The auto insurer of a person who rented a car sought a declaration that the self-insured rental car company had no right to recover from the insurer or renter for damages the company paid to a third party due to the renter's negligence in an auto accident. The rental car company sought a declaration that the renter had to indemnify the company pursuant to the indemnification provision of the lease agreement, and that the renter's insurer had to reimburse the company for the sum that the company paid to the third party on behalf of the renter. This case is Farmers Insurance Exchange v. Enterprise Leasing Company, 708 S.E.2d 852 (2011).

Baasanjav rented an auto from Enterprise Leasing Company, a self-insured rental car company; although provided an opportunity to purchase supplemental liability protection, Baasanjav declined. The lease agreement stated in part: the renter shall defend, indemnify, and hold harmless from all losses, liabilities, damages, injuries, claims, demands, costs, attorney fees, and other expenses incurred by the owner in any manner from this rental transaction. Renter shall have final responsibility to the owner for all such losses.

Baasanjav was insured under an auto policy issued by Farmers and the vehicle rented from Enterprise qualified as a covered auto since it was a temporary substitute auto (as defined in the policy). The auto policy stated that insurance coverage for nonowned autos is excess over any other and collectible insurance.

Baasanjav was involved in an accident and was at fault. The damages to the third party's auto totaled over $5,000. Enterprise paid this sum and then sent a letter to Baasanjav, claiming a right of indemnity from him for the payment made to the third party. Baasanjav refused to indemnify Enterprise .

Farmers filed a complaint for declaratory relief asking the circuit court to determine whether Enterprise had a right to recover from Farmers or Baasanjav or both under the terms of the auto policy and the lease agreement. The court granted summary judgment to

Enterprise and this appeal followed.

The insurer argued that, according to precedent, a self-insured rental car company must provide primary bodily injury and property damage liability insurance coverage to its renters. Enterprise argued that it complied with the state supreme court directive that a self-insured rental car company provide primary coverage by promptly paying the third party's damages for which Baasanjav was liable.

And, Enterprise contended, the precedent cited by Farmers did not bar a self-insured rental car company from seeking indemnity from its renters.

The Virginia Supreme Court held that, in order to give effect to a public policy in the state that assures innocent parties injured in auto accidents are afforded at least minimum levels of protection, self-insured rental car companies must provide primary bodily injury and property damage liability coverage in the amounts statutorily mandated. In this instance, the court said that Enterprise fulfilled that obligation by paying the damages incurred by the injured third party. However, the issue of whether a self-insured rental car company may seek indemnification from its renters for damages caused by the renters' negligence once the rental car company has satisfied its obligations to afford primary coverage was an issue that the court still had to decide.

The court ruled that, by declining to purchase the supplemental liability protection, Baasanjav subjected himself to the terms of the indemnification provision in the lease that required him to indemnify Enterprise . The anti-subrogation rule that an insurance company may not seek indemnification from its insured does not apply in this instance since Enterprise was self-insured and so, was not an insurer. Enterprise had a right to seek indemnification from Baasanjav.

On another note, Farmers contended that self-insurance qualified as collectible insurance and so, it should not be held liable to either its insured or Enterprise because its obligation is limited to excess coverage pursuant to the other insurance clause in its auto policy.

The Supreme Court disagreed. The court said that under the plain language of the other insurance clause, if there is other collectible insurance available to Baasanjav, the coverage provided by Farmers is excess coverage. However, self-insurance is not the equivalent of insurance under Virginia law. Accordingly, Enterprise 's self-insurance did not constitute collectible insurance and the excess coverage provision in the auto policy could not be invoked. Farmers was required to reimburse Enterprise for the damages caused by

Baasanjav's negligence. The ruling of the circuit court was affirmed.

Editor's Note: The Virginia Supreme Court made the point to insurers in this case that self-insurance is not insurance as that term is used in other insurance clauses; the court listed several cases from other jurisdictions upholding this position. The court, in finding for the car rental company, also emphasized the point to insureds that they need to read and understand auto lease agreements and the requirements such agreements put on insureds who rent cars.

Classification Limitation Endorsement and General Liability Coverage

This matter came before the United States District Court for the Southern District of Alabama on a motion for summary judgment. The insurer brought the action to resolve a dispute arising from a slip-and-fall accident at premises owned by its insured. This case is Essex Insurance Company v. Foley, 2011 WL 1706214 (S.D.Ala.).

The underlying complaint alleged that Water's Edge (the insured) began remodeling a parking lot for Tacky Jack's restaurant. In the course of that endeavor, Foley was injured and the claim was that the insured negligently and/or wantonly built a makeshift plywood ramp for use by the employees of the restaurant. Foley was an employee and he slipped and fell on the ramp, shattering his femur and sustaining permanent injuries.

Essex Insurance Company had issued a general liability policy to Water's Edge. That policy had an endorsement titled “Classification Limitation Endorsement” and read as follows: the coverage provided by this policy applies only to those operations specified in the application for insurance on file with the company and described under the description or classification on the declarations of the policy. It was undisputed that the insured described its operations with a single word: marina. It is also undisputed that a supplemental declarations page in the policy lists under the heading of description of hazards/insured classifications the following: boat moorage and storage; vessel fueling; and store sales.

So, the question before the court became: does the claim against the insured concern Water Edge's operations within the scope of the classification endorsement?

The court reviewed the positions of the insurer and the insured. The insurer took the position that the claims are not covered unless they relate to operations that are both specified in the application and set forth in the declarations, such that an operation recited in one location but not the other would be excluded from coverage. In contrast, Water's Edge insisted that the claims are covered if they relate to operations specified in either the application or the declarations, even if the same operation is not listed in both sets of documents.

The court decided that the classification endorsement was ambiguous because it may be reasonably understood in more ways than one. The language that coverage “applies only to those operations specified in the application for insurance … and described … on the declarations” could be reasonably read either as fixing two cumulative prerequisites for coverage (the insurer's position), or as identifying two sets of documents where covered operations may be listed (the insured's position). Thus, both the insurer and the insured have proffered reasonable, but conflicting, interpretations of the classification endorsement. Therefore, the endorsement is ambiguous and it must be interpreted in favor of the insured. As long as the claims relate to Water's Edge operations that are either specified in the application or described under the classification on the policy's declarations, the duty to defend attaches.

Since the court decided that the policy provided coverage for claims arising out of any of the insured's operations as described in the application or the declarations, the next issue was whether the Foleys' claims did indeed relate to such operations.

The Foleys' claims center on the ramp built for and used by the restaurant on Water's Edge property. Essex seizes on that fact, maintaining that the classification endorsement excludes coverage because the activities of operating a restaurant or constructing a ramp for a restaurant's benefit were neither specified as operations in the insured's application for insurance nor described in the classification section of the policy's declarations. The insurer argued that the insured never requested coverage for any restaurant operations that were occurring on or near its property, but rather applied for and was granted coverage for marina operations.

The court was not convinced by the insurer's argument. The court said that the insistence that marina operations are absolutely, categorically separate and distinct from the activities for which the Foleys seek to hold the insured liable is untenable. The court asked: what are marina operations? The phrase is not defined in the policy and the customary, everyday meaning of the term cannot confine the phrase to a water-based business for the mooring and docking of vessels (as the insurer urged). The court decided, in common parlance and understanding, that a marina may be far more than a place to dock a boat; a marina could provide a variety of ancillary, complimentary facilities and services above and beyond the mere moorage of vessels. In fact, the court said, it is entirely commonplace for restaurants to be part and parcel of marinas and for them to be operated, marketed and branded together as part of the same facilities and premises. It would do violence to the common understanding of the term “marina” to declare, as the insurer would, that marina operations necessarily exclude restaurant operations for a restaurant located on the same premises as the boat slips.

Based on the determination that a marina may include on-site restaurants, the court could not as a matter of law find that the claims against the insured are excluded from coverage. It was no great stretch to say that the covered marina operations may include the management, oversight, and coordination of support services at the marina. Therefore, if the area where the ramp was built is part of the marina complex, and if Water's Edge constructed the ramp as part of its overall activities, then this conduct would fall within any reasonable meaning of the term “marina operations”.

The motion by the insurer for summary judgment was denied.

Editor's Note: The U.S. District Court with this decision has subscribed to the proposition that the commercial general liability policy is indeed a comprehensive liability policy and that all of the operations of the insured are covered unless there is a specific exclusion or clarification that is applicable. In this instance, the insured described its operations in its application as a marina, and even though the insurer sought to limit coverage to its strict interpretation of what a marina is, this court said that the policy language would not allow it. Since there was no definition or explanation in the policy as to what a marina is, the court relied on the common, everyday interpretation of the word and found that a marina operation can include quite a variety of activities.

Moreover, the court felt that the classification limitation endorsement was ambiguous and if interpreted in favor of the insurer's views, it would allow the insurer to charge its insured a premium for a specific designated classification on the declarations page, only to renounce all coverage for that classification if it were omitted from the application form. This would amount to illusory coverage and this is not permissible.

Coverage Precluded When Insured Fails to Maintain Protective Safeguards

The insured brought an action against its insurer to determine whether coverage exists for a fire loss. The insured failed to maintain protective safeguards in complete working order as the policy required but still sought coverage for its loss. This case is French King Realty v. Interstate Fire and Casualty Company, 948 N.E.2d 1244 (2011).

French King Realty owned real property and operated the French King Restaurant. A Kidde HDR 50 dry chemical fire suppression system was installed in the kitchen before French King took ownership of the restaurant in 1974. Interstate Fire and Casualty issued a commercial lines insurance policy to French King and that policy contained the following provisions: “as a condition of this insurance, you are required to maintain the protective devices or services listed in the schedule above, e.g. ANSUL SYSTEM OR EQUIVALENT”; “we will not pay for loss or damage caused by or resulting from fire, if prior to the fire, you knew of any suspension or impairment in any protective safeguard and failed to notify us of that fact, or failed to maintain any protective safeguard listed in the schedule, and over which you had control, in complete working order”.

Over the years, the Kidde Fire Systems issued a bulletin that the type of system in the restaurant for the purposes of protecting the kitchen appliances could no longer be inspected, serviced, recharged, or repaired. Moreover, the department of fire services in the state issued a memo that said in order for a fire suppression system to be in compliance with state codes, the system had to be installed, maintained, and tested in accordance with NFPA standards. Also, a semiannual inspection by Fire Pro-Tec revealed that the fire suppression system at the restaurant was not in accordance with current NFPA requirements and not in accordance with the manufacturer's UL listing. Finally, the building inspector advised French King that the system was red tagged and he could not issue a certificate of inspection until French King had the system fixed.

The insured did nothing with respect to the system and a fire occurred in 2005. It was determined that the fire was caused from an ignition of the fryalator during after hours use. The insurer did an advance payment of $15,000 to the insured for clean up purposes; however, when French King demanded coverage for the fire loss, the insurer declined. The insured sued for coverage. The Superior Court entered summary judgment in favor of the insurer and this appeal followed.

The Appeals Court of Massachusetts found that, based on the facts, the condition requiring the insured to maintain a protective system was not a bar to coverage since French King did have a fire suppression system in place (regardless of its usefulness). However, the court also found that the exclusions in the policy did apply and the insurer is entitled to judgment as a matter of law.

The court said that the record shows clearly and conclusively that the fire suppression system was impaired, the insured knew it was impaired, and that the insured failed to inform the insurer. The record amply demonstrated to the court that the insured kept putting off the day that French King had to upgrade the restaurant's fire suppression system and that at no time was the insurer informed about the status. French King was required to notify the insurer that the system was impaired and this requirement was unfulfilled, so the insurer was entitled to summary judgment.

As for the requirement that the insured was to keep the system in complete working order, the court once again pointed to the facts and said French King failed to maintain the fire suppression system in complete working order. The system could no longer be serviced; it was labeled noncompliant; parts were no longer available for repair or maintenance; and the building inspector refused to issue a certificate of inspection. There was no genuine issue of material fact whether the Kidde system was in complete working order at the time of the fire, and there are no facts or circumstances that the insured can show to the contrary.

Finally, the court addressed the issue of whether the insured had to return the advance payment to the insurer. The insured argued that it was not required to return the payment because Interstate did not reserve its rights and defenses in connection with the payment. The court ruled that, although no Massachusetts courts have directly addressed this issue, other jurisdictions have persuasively reasoned that an insurer is entitled to reimbursement for an erroneous payment when coverage does not exist under the policy and the insured was unjustly enriched. There is nothing in the record to indicate that the advance was an unconditional advancement, especially because the insurer had not yet commenced investigating why the fire suppression system did not work.

Thus, the insurer was entitled to reimbursement of the $15,000.

The judgment of the Superior Court was affirmed.

Editor's Note: Most, if not all, property policies that apply to restaurants and other cooking risks require the insured to maintain a fire suppression system. This decision by the Appeals Court of Massachusetts, Franklin , confirms that insureds face the loss of coverage if the systems are not maintained in proper working order and kept up to current acceptable fire code regulations. The fact that this insured had so many warnings as to the defects in the system and still failed to respond only strengthened the case for a denial of coverage.

The ruling that the insurer is entitled to reimbursement for its advance payment is an interesting side note to this decision. The court said that, as a matter of policy, it would be unwise to discourage insurers from making payments, even if the payments were made in error, by refusing to permit later adjustments.