Risk Management

Multi-million-dollar verdicts

Caveats for limited liability companies

By Donald S. Malecki, CPCU

It seems like $21 million is somewhat excessive for an auto accident involving non-fatal injuries to one person in what appears to be anything but a high-impact, high-speed accident. However, considering the declining value of the dollar, the susceptibility of damage to autos, the fragility of human life, the generosity of juries today and, particularly, the current state of the economy, these high awards may likely become more common.

The case Peerless Ins. Co. v. Eugene Roedder, et al., 4:08CV729 RWS (U.S. Dist. Ct. E.D. Mo. 2009) involves an interesting story where producers, risk managers and insurance people in general can learn at someone else’s expense and experience how to lessen the chances of the same financial disaster occurring.

Since this case involved a limited liability company—which is producing some new insurance issues not limited solely to liability insurance—the discussion temporarily digresses to explain how an LLC affects this and other insurance issues before returning to the subject at hand and its conclusion.

Briefly, at the time of the accident, Roedder [defendant] was the registered agent, organizer, co-owner, and manager of Gencar, a limited liability company owned by him and his wife. The company owned one piece of commercial real estate. The defendant’s duties, regarding that company, consisted of managing it, performing maintenance, tenant relations, and maintaining a monthly ledger as to accounts receivables. This limited liability company was the only named insured listed on a commercial liability and umbrella policy issued by Peerless [insurer].

On the day of the accident, the defendant was driving his own automobile from his home to his cabin for a weekend vacation. This automobile was insured by a personal auto policy issued by State Farm. The accident occurred as the defendant attempted to pull into a restaurant parking lot.

Litigation ensued. The case does not discuss what the injuries were, the nature of the accident, whether the plaintiff was a motorist or pedestrian and why the court decided on this high amount of damages despite the defendant’s admission of fault. That would have been nice to know for purposes of case analysis.

Nonetheless, the defendant fortunately was defended by its personal auto insurer, State Farm. The defendant admitted liability and a verdict was returned against him in the amount of $21 million. Presumably, the insurer, after providing a defense, paid its limit of insurance, which was insufficient, causing the defendant to look elsewhere for coverage.

Hired and non-owned auto cover

With the commercial liability policy excluding the ownership, maintenance, use, or entrustment to others of any auto owned or operated by or rented or loaned to any insured, the defendant’s only alternative was the hired and non-owned auto liability endorsement attached to his commercial liability policy.

The hired and non-owned auto endorsement, which commonly is issued in relation to the business-owners policy, is ideal for the owner of a business who does not own any business autos but could have a business-use exposure. This endorsement, however, proved to be without value for the following reasons:

First, coverage is limited to business usage. The defendant may have realized this endorsement’s limitation when he testified that it was “possible” he might have been at one of his company’s rental properties earlier the morning of the accident.

The problem with that argument, according to the Missouri court, was that it did not change the fact that at the time of the accident, the defendant was traveling for a personal, not business, reason.

Second, the named insured on the endorsement was the defendant’s company and not the defendant individually. With that in mind, the endorsement covered the company with respect to a non-owned auto—but only while the auto was being used for business purposes, which was not the case here.

Third, the hired and non-owned auto liability endorsement also covers any partner or executive officer of the named insured, but only while using a non-owned auto in the company’s business. The fact that the auto was being used at the time of the accident for pleasure purposes was all that was necessary to conclude this case.

It is interesting, however, that the insurer had another argument to pursue. The hired and non-owned auto liability endorsement also states that not included as an insured is any partner or executive officer for any auto owned by such partner or officer or a member of his or her household. It was the insurer’s argument that coverage also was precluded because the defendant was an executive officer.

The problem with an LLC

Were it not for the Achilles’ heel being the non-business use of the auto, the defendant might have had an argument for coverage because of the reference to any partner or executive officer not being an insured. The reason is that an owner of a limited liability company is referred to as a member or manager, not as a partner or officer. A limited liability company, in other words, is not a corporation and, therefore, its members are not executive officers.

To the extent the hired and non-owned auto liability endorsement BP 04 04 is being issued without reference to the limited liability company nomenclature, it needs to be amended by insurers. The reason is that had the defendant been using his personal auto on business, he might have been successful in arguing for coverage, since there is no provision to preclude such an exposure for members or managers of limited liability companies.

While on the subject of limited liability companies, it is important that producers and others keep in mind that an LLC is not a corporation, even though two of the reasons for forming an LLC correspond to the reasons for incorporation: namely, tax considerations and limited liability.

A corporation recently found this out the hard way in the case of American Electric Power Co., Inc. v. Affiliated FM Insurance Co. No. 07-31061 (5th Cir. 2009). American Electric Power Company (AEP) was issued a policy by Affiliated FM Insurance Company (Affiliated) covering AEP and its subsidiaries from loss due to employee theft or misconduct.

That policy was amended to cover Central & Southwest Corporation (CSW) and its subsidiaries. The Affiliated policy, which was issued in 2000, had a prior loss clause that provided coverage for earlier losses, if those losses would have been covered by a policy that was in effect at the time of loss and were not discovered until after the Affiliated policy began.

AEP sought coverage from Affiliated for employee theft that had occurred in 1999, prior to the Affiliated policy inception but that remained undiscovered until 2000 during the Affiliated policy. The thefts occurred at two CSW subsidiaries, both of which were limited liability companies.

The coverage obligation of Affiliated applied only if a policy in effect at the time of the theft would have applied when the theft occurred in 1999. A policy issued by Chubb Insurance Company was in effect at the time of the theft, covering CSW and any subsidiary corporation.

Affiliated determined it could escape its coverage obligation if it could demonstrate that there was no coverage under the Chubb policy. With that in mind, Affiliated argued that because the two limited liability companies were not corporations, they did not qualify as “subsidiary corporations” and, therefore, were not insureds under the Chubb policy. The court agreed with Affiliated.

Conclusion

The point here is that, while an LLC is a company and has some of the same objectives as a corporation, it is not a corporation. It therefore might be better that an LLC be identified specifically as a limited liability company in liability policies, in broad named insured endorsements and in auto policies and endorsements, such as the one dealing with hired and non-owned auto liability.

Insurers that still issue the hired and non-owned auto liability endorsement need to make some amendments by specifically including reference to an LLC and its members and managers if they wish to avoid any grant of coverage through ambiguity.

The defendant in the Peerless Ins. Co. v. Eugene Roedder case did not have much of a chance for coverage. The defendant also had a commercial umbrella policy, but coverage for auto liability was follow form, which is usually the case. With no coverage applicable to the commercial liability policy, no coverage applied to the umbrella policy.

There was no mention in this case of a personal umbrella policy. With hindsight, one could have rescued the defendant in this case. Many of these umbrella policies, however, are being sold at limits of $1 million. Million-dollar judgments were relatively unheard of until the mid-1970s, and a million-dollar umbrella policy would have been sufficient in many cases at that time.

Today, however, the limits for a personal umbrella policy should be considerably higher, to the extent the higher limits are available and affordable. This is because multi-million-dollar verdicts are fairly common these days.

No one knows for sure when they will have an accident that will be as costly as the one that confronted this defendant. Whether it is an inflated and absurd amount or not, someone is going to have to pay.

The author
Donald S. Malecki, CPCU, has spent 49 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.