INSURANCE-RELATED COURT CASES

Court Decisions

Digested from case reports published in Westlaw,
West Publishing Co., St. Paul, MN

Did sister have permission to drive rental car?

Iva Heflin was driving a car owned by National Car Rental System, Inc., when she struck and injured Jerome and Barbara Sauer. The rental car had been rented to Rose Hutchins, Heflin’s sister, who was a passenger in the car when the accident occurred.

The Sauers filed a lawsuit against Heflin, Hutchins, National, and Allstate Insurance Company. Allstate was the automobile insurer of both the Sauers and Heflin.

Heflin’s Allstate policy provided coverage when a named insured was using a non-owned vehicle. “Non-owned auto” was defined as “[A]n auto used by you or a resident relative with the owner’s permission but which is not: a) owned by you or a resident relative, or b) available or furnished for the regular use of you or a resident relative.” Allstate denied coverage under Heflin’s policy, claiming that she was driving a non-owned car without the owner’s permission.

Hutchins had rented the car at the New Orleans airport. She and her sister were traveling together to attend a wedding in New Orleans. The National Car rental contract clearly provided that Hutchins was the only authorized driver. Heflin testified that she had not been involved in the rental transaction because she had remained with the luggage while Hutchins rented the car. Nevertheless, Heflin believed that she could drive the car because the two sisters often traveled together, and Hutchins would always add Heflin as an additional driver.

Based on this pattern of behavior, she assumed her sister had added her name to the contract as an additional driver in New Orleans. In addition, according to Heflin, the rental agent, Jorge Vacas, personally accompanied her to the car and educated her as to how to operate the car. The agent who handled the actual transaction did not testify in the case; however, a representative of National testified that it was National Car’s policy that all drivers listed on a rental contract show their driver’s licenses and sign the contract. He also testified that the rental agent is rarely the individual who accompanies drivers to cars to educate them.

The trial court agreed with Allstate’s argument that Heflin was driving a non-owned car without the owner’s permission. However, the Court of Appeal of Louisiana, Fifth Circuit, reversed that decision and sent the case back to the trial court to decide whether or not the fact that the agent educated Heflin implied that she had permission to drive the car. By the time the case made it to trial, both Hutchins and Heflin were deceased and National was in bankruptcy. At this point, the parties decided to litigate only the issue of Heflin’s coverage under the Allstate policy. The court again found in favor of Allstate, and another appeal followed.

On appeal, the Court of Appeal of Louisiana, Fifth Circuit, found that the trial court’s analysis of the facts was too limited to determine that the rental agent’s implied permission to drive the car was insufficient to provide coverage. The court weighed Vacas’s “vague” testimony against Heflin’s “detailed” testimony and found that “the actions of the National rental agent show[ed] a sufficient acquiescence in, or lack of objection to, the use of the vehicle.” Therefore, Heflin’s testimony established that she had implied permission to drive the rental car such that she was covered under her policy.

The court reversed the trial court’s ruling in favor of Allstate and remanded the case, once again, to the trial court for further proceedings.

Sauer vs. National Car Rental System, Inc.-No. 07-CA-844-Louisiana Court of Appeal, 5th Circuit-April 15, 2008-980 Southern Reporter 2d 898.

Insured blames agents for its misrepresentations

Precision Auto Accessories, Inc., was insured by Utica First Insurance Company when its business was completely destroyed by fire. After Precision filed a claim, Utica commenced an investigation and discovered that Precision had materially misrepresented its claims history on its application for insurance. Utica informed Precision that it would not cover its loss. It also rescinded the policy and refunded Precision’s entire premium. Precision filed a lawsuit against Utica, asking the court to make a determination that it did not willfully conceal or misrepresent a material fact in its application for insurance, and that Utica should therefore provide coverage under the policy. The lower court found that Utica had not established as a matter of law that Precision made a material misrepresentation. Utica appealed.

On appeal, the Supreme Court, Appellate Division, Fourth Department, New York, stated: “To establish materiality of misrepresentations as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins or rules pertaining to similar risks, to establish that it would not have issued the same policy if the correct information had been disclosed in the application.” Precision argued that Utica also needed to provide evidence that the misrepresentation was willful. The court disagreed and stated that a “material misrepresentation, even if innocent or unintentional, is sufficient to warrant a rescission of the policy.”

Precision argued that Utica could not rely on any misrepresentation in the application because its own agents should have obtained the correct information. Again, the court disagreed. It noted that as the signer of the contract, Precision was bound by the misrepresentations in the application. The court also noted that an insurance broker is generally considered to be an agent of the insured.

Next, Precision argued that Utica waived its right to rescind the policy because it learned about Precision’s loss history after issuing the policy but before the fire occurred. As evidence of Utica’s knowledge, Precision submitted testimony of the insurance broker stating that on the day of the fire she was told that Utica knew about Precision’s loss history. The court noted that this testimony was speculative and inadmissible. It also noted that even if Utica did know about Precision’s loss history before the fire, there was no evidence that it accepted a premium from Precision after it learned about Precision’s history.

Finally, Precision argued that it was “prejudiced” because Utica took eight months to give Precision notice that it was rescinding the policy. Again, the court disagreed. It noted that even if Utica’s disclaimer was not timely, Precision had not shown that it was actually prejudiced in any way by the timing of the disclaimer.

The court modified the decision of the lower court and concluded that Utica was not obligated to indemnify Precision for its fire loss.

Precision Auto Accessories, Inc., vs. Utica First Insurance Company-Supreme Court, Appellate Division, Fourth Department, New York-June 6, 2008-52 Appellate Division 3d 1198.

Is exclusive agent a broker?

On December 31, 2002, Jim and Donna Schekall met with Randy Bauer of the Randy Bauer Insurance Agency, Inc., with whom they had been doing business for nine years, to review their insurance coverage. The Bauer agency was an exclusive agent for State Farm Insurance Company and did not represent any other insurers. The Schekalls’ son, David, attended the meeting as well. David had recently purchased land and cattle to start his own farming operation, for which he needed insurance coverage. Bauer issued David a farm and ranch premises/personal liability policy with an effective date of December 31, 2002. On July 10, 2003, Bauer issued a separate farm/ranch policy to David because he had mortgaged farm equipment that required a different type of coverage.

In August 2003, David was killed in an automobile accident, and a passenger in his car was killed as well. The passenger’s estate sued David’s estate. Neither of the policies procured by Bauer on David’s behalf provided personal liability umbrella coverage for the accident. There was an Allied Insurance policy that provided some coverage, but the amount was inadequate. David’s estate eventually paid $165,000 to settle the claim.

The personal representative of David’s estate sued Bauer, alleging that Bauer had breached an agreement to procure personal liability insurance that would have provided coverage for an automobile accident. Jim Schekall, David’s father, testified that Bauer and the Schekalls had agreed that Bauer would obtain the same coverage and policies for David that he had obtained for Jim and Donna, except that Jim and Donna’s personal liability umbrella coverage would be $3 million and David’s was to be $1 million. Bauer claimed that David told him he had homeowners and automobile insurance with an independent insurance agent and that David never asked for his advice on the adequacy of that insurance.

The trial court found in favor of Bauer, noting that David had an obligation to read the policies to determine if his coverage was adequate. According to the court, “He either read the same and was satisfied with the coverage or did not, in which case his failure insulates the insurance agent and the agency from liability.” The personal representative of David’s estate appealed.

On appeal, the Supreme Court of Nebraska noted the difference between an insurance agent and an insurance broker, and concluded that an action for breach of contract to procure insurance is an appropriate cause of action only when brought against a broker. The court refused to recognize such a cause of action when brought against an insurance agent acting solely on behalf of a disclosed insurer. The court then looked at the pleadings to ascertain if there was enough information to determine whether Bauer was a broker or an agent.

The personal representative of David’s estate had alleged that Bauer’s business was to “market, advise, recommend, and sell policies of insurance and coverage through State Farm Insurance Company.” According to the court, if, as this statement implied, Bauer was an agent solely for State Farm, then the breach of contract claim was inappropriate. The court concluded, however, that there wasn’t enough information in the pleadings to ascertain if Bauer was solely the insurer’s agent or if he was an independent broker. In addition, the court refused to decide whether or not the insured’s failure to read the insurance policy was a valid defense in an action for breach of contract for failure to procure requested insurance coverage.

The decision of the lower court was reversed, and the case was remanded to the trial court.

Broad, Successor Personal Representative of the Estate of David D. Schekall, vs. Randy Bauer Insurance Agency, Inc.-No. S-06-844-Supreme Court of Nebraska-May 30, 2008-749 North Western Reporter 2d 478.

Did emotional damage cause physical injuries?

Matthew Rusk and his brother, Brandon, were crossing a street in front of their elementary school when Matthew was struck by a vehicle driven by Terry Wagner-Ellsworth. The boys’ mother, Tiffany, who was arriving at the school at the time, observed Matthew still lying in the street, severely injured.

Wagner-Ellsworth’s insurer was Allstate Insurance Company. The claims for Matthew’s injuries were eventually settled for $50,000, the entire per-person limit under the Allstate policy. Tiffany then filed her own lawsuit against Wagner-Ellsworth. She claimed that she and Brandon both suffered their own physical and emotional injuries as a result of the accident. Allstate filed a declaratory judgment action asking the court to find that it was not obligated to provide a defense or coverage to Wagner-Ellsworth for Tiffany’s lawsuit. The lower court found in favor of Allstate; Tiffany appealed.

The policy’s Statement of General Coverage provided that Allstate would pay damages “which an insured person is legally obligated to pay because of a. bodily injury sustained by any person…” The policy defined “bodily injury” as “physical harm to the body, sickness, disease, or death.” In addition, the Limitation of Liability section of the policy provided that “[t]he limit stated for each person for bodily injury is our total limit of liability for all damages because of bodily injury sustained by one person, including all damages sustained by anyone else as a result of that bodily injury.”

On appeal, the Supreme Court of Montana interpreted these two sections of the policy and concluded that there was coverage for Tiffany’s claims. Allstate argued, however, that even if this was the correct interpretation, no funds were available for Tiffany’s “derivative claims” because the policy limits had already been met with Matthew’s settlement. With regard to policy limits, the policy provided: “The limits shown on the Policy Declarations are the maximum we will pay for any single accident involving an insured auto. The limit stated for each person for bodily injury is our total limit of liability for all damages because of bodily injury sustained by one person, including all damages sustained by anyone else as a result of that bodily injury.” Applying this language, the court agreed with Allstate that there were no additional funds available under the policy for Tiffany’s “derivative” claims; in order to prevail, Tiffany would need to show that she and Brandon had their own “bodily injuries” within the meaning of the policy.

The court then turned to the primary issue of the case: whether Tiffany and Brandon’s emotional injuries, with the resulting physical manifestations, fell within the Allstate policy’s definition of “bodily injury.” Tiffany argued that she and Brandon experienced “shock and fright,” which led to physical symptoms that could constitute “bodily injury.” She claimed that she suffered from stress, migraine headaches, a rapid heartbeat and depression, and that Brandon became withdrawn. Both of them underwent therapy. After evaluating previously decided cases, the court took the position that the term “bodily injury” included mental or psychological injuries accompanied by physical manifestations. The court noted, however, that emotional injuries without physical manifestations did not fall within the definition.

The decision of the lower court was reversed, and the case was remanded to the trial court to address the factual issue of whether Tiffany and Brandon suffered mental injuries with physical manifestations.

Allstate Insurance Company vs. Wagner-Ellsworth-No. DA 06-0061-Supreme Court of Montana-July 8, 2008-188 Pacific Reporter 3d 1042.