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Challenging Unlawful Auto Liability Exclusions

Challenging Unlawful Auto Liability ExclusionsExclusions deemed unenforceable in a primary policy because of the application of Insurance Code §11580.1 are nonetheless lawful and permitted when the exclusions are contained in a policy deemed to be the excess policy.

Crackhead Craig had recently been released from prison and wanted to take a drive along the beautiful California coast. Crackhead’s friend, Speedball Bobby, refused to lend his monster truck to Crackhead since Crackhead had crushed several cars in the past while driving the monster truck. Undeterred, Crackhead decided to rent a car from Quickie Rental Car Company. Crackhead rented a Hummer since he thought he might have an opportunity to do a little off roading while driving along the coast.

Crackhead decided against purchasing the liability insurance supplement/excess policy that was offered through Quickie Rental. Crackhead felt he had ample insurance with his $500,000 automobile liability insurance policy issued by Allsnake Insurance Company. The automobile rental agreement contained a section entitled “Prohibited Use of the Car” that listed various activities that would revoke the permission of Quickie Rental for the renter to use the car. One prohibition was that the renter could not use or operate the car under the influence of drugs or alcohol. Another exclusion prohibited the use of the rental vehicle in off road activities. Crackhead Craig was driving past Pismo Beach and decided to smoke some crack cocaine and go off road and drive through the dunes. While off roading under the influence of crack cocaine, Crackhead ran over Sweet Mary who was sunbathing in preparation for a photo shoot for the swimsuit edition of Sports Illustrated. The police were summoned and Crackhead was arrested and convicted of driving under the influence of crack cocaine and causing bodily injury.

Sweet Mary retained you to pursue claims against Crackhead and Quickie Rental. Crackhead tendered his defense to Allsnake. Allsnake claimed that its policy incorporated the terms of the car rental agreement and coverage would be provided if the car was used with permission of the owners. Since the car rental agreement withdrew permission to use the vehicle when it was used in off roading activity or while the renter was driving under the influence of drugs or alcohol, Allsnake denied coverage and a defense under the policy. You file suit on behalf of Sweet Mary against Quickie Rental and Crackhead Craig. The hurdle you face is whether the exclusions for off road activity and driving under the influence of drugs and alcohol are enforceable.

California Law Specifies Permitted Exclusions for Auto Liability Insurance

Insurance Code §11580.1 sets forth the mandatory provisions and exclusions for automobile liability insurance in California. Section 11580.1(b) requires every policy of automobile liability insurance to contain (1) coverage limits of not less than $15,000 per person and $30,000 per accident for bodily injury and $5,000 per accident for property damage; (2) an explicit description of the motor vehicles or class of motor vehicles to which the coverage is specifically granted; (3) designation by explicit description of the purposes for which coverage of those motor vehicles is specifically excluded; and (4) a provision affording insurance to the named insured with respect to any owned or leased motor vehicle covered by the policy, and to the same extent that insurance is afforded to the named insured, the insurance is required to be afforded to any person using the motor vehicle with the express or implied permission of the named insured and within the scope of that permission.

Insurance Code §11580.1(c) sets forth the exclusions which are permitted in a California automobile liability insurance policy. Section 11580.1(c) states that a policy may, by appropriate policy provision, be made inapplicable to any or all of the following: (1) liability assumed by the insured under contract; (2) liability for bodily injury or property damage caused intentionally by or at the direction of the insureds; (3) liability imposed upon or assumed by the insured under any workers’ compensation law; (4) liability for bodily injury to any employee of the insured arising out of or in the course of his or her employment; (5) liability for bodily injury to an insured or liability for bodily injury to an insured whenever the ultimate benefits of the indemnification accrue directly or indirectly to an insured; (6) liability for damage to property owned, rented to, transported by, or in the charge of, an insured. A motor vehicle operated by an insured shall be considered to be property in the charge of an insured; (7) liability for any bodily injury or property damage with respect to which insurance is or can be afforded under a nuclear energy liability policy; and (8) any motor vehicle or class of motor vehicles, as described or designated in the policy, with respect to which coverage is explicitly excluded, in whole or in part.

Insurance Code §11580.1(d) permits the carrier to provide by an appropriate policy provision that the policy does not accrue to the benefit of any insured or any third-party claimant while the motor vehicle is being used or operated by a natural person or persons designated by name in the policy. Such a provision is sufficient to delete coverage when a motor vehicle is operated by a natural person or persons designated by name in the policy.

Allsnake contended that the ownership liability of Quickie Rental Car Company constituted primary coverage and therefore Insurance Code §11580.1 does not apply to preclude it from excluding coverage as the excess policy for the use of the automobile under the influence of drugs or alcohol or for off roading. See, Hertz Corporation v. Home Insurance Company (1993) 14 Cal.App.4th 1071, 1078-1080.

You make a policy limits demand against Allsnake for $500,000. Allsnake denies coverage and refuses to defend Crackhead Craig in the underlying litigation. Crackhead Craig retains counsel who offers to stipulate to a judgment of $1.5 million in exchange for an assignment of Crackhead’s rights against Allsnake to Sweet Mary and a covenant not to execute. Quickie Rental agrees to pay its statutory maximum ownership liability of $15,000. You accept the offer and judgment is entered by way of a stipulated judgment.

A second lawsuit is filed based upon the judgment. Allsnake raises the exclusions and contends that the exclusions are permitted since Quickie Rental had ownership liability and had posted a cash deposit of $30,000. The trial court rejects Allsnake’s arguments. The trial court distinguishes Hertz Corporation v. Home Insurance Company, supra, 14 Cal.App.4th 1071, from the facts of your case. The Hertz case involved a rental agreement in which the Hertz Corporation provided primary coverage under the basic rental agreement of $25,000 per person and $50,000 per accident. The renter was not required to buy any insurance since the rental agreement provided a basic insurance policy which exceeded the minimum liability limits required by California law. In contrast, Quickie Rental provided no such primary policy through the rental agreement. Quickie Rental had filed a cash deposit under the Vehicle Code in lieu of having insurance for the vehicle. The trial court agreed with Allsnake that the cash deposit was the equivalent of an insurance policy. However, the trial court pointed out that Vehicle Code §17150 provides that the owner of a motor vehicle is liable for death or injury caused by the negligent or wrongful act or omission of a permissive driver under a theory of imputed negligence. The liability of the owner of the vehicle is limited by Vehicle Code §17151, while the driver’s liability is unlimited. Vehicle Code §17153 provides the owner with subrogation rights from the driver of any amount of judgment recovered against it by the injured party. The liability of the permissive driver is primary and that of the owner is secondary, as between the two. Consequently, Allsnake Insurance Company would be primarily liable to Sweet Mary.

Since the Allsnake policy was the primary policy liable, the trial court holds Insurance Code §11580.1 applied to preclude the enforcement of the alcohol/drug and the off road exclusions. Those exclusions are not listed in Insurance Code §11580.1, which provides the exclusive list of exclusions authorized in California for an automobile liability insurance policy. The trial court finds that Allsnake unreasonably failed and refused to defend Crackhead Craig against the claims of Sweet Mary. The court also finds that the settlement of $1.5 million was reasonable and was not entered based upon fraud or collusion.

Following the trial court’s ruling, you demand that Allsnake pay the judgment. Allsnake refuses your demand and the matter proceeds to trial. At trial, Allsnake is held liable for bad faith damages and punitive damages since your client, as the judgment creditor, is considered a third-party beneficiary of the policy and may pursue those types of damages. The jury returns a verdict in Sweet Mary’s favor for the underlying judgment and $500,000 for emotional distress on the bad faith causes of action and punitive damages of $3 million. Allsnake appeals. The Court of Appeal affirms and holds that the trial court properly applied Insurance Code §11580.1 to preclude the enforcement of the exclusions set forth in the car rental agreement since the Allsnake policy was primary.

CONCLUSION

You should always study the exclusions relied upon in an automobile liability insurance policy to deny coverage for all or a portion your client’s claim. Careful analysis of Insurance Code §11580.1 and the exclusion relied upon by the insurance carrier should be done before you tell your client any bad news. While insurance companies frequently insert provisions that exclude coverage, they do not always know or tell you that the provisions in the form policy are unenforceable in California because of the application of Insurance Code §11580.1. Section 11580.1 provides the exclusive list of exclusions permitted in an automobile liability insurance policy sold or delivered in California. Hertz Corporation v. Home Insurance Company, supra, 14 Cal.4th at 1078. You should be careful in your analysis to determine whether the policy that is excluding coverage is the primary policy or an excess policy.

Exclusions deemed unenforceable in a primary policy because of the application of Insurance Code §11580.1 are nonetheless lawful and permitted when the exclusions are contained in a policy deemed to be the excess policy. In this case, your analysis was correct and Allsnake has been taught its lesson not to mess with you or Sweet Mary. Sweet Mary recovered from her injuries, decided to model for something indoors, and agrees to be an underwear model for Victoria’s Secret.


This article was also published in the Trial Bar News. The APA citation for the Trial Bar News article is as follows:

Copley, R. K. (2013). Challenging unlawful auto liability exclusions. Trial Bar News, 36(5), 11-12, 32-33.

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