Repossessed Auto and the Question of Coverage

The insurer of a car repossession business brought an action against the insurer of the lessees of the car for indemnification regarding a personal injury settlement paid to a third party claimant; an auto accident occurred just after the car had been repossessed but while it was still listed under the lessees' policy. Both parties in this lawsuit moved for summary judgment. The case is Standard Fire Insurance Company v. Empire Fire and Marine Insurance Company, 2007 WL 2460634 ( Ky. App.). Note that this opinion is not final and should not be cited as authority in any Kentucky courts.

Standard issued an auto insurance policy to the Kaelins for an auto that the Kaelins had leased from Wells Fargo. Empire issued a garage policy to Imperial Recovery Company, a business involved in the repossession of autos. Subsequently, the Kaelins defaulted on their lease payments and Wells Fargo employed Imperial to repossess the car. When the employee went to repossess the car, the Kaelins cooperated and even handed the keys to the employee. While driving the car away from the Kaelins' residence, the employee had an at-fault accident. The injured parties sued and Empire handled the lawsuit and paid for the injuries. Empire then filed a lawsuit and sought reimbursement from Standard, alleging that Standard had the primary liability coverage applicable to the claim.

The circuit court ruled in favor of Empire and Standard appealed.

The appeals court saw three separate issues to address. The first was whether Standard's policy provided coverage for the injuries.

The second issue was whether Empire's policy provided coverage. And the third was, if both policies applied, which policy is primary? The court looked to the language of the policies to decide these issues.

Standard's auto insurance policy specifically listed the auto leased by the Kaelins as the covered auto. However, Standard claimed that the policy did not apply due to the exclusion pertaining to a vehicle being used by a person without a reasonable belief that he is entitled to do so. The court said that the problem with this argument is that the employee of Imperial did have a reasonable belief that he was entitled to drive the car. In fact, the court added, the employee had express or clearly implied permission from both

Imperial and the Kaelins to that effect.

Standard also argued that the Kaelins no longer had authority to give permission for the employee to drive the car because they had defaulted on the lease and the car was being repossessed. The court disagreed with this idea and said the Kaelins had at least apparent authority, so as to create in the mind of the employee an entitlement to drive the car. Besides, even if the Kaelins did not have such authority, it would then have resided with Imperial as the agent for Wells Fargo, and Imperial had expressly told the employee to repossess the car.

The court concluded that Standard's policy did apply and provided liability coverage to the employee at the time of the accident.

Empire had already admitted that its garage policy applied, so that issue was a settled one.

As for the final issue as to primacy of coverage, the appeals court looked to the terms of the respective insurance policies. The Standard policy contained an other insurance clause that declared the insurer will pay its share of the loss if there was an other applicable liability insurance policy, and that any insurance provided for a vehicle not owned by the named insured was on an excess basis. Empire's policy also had an other insurance clause that stated coverage for autos not owned by the named insured was excess.

Standard argued that the Kaelins should not be considered the owners of the car because their entitlement to possession ended immediately upon their default; they were not then the owners of the car. However, Standard cited no authority for this reasoning and the court rejected it. Furthermore, since the Kaelins had not yet cancelled the policy at the time of the accident, the coverage was still there for their covered auto as an owned auto; therefore, the coverage was primary.

The appeals court ruled that Empire had acted in good faith by paying to settle the claim even though Standard had the primary liability coverage and the primary responsibility to defend and settle the claim. So, Empire was entitled to reimbursement from Standard for the amount of the settlement as well as its costs and fees incurred. The judgment of the trial court was affirmed.

Permissive User Issue under Watercraft Liability Coverage

This was a declaratory judgment action in which an insurer sought a declaration that the user of a watercraft was an insured person under the terms of the watercraft liability policy; the insurer of the watercraft policy objected. The case is Liberty Mutual Insurance Company v. Markel American Insurance Company, 2007 WL 2463348 (W.D. Mich.). This is a slip copy.

Mark Hoofman owned two Sea-Doo watercraft and Markel American Insurance Company issued a watercraft liability policy for these watercraft. Under the terms of the policy, an insured person included the named insured, the spouse, a household member related to the named insured, and any person operating the watercraft with the permission of the named insured.

The named insured had given permission for his children to use the Sea-Doos, but had decreed that friends of the children could only ride as passengers and not drive the vehicles. The teenage son of Hoofman allowed his friends to drive the Sea-Doos without the knowledge of Hoofman. On one occasion, a friend of the son, Lindsey Cavanaugh, was driving a Sea-Doo and hit Davis who was standing in the water near the shore. Davis brought a lawsuit against Cavanaugh and Hoofman due to her injuries.

Liberty Mutual, the homeowner's insurer for Cavanaugh, defended Cavanaugh and then brought a declaratory judgment against Markel American seeking to impose upon Markel a pro rate share of the defense costs and the ultimate judgment.

The issue before the court was whether Cavanaugh was an insured person under the terms of the watercraft policy, and the court said that this depended on whether Cavanaugh was operating the Sea-Doo with the permission of the named insured. The policy language was clear to the court in this matter; the named insured had to give prior permission to the operator before that operator was considered an insured person. In this instance, the court could find no evidence that would support a finding that Mr. Hoofman or his spouse ever gave permission to Cavanaugh to operate the Sea-Doo; there was no evidence that Hoofman even implicitly gave permission for Cavanaugh to use the watercraft. And, there was evidence that Hoofman had a strict rule against operation of the Sea-

Doos by his children's friends. Therefore, the vast weight of evidence in the case excluded any coverage for Cavanaugh under the watercraft policy. The court found in favor of Markel American.

Unearned Premiums Retained by Managing General Agent

This case revolved around the fact that the managing general agent of the insurer retained unearned premiums even though the policy was cancelled. The issue was what impact this action had on the applicability of the policy. The case is Lazo v. RSI International, Inc., 2007 WL 2447299 (Tex.App.—Hous. 14 Dist.).

Lazo worked as a contractor and purchased a general liability policy underwritten by St. Paul . The premiums were finance through Surety Premium Finance. Surety paid all premiums in advance and then collected periodic payments from Lazo. As part of this arrangement, Surety had the power of attorney from Lazo which enabled Surety to cancel the policy as though the cancellation were directly from Lazo if a payment from Lazo was more than ten days late. Lazo was eight days late with his first payment, Surety sent a notice of cancellation to RSI, and RSI issued an endorsement declaring that “in consideration of the return premium, this policy is cancelled effective July 2, 2001″. But, for the next several months, Lazo continued making timely payments to Surety, never having been told that the policy had been cancelled. St. Paul 's agent, RSI, retained the unearned premiums.

The problem arose when a worker on a building project fell from a ladder and was injured. The worker sued Lazo, among others, claiming that Lazo was negligent in failing to properly install and inspect the ladder. Lazo submitted the claim to St. Paul which denied coverage, claiming that the policy had been cancelled for failure to pay the required premiums. Lazo then filed a lawsuit against RSI and St. Paul seeking a declaratory judgment that the coverage was in full force and effect. The trial court ruled in favor of RSI and the ruling was appealed.

The issue for the appeals court was whether the trial court erred in deciding that the policy purchased by Lazo had been effectively cancelled as a matter of law at the time of the accident. The court noted that the language of the policy stated that cancellation of the policy would be effective even if a refund has not been made or offered. To the court, this meant that cancellation occurs separately from the refunding of any unearned premiums. Moreover, case law established that the failure to return unearned premiums was immaterial to cancellation of the policy when the contract language did not make return of unearned premiums a condition precedent to cancellation.

The appeals court also found that Surety, under its power of attorney, gave notice of cancellation with an effective date of July 3, 2001, and so, that was the effective date of cancellation.

The ruling was that retention of the funds was not inconsistent with the position that the policy had been cancelled, and St. Paul and RSI did nothing inconsistent with their position that the policy had been cancelled. The judgment of the trial court was affirmed.

Damage to Property Exclusions Discussed by District Court

In Transportation Insurance Company v. The Regency Roofing Companies, 2007 WL 2904156 (S.D. Fla. ), the cause before the court was a motion for partial summary judgment. Transportation sought a declaration of its rights and obligations under certain insurance policies issued to Regency Roofing Companies. Specifically, Transportation sought a declaration that it had no obligation to defend Regency in a case pending in the Florida State Courts between Regency and Rhoads.

Rhoads, a homeowner, sued Regency for damages resulting from Regency's installation of a roof on the Rhoads' home. Regency had been hired by Rhoads to fix a leaking roof and Regency attempted to do so. However, Rhoads continued to find leaks and finally, sued Regency seeking recovery for damages allegedly caused by Regency's defective roof work.

Transportation had issued general liability policies to Regency and Regency sought coverage for the claim against it. Transportation denied coverage and based this on the damage to property exclusions in the policy, specifically the exclusions pertaining to damage to the named insured's work and property damage to that particular part on which the insured is performing operations. Transportation claimed that these exclusions prohibited recovery for damages to the roof itself.

The court reviewed the policies and the language and the facts of the matter and found that Transportation had not met its burden of establishing that there are no undisputed issues of material fact in the case. The court noted that Regency did not dispute Transportation's contention that several of the exclusions did bar any recovery of damages to the roof work or the replacement of the roof, but the actual complaint against Regency alleged mold related damages and injuries, and these injuries arose out of the work and were not affected by the exclusions asserted by Transportation. Therefore, summary judgment for Transportation premised on the various exclusionary provisions of the liability policy had to be denied.

It should also be noted that this case is apparently the first ever to address the Montrose endorsement to the CGL form. Mr. Randy J. Maniloff, Esq., a frequent contributor to the FC&S Bulletins, has pointed out that the court in this case did not choose to apply the Montrose language. The court said that the policy contained a pre-existing condition that limits its property damage coverage to only those situations in which, prior to the policy period, no insured knew that the property damage had occurred in whole or in part; in other words, to be covered, the insured must have been unaware of any property damage prior to the policy period. Transportation claimed that the known injury provisions barred coverage in this instance since Regency knew about Rhoads's claims because the employee who went to fix the roof was repeatedly requested to do repair work due to continuous leaks. But, the court ruled that

Transportation provided no evidence establishing that Regency had any knowledge of the existence of any mold damage to the home allegedly caused by the defective repair work. Accordingly, in a round-about way, this court acknowledged and upheld the Montrose provisions; the provisions simply did not apply to the claims made here.