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SAMPLE: Rental Car Co. Liability

Copyright (C) 1999 Quo Jure Corporation

STATEMENT OF FACTS

On January 26, 2000, Mr. Green was involved in an automobile accident with Mr. Brown. Mr. Brown was driving a vehicle his friend and associate Mr. White had rented the previous day from Sunshine Rent-a-Car. White rented the vehicle using Brown's credit card, although he signed his own name. In the space for specifying additional authorized drivers, White filled in "none." White accepted and paid for supplemental liability insurance ("Low SLI") in the amount of $1 million.

The rental agreement includes the following terms and conditions:

1. The agreement acknowledges that the rental vehicle may be driven by "Authorized Drivers" and "Additional Authorized Drivers." In either case, the vehicle's permissive user must have a valid license and be 25 years of age or older. An "Authorized Driver" is defined as: (1) a member of the renter's immediate family who permanently resides with him; or (2) "a business partner, employer or regular fellow employee who drives the Vehicle for business purposes." An "Additional Authorized Driver" is "a person who has signed the Rental document of this Agreement as an Additional Authorized Driver after qualification by the Company." Terms and Conditions of Rental Agreement, p. 3, ¶4b. "These are the only Authorized or Additional Authorized Drivers who may drive the vehicle, except as otherwise required by applicable law." Ibid. (emphasis added).

2. The list of "prohibited Uses of the Vehicle" includes: use by an unauthorized driver. Terms and Conditions of Rental Agreement, p. 3, ¶4(b). The agreement then states in bold-face type that prohibited use of the vehicle will void any limitations on the renter's liability, and render the renter liable for any resulting damages. Id., at ¶5.

3. The Agreement says that liability insurance or a self-insurance arrangement will cover the Authorized Drivers in accidents involving third parties at the minimum limit required by the compulsory insurance laws of the applicable state. Terms and Conditions of Rental Agreement, p. 4, ¶9. It also states that insurance protection will not apply to

any liability of a driver who is not an Authorized Driver and any liability for an accident which occurs while the Vehicle is obtained or used in violation of this Agreement. In the event liability protection is extended by operation of law to anyone not permitted by this Agreement to drive the Vehicle, the limits of protection shall be the minimum required by the automobile financial responsibility or compulsory insurance laws of the state or other jurisdiction in which the accident occurs.

Ibid.

The terms and conditions of the SLI B state that this is excess insurance. "We will indemnify any 'insured' for 'ultimate net loss' in excess of the 'underlying insurance' to which the coverage applies . . . ." SLI Policy, ¶I(D). This agreement states that the limit of coverage "is the difference between the limits of liability provided by the 'underlying insurance' and the dollar amount shown in Item 4 of the Declarations." Id., at ¶I(E).

Sunshine contends it is not obliged to provide liability coverage to White and Brown because they violated the agreement's terms and conditions by allowing Brown to drive the vehicle when he was not twenty-five years old; not identified as an Additional Authorized Driver under the Agreement, was not a member of White's immediate family; and was not White's business partner. Brown and White contend that Brown was driving the vehicle for a "business purpose" because one of the purposes of his trip was to discuss business opportunities with White. The two had engaged in several joint ventures in the past, and Brown co-signed for a credit card White needed for his business. Additionally, Brown and White contend that they jointly rented the automobile because Brown paid for the rental with his credit car. (It is not clear if Brown signed the credit card receipt or if White did so with Brown's authorization.)

ISSUES

1. Does the insurance purchased with the vehicle's rental, including the LOW SLI coverage of $1 million, cover Brown's accident with Green?

2. May Sunshine be held liable as the vehicle's owner under Vehicle Code §17151?

SUMMARY

1. The insurance provided by the rental agreement itself must provide coverage of $15,000 to Brown as the vehicle's permissive user, even though he may not qualify as an authorized driver under the agreement. In order for the LOW SLI excess coverage to apply, Brown must qualify as an authorized driver.

2. Sunshine's liability as the vehicle's owner is secondary to the liability of White and Brown. If either or both of them are covered by other insurance, and pay at least $15,000 under a judgment or settlement, this will extinguish Sunshine's liability under the coverage the agreement provided. Coverage afforded by the LOW SLI will depend on Brown's qualifying as an authorized driver, and whether other primary insurance will pay for Mr. Green's injuries.

DISCUSSION

1. Does Sunshine's Insurance cover the accident?

A. Insurance Code §11580.1 requires primary insurers to provide coverage for permissive users to the same extent as an insured.

Subject to a few exceptions, the California public responsibility law compels all issuers of automobile liability policies to provide coverage for permissive users to the same extent as insureds, up to the limits specified by Vehicle Code §16506 (i.e., $15,000 personal liability for a single claimant). Veh. Code §11580.1 (a), (b). The statute provides, in pertinent part:

Every policy of automobile liability insurance . . . shall contain all of the following provisions:

Provision affording insurance to the named insured with respect to any owned or leased motor vehicle covered by such policy, and to the same extent that insurance is afforded to the named insured, to any other person using such motor vehicle, provided the use is by the named insured or with his or her permission, express or implied, and within the scope of such permission . . . .

Ins. Code §11580.1(b)(4).

This rule of equal coverage for permissive users is subject to exceptions concerning insurance for the loading and unloading of vehicles; co-employees injured in the course and scope of employment; and persons engaged in the business of selling, repairing, road-testing, or parking automobiles. Ibid.

In Lovy v. State Farm Insurance Co. (1981) 117 Cal.App.3d 834, 848, the court held that a policy endorsement that attempted to limit the policy's coverage as to certain classes of permissive users was invalid on its face because it did not comply with Insurance Code §11580.1(b)(4). Lovy rented an automobile from Hopkins, an automobile dealer, for a pleasure trip. At the time of the one-car accident, Kondrack was driving the vehicle with Lovy's permission. Lovy suffered serious injuries in the accident. In a personal injury action, Lovy received a judgment in excess of $1 million. The consolidated appeals raised the question of the type and scope of coverage offered to Kondrack under eight different policies.

The trial court concluded that three of the policies issued to Hopkins afforded no coverage for a variety of reasons. The court of appeals reversed, and held that all three policies covered the accident. With regard to Hopkins' comprehensive policy, the court held that the attempted exclusion of coverage for permissive users was ineffective because it violated Insurance Code §11580.1(b)(4). Id., at 847-849. The court also observed that the rental agreement's terms and conditions did not require the lessee to obtain insurance of any kind. Instead, the agreement implied that the lessor provided insurance with limits equal to or in excess of the statutory limits. Id., at 850. Thus, the court concluded that the comprehensive policy offered coverage because the attempted exclusion violated state law, and the rental agreement's language did not support an interpretation that the policy only offered coverage if the lessee failed to obtain his own insurance. Id., at 851.

In this case, the Sunshine agreement states that it provides coverage under an automobile liability policy or qualified self-insurance arrangement for third-party bodily injury. Terms and Conditions, p. 4, ¶9. The agreement attempts to restrict coverage to certain classes of permissive users (immediate family members and business partners twenty-five years of age or older), "except as otherwise required by applicable law." Id., p. 1, ¶2. Yet, the agreement recognizes that coverage may be "extended by operation of law to anyone not permitted by this Agreement to drive the Vehicle" and affords protection in this case at "the minimum required by the automobile financial responsibility or compulsory insurance laws of the state . . . ." Id., at 4-5, ¶9. Thus, under Lovy, and by its own terms, the Sunshine Agreement offers coverage for Brown for Green's injuries at least in the amount of $15,000.

B. Insurance Code §11580.1 allows policies affording excess coverage to contain exclusions not permissible in policies affording primary coverage.

Policies of automobile liability insurance do not need to contain the required provisions, including that affording full coverage for permissive users,

(1) to the extent that such insurance exceeds the limits specified in subdivision (a) of Section 16056 of the Vehicle Code, or (2) if such policy contains an underlying insurance requirement or provides for a retained limit of self-insurance, equal to or greater than the limits specified in subdivision (a) of Section 16056 of the Vehicle Code.

Ins. Code §11580.1(a).

At least one court of appeals has addressed how this statutory exception for excess coverage applies to supplemental liability insurance provided under an automobile rental agreement. In Hertz Corp. v. Home Ins. Co. (1993) 14 Cal.App.4th 1071, an automobile's lessee elected to buy the "liability insurance supplement" or "LIS"coverage. Driving under the influence of alcohol, the lessee rear-ended another vehicle, injuring the occupants. The injured parties filed suit against the lessee, his employer, and Hertz, the automobile lessor. After the parties settled the personal injury actions, Hertz and its insurer sought a declaration that they were not obligated to provide any LIS/excess coverage to the lessee because he had violated a contractual clause against driving the vehicle while under the influence of alcohol. Ibid.

The Hertz agreement contained a provision indemnifying the lessee from liability to third persons resulting from an accident while operating the leased vehicle. The limits of protection were $25,000 per person and $50,000 per accident. Hertz did not contest coverage under this "primary policy." Id., at 1074, n.1, 1075.

The rental agreement also contained a provision, conspicuously printed in capital letters, which stated:

5. PROHIBITED USE OF THE CAR. THE CAR MAY NOT BE USED BY ANYONE UNDER THE INFLUENCE OF ALCOHOL OR OTHER INTOXICANTS, SUCH AS DRUGS; . . . IF THE CAR IS OBTAINED OR USED IN VIOLATION OF THIS AGREEMENT . . . LDW, PAI, AND ALL LIABILITY PROTECTION, INCLUDING LIS, ARE VOID AND YOU MAY BE RESPONSIBLE FOR ALL LOSS OR DAMAGE TO OR CONNECTED WITH THE CAR, REGARDLESS OF CAUSE.

Id., at 1075 (citing Hertz contract) (italics in original).

The LIS/excess policy specified that it was to serve as an excess policy, and provided coverage in excess of that afforded by the "primary policy," which it defined in its "Schedule of Primary Insurance" as the Hertz rental agreement. The LIS/excess policy incorporated by reference the limitations of coverage the Hertz agreement imposed. Id., at 1075-1076.

The trial court granted Hertz's motion for summary judgment on the grounds that the accident occurred while the lessee was drunk, thereby triggering the "driving under the influence" exclusion. It found that the LIS/excess policy was excess to the liability limits of the Hertz rental agreement, and therefore was not subject to the limitations on permissible exclusions set by Insurance Code §11580.1. On appeal, the parties did not dispute that §11580.1 permits excess insurance to contain broader exclusions than those allowed to primary or "underlying insurance." Rather, the issues were: (1) whether the Hertz rental agreement was a primary insurance policy; (2) whether the "driving under the influence" exclusion voided the coverage offered by the agreement such that the LIS/excess policy became the only (and hence primary) coverage; and (3) whether this exclusion was sufficiently incorporated into the LIS/excess policy. Id., at 1077.

The court of appeals held that the Hertz agreement's terms concerning indemnification made it an insurance contract, but because the coverage was primary, the "driving under the influence" exclusion was unenforceable under Insurance Code §11580.1. Id., at 1077-1078. The court also concluded that the Hertz agreement qualified as "underlying insurance" because its limits of coverage exceeded those imposed by Vehicle Code §16056, and despite the improper exclusion, Hertz's insurer paid benefits under the policy. Id., at 1079-1080. Finally, the court determined that the language of the exclusion was sufficiently clear and conspicuous to permit its enforcement, and that the LIS/excess policy properly incorporated the driving-under-the- influence exclusion by stating that it was subject to the same "terms, conditions and exclusions" as the Hertz agreement. Id., at 1080-1082.

One earlier case applied similar reasoning to hold that an excess policy supported by adequate underlying insurance need not afford coverage to permissive users. Harbor Ins. Co. v. KSCH, Inc. (1989) 208 Cal.App.3d 965, 969. In that case, the court held that, when one policy requires the maintenance of another specific policy, the specified policy's terms must be examined to determine if it affords coverage for permissive users. If it does, this policy will qualify as "underlying insurance" for purposes of Insurance Code §11580.1(a), and any exclusion of coverage for permissive users under the excess policy will be valid. Ibid.

The SLI policy defines the "authorized drivers" it covers as those who sign the rental agreement, those designated by any description in the rental agreement, and drivers "designated by description, if any, in item 6 of the Declarations." SLI Policy, p. 1, ¶I(C). The exclusions then state that the insurance will not cover accidents for permissive users other than those qualifying as authorized drivers. Id., at I(E)(1). Nonetheless, this exclusion of coverage for certain classes of permissive drivers will not violate Insurance Code §11580.1(a) if the policy qualifies as excess insurance with proper underlying insurance.

The SLI policy contains the features of an excess policy. In addition to describing itself as an excess policy, the terms also call for maintenance of underlying insurance by the "policyholder," defined as the rental vehicle's owner. Id., p. 1 ¶¶I(B)(2); II(B)(2). The Sunshine agreement also qualifies as underlying insurance. It meets the coverage requirement of $15,000 set by Vehicle Code §16506, and it states that unauthorized drivers will be covered in this amount where applicable law requires it. Terms and Conditions, p. 1, ¶2; pp. 4-5, ¶9. Thus, in order to reach the excess coverage offered by the LOW SLI, Brown must qualify as an authorized driver under the agreement's terms or the LOW SLI declarations.

Under the Sunshine agreement, Brown will qualify as an authorized driver only if he signed the agreement, was listed as an authorized driver, or was a twenty-five year-old business partner of White driving the vehicle for a business purpose. The excerpts from Hertz's discovery responses show that Brown was not yet twenty-five. Brown and White contend that they were business partners based on past associations and were negotiating a new business joint venture. No cases were found supporting the notion that this means the two were business "partners" as this term is commonly understood. It is certainly an argument worth making if Brown was in fact twenty-five years old.

The fact that White used Brown's credit card to pay for the rental supports the notion that the two intended that Brown would drive the vehicle. If Brown also signed the credit card receipt (indicating he was present when the vehicle was rented), this raises additional questions as to whether his name was intentionally left off the rental agreement, or whether this was an accidental omission. The facts may show that White signed the rental agreement and omitted Brown's name because Brown was not old enough to rent an automobile on his own.

2. Sunshine's liability as the vehicle's owner

Vehicle Code §§17150 and 17151 establish that the owner of a vehicle involved in an accident is a joint tortfeasor with the vehicle's negligent operator and therefore is jointly and severally liable for damages to the extent of $15,000. Fenley v. Kristoffersen (1979) 94 Cal.App.3d 139, 141.

California case law has long held that the negligent nonowner driver's settlement for an amount equal to or in excess of the owner's $15,000 statutory liability discharges the owner under Vehicle Code §§17150 and 17151. See, e.g., Fenley, supra, 94 Cal.App.3d at 141. The explanation for this is that the owner's liability under §17151 is primary and direct to the injured plaintiff, but secondary as between it and the negligent driver. Thus, the vehicle's owner essentially serves as the guarantor of its joint liability with the driver. Walker v. Belvedere (1993) 16 Cal.App.4th 1663, 1667-1668. Obtaining a judgment against the negligent permissive driver will not extinguish the owner's statutory liability until the judgment is satisfied to the extent of the owner's $15,000 liability under §17151. Id., at 1669.

This interpretation of Vehicle Code §§17150 and 17151 means that the first $15,000 paid to satisfy any judgment plaintiff might receive would be credited to the rental car company, regardless of whether it was paid by the rental car company or the driver. (The rental car company would have subrogation rights against the driver if it paid toward satisfaction of the judgment). The rental agreement's coverage thus does not act as an additional source of funds over and above Brown's or White's coverage limits. For this reason, it is important to ascertain: (1) whether Brown has insurance; (2) whether White has insurance that covers Brown. See Mercury Ins. Group v. Checkerboard Pizza (1993) 12 Cal.App.4th 495 (automobile lessee's insurer improperly denied coverage to lessee's permissive user of rental car).

CONCLUSION

Based on the facts provided, it appears that Sunshine will be liable for a maximum of $15,000 unless you can demonstrate that Brown was an authorized driver covered by the LOW SLI excess insurance. One of the determinative facts is Brown's age. You can make an argument that the two were business partners, although this is not a particularly strong argument considering they state they were negotiating a new venture. But you cannot argue around the fact of Brown's age. You should also ascertain whether Brown was present when White rented the automobile to see if any facts support the contention that the two jointly rented the vehicle. How far you choose to argue this point on summary judgment in the declaratory relief action regarding coverage depends on the extent of Mr. Green's injuries, and whether Brown and White have other insurance that would cover these without resort to the LOW SLI excess coverage.

Although the Sunshine agreement provides coverage up to $15,000, payment under this policy will only be required by Vehicle Code §17151 if Brown and White are not covered by other insurance. If other insurance, through judgment or settlement, pays at least $15,000, this will extinguish Sunshine's liability as the vehicle's owner.

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