss in progress doctrine to apply. A subjective standard is appropriate in light of the doctrine’s history in fraud prevention. It is only when the policyholder has actual knowledge that a fraud can be perpetrated. State v. Hydrite Chemical Co., 280 Wis.2d 647, 671, 695 N.W.2d 816, 829 (Wis.App.2005); Aetna Cas. & Surety Co. v. Dow Chem. Co., 10 F. Supp. 2d 771, 789-91 (E.D. Mich. 1998); United Techs. Corp. v. American Home Assur. Co., 989 F. Supp. 128, 151 (D.Conn.1997). As one court noted: “[T]he purpose of the loss in progress doctrine, preventing fraud, will be served by a subjective knowledge analysis. The insurer is protected because the insured cannot misrepresent its knowledge to the insurer. The insured is protected because the insurer cannot refuse responsibility merely by learning of facts that both parties previously were unaware of.” United Tech Corp., 989 F. Supp. 128, 151 (D. Conn. 1997). “A subjective standard also protects against the misuse of hindsight to avoid indemnification coverage.” Dow Chem. Co., 10 F. Supp. 2d at 789.

Common Law: Knowledge of Actual Loss, Not Acts Which Produced Loss

It is well established that the loss in progress doctrine does not bar coverage simply because an insured knows of an act or omission that might result in a covered loss after the policy is purchased. In Gopher Oil Co v American Hardware Mut. Ins. Co., 588 NW2d 756 (Minn. Ct. App. 1999), American Hardware argued that Gopher State knew that the disposal of oil sludge at its Arrowhead site was causing groundwater contamination. The court disagreed holding that at best Gopher State knew that the oil sludge was unsightly and a risk to surface water; there was no evidence suggesting that it knew the oil sludge disposal was causing groundwater contamination. See also Domtar, Inc. v. Niagara Fire Ins. Co., 552 N.W.2d 738, 747 (Minn.App.1996) (known-loss defense requires evidence that the insured knew of the loss, not that the insured knew of the acts leading to the loss), affirmed in part, reversed in part on other grounds, 563 N.W.2d 724 (Minn.1997); Buckeye Ranch, Inc. v. Northfield Ins. Co., 134 Ohio Misc.2d 10, 23-28, 839 N.E.2d 94, 104 (Ct. Common Pleas 2005) (known loss doctrine does not bar coverage where the insured only knows of an act that someday might result in damages); United Technologies Corp., 989 F. Supp. at 148-52 (although insured may have known of the waste disposal practices that ultimately resulted in environmental contamination, question of fact remained whether it knew at the inception of the policy that those practices would result in contamination); Cincinnati Ins. Companies v. Pestco, Inc., 374 F. Supp. 2d 451 (W.D. Pa. 2004) (known loss doctrine did not apply to bar advertising injury coverage for alleged trade dress infringement, notwithstanding allegation that plaintiff sent insured cease and desist letter prior to policy).

In Buckeye Ranch, 839 N.E.2d 94 (Ct. Common Pleas 2005), one boy sexually assaulted his younger roommate in 1996 while both were long-term residents receiving treatment at The Buckeye Ranch, Inc. (“the Ranch”). The Ranch was a nonprofit institution that provided services, including a residential program, for children and families struggling with emotional, behavioral, and mental health issues. The Ranch was aware of the assault incident in 1996. However, the Ranch conducted an internal investigation, assisted in a criminal investigation, and participated in investigations by various agencies, but ultimately no investigation resulted in “specific allegations” of fault against the Ranch. Several years later, the Ranch was sued and its CGL insurer contended that the claim was barred under the common law known loss doctrine. The court held that these facts did not give rise to a “known loss” defense. The court noted that “[a] risk that the incident might produce a claim for damages can now be appreciated in hindsight. However, there is no “known risk.” Id. at 109. Thus, the Ranch was entitled to coverage under the policy.

One of the clearest cases of a known loss was involved in Crawfordsville Square, LLC. v. Monroe Guar. Ins. Co., 906 N.E.2d 934 (Ind. Ct. App. 2009). In that case, CS operated a shopping mall and in 1998 submitted a purchase agreement on a parcel of land adjacent to the mall which contained several businesses, including a dry cleaning business. Soon thereafter, as part of an environmental audit, CS had subsurface testing performed on the parcel. The testing revealed petroleum and cleaning agent contamination in the land. In September 1998, CS member L.E. Kleinmaier sent a letter to the seller stating: “Clean up [sic] of both petroleum and cleaning agent contamination must happen. The law requires it. We are willing to proceed with the closing provided an escrow account is established with the title company in the amount of $90,000. The title company will hold the funds and make disbursements from time to time to the environmental firm (AEAC) which will perform the clean-up.” CS ultimately agreed to proceed to closing on the Parcel and both the closing and escrow agreements provided, in part, that “[t]he parties have confirmed the existence of petroleum and other contamination of the soil and water on and under the real estate that is residual contamination from the operation of a cleaner and underground storage tanks on the real estate.” In February 1999, CS’s insurance agent contacted Monroe Guaranty, seeking to add the parcel to CS’s existing CGL policy. Although CS’s agent advised Monroe Guaranty that a dry cleaning business was operating on the parcel, neither the agent nor CS advised Monroe Guaranty of the existence or believed existence of dry cleaning contamination at the site. In 2005, an environmental engineering company reported evidence of contamination on the parcel to the Indiana Department of Environmental Management (“IDEM”). The IDEM sent notice of the contamination to CS and requested that it investigate the nature and extent of the contamination. CS, in turn, tendered the claim to Monroe Guaranty under the CGL policy. Monroe Guaranty denied coverage for the claim contending, among other things, that coverage was barred by the known loss doctrine. , CS claimed that it was not actually aware that a loss had occurred, was occurring, or was substantially certain to occur. CS relied on the October 2007 deposition testimony of Kleinmaier where he suggested, in contrast to his September 2008 letter, that CS only knew of a “possibility” of contamination. The trial court rejected CS’ position and granted Monroe Guaranty summary judgment. Indiana Court of Appeals agreed that the known loss doctrine barred the claim, stating:

On September 29, 1998, CS member Kleinmaier sent a letter to Hedrick indicating that “[c]lean up [sic] of both petroleum and cleaning agent contamination must happen. The law requires it….After two successive quarters of below action level reports, the Indiana Department of Environmental Management will issue ‘no further action’ letter is received from the state. [sic.]” Indeed, Kleinmaier’s letter included a request that an escrow account in a specific amount be made available for the clean-up, indicating that CS knew enough regarding the contamination to estimate the cost of its remediation. The communication clearly indicates knowledge of dry cleaning contamination and, by its references to legally-mandated clean-up and IDEM requirements for successful compliance with applicable regulations; that the contamination was at actionable levels. *** [The] letter represents specific knowledge of a loss that had already occurred . . . we conclude that the designated evidence establishes that CS had the required actual knowledge of dry cleaning fluid contamination at actionable levels, which constitutes a known loss.

In addition, the “loss in progress” doctrine will only apply “where the insured is aware of a threat of loss so immediate that it might fairly be said that the loss was in progress and that the insured knew it at the time the policy was issued or applied for”. Inland Waters Pollution Control, Inc. v. Nat’l Union Fire Ins. Co., 997 F.2d 172, 178 (6th Cir.1993). While there is no bright-line test, there is a major distinction between (a) knowledge of a risk or a potential for loss; and (b) knowledge that a loss is virtually certain to occur. Thus, more is required than mere awareness of a potential risk of a loss or of the potential that damages may arise sometime in the future.

In Insurance Co. of North America v. U.S. Gypsum Co., 870 F.2d 148 (4th Cir.1989), the Fourth Circuit held that the insured’s knowledge that its plant was built on a mining site which had suffered several incidents of subsidence over the years did not justify its insurer in denying coverage when an area of more than twenty-one acres collapsed and dropped as much as six feet. Although the insurer could show that other smaller sink holes had appeared from time to time and that the insured periodically hired professionals to evaluate the stability of the site, the insured’s witnesses testified that the “catastrophic subsidence” that occurred was entirely unexpected. On these facts, the court held that the fact that it is known that subsidence will occur does not mean that it will occur during the policy period. Moreover, there is a fundamental distinction between the certainty of subsidence and the certainty of resulting loss. Id. at 152. Significantly, the court went on to reject the insurer’s “loss in progress” argument “for the same reasons.” Id. It concluded that this is not a case where the forces which eventually led to the subsidence and collapse created an immediate threat of loss at the time the policy was issued. Id. at 153.

Common Law: Different Damages or Unrelated Causes not Barred

Similarly, mere knowledge of prior damage is insufficient to establish a defense under the fraud-based loss in progress doctrine where the insured is sued for different damages or there remained uncertainty as to the cause of the prior damage or the scope of damages at the time the insured purchased the liability policy. While “losses stemming from the same cause relating to a previously discovered and manifested loss are included within the ‘loss-in-progress’ rule,” Factory Mutual Ins. Co. as Successor in Interest to Arkwright Mutual Ins. Co. v. Estate of James Campbell, 81 Fed. Appx. 918, 919-20 (9th Cir. 2003), the doctrine does not apply to damages resulting from unrelated causes or damages of different scope or dimension. See e.g., Pines of La Jolla Homeowners Assn. v. Industrial Indemnity, 5 Cal. App. 4th 714, 7 Cal. Rptr. 2d 53 (4th Dist. 1992) (loss in progress rule does not apply as to a distinct item of damage that was not known by insured prior to the policy period); MAPCO Alaska Petroleum, Inc. v. Central Nat. Ins. Co. of Omaha, 784 F. Supp. 1454, 1462 (D. Alaska 1991) republished as corrected at 795 F. Supp. 941 (loss in progress doctrine did not apply to claim of groundwater contamination where insured “believed the problem was localized and capable of remediation”). In Stonehenge Eng. Corp. v. Emp. Ins. of Wausau, 201 F.3rd 296 (4th Cir. 2000), defects in condominium foundations and balconies appeared in 1989. Wausau undertook the risk in 1992-1995, after the owners’ association had formally notified the general contractors of difficulties and solicited a response from their lawyer. The court rejected the known-loss defense. It pointed out that the exact cause of the difficulties with the concrete was not known when coverage was bound. The insured only “knew of the obvious potential for problems with the remaining twenty-eight villa units” by 1992, after four floors had failed and were replaced. “Such knowledge on the part of Stonehenge, however, does not equate to knowledge prior to the effective dates of the three Wausau policies that imposition of liability upon it for construction of the lightweight concrete floors in all of the villa units was substantially certain to occur.” 201 F.3d at 303. The known loss defense did not apply.

The Known Injury or Damage Policy Provision

There has been only one reported Minnesota appellate decision addressing the Known Injury or Damage provision. In Westfield Ins. Co. v. Wensmann, Inc., 840 N.W.2d 438 (Minn. Ct. App. 2013), review denied (Minn. Feb. 26, 2014), Diseworth at Somerby (“Diseworth”) a planned community consisting of 18 townhome units designed and constructed by Wensmann Homes, appealed the district court’s ruling that Wensmann’s general liability insurer, Westfield, excluded coverage for defective construction work because Wensmann knew of the property damage prior to the inception of the policy.

Diseworth sued Wensmann for negligence and breach of statutory warranties relating to claims of failed arches and water infiltration issues. Each unit had brick arches under the unit’s back deck. All of the buildings were built and occupied before April 1, 2007, the date Westfield issued the commercial general liability (CGL) policy to Wensmann.

Wensmann first became aware of cracks in the brick arches in July 2005 when a homeowner submitted requests for warranty work. The repair work was completed on September 15, 2005 and Wensmann hired a structural engineer to create a design plan for future arches as other arches were cracking and four townhome units had not yet been built. While the arch masonry complaints were documented prior to April 1, 2007, there was no documentation of water infiltration claims before that date.

The Westfield policy contained a known loss provision stating that the insurance only applied to “property damage” if

Prior to the policy period, no insured … knew that …”property damage” had occurred in whole or in part. If such a listed insured … knew prior to the policy period, that …”property damage” occurred, then any continuation, change or resumption of such … “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

In addressing the known loss coverage issue, the appellate court separated the claimed damages into three classes: damage resulting from brick arches constructed before the new arch design; damage resulting from brick arches that were constructed with the new arch design; and damage resulting from water infiltration issues.

With regard to damages to brick arches constructed before the new arch design, Diseworth argued the exclusion did not apply because the cracks were minor and Wensmann repaired the cracks and, thus, could not have expected future damage. While the court engaged in a lengthy analysis of the issue, the result was clear. There were numerous cracks on different arches prior to the inception of the Westfield policy on April 1, 2007 caused by an improper design (or a lack of any design) and Wensmann was aware of the problem before the Westfield policy went into effect. The typical known loss provision, and that set forth in the Westfield policy, do not require knowledge of the full extent of the property damage.  Rather, the provision excludes coverage where, before the policy was issued, the insured knew that the “property damage had occurred in whole or in part.”  Thus, the known loss exclusion barred coverage for damages to brick arches constructed before the new arch design was implemented.

However, damages to the brick arches constructed with the new arch design in the last four units could not be barred as a matter of law because the known loss provision only excludes damages which are a “continuation, change or resumption” of damage that occurred before the policy inception date.  Because of the changed design, the arch damages to the last four units may have been due to a different cause than the arch damages sustained prior to the policy period.  The district court therefore erred in granting summary judgment as to the arches constructed in the last four units.

The damages resulting from water infiltration was not subject to the known loss exclusion because there was no evidence of water infiltration before the inception of the Westfield policy: “[t]o hold that the cracks in an exterior brick arch provided Wensmann with knowledge that there may be water infiltration resulting from improperly installed windows, doors, and siding would greatly expand the universe of potential claims excluded by an insured’s awareness of a known loss.” The district court therefore erred in granting summary judgment as to the water infiltration claims.

The last two holdings in Westfield are similar to several cases (discussed above) holding the common law known loss/loss in progress doctrines do not apply to damages resulting from unrelated causes or damages of different scope or dimension. See e.g., Pines of La Jolla Homeowners Assn. v. Industrial Indemnity, 5 Cal. App. 4th 714, 7 Cal. Rptr. 2d 53 (4th Dist. 1992) (loss in progress rule does not apply as to a distinct item of damage that was not known by insured prior to the policy period); MAPCO Alaska Petroleum, Inc. v. Central Nat. Ins. Co. of Omaha, 784 F. Supp. 1454, 1462 (D. Alaska 1991) republished as corrected at 795 F.Supp. 941 (loss in progress doctrine did not apply to claim of groundwater contamination where insured “believed the problem was localized and capable of remediation”).

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 consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

The Future (My Guesstimate) Hybrid “Uber-Lyft” Auto Insurance Policy


I’ve recently posted several articles about transportation network companies (TNCs) and the inroads they are making into the traditional taxi-cab business across the country. Tech savvy companies such as Uber, Lyft and Sidecar are poised to significantly erode, if not entirely replace, the taxicab industry within the next handful of years . . . assuming they can get their insurance programs in place.

The TNC insurance bill that passed the California Legislature in late August is paving the way for a new hybrid form of automobile insurance policy that will cover drivers whether they are using the vehicle personally or in the “taxi-cab” business. AB2293 directed the California Department of Insurance to expedite approval of new hybrid products and some insurers have been actively working with TNCs to develop them. See: http://blogs.kqed.org/newsfix/09/02/2014/Uber_Lyft_California_insurance

While there are certainly underwriting, pricing and policy writing challenges in assessing and limiting the risks, one would expect several liability insurers to join the fray and begin offering the new hybrid policy forms prior to the July 1, 2015 deadline.

The Hybrid Auto Insurance Policy:

It’s fairly easy to envision the general contours of a new “hybrid” automobile insurance policy, if that is the insuring path the TNCs decide to go down. The new hybrid auto policy would be issued to the TNC driver as the named insured. To keep things simple, TNC’s will probably mandate their drivers (1) maintain hybrid policies written with liability limits that, at a minimum, match the highest limits required of personal auto policies by any jurisdiction in the country (what I refer to as “base liability limits”); and (2) own the vehicle insured by the policy. At present, the highest personal auto limits in the country are $50,000 for death and personal injury per person, $100,000 for death and personal injury per accident, and $30,000 for property damage. These base liability limits would apply whenever the named insured is using the vehicle for any non-commercial use and during periods 1 and 3 of the TNC taxi-business (period 1: the moment a driver logs on to the TNC’s online app until the driver accepts a request to transport a passenger and period 3: the moment the ride is complete until the driver either accepts another ride request or logs off the app).

The hybrid policy would afford liability coverage on a primary, non-contributing basis and would need to name the TNC as an additional insured for any liability it may incur arising out of the ownership, maintenance or use of the vehicle when used in the TNC taxi-cab business. The insurer of the hybrid policy would be required to notify the TNC in the event of the driver’s non-payment of premium and cancellation. The hybrid policy may also include a “step-down” provisions where the base liability limits would be reduced to the minimum limits mandated by the law of the state where the accident occurred when the vehicle was used by someone other than the named insured TNC authorized driver (assuming step-down provisions are valid and enforceable in the state where the hybrid policy was issued). (See e.g., 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. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160, 165 (Minn. Ct. App. 2001), review denied (Minn. June 27, 2001), cases I handled). The hybrid policy would contain the same type of provisions and exclusions normally found in a personal auto policy as authorized by the applicable jurisdiction except those which limit or exclude use of the vehicle as a taxi-cab.

AB2293 requires a TNC to maintain $200,000 of “excess” liability coverage insuring the TNC and driver for any liability arising out of the ownership, maintenance or use of the vehicle during periods 1 and 3 of the TNC’s taxi-cab business. AB2293 provides that this $200,000 can be satisfied by insurance maintained by the TNC, insurance maintained by the driver, or a combination of both. There are two primary alternatives here. First, the $200,000 of “excess” liability coverage could come from the TNC’s own commercial automobile policy, which would be issued to the TNC as the named insured and also automatically cover authorized drivers as additional insureds. The TNCs could pass on the cost of this additional $200,000 of liability coverage, or a portion of the cost, to their authorized drivers by a monthly fee, usage fee, increasing their revenue split with drivers, or by increasing fares. Second, the TNC’s could mandate that their drivers’ hybrid policy contain a “step-up” liability limit provision (above the $50,000/$100,000/$30,000 base liability limits) to extend $200,000 of additional liability coverage during these periods of time. (Of course, any time a TNC imposes additional premium costs on its drivers or decreases driver revenues, it will affect the competitiveness between TNCs in terms of attracting drivers).

I assume TNC’s will want to “control” the risk of liability above the base liability limits ($50,000/$100,000/$30,000) by having their commercial policies provide liability coverage to drivers during periods 1 and 3 (and pass along the premium cost to drivers through monthly fees, increased revenue splits or increased fares) as opposed to mandating the driver’s policy insure this risk. I say this for at least a couple of reasons. First, ABA2293 provides that if any insuring obligation “will be satisfied in whole or in part through a driver’s policy, the TNC must verify that insurance is maintained by the driver.” That would present an onerous challenge. Second, from a practical standpoint, many TNC drivers may not be able to absorb increased premium charges associated with obtaining $200,000 of liability coverage in one fell swoop. I assume most TNC drivers, if not all, would opt to pay the cost on a usage basis (or out of fare revenue realized) as opposed to paying the cost up-front. One downside of insuring the drivers is that TNC would have no right of indemnity against the driver for any amount the TNC insurer pays which exceeds the base liability limits.

Note that the California Public Utilities Commission (CPUC) called for greater liability limits during periods 1 and 3 than AB2293 requires. The CPUC plan required $100,000/$300,000/$50,000 instead of 50,000/100,000/30,000 coverage. There does not appear to be anything in AB2293 which would prohibit the CPUC, which regulates the taxi-cab industry in California, from requiring greater limits (or additional types of coverage) than those specified in AB2293 assuming the amounts identified in AB2293 are only minimum amounts and the CPUC’s regulatory power allows it. However, with AB2293’s additional requirement of $200,000 excess liability coverage, it would appear the California legislature largely satisfied the CPUC plan.

Also, the original bill called for $750,000 in liability coverage during periods 1 and 3, considerably more than the amounts ultimately passed. At least one legislator wanted a minimum of $750,000, the same liability limit mandated for limousine services.

Periods 1 and 3 gives rise to some ambiguity. For example, it is possible that a TNC driver may log onto the app in order to qualify for greater levels of insurance or the driver may be logged onto apps from different TNCs and get into an accident. Presumably, the TNCs will develop some type of usage fee to lessen these potential problems. At a minimum, if the driver is logged onto more than one TNC online-app at the time of an accident and the loss exceeds the base liability limit of the TNC driver’s policy, the policies insuring the TNCs would have to contribute equally to the loss.

Period 2 presents the greatest liability risk to a TNC and its drivers. Period 2 begins the moment in time a driver accepts a ride request until the ride is complete. AB2293 requires $1,000,000 in liability coverage for death, personal injury and property damage and provides that this obligation can be satisfied by insurance maintained by the TNC, insurance maintained by the driver, or a combination of both. The same two alternatives discussed above with respect to the $200,000 excess obligation apply here as well.

In summary, I would expect the TNCs to mandate that their drivers carry a hybrid policy affording the base liability limits of $50,000/$100,000/$30,000 on a primary, non-contributing basis with step down liability limits the base liability limits where the base liability limits would be reduced to the minimum limits mandated by the law of the state where the accident occurred when the vehicle was used by someone other than the named insured TNC authorized driver (assuming step-down provisions are valid and enforceable in the state where the hybrid policy was issued). The hybrid policy would need to be endorsed to add the TNC as an additional insured. I anticipate the TNC’s commercial policy would insure TNC drivers against liability during periods 1 and 3 in the amount of $200,000 and during period 2 in the amount of $1 million. I would further expect the TNCs to pass along the cost of liability coverage in excess of the base liability limits of $50,000/$100,000/$30,000 to the TNC drivers, either by use of a monthly fee, usage fee, increased split of fare revenue or increased trip fares.

There are, of course, other ways of satisfying the liability insuring requirements of AB2293 (and those which will be imposed by other jurisdictions), but I’ll leave that for another day.

Interim California Rules:

The new hybrid automobile insurance policies are expected to hit the streets before July 1, 2015.

In the interim, AB2293 protected personal auto insurers, at least from the perspective of third-party liability insurance. Personal auto insurers were legitimately concerned about having to take on the risk (and indemnification costs) associated with commercial use by their named insured TNC drivers. All personal auto policies contain livery and business use exclusions. While such exclusions will invariably insulate the personal auto insurer when its named insured TNC driver is transporting a passenger for hire, the applicability of the exclusions during periods 1 and 3 is less certain. AB2293 makes it clear that in California a driver’s personal auto policy has no obligation to respond to a TNC accident during periods 1-3 (unless the personal auto policy is “specifically written to cover the driver’s use of a vehicle in connection with a transportation network company’s online-enabled application or platform”).

First Party Coverages:

Most jurisdictions require the owner of a motor vehicle to obtain an automobile insurance policy which, in addition to providing third-party liability insurance, affords first-party coverages such as no-fault coverage (a/k/a personal injury protection or medical and income loss benefits) and uninsured motorist (UM) and underinsured (UIM) motorist protection coverage. These coverages are referred to as first-party coverages, as opposed to third-party coverage, because the accident victim generally obtains the benefits from his or her own insurance company. Further, in contrast to third-party liability coverage – which typically follows the insured vehicle – first party coverages typically follow the named insured (and others who qualify as an insured under the policy) wherever they may be injured. In other words, if an accident arises out of the ownership, maintenance or use of a motor vehicle, an insured can generally looks to his/her own insurance policy to recover first-party benefits regardless of where s/he is injured.

ABA2293 only addressed UM/UIM coverage and require $1,000,000 in uninsured motorist (UM) and underinsured (UIM) motorist coverage during period 2 (“from the moment a passenger enters the vehicle of a participating driver until the passengers exists the vehicle”). This requirement is extremely odd to me as it appears to be well in excess of any UM/UIM limit mandated by California law. I would have expected TNCs to oppose this limit as vigorously as they opposed the bill’s original requirement that TNCs afford $750,000 in liability coverage during periods 1 and 3. TNC drivers, like taxi-cab drivers, are not always at fault for an accident, much less always 100% at fault. Requiring UM/UIM limits of $1,000,000 as opposed to say, $50,000 per person/$100,000 per accident (or even a lesser amounts) imposes a substantial risk on TNCs.

ABA2293 does not address whether the $1 million of UM/UIM coverage applies on a “primary” basis to any person injured while occupying a TNC authorized vehicle or whether it would be excess to any UM/UIM coverage available to the passenger. Although UM/UIM coverage is a first-party coverage which typically follows the person, not the vehicle, some jurisdictions, like Minnesota, have enacted UM/UIM priority statutes which require the accident victim to look first to the UM/UIM coverage on the occupied vehicle (i.e., the TNC vehicle). (See Minn. Stat. §65B.49, subd. 3a(5).) If the accident victim’s damages exceed the UM/UIM limits available under the policy insuring the occupied vehicle, the accident victim may then seek “excess” UM/UIM coverage under his/her own policy to the extent the limits available under that policy exceed the UM/UIM limits of the policy insuring the occupied vehicle. Id. Even assuming the $1,000,000 UM/UIM limits mandated by ABA2293 only apply on an “excess” basis, the risk remains substantial as the majority of passengers are only going to maintain minimum limits of UM/UIM coverage, if they even have a personal auto policy.

ABA2293 did not address no-fault coverage (a/k/a personal injury protection or medical and income loss benefits) which is typically mandated by law or comprehensive and collision coverages, which are optional coverages insuring damage to the insured vehicle. It is my understanding that TNCs offer comprehensive and collision coverage during period 2 (i.e., when transporting passengers), but only if the driver purchased similar coverage under his/her personal policy.

I’ll address first-party coverages more extensively in a future article on this blog.

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 consult an attorney. © All rights reserved. 2010.

Yikes!! Self-Insured Enterprise Rent-A-Car Required to pay $600,000 on behalf of Renter even though Insurer’s Maximum Liability would have been $50,000.


In Nelson v. Artley, 2014 Ill App (1st) 121681, reh’g denied (July 16, 2014), the court held that a self-insured car rental company (Enterprise) was required to pay a $600,000 judgment against its renter despite the fact the Illinois Vehicle Code limits an insurer’s liability to $50,000 per person/$100,000 per accident.  The court was of the view that the Illinois legislature intended to treat self-insurers differently than insurers.  The court’s ruling in Nelson should be reversed; it misperceives the role of self-insurance in the context of a compulsory automobile liability system.  This article explains why.

In Nelson, Haney rented a vehicle from Enterprise and allowed Artley to drive it.  While operating the vehicle, Artley caused an accident, injuring Nelson. Nelson filed a personal injury lawsuit against Artley alleging he was negligent in the operation of the vehicle, but Artley failed answer. The circuit court entered a default judgment of $600,000 against Artley.

Nelson then commenced collection proceedings against Enterprise. The issue was whether the limit Enterprise provided to the renter and Artley as an authorized driver was $2,000,000 (the self-insured retention Enterprise identified in its self-insured filings with the Illinois Department of Insurance), the $50,000 per person/$100,000 per accident limits specified by Illinois Vehicle Code (Code), 625 ILCS 5/9–105, or some other amount.

Under the rental agreement, Enterprise agreed to protect the renter and authorized drivers “to the minimum amount set forth in the relevant financial responsibility laws.” Enterprise contended the minimum amount was $50,000 per person/$100,000 per accident pursuant to section 9-105 of the Code, but it only owed Nelson $25,000 because it had already paid $75,000 to two other persons injured in the accident.

Nelson, on the other hand, claimed Enterprise’s responsibility was not subject to any limit.  He claimed the limits described in section 9-105 only applied to car rental companies that had purchased an insurance policy, not self-insured entities like Enterprise. According to Nelson, Enterprise’s choice to become self-insured under section 7-502, meant it assumed the risk of all damages caused by its renters and drivers. Nelson argued the Illinois legislature intended to treat self-insured car rental companies differently than car rental companies who purchased an insurance policy.

The circuit court ordered Enterprise to pay Nelson $25,000, concluding that Enterprise’s financial responsibility for the accident was limited to $100,000 per accident. As Enterprise was a self-insured entity, the court interpreted the Code to “determine the minimum financial responsibility of a self-insured rental car company to ascertain what portion of the default judgment Enterprise is required pay.”

Because the statutory language of chapter 9 was important to disposition, the court provided a brief summary of some of the individual statutory sections within chapter 9.

In general, all motor vehicles operated or registered in Illinois must be covered by a liability insurance policy. (625 ILCS 5/7–601(a).) The insurance policy must afford coverage for bodily injury in the minimum amount of $20,000 per person for injuries and $40,000 per occurrence. (625 ILCS 5/7–203.) Certain vehicle owners are exempt from that requirement, including owners of vehicles who are covered by a certificate of self-insurance issued under section 7–502. (625 ILCS 5/7–601(b)(3), (b)(6).)

The owner of for-rent vehicles is required to file proof of financial responsibility with the Illinois Secretary of State. Proof of financial responsibility can come in one of three forms: (1) an insurance policy, or (2) a certificate of self-insurance issued by the Director of the Illinois Department of Insurance, or (3) a bond. 625 ILCS 5/9–102.)

An insurance policy issued to the owner of for-rent vehicles must insure the owner and “any person operating the motor vehicle with the [rental car company’s] express or implied consent.” The policy must afford coverage for bodily injury in the minimum amount of $50,000 per person and $100,000 per occurrence. (625 ILCS 5/9–105.)

Under both the general mandatory liability insurance requirements and the rental car company financial responsibility requirements, the owner of a vehicle may satisfy its statutory obligations by either obtaining an insurance policy or by demonstrating sufficient resources to qualify as a self-insurer. Section 7–502 sets forth the requirements to self-insure: “[a]ny person in whose name more than 25 motor vehicles are registered may qualify as a self-insurer by obtaining a certificate of self-insurance issued by the Director of the Department of Insurance.” (625 ILCS 5/7–502.) The Director may issue a certificate of self-insurance if “such person is possessed and will continue to be possessed of ability to pay judgment obtained against such person” and may cancel a certificate if that person fails to pay a judgment “against any person covered by such certificate of self-insurance” arising out of any accident in which a vehicle covered by the certificate is involved within 30 days of judgment. Id.

Section 9–110 sets forth the penalties for violations of chapter 9. (625 ILCS 5/9–110.)

Result in Fellhauer Case

Prior to the Nelson case, another Illinois appellate court had considered the identical issue in the case of Fellhauer v. Alhorn, 361 Ill. App. 3d 792, 838 N.E.2d 133 (2005), which also involved Enterprise. In that case, Fellhauer was injured in an automobile accident by the driver of a vehicle rented from Enterprise and obtained a $450,000 default judgment against the driver. Fellhauer argued that Enterprise was obligated to pay the entire $450,000 judgment.  He claimed that because section 7-502 did not provide any limits of liability, Enterprise’s financial responsibility was not limited in any way.

The appellate court rejected Fellhauer’s arguments. Although 7-502 does not state that a self-insured entity’s obligations are subject to the liability limits specified in chapter 9, the court held the chapter 9 limits applied to self-insured car rental companies: the “legislature intended no distinction between self-insurers and those companies that purchased an outside insurance policy in terms of the companies’ liability to injured third parties.” Id. at 838 N.E.2d 133. Ultimately, the court concluded that Enterprise was required to pay $50,000 of the judgment because “common sense dictates that the legislature did not intend to treat self-insurers differently and expose them to unlimited liability when their counterparts, who chose to be covered by a traditional insurance policy, have only a $50,000 exposure.” Id.

Result in Nelson Case

However, the Nelson court reached the exact opposite result — it concluded the Illinois legislature intended to treat self-insured car rental companies differently than car rental companies who purchased insurance. The court rejected the Fellhauer court’s determination that a self-insured entity’s obligations are subject to the bodily injury liability limits identified in chapter 9 of the Code (i.e., $50,000 per person/$100,000 per accident). Id. at __ (“[t]o the extent the court in Fellhauer decided that … a self-insured rental car company’s financial responsibility requirements were governed by chapter 9, we disagree”).  The Nelson court found the omission of any liability limit provisions in 7-502 to be significant and conclusive on the issue: “By specifying minimum amounts of financial responsibility for … insurance policies, but declining to do so for self-insured companies, the legislature … allow[ed] for greater protection in the event rental car companies that are financially able to do so choose self-insurance.” Id. at __. According to the Nelson court, “the Code does not limit a self-insured rental car company’s financial responsibility to the same minimum amounts that are required of an insurance policy.” Id. at __.

Because a “self-insured rental car company’s minimum responsibility to pay judgments is not limited to $100,000 per occurrence or any other amount,” Enterprise was obligated to satisfy the full $600,000 judgment against the driver of its rented vehicle.

Self-Insurance in Compulsory Auto Liability System  

The court reached the wrong result in Nelson.  The court misperceived the role of self-insurance in the context of a compulsory automobile liability system.

The phrase “self-insurance” means, generally, the assumption of one’s own risk and, typically, involves the setting aside of a special fund to meet losses and pay valid claims, instead of insuring against such losses and claims through an insurance policy. Black’s Law Dictionary, 1360 (6th ed. 1990); Hillegass v. Landwehr, 176 Wis.2d 76, 499 N.W.2d 652 (1993) (“[w]hereas contractual insurance policies involve a third-party insurer under-writing the insured’s risk in exchange for premium payments, self-insurers retain their own risk in exchange for not paying premiums”). When utilized in a compulsory automobile insurance system, self-insurance is the functional equivalent of an automobile insurance policy and requires the self-insured entity to afford the same coverages and limits as an insurer would be required to provide under a policy. See e.g., McClain v. Begley, 465 N.W.2d 680, 685 (Minn.1991) (noting that “[s]elf-insurance is the functional equivalent of a commercial insurance policy” and “[t]he certificate filed with the commissioner is the functional equivalent of an insurance policy”); United States Fidelity & Guaranty Co. v. Budget Rent–A–Car Systems, Inc., 842 P.2d 208 (Colo.1992) (Kirshbaum, J., specially concurring) (self-insurers must comply with the standards applicable to commercial insurers with respect to liability responsibility); Southern Home Ins. Co. v. Burdette’s Leasing Serv., Inc., 268 S.C. 472, 234 S.E.2d 870, 872 (1977) (“[w]e think it was the intention of the legislature that a self-insurer provide the same protection to the public that a statutory liability policy provides. A self-insurer substitutes for an insurance policy to the extent of the statutory policy requirements”).

Statutes authorizing self-insurance in a compulsory automobile liability system are often quite vague.  Like section 7-502 of the Illinois Vehicle Code, they typically do not require the self-insured entity to file any detailed plan specifying terms, conditions or exclusions to its obligations similar to an insurance policy. The certificate of self-insurance only serves to demonstrate the financial responsibility of the self-insured party.  Instead, the self-insurer is treated “as if” it had purchased a policy for each of its vehicles with itself as the named insured and its obligations are measured against the standards imposed by the statutes on insurers. See e.g., Original Blue Ribbon Taxi Corp. v. S. Carolina Dep’t of Motor Vehicles, 380 S.C. 600, 610, 670 S.E.2d 674, 679 (Ct. App. 2008) (“[o]ur courts have consistently held self-insurers are required to provide a substitute for an insurance policy to the extent of the statutory policy requirements”); Jackson v. Donahue, 193 W. Va. 587, 457 S.E.2d 524, 530 (1995)(“when one becomes a self-insurer under the Motor Vehicle Financial Responsibility Act, he must pay those claims which normally would arise under the terms of the Act and which are covered by the insurance policies described in the Act itself”).

In the course of defining “self-insurance,” it is a common business practice to self-insure up to a certain amount, and then to cover any excess with insurance. This self-insured retention (SIR) amount serves as the self-insurer’s limit of liability with respect to any tort liability the self-insured entity may incur in connection with the ownership, maintenance or use of its vehicles. As noted, the terms of the self-insured “policy” are supplied by the requirements imposed by statute on an insurance company. Thus, for example, if the compulsory auto law requires a liability insurer to provide omnibus liability coverage protecting permissive users, the self-insurer must likewise extend omnibus protection to permissive users. See e.g., McClain v. Begley, 465 N.W.2d 680, 685 (Minn.1991) (Simmonet, J. concurring) (because a commercial automobile policy, if purchased, would afford omnibus liability coverage for permissive users, self-insurer is required to extend omnibus coverage); Barnes v. Whitt, 852 P.2d 1322, 1323-26 (Colo. App. 1993) (“the language of the statutes requires every owner of a motor vehicle to provide liability coverage for bodily injury arising from the vehicle’s permissive use without exception and that the provisions with regard to self-insurers do not limit that obligation”); United States Fidelity & Guaranty Co. v. Budget Rent–A–Car Systems, Inc., 842 P.2d 208 (Colo.1992) (Kirshbaum, J., specially concurring) (self-insurers must comply with the standards applicable to commercial insurers with respect to liability responsibility).

A few states do not require omnibus coverage. See e.g., Enterprise Rent-A-Car Co. of Boston, LLC v. Maynard, 2012 WL 1681970 (D. Me. May 14, 2012) (although Enterprise paid $260,000 to settle a lawsuit against its renter, it was not obligated to do so because Enterprise had no tort liability and 29–A M.R.S. § 1611 did not require rental vehicle owners to obtain a policy insuring a permissive user of a rental vehicle). (I addressed the Maynard case in a separate blog article, “Oops!! Self-Insured Owner of Rental Vehicle that had no Obligation to Afford Omnibus Coverage to Permissive Users not entitled to recover $260,000 Settlement Payment”).  

Illinois requires vehicle owners and their insurers extend omnibus coverage to permissive users. See e.g., Farm Bureau Mut. Ins. Co. v. Alamo Rent A Car, Inc., 319 Ill. App. 3d 382, 386-87, 744 N.E.2d 300, 303 (Ill. App. Ct. 2000) (omnibus clause insuring permissive users must be read into all motor vehicle policies that do not expressly include it); State Farm Mutual Automobile Insurance Co. v. Universal Underwriters Group, 285 Ill.App.3d 115, 674 N.E.2d 52 (1996) (“the [Vehicle] Code mandates that the insurance policy issued by Universal provide omnibus coverage in the absence of any statutory language qualifying the mandate”).

This, in turn, raises the issue of whether a self-insured entity may limit the extent of omnibus protection it may be required to extend permissive users to an amount less than its SIR. The majority of jurisdictions have held that a self-insurer, like an insurer, is not required to provide the same level of protection to permissive users (omnibus insureds) as provided to the self-insured entity (named insured).  Stated another way, coverage for the named insured need not be coextensive with omnibus coverage.

In the case of a self-insured car rental company, a special type of self-insurance, the car rental company typically limits its omnibus coverage obligation by use of a rental contract language limiting the protection to the “minimum” limits mandated by the applicable law.The effectiveness of such step-down provisions was most thoroughly addressed in Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994), a case I handled for the rental car company, Agency.  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 bodily injury liability protection to its renters. At the time of the accident, Gruett (the renter) was insured by 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 liability coverage 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 the remaining balance of $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 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 stated:

 [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 Correct Result in Nelson

A self-insured entity wears two hats: one as the “owner” of a motor vehicle and another as an “insurer.” Section 7-502 of the Illinois Vehicle Code addresses the self-insured entity’s tort liability and its ability to pay any judgment entered against it arising out of the ownership, maintenance or use of its vehicles: “The Director may issue a certificate of self-insurance if “such person is possessed and will continue to be possessed of ability to pay judgment obtained against such person.” (625 ILCS 5/7–502.) Section 9-105 addresses the self-insured entity’s insurance obligations.

In Nelson, Enterprise had a $2 million SIR.  That amount serves as its limit of liability with respect to any tort liability it may incur in connection with the ownership, maintenance or use of its vehicles. Enterprise had no independent liability in Nelson and was not vicariously liable for the driver’s negligent operation of the vehicle.  Illinois does not impose vicarious liability on the owners of motor vehicles.  Enterprise sought to limit the protection provided to permissive users to the minimum limits mandated by Illinois law.  Paragraph 7 of the rental contract obligated Enterprise to provide protection to the renter and additional authorized drivers “to the minimum amount set forth in the relevant financial responsibility laws.”

The Nelson court held that Section 7-502 described the limits of Enterprise’s obligations relative to the judgment entered against its authorized driver.  However, section 7-502 does not even require omnibus protection, much less proscribe a limit for such protection.

The obligation to provide omnibus coverage is identified in section 9-105. That statute provides that an insurance policy insuring the owner of for-rent vehicles must also insure the owner and “any person operating the motor vehicle with the [rental car company’s] express or implied consent.” Because self-insurance is the functional equivalent of an insurance policy (or a “substitute” for an insurance policy), a self-insurer must likewise extend omnibus protection. Enterprise acknowledged its statutory obligation to afford omnibus liability protection in paragraph 7 of its rental contract.  Section 9-105 requires a policy to afford coverage for bodily injury in the minimum amount of $50,000 per person and $100,000 per occurrence. (625 ILCS 5/9–105.)  That limit is likewise the limit that must be extended to the permissive user of a self-insured vehicle.  It only makes sense that the statute which imposes the obligation to provide omnibus coverage would likewise identify the limit of that obligation.

Nothing suggests that the Illinois legislature actually intended to treat self-insured car rental companies differently than car rental companies who purchased insurance.

Enterprise’s liability for the judgment in Nelson should have been $25,000 not $600,000.

A contrary ruling would expose self-insured car rental companies to unlimited liability for accidents resulting from the negligence of rented vehicles.  It would, in essence, impose vicarious liability on self-insured car rental companies. To that extent the law is interpreted in that fashion, it may very well be preempted by the Graves Amendment. The Graves Amendment provides that a rental car company may not be held liable for harm to persons or property arising from the use, operation, or possession of one of its rental vehicles if there is no negligence or criminal wrongdoing on the part of the company. 49 U.S.C. § 30106(a) (2006).  I have addressed the Graves Amendment in several prior, extensive articles on this site.

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 consult an attorney. © All rights reserved. 2010.

Are Step-Down (Drop-Down) Liability Limits in Minnesota Automobile Policies Void and Unenforceable?


A recent South Carolina Supreme Court decision invalidating a “step-down” provision in a household intra-family exclusion to an automobile insurance policy got me thinking about whether such provisions would be invalid under Minnesota law as well. In Williams v. Gov’t Employees Ins. Co. (GEICO), 2014 WL 4087958 (S.C. Aug. 20, 2014), an auto liability policy provision which reduced bodily injury liability coverage for resident family members from $100,000 to $15,000 was deemed void and unenforceable.

A step-down provision is one in which “the coverage ‘steps down’ from the actual policy limits to the minimum required by statute.” Liberty Mut. Ins. Co. v. Shores, 147 P.3d 456, 458 n. 4 (Utah Ct.App.2006) (quoting 1 Rowland H. Long, The Law of Liability Insurance, § 2.05[5] (2003)).

I handled the two cases which first approved step-down provisions in Minnesota. See e.g., 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. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160, 165 (Minn. Ct. App. 2001), review denied (Minn. June 27, 2001). In both cases, the insuring agreements provided one policy limit for the car rental company (in Agency Rent-A-Car) and dealership (in Universal Underwriters) and another, lower (statutorily minimum) limit for the customer. The step-down provisions in these cases were enforceable because they did not omit any coverage mandated by the Minnesota No-Fault Act or undermine any of its purposes.

Having spent time researching the issue, “step-down” provisions used in connection with a household intra-family exclusion in an auto insurance policy may be invalid under Minnesota. Although the Minnesota Court of Appeals and Eighth Circuit Court of Appeals has approved step-down provisions in this context (see e.g., Frey v. United Servs. Auto. Ass’n, 743 N.W.2d 337 (Minn. Ct. App. 2008); Bundul v. Travelers Indem. Co., 753 N.W.2d 761 (Minn. Ct. App. 2008); Babinski v. Am. Family Ins. Grp., 569 F.3d 349 (8th Cir. 2009)), the Minnesota Supreme Court may reach a different result assuming the correct legal arguments are made, the record is fully developed and the policy language is similar to that considered in Frey, Bundul and Babinski.

I will be posting an in-depth article on the subject in the future.

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 consult an attorney. © All rights reserved. 2010.

Uber, Lyft and TNC’s win (Again) in California: New Insurance Requirements Approved


In late August, the California Assembly voted 70-0 to pass AB2293, an Act specifying insurance requirements for transportation network companies (TNC) like Uber, Lyft and Sidecar.  I recently posted an article about the TNC’s victory in Minneapolis (“Uber, Lyft and other Transportation Network Companies Hitting the Streets in Minneapolis”). TNC’s connect passengers and drivers through smartphone apps with the driver using his or her own personal automobile to provide “taxicab” rides to customers.  Tech savvy companies such as Uber and Lyft are poised to significantly erode, if not entirely replace, the taxicab industry within the next few years. Upon passage of AB2293, Robert Callahan, the Internet Association’s California director, applauded lawmakers. “Ridesharing has revolutionized the way we move around our communities, and Californians have embraced it as a safe, innovative and cost effective transportation option,” he said. “Californians love Uber and lawmakers have heard them loud and clear,” Uber spokeswoman Eva Behrend added.

The Act, which becomes effective July 1, 2015, amends Chapter 8 of Division 2 of the California Public Utilities Code.  Below is a summary of the significant aspects of the bill.

A “transportation network company” is defined to mean companies that provide “prearranged transportation services for compensation using an online-enabled application or platform to connect passengers with drivers using a personal vehicle.”

A “participating driver” or “driver” is defined to mean “any person who uses a vehicle in connection with a transportation network company’s online-enabled application or platform to connect with passengers.”

The Act defines “transportation network company insurance” to mean “a liability insurance policy that specifically covers liabilities arising from a driver’s use of a vehicle in connection with a transportation network company’s online-enabled application or platform.”

Under the Act, the TNC must advise its drivers in writing that the driver’s personal automobile insurance policy will not provide coverage when using a vehicle in connection with a transportation network company’s online-enabled application or platform and will not provide collision or comprehensive coverage for damage to the vehicle from the moment the driver logs on to the TNC’s online-app to the moment the driver logs off the TNC’s online-app.

The Act specifies the insuring obligations of the TNC and driver during three different periods of time:

First, from the moment a driver logs on to the TNC’s online app until the driver accepts a request to transport a passenger. During this time period, the TNC insurance is “primary” and is $50,000 for death and personal injury per person, $100,000 for death and personal injury per accident, and $30,000 for property damage. This obligation can be satisfied by insurance maintained by the driver or insurance maintained by the TNC if the driver does not maintain insurance or if the driver’s policy has ceased to exist or has been canceled, or a combination of both policies. If the obligation will be satisfied in whole or in part through a driver’s policy, the TNC must verify that insurance is maintained by the driver and that the policy is specifically written to cover the driver’s use of a vehicle in connection with the TNC online app. The TNC is also required to maintain $200,000 of “excess” coverage insuring the TNC and driver to cover any liability arising from a driver using a vehicle during this time period.

Second, from the moment a participating driver accepts a ride request until the ride is complete.  During this time period, the TNC insurance is “primary” and is $1,000,000 for death, personal injury, and property damage. The $1 million obligation can be satisfied by insurance maintained by the driver or insurance maintained by the TNC, or a combination of both. If the obligation will be satisfied in whole or in part through a driver’s policy, the TNC must verify that the policy is maintained by the driver and that the policy is specifically written to cover the driver’s use of a vehicle in connection with the TNC online app. The TNC insurance must also provide $1 million in UM/UIM coverage from the moment the passenger enters the vehicle until the passenger exits the vehicle. (Whether the $1 million of UM/UIM coverage must apply to the driver if injured is not addressed in the legislation).

Third, from the moment the ride is complete until the driver either accepts another ride request or logs off the app. The insurance requirements relating to this relating time period are the same as those required when the driver has logged onto the online app.

In any case where the insurance obligation is to be satisfied from the driver’s policy, if the driver’s policy has lapsed or ceased to exist, the TNC is required to provide the coverage required by the Act from the first dollar of a claim.

The Act also contains a provision stating that it shall not be construed to require a personal auto policy provide any coverage during the period of time the driver is logged onto a TNC’s online app. Further, during the period of time between the moment a drive logs on to a TNC online app and when the driver logs off or passenger exits the vehicle, whichever is later, the following rules apply: (1) the personal auto policy of the driver (or vehicle owner) will not provide coverage to anyone, unless the policy expressly provides for coverage during this period of time; and (2) a personal auto insurer may, in its discretion, extend coverage while the vehicle is used in connection with a TNC’s online app during this time period only if the policy expressly provides for the coverage during this time period.

The Act encourages the California Department of Insurance to expedite review of any application for approval of transportation network company insurance products so that these products become available for purchase before July 1, 2015.

Finally, the Act does not limit the liability of a TNC in any action for damages against a TNC for an amount above the required insurance coverage.

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 consult an attorney. © All rights reserved. 2010.

 

 

Auto Dealer (Garage) Policy: Wrongful Repossession Claims not Covered


Every once in a while when putting together a blog article, I run across an insurance coverage case that all dealers should know about.  Although not a recent case, North Carolina Farm Bureau Mut. Ins. Co. v. Weaver, 134 N.C. App. 359, 517 S.E.2d 381 (1999), is such a case.  In short, the court held that wrongful repossession claims were not covered by a garage liability policy as repossession of collateral, even if the insured had a valid possessory right, is not “necessary or incidental” to garage operations.

Weaver owned an automotive parts and repair company, Weaver’s Auto Parts and Garage. Grice contacted Weaver about getting repair work done on his 1986 Camaro. The Camaro was towed to the garage and the repair work was completed. Grice attempted to retrieve the Camaro on several occasions, but failed to pay the bill for the complete repairs and was informed that the Camaro would not be released until full payment was made. Grice later tricked an employee of the garage into giving him the Camaro without having paid the repair bill. Weaver called the police and reported the Camaro stolen. Later, Weaver assembled a group of seven people to accompany him to recover the Camaro with a wrecker. Weaver had in his possession a .357 Magnum revolver. The Camaro was found parked off the road near an abandoned house trailer. As the Camaro was being hooked up to the wrecker, Grice emerged from the trailer and ran towards Weaver. A struggle ensued and ultimately Weaver’s gun fired, killing Grice.

Grice’s estate brought a wrongful death action against defendants. The insurer, which had issued a policy to the garage under a policy extending coverage for “garage operations” filed a declaratory judgment action seeking a determination of no coverage. The policy provided coverage for liability resulting from “garage operations” defined as follows:

[T]he ownership, maintenance or use of locations for garage business and that portion of the roads or other accesses that adjoin these locations. “Garage operations” includes the ownership, maintenance or use of the “autos” indicated in SECTION I of this Coverage Form as covered “autos.” “Garage operations” also includes all operations necessary or incidental to a garage business.

 Weaver argued that his actions in attempting to recover the Camaro were “necessary” to the business of the garage and that he could not afford the lost profits from stolen property.

The court first held that Weaver’s efforts to retrieve the Camaro were not “necessary” to the operations of the garage. Although Weaver had a valid possessory lien on the Camaro under North Carolina law because Grice owed the repair bill, North Carolina law addressed the steps to be taken by a lienor where possession of a vehicle was not voluntarily released.  Those steps required the lienor to “institute an action to regain possession of the motor vehicle or vessel in small claims court.” As Weaver was not acting in a manner authorized by law when he attempted to repossess the Camaro, it could not be considered “necessary” to garage operations.  The court also rejected Weaver’s argument that his actions were “incidental” to “garage operations,” stating: “we conclude that since defendants had available legal remedies, but instead attempted to repossess the Camaro by means not authorized by law, defendants’ actions were not “necessary or incidental” to the “garage operations.” Thus, the policy did not provide coverage for the wrongful death action.

Note:  Most auto dealerships, in addition to selling or leasing vehicles, arrange financing on the vehicle pursuant to a retail installment sales contract or lease agreement. If the retail installment sales contract or lease agreement is assigned to a lending institution (most dealers do not hold the paper), the dealership has no rights in the collateral – the rights in the collateral have been assigned to the financial institution.  Dealers should ALWAYS consult with their attorney before attempting to repossess anything.

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 consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.

The ADCF Policy: The “Auto Dealer Operations” Trigger


In previous posts, I’ve discussed the new Auto Dealers Coverage Form (“ADCF”) policy (“The Comprehensive Guide to the 2013 Auto Dealer’s Coverage Form”), which replaced the Garage Liability form in 2013. This article addresses the insuring clause requirement that the accident arise out of “auto dealer operations” (“garage operations” under the former GL policy). The ADCF policy replaces the Garage Liability (“GL”) policy.  Unlike most commercial policies, the ADCF policy is, as its name suggests, is specifically tailored to meet the insuring needs of a particular industry, automobile retail dealerships.  Today, franchised auto dealers operate three discreet businesses: vehicle sales, vehicle servicing and vehicle financing. Because of the significant variation in liability risks flowing from an auto dealer’s businesses, the ADCF policy, like the predecessor GL policy, rolls several different coverage forms into one. “The automobile garage policy affords coverage for many hazards which would ordinarily be covered by separate policies.” 1 R. Long, The Law of Liability Insurance, Sec. 7.07 (1966). The ADCF policy includes liability coverage parts that are similar to those found in a Business Auto policy, Commercial General Liability policy, Personal Injury & Advertising policy and Professional Liability policy.  There is coverage for auto, coverage for premises and coverage for operations.  In addition, the ADCF policy now includes optional “acts, errors or omissions” coverage which insures the dealership against liability for truth-in-lending, truth-in-leasing, odometer disclosure, title work and insurance agent activities. Historically, all of the liability coverages afforded under an auto dealer policy have been based on, and restricted to, liability arising out of “garage operations.”

The ADCF policy uses the term “auto dealer operations,” which is defined to mean “the ownership, maintenance or use of locations for an ‘auto’ dealership and that portion of the roads or other accesses that adjoin these locations [and] also include[s] all operations necessary or incidental to an ‘auto’ dealership.” For some unknown reason, the ADCF policy no longer limits auto coverage to “auto dealer operations.” The “operations” requirement rarely comes into play, but does serve as an outer-limit on coverage and confine it to activities which have some causal nexus to sales, servicing or financing activities. There “must be some nexus between the insured’s business and the act or occurrence at issue.” Cotton v. Auto-Owners Ins. Co., 937 N.E.2d 414, 414-19 (Ind. Ct. App. 2010). The “policy here does not insure gratuitous conduct unrelated to garage operations.” Id. However, the causal nexus is rather easily satisfied as demonstrated by the Minnesota Court of Appeals decision in American Hardware Mut. Ins. Co. v. Darv’s Motor Sports, Inc., 427 N.W.2d 715 (Minn. Ct. App. 1988). In that case, Darv’s Motor Sports, Inc. (DMS) was involved in selling and repairing motorcycles. The company was owned and operated by Darvin and Kathleen Sembauer. The Sembauers taught their five year old daughter, Jill, how to ride a Yamaha Y-Zinger, a motorized dirt bike. Jill was injured while operating the dirt bike when she collided with a motorcycle operated by Thomas Boran on a driveway next to the Sembauer home. Boran, who was 26 and employed by DMS as a mechanic, was test-driving a Kawasaki motorcycle under repair. Jill was on her way to visit a friend when the accident occurred.

Jill’s guardian-ad-litem brought a negligence action on against Boran and DMS. At the time of the accident, DMS was insured by American Hardware under a garage policy. The liability coverage provided that American Hardware would defend suits and pay all sums the insured legally must pay because of bodily injury covered by an accident and “resulting from garage operations.” The term “garage operations” was defined to mean “the ownership, maintenance or use of locations for garage business and that portion of the roads or other accesses that adjoin these locations. Garage operations includes the ownership, maintenance or use of the autos * * * as covered autos. Garage operations also include all operations necessary or incidental to a garage business.” Although the accident did not occur on the business premises and Jill was on her way to visit a friend when the accident occurred, DMS argued that Jill was nonetheless operating the Y-Zinger (which was owned by DMS and offered for sale by DMS) for “promotional purposes” and her use of the bike on that day was “incidental” to garage operations. The trial court, affirmed by the appellate court, agreed:  

There can be no doubt Jill Sembauer’s activities, on this day, fell within the broad Garage Operations definition. Garage operations include all operations necessary or incidental to the garage business. One important activity which is necessary and incidental to Darv’s Motor Sports Inc. was the promotion and sale of its products. One of these products was the Y-Zinger. The Y-Zinger was designed to be driven by younger children. Darv’s demonstrated to potential customers that a young child is capable of riding the Y-Zinger. And for that purpose, Jill Sembauer was trained in its use and proficiency. She fit the business needs of Darv’s Motor Sports. Jill was given expressed authorization to practice driving the Y-Zinger * * * even though she may be using the vehicle for personal or social purposes. It certainly is reasonable, under the circumstances of this case, that the more Jill drove the motorbike, for whatever reason, the more proficient she would become in its operation and handling characteristics. In fact, it certainly inures to Darv’s benefit to have Jill ride the bike as much as practically possible to become extremely proficient in its operation to show potential customers how skillful she was in handling the bike to demonstrate its versatility and ease of handling. The more proficient she was in showing potential customers its versatility and ease of handling, the greater sales potential for the bike.         

Generally, the “operations” requirement will be satisfied if the vehicle involved in the accident had been previously used in the dealer’s operations, or the accident occurred on or near the business premises or the accident was caused by an employee acting within the scope of employment. As to vehicles previously used in garage operations, see Farmers Alliance Mut. Ins. Co. v. Ho, 68 P.3d 546 (2002) (accident was covered where car involved in the accident had been left by a customer for service or repair despite fact that garage owner used the car for personal reasons after hours, became intoxicated and caused the accident); Northland Ins. Co. v. Boise’s Best Autos & Repairs, 132 Idaho 228, 229 (1997) (accident arose out of garage operations where truck involved in the accident was owned by the garage, accident occurred while the truck was being used to deliver advertising materials to a related business, a pawn shop that provided the garage with all of its vehicles for sale); American Hardware Mut. v. Darv’s Motor Sports, 427 N.W.2d 715, 717-718 (Minn. Ct. App. 1988) (case discussed above); Providence Washington Ins. Co. v. Glens Falls Ins. Co. (1971) 114 N.J.Super. 350, 352 (1971) (car involved in the accident was left for spot painting; the garage owner used it for a personal errand and caused the accident); Rivas v. Killins, 346 S.W.2d 698, 699, 700 (1961) (car involved in the accident was owned by the used auto agency and loaned indefinitely to a prospective purchaser; the accident occurred while the borrower was driving for personal reasons). But see, Peirson v. Insurance Co., 249 N.C. 580, 107 S.E.2d 137 (1959) (even though vehicle was used occasionally in garage business, there was no coverage under garage policy for garage owner’s use of vehicle to attend unrelated social function).

Accidents that occur on the business premises will generally satisfy the “operations” requirement because coverage is not restricted to defective conditions on the premises. In Knowles v. Lumbermens Casualty Company, 69 R.I. 309, 33 A.2d 185 (1943), the court noted the phrase “ownership, maintenance, occupation or use of the premises” for garage purposes was not modified by the phrase “operations necessary or incidental thereto” and, as such, coverage was afforded for an accidental injury arising from the use of the premises even if the “operation” which caused the injury was not necessary and incidental to the conduct of the business.  See also, Linderman v. American Home Assurance Co., 414 So.2d 1124, 1125 (1982) (accident occurred when an employee was balancing the wheels on his personal car and the car sped out of the garage and struck a passing car); Jackson v. Lajaunie, 270 So.2d 859, 861 (1972) (accident occurred when the service station owner fired a pistol at a customer as a practical joke, thinking the pistol was loaded with blank ammunition).  Likewise, accidents that occur within the scope of a dealership employee’s employment for the dealership generally satisfy the “operations” requirement.  See e.g., General Accident Ins. Co. v. Safeco Ins. Cos., 314 S.C. 63 (1994) (accident arose out of garage operations when an employee of the garage was driving a rental car while attending a conference because attendance at the conference was a requirement of employment).

However, when none of the three factors outlined above are present, the auto dealer policy will likely not afford coverage. In Fid. & Guar. Ins. Co. v. German Motors Corp., 2007 WL 2965608 (Cal. Ct. App. Oct. 11, 2007), the insurer had no duty to defend and indemnify its insured dealership for liability arising from a car accident caused by an employee driving a rental car he had rented from a related car rental business.  The vehicle had never been used in dealership operations, the accident did not occur on business premises and the employee was not acting within scope of employment when he drove the vehicle.

In addition, some activities are wholly unrelated to dealer “operations” – the risks insured by the policy – and, thus, are not covered.  See e.g., North Carolina Farm Bureau Mutual Ins. Co. v. Weaver, 517 S.E.2d 381 (N.C. App. 1999) (repossessing vehicles without a legal right; “we conclude that since defendants had available legal remedies, but instead attempted to repossess the Camaro by means not authorized by law, defendants’ actions were not ‘necessary or incidental’ to the ‘garage operations’”); Automobile Underwriters, Inc. v. Hitch, 169 Ind. App. 453, 349 N.E.2d 271 (1976) (selling shotgun shells out of a service station; court held that “sale of reloaded shotgun shells was not necessary or incidental to the maintenance or use of the premises for the purpose of a garage”); McLeod v. Nationwide Mutual Insurance Co., 115 N.C. App. 283, 444 S.E.2d 487 (1994) (affixing dealership license tags to personal vehicles; accident did not result from “garage operations” where dealership permitted an employee to affix dealership license tags to his personal vehicle and the employee, in turn, permitted another person to operate his vehicle); Cotton v. Auto-Owners Ins. Co., 937 N.E.2d 414, 414-19 (Ind. Ct. App. 2010) (policy did not afford coverage where dealer provided a temporary license plate for use on a vehicle it did not own and vehicle was not used in dealership business).

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.

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 consult an attorney licensed in your jurisdiction. © All rights reserved. 2010.

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