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Everything You Always Wanted to Know About Liability Insurance Coverage for Rental Vehicle Accidents*

*But Were Afraid to Ask

©2000 by Pollak, Vida & Barer

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior written permission. For information, contact Pollak, Vida & Barer.

Notice of Non-Liability

The information in this book is distributed on an "as is" basis, without warranty. While every precaution has been taken in the preparation of this book, neither the individual authors nor Pollak, Vida & Barer shall have any liability to any person or entity with respect to any liability, loss, or damage caused or alleged to be caused directly or indirectly by the information contained in this book.

1. About This Booklet

Who is this booklet for?

This booklet is for personal and commercial lines claim professionals who adjust liability claims arising out of vehicle accidents.

What does this booklet cover?

The purpose of this booklet is to assist you in analyzing coverage for accidents involving rental vehicles. It helps you to identify the usual sources of potential liability coverage for rental vehicle accidents, discusses the issues that typically arise under each source of coverage, and explains how the different sources of liability coverage relate to each other.

About the author

Scott Vida is a partner at Pollak, Vida & Barer. He received a BA in Philosophy from the University of California at Irvine in 1979 and a JD from Yeshiva University, Benjamin N. Cardozo School of Law, in 1982. An expert on insurance issues, Mr. Vida represents the insurance industry in insurance coverage litigation and authors hundreds of formal coverage opinions each year.


2. Claim Investigation

What information do I need to analyze coverage for an accident involving a rental vehicle?


Just as the police must round up all of the likely suspects to solve a crime, so must you round up all of the likely sources of insurance coverage before you can analyze who ultimately is responsible for a liability claim involving a rented vehicle. To do this you must know the answers to the following questions:

Now that you've identified all the possible cover­age sources, we will look at each one individually. But first, there are a few more questions to ask before your coverage investigation is complete:

3. Rental Company Self-Insurance

What is rental company self-insurance and why is it significant?

California rental car companies and automobile insurers have for years battled over which is to bear the primary exposure for accidents involving rental vehicles. By and large, the war is over and the rental car companies have won. The key to the rental industry's victory lies in its now nearly exclusive use of self-insuring methods to comply with the financial responsibility laws.

Like all vehicle owners, rental companies may comply with the financial responsibility laws in any one of three ways: they may purchase an automobile liability policy or bond (Vehicle Code § 16054); they may obtain a certificate of self-insurance (Vehicle Code sect. 16053); or they may make a cash deposit (Vehicle Code § 16054.2).

Although certificates of self-insurance and cash deposits are both expressly declared by Insurance Code § 11580.9(h) to be policies of liability insurance, they are fundamentally different from traditional automobile insurance policies. Insurance Code § 11580.1(b)(4), which requires that automobile liability policies extend coverage to permissive users of the named insured, is limited by its terms to traditional liability policies issued pursuant to Vehicle Code § 16056. Because self-insurance certificates and cash deposits are not issued pursuant to § 16056, they are neither required nor construed to provide any coverage whatsoever other than to the person holding the certificate or making the cash deposit.

All of this means that when a rental company satisfies its financial responsibility obligation through either of these self-insurance methods, only the rental company itself is covered and no protection is extended to the rental company's permissive users. Interinsurance Exchange of The Automobile Club of Southern California v. Spectrum Investment Corp. (11989) 209 Cal.App.3d 1243 1256-1258. Thus, if the permis­sive user's liability is to be covered at all, it must be through another source—usually through his or her personal automobile liability policy.

If rental company self-insurance doesn't cover the driver, what are the respective rights and obligations of the rental company and the driver?

Because there is no insuring relationship between self-insured rental companies and their renters, their relationship is only that of vehicle owner and permissive user. In its capacity as a vehicle owner, the rental company has statutory liability with limits of $15,000/30,000/5,000 for injuries caused by permissive users of its rental vehicles under Vehicle Code §§ 17150 and 17151. But, under Vehicle Code § 17153, the rental company is subrogated against its permissive user for any amounts the rental company is required to pay as the vehicle owner. Accordingly, as between a self-insuring rental company and its permissive user, the ultimate responsibility for an accident involving a rental vehicle will fall upon the permissive user and, therefore, upon his or her liability insurer.

4. Optional Liability Coverage Purchased From or Through The Rental Company

What is the nature of the optional liability coverage offered by rental companies?

Rental companies offer their renters optional liability coverage, commonly called Supplemental Liability Insurance (SLI) or Liability Insurance Supplement (LIS). Although sold for one price, the optional coverage typically includes two layers: primary coverage with limits usually equal to those required by the financial responsibility law, and excess coverage that applies above the primary coverage, often to a combined single limit of $1,000,000 per occurrence.

The primary coverage may consist of a liability insurance policy issued by an insurance company, but it more often consists solely of the rental company's direct agreement to defend and indemnify, and is not backed by a policy issued by an insurance company. The rental company generally warrants that this primary coverage will apply ahead of any other insurance coverage available to the renter.

The excess coverage is virtually always in the form of a liability insurance policy issued by an insurance company to the rental company as named insured. Like the primary coverage, the excess policy is warranted to apply ahead of any other insurance available to the renter.

What effect does use of the rental vehicle by an unauthorized driver have on the optional coverage?

The rental contract and the policy or policies comprising the optional liability coverage declare that violations of the rental contract will result in exclusion under the optional liability coverage. This exclusion is most often tested when the renter en­trusts the rental vehicle to an unauthorized driver.

Car rental contracts typically restrict permission to drive to the renter; his or her spouse, employer and employees; and only to such others as are specified by name on the face of the rental contract. This restriction of coverage to those driving with the permission of the rental company conforms to Insurance Code §11580.1(b)(4), which requires only that coverage extend to persons operating the insured vehicle with the permission of the named insured. A recurring question, however, is whether a violation of the rental contract's restriction against operation by unauthorized drivers is sufficient in itself to establish lack of permission.

The rule for determining permissive use under a rental company's coverage is whether the third party's use was or should have been within the contemplation of the owner. Sandoval v. Mercury Insurance Group (1991) 229 Cal.App.3d 1, 9-10. (As we will see in Section 6, the rule for determining permissive use for purposes of the operator's personal automobile policy is significantly different). It is clear that, at least when the rental company explicitly brings the permissive use restriction to the renter's attention, such as by requiring him to initial the provision, there is no permission when the vehicle is driven by an unauthorized driver. Baker v. Liberty Mutual Ins. Co. (9th Cir. 1998) 143 Fad 1260; Marquez v. Enterprise Rent-A-Car (1997) 53 Cal.App.4th 319. On the other hand, an older case, Financial Indemnity v. Hertz Corp. (1964) 226 Cal.App.2d 689, found implied permission where the restriction was in small type, the rental company failed to mention the term, and it was proven that the renter was unaware of the restriction. The court held that under those circumstances the rental car company had no reasonable expectation that the no additional-driver restriction would be obeyed. This holding has been criticized, however, on the ground that "the idea that a party may not rely on a contract term because the other side can be expected to violate it cuts at the very heart of contract law." Baker v. Liberty Mutual Ins. Co., supra, 143 Fad at 1264. As matters now stand, it is unresolved whether a permissive use claim may be defeated merely by showing a violation of the no-additional driver restriction, or if, instead, it must also be shown that the restriction was explicitly brought to the renter's attention. Id.

What effect do other rental contract violations have on the optional coverage?

Whether violations of other provisions of the rental contract will result in a loss of insurance coverage will depend upon whether one looks at the first or second layer of the rental company's coverage. The first layer of coverage, whether provided directly by the rental company or through an insurance company, is primary insurance that must conform to the minimum requirements of Insurance Code §11580.1. Hertz Corporation v. Home Insurance Co. (1993) 14 Cal.App.4th 1071, 1077 1078, In particular, such a primary policy may not include any exclusions not specifically authorized by §11580.1. Id. Few restrictions in the rental contract other than that relating to non-permissive use fall within the category of authorized exclusions. For example, a rental contract restriction against operation of the vehicle while intoxicated is not an exclusion authorized by §11580.1, and the company's primary coverage therefore will apply even if the restriction is violated. Id.

On the other hand, the rental company's excess coverage is not bound by the limitations on permissible exclusions. Id. at 1078-1079. Accordingly, a violation of the restriction against driving while intoxicated, for example, will result in exclusion under the excess coverage even though it does not do so under the primary coverage. Id. at 1079-1080.


5. Other Liability Coverage Possibly Available Through the Rental Company

Although rental companies almost exclusively self-insure, there are some exceptions. For example, rental companies who offer commercial vehicles often carry insurance rather than self-insure. Therefore, the possibility that insurance exists through the rental company should be explored even when the renter does not purchase it.

If such insurance exists, it must by law apply to the rental company's permissive users, who may also be covered under their own personal policies. Which policy provides the primary coverage in this and other cases of overlapping coverage is often the subject of debate.

In some cases, Insurance Code §11580.9 provides the answer. For example, sub-division (b) of that section provides that where the rental vehicle either qualifies as a commercial vehicle or has been leased for a term of six months or longer, the rental company's policy shall apply to the driver as excess insurance above any other insurance available to the driver.

If the rental vehicle is neither a commercial vehicle nor leased for six months or longer, then subdivision (d) must be consulted. That subdivision provides that, of all the policies, the policy which specifically describes the accident vehicle as an owned automobile shall be primary to any other insurance. Since the rental vehicle is owned by the rental company, only a policy issued to the rental company could apply on a primary basis under sub-division (d). It would be a mistake, however, to automatically assume that the policy issued to a rental company specifically describes the rental vehicle involved in the accident: Rental companies often purchase "fleet" policies which cover all vehicles owned by the rental company without specifically describing any of them. In those and other cases where the rental company's policy does not specifically describe the vehicle, the statute provides no directions for ordering coverage priorities.

When none of the statutory rules applies, the courts typically resort to an analysis of the individual policies' "other insurance" clauses to determine the order of priority. When there is no conflict between the other insurance clauses, courts will generally give effect to them. Olympic Ins. Co. v. Employers' Surplus Lines Ins. Co. (1981) 126 Cal,App.3d 593, 599. Thus, when one policy's "other insurance" clause provides that it is primary and the other provides that it is excess, the clauses will be enforced accordingly. Often, however, there is a conflict between "other insurance" clauses, usually where one insurer has a "pro rata" other insurance clause and the other an excess clause, or where both insurers have excess clauses. In both cases courts resolve the conflict by applying the policies on a pro rata basis. Fireman's Fund Ins. Co. v. Maryland Ins. Co. (1998) 65 Cal.App.4th 1279, 1304-1306; Olympic Ins. Co. v. Employers' Surplus Lines Ins. Co., supra, 126 Cal.App.3d at 599.


6. Coverage Under the Rental Car Opera tor's Personal Automobile Policy

Who is entitled to coverage under the rental car operator's personal automobile policy?

 Claims professionals too often think in terms of a liability policy applying to a vehicle, rather than applying to particular persons allegedly responsible for the loss. As a result, coverage is sometimes unnecessarily extended to liable persons who are not entitled to it. Because in our experience this is especially true in rental car situations, it is important to pay close attention to which of the potentially liable parties qualifies as an insured person under the policy in question.

For the permissive use of non-owned automobiles such as rental cars, personal auto policies typically have three categories of insured persons. The first category, of course, extends coverage to the named insured. Thus, the rental company's permissive user usually will be covered under his own auto policy.

The second category of insured persons is resident relatives of the named insured. Sometimes the resi dents of one household have separate policies. If so, a rental car operator may have two personal auto policies that cover him: the one issued to him as the named insured, and the one issued to a rela tive who resides in his household. Because both policies likely will apply on a pro rata basis, the personal auto insurer of a rental car operator should always investigate to determine whether there are any other personal automobile policies in the insured's household.

The third and final category of persons insured for non-owned automobiles comprises any other persons or entities who may be legally responsible for the use of a vehicle involved in an accident when driven by an insured person, provided that those other persons or entities do not themselves own or hire the accident vehicle. The primary beneficiaries of coverage in this category are employers, who are vicariously liable for an employee's vehicle operation in the course and scope of employment.

Is the rental car company entitled to coverage under the operator's personal automobile policy?

Significantly, the rental company itself does not fall within any category of insured persons in the rental car operator's personal auto policy. Obviously, the named insured and resident relative categories do not apply to the rental company. And while the rental company, as the vehicle owner, is vicariously liable up to the statutory limits for its permissive user's negligence, its ownership of the rental car disqualifies the rental company from coverage under the vicarious liability category.

In the end, however, the rental car operator's personal auto insurer can not take much solace in the rental company not being entitled to coverage under its policy. This is because, as discussed earlier in Section 3, the rental car owner is subrogated to the injured party's rights against its permissive user to the extent of its payment to the injured party. The operator's liability to the subrogated rental company in turn is covered under his personal auto policy. Thus, in this indirect way, the rental company enjoys the indemnity benefits of its permissive operator's personal auto policy even without being insured under it.

Does the rental car company's right of indemnity against the operator include a right to recovery of the rental company's defense costs?

Whether the rental company is similarly entitled to recovery of its de­ fense fees from its permissive operator is a harder question. Vehicle Code §17153, the statute creating the owner's subrogation right against a per missive operator, does not specifically authorize recovery of defense fees. Presumably, however, the subrogated rental company is not limited to the subrogation remedy, but may also assert a claim against its permissive operator for implied indemnity. If so, it may recover its defense fees under Code of Civil Procedure §1021.6, which authorizes the court in its discre tion to award recovery of defense fees incurred by one sued solely as the result of a tort of another.

Also, the rental contract itself may impose a contractual obligation on the renter to defend the rental company against claims arising from the renter's negligent use of the rental vehicle. That obligation, however, may fall within an exclusion in the renter's policy for liability assumed by contract. In any event, the possibility of ultimate liability for the rental compa ny's defense costs sometimes persuades personal auto insurers to volun tarily undertake the rental company's defense, so that it can control defense costs.

If the renter is not the operator, is he covered under the operator's personal automobile policy?

The operator of a rental car is not always the renter. Nonetheless, as the bailee of the vehicle, the renter is statutorily liable for the operator's use under Vehicle Code §17151 up to $15,000/$30,000/$5,000. The renter is not covered for this liability as an insured person under any of the three categories of the operator's personal policy. He is not the named insured; not a resident relative; and, although legally responsible for the operator's use of the vehicle, the renter does not fall within the third category of insured persons because the renter "hired" the vehicle when he rented it.

But, under Vehicle Code §17153, the renter, like the vehicle owner, is statutorily subrogated to the injured party's rights against the vehicle operator to the extent of his payment to the injured party. Also like the vehicle owner, therefore, the renter's statutory liability ultimately will be borne by the vehicle operator and that operator's insurer.

How does an operator's unauthorized use of a rental vehicle affect coverage under his own personal automobile policy?

As mentioned earlier, permissive use issues arise when the renter violates the rental contract provision against entrusting the vehicle to someone other than specifically authorized operators. Importantly, the analysis of permissive use under the rental com pany's owned automobile coverage is fundamentally different than the permissive use analysis under the unauthorized driver's non-owned automobile cover age. As a result, it is conceivable that an unautho rized driver may be excluded from the rental compa ny's coverage but covered under his own personal auto policy.

The reason for this lies in the difference in language used in the rental company's owned automobile coverage and the unauthorized driver's non- owned automobile coverage. The rental company's coverage extends to persons using the rental car with the permission of "the named insured" (i.e. the rental company). By contrast, the renter's non-owned automobile coverage applies when the rental vehicle is used with the permission of "the owner." This dif ference in language is critical, because the courts have held that the undefined term "owner" as it is used in the renter's non-owned automobile coverage is ambiguous. Government Employees ins. Co. v. Kinyon (1981) 119 Cal.App.3d 213, 222. The courts reason that ownership is a broad term that is not limited to title ownership, but may extend to mere possession. Id.

Out-of-state courts have used this reasoning to conclude that, for purposes of non-owned auto cov erage, there is permissive use whenever a non-owner in legal possession of the vehicle gives permission to another to drive. Allstate Ins. Co. v. Sandier (E.D. Pa. 1990) 753 F.Supp. 573 (applying Pennsylvania law). Under this view, a person operating the rental car without the authorization of the rental company, but with the permission of the renter, is entitled to coverage under his own personal auto policy.

California , however, has not gone so far. The rule in California is that an insured is covered under his non-owned auto coverage if he has a reasonable belief that he was driving with the permission of the owner. Government Employees Ins. Co. v. Kinyon. supra, 119 Cal.App.3d at 222-223. This rule is based in large part on the consideration that it is not workable for the driver of a non-owned automo bile to determine in all instances whether he had the implied permission of the owner; if the rule were different, an innocent insured acting in good faith would always be at risk of a coverage denial when driving a non-owned automobile. Id. at 223.

Thus, where the driver reasonably believes that the one giving him permission to drive either is the owner of the car or else has the owner's authority to lend the car, permissive use will be found, even in cases where there is no actual permission. But where the driver receives the car from one whom he knows is unauthorized to extend permission, there is no permissive use. In the context of a renter who entrusts the car to a driver not authorized by the rental company, the critical question will be whether the driver knew or had reason to believe the restriction existed. In many cases the answer to this question may depend upon whether the driver is himself an experienced car renter who should be expected to know that rental companies universally use such restrictions in rental agreements.

Does business use of a rental vehicle jeopardize coverage under the driver's personal automobile policy?

It is always important to determine whether the operator of a rental vehicle was in the course and scope of employment when the accident occurred. For one thing, other sources of insurance coverage may be discovered. (See Section 8.) Of equal importance, however, is that most personal auto policies exclude coverage for non-owned vehicles "while used in the business or occupation" of an insured. Typically, this exclusion does not apply to the named insured or resident spouse for the operation of a private passenger auto or trailer. Thus, the exclusion will eliminate coverage for a resident relative driving a rental vehicle in the course and scope of employment, and for all insureds while driving a rented commercial-type vehicle in the course and scope of employment.

7. Coverage Under the Personal Auto Policy of a Renter Who is Not the Operator

Who is covered by the renter's personal automobile policy when the rental vehicle is driven by somebody else?

Depending on policy language, a renter who is liable for the operation of a rental vehicle by a person to whom he has entrusted it may find himself uncovered under his own personal auto policy. Most personal auto policies extend coverage for the named insured's "use" of non-owned vehicles such as rental cars. "Use" of a vehicle is defined by Insurance Code § 11580.06 and often by policy defi nition to mean only "operating, maintaining, loading, or unloading." Conspicuously absent from the defini tion is any mention of entrustment of the vehicle. Thus, a renter who is liable based on his entrustment of a rental car may not fall within the policy's cover age for the "use" of a non- owned auto. National Union Fire Ins. Co. v. SHOWA Shipping Co. (9th Cir. 1995) 47 F.3d 316, 321; City of San Buenaventura v. Allianz Ins. Co. (1992) 9 Cal.App.4th 402.

As mentioned, personal auto policies also typically extend coverage to "any other person or organiza tion legally responsible for the use of a vehicle by an insured person," but exclude from the definition those persons or organizations who own or hire the vehicle involved in the accident. Because the renter is a hirer of the rental vehicle, his vicarious liability for another person's negligent operation of it will not fall within this provision of his own policy.

Neither is the rental company covered under the renter's policy for accidents involving an operator other than the renter. It is neither the insured nor a resident relative, and its ownership of the rental vehicle disqualifies it from coverage under the cate­ gory of persons and organizations legally responsi ble for the use of the vehicle.

An operator who is not the renter is not covered under the renter's personal auto policy unless he is a resident relative of the renter. If a resident relative, then the operator will be covered under both the renter's policy and his own personal auto policy. The allocation between the two policies will be based on a comparison of other insurance clauses.


8. Coverage Under An Employer's Policy

Who is covered under an employer's policy?

Employees often rent cars away from home while on business for their employers. Many employers carry a business auto policy (or an endorse ment to their general liability policy) covering liability arising from the sep arate risks of hired and non-owned vehicles. "Hired autos" include those rented by the named insured, while "non-owned autos" exclude those rented by the named insured. Hired auto coverage extends both to the named insured and to its employee who operates the vehicle. Thus, when an employee rents a car in his employer's name, both will be covered under the employer's hired auto coverage.

When the employee rents a vehicle in his own name, however, the vehicle may no longer qualify as a hired auto because it was not rented by the named insured. In that case, the vehicle will qualify as a non-owned automobile within the employer's non-owned automobile coverage. Depending upon policy language, that coverage may extend only to the employer, If so, when an employee rents a car in his own name and uses it in his employer's business, the employer will be covered under the employer's policy but the employee will not.

Both hired and non-owned auto coverages typically exclude the owner of the vehicle from the definition of insured persons. But such coverages separately extend coverage for "anyone liable for the conduct of an insured ... but only to the extent of that liability." As the owner of the rental car, the rental company is liable up to the statutory limits for acci dents caused by a permissive user. If that permissive user is an employee who qualifies for coverage under his employer's policy, then so does the rental company to the extent of its ownership liability.

When there is an overlapping coverage between the employer's business automobile policy and the employee's personal automobile policy. priority of coverage will be determined by the policies' "other insurance" clauses, usually resulting in proration. But where there is no overlap, as where the employee is covered only under his personal auto policy and the employer is covered only under its business automobile policy, the ultimate burden of the loss likely will fall upon the employee and his or her insurer. This is because Labor Code §2865 makes the employee liable to his or her employer for damage caused to the employer by the employee's negligence. Pacific Indemnity Co. v. Truck Ins. Exch. (1969) 269 Cal.App.2d 420. 426.



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