In Philadelphia Indemnity Ins. Co. v. Montes-Harris, No. S130717, 2006 WL 3517847 ( Cal. Dec. 7, 2006), the California Supreme Court held that an excess liability insurer had no duty to investigate when a rental car agency examined a drivers license that was facially valid but had been suspended.

 

Alric Burke rented a car and presented a drivers license that appeared valid. The rental agent photocopied the license, and Burke signed the rental agreement. Burke also purchased excess liability insurance, which was offered by the rental agency.

 

Burke was involved in an accident in the rental car and injured a number of people. At that time, the rental agency learned that Burke was driving with a suspended license. The excess insurer, Philadelphia Indemnity, sought a judgment declaring it had no liability for the damage. Philadelphia claimed that the policy excluded coverage for injuries arising out of the use of a rental car obtained through fraud or misrepresentation.

 

The Supreme Court of California was asked to address the following question: “Does the duty of an insurer to investigate the insurability of an insured, as recognized by the California Supreme Court…apply to an automobile liability insurer that issues an excess liability insurance policy in the context of a rental car transaction?”

 

The court said, “Specifically, we hold that an insurer selling supplemental liability coverage in excess of minimum statutory amounts, in the context of a rental transaction, does not forfeit any statutory or contractual right to rely on the rental car customer's misrepresentation in tendering a facially valid but suspended driver's license as a basis for avoiding liability under an excess policy, if there has been compliance with the mandate of [California insurance law] to inspect the driver's license and verify the signature of the customer.”

 

Since the statutory requirements were met, Philadelphia had no obligation to conduct any further investigation regarding the validity of Burke's driver's license. Thus, the insurer could avoid liability to third parties.