Loaned Vehicle Policy Provides Primary Coverage for Auto Accident

This case is an insurance coverage dispute arising out of an auto accident in which the driver was operating a temporary substitute vehicle provided by a car dealership. Because both the policy insuring the driver and the policy insuring the dealership and its autos purport to transfer liability to the other insurance policy, the question the court had to answer was which policy provided primary coverage. This case is Beckman v. Federated Mutual Insurance Company, 2010 WL 3655916 (Neb.App.).

 

Beckman took his car in for repair work at Dillon Chevrolet. The dealership provided a substitute vehicle for Beckman to use in the meantime. While driving the substitute auto, Beckman was involved in an accident with a bicyclist. At the time of the accident, Beckman was insured with Farmers Mutual Insurance Company and the dealership was insured by Federated Mutual. Farmers filed a complaint for declaratory judgment requesting that Federated provide primary coverage. The trial court ruled in favor of Federated and Farmers appealed.

 

The appeals court said that there was a central question in this case: whether the trial court erred in determining that Farmers Mutual afforded primary coverage under the undisputed facts. After examining both insurance policies, the court said that the resolution of the question depends on the effect of the clause in the Federated policy that excludes as an insured all customers of an auto repair shop, except those without sufficient liability insurance, and in that case, only to the extent required by law. Federated asserted that because Beckman had his own auto liability insurance policy sufficient to comply with state financial responsibility requirements, Beckman did not fit the definition of an insured under its policy. Farmers disagreed and said the Federated clause is mutually repugnant with the clause in the Farmers Mutual Policy that provides that where the policyholder is driving a nonowned vehicle, the policy is excess coverage. And, Farmers continued, if two auto insurance policies are mutually repugnant, Nebraska law places the responsibility for primary coverage on the policy covering the vehicle, which in this case, is the Federated policy.

 

The court took note of the Nebraska Supreme Court ruling that where an excess insurance clause in an auto policy and a no-liability clause in another auto policy apparently conflicted, the no-liability clause is ineffective and the insurance policy of the driver provides excess coverage. The Supreme Court stated that its rationale for adopting this rule was that a need exists for certainty, simplicity, and inexpensive administration in connection with business relations among insurers.

 

Based on the Nebraska Supreme Court ruling, the appeals court declared that because the Farmers Mutual policy and the Federated policy contain mutually repugnant language, state law requires the insurer of the vehicle to assume primary liability in this situation. The ruling of the trial court was reversed and remanded with direction to enter summary judgment in favor of Farmers Mutual.

 

Editor's Note: The dispute over primary coverage versus excess coverage is not new. Most, if not all, auto policies declare that coverage for nonowned autos is generally excess. Policies for garage and auto repair shops usually consider customers as insureds and provide limited coverage for them only under certain circumstances. When these two items collide (or have mutually repugnant policy language as this court describes it), states have to provide guidance so as to make sure a claimant is going to be recompensed for his injuries and that an insured is not left without any insurance coverage at all. In this case, the appeals court invokes the guiding rule established by the Nebraska Supreme Court and basically declares that the insurance follows the auto; the policy that applies to the auto involved in the accident provides primary coverage, and the policy that covers the driver provides excess coverage.