Risk Management

Hired auto coverage may undergo revision

Bus accident decision may have ramifications for BAP

By Donald S. Malecki, CPCU

In March 2007, a serious accident took place that is likely to generate a change with the hired auto provisions of the business auto policy (BAP). The accident, which occurred in Atlanta, Georgia, involved a chartered bus that was taking 33 students and coaches of the Bluffton University baseball team (an Ohio institution) to Florida.

The bus accident killed five baseball players, the bus driver and his wife. Many of the other occupants were injured. As a result of this accident, numerous lawsuits were filed. The bus carrying the team was owned by (Partnership), and leased to (Executive Coach), and chartered out to the university (Bluffton).

The executor of the bus driver's estate filed a complaint in 2008 declaring that coverage existed under both the decedent's personal auto (PAP) and personal umbrella (PUP) policies. The limits of the PAP were $300,000 per accident and the PUP had limits of $1 million per occurrence.

The insurer of the PUP contended that coverage did not exist because the term "auto," as defined in that policy to mean a "private passenger motor vehicle, motorcycle, moped or motor home," did not encompass a bus. The insurer also maintained that coverage was excluded because the vehicle was being operated as a "public or livery conveyance." The trial court agreed with the insurer's reasons for denying coverage.

This argument was affirmed in a decision by the Ohio Court of Appeals in the case of Niemeyer, et al. v. Western Reserve Mutual Casualty Co., Ohio 1710 (Ohio App. Dist. 3, 2010). As one might expect, a variety of attempts were made to counter the insurer's reasons for maintaining that coverage did not apply. However, they all fell on deaf ears.

More fertile territory

With the plaintiffs losing out in their attempt to obtain judgment for the limits payable by personal insurance policies of the bus driver's estate, representatives of the deceased and the injured persons then focused their attention on the university's auto liability insurance in the case of Federal Insurance Co. v. Executive Coach Luxury Travel, Inc., Slip Opinion No. 2010-Ohio-6300 (Sup. Ct. OH 2010).

At the time of the crash, the university had a commercial auto policy with Hartford Fire Insurance Company (Hartford), a commercial umbrella policy with American Alternative Insurance Corporation (American), and an excess follow form policy with Federal Insurance Company (Federal).

The Federal excess liability policy stated that its terms and conditions were subject to the controlling underlying insurance of American. The American umbrella policy, on the other hand, was subject to the underlying (primary) policy of the Hartford. The issue was whether the deceased bus driver was an insured within the language and meaning of the university's commercial auto policy.

With that lineup of policies, the attention was directed to the commercial auto policy of Hartford, where the first prong of attack was that the bus driver was an insured under the university's auto policy because he drove the bus that the university hired with its permission.

The plaintiffs' argument was based on the principle that words not defined within an insurance policy must be given their natural and commonly accepted meaning. The insurers, however, countered with the argument that the university did not hire the bus because it did not exert control over and possess the bus. Instead, they said, the university simply contracted for transportation services and nothing more.

The trial court granted the insurers their motion for summary judgment, stating that the university had neither hired the bus nor permitted the driver to drive the bus, and concluded that the university did not have control or authority over the driver. The Ohio court of appeals affirmed, concluding that the driver and the bus were not insureds under the Hartford policy. The Ohio Supreme Court, however, reversed the judgment of the court of appeals.

Analysis

Addressing the policy owner (University), Section II(A)(1)(b) of the Hartford commercial auto policy defined an "insured" as "[a]nyone else while using with your permission a covered 'auto' you own, hire or borrow." (The court referred to this provision as the "omnibus clause." This was the appropriate term until 1978, when the BAP was first introduced. Since then, it is commonly referred to as the "Persons Insured" provision.)

While the appellants (plaintiffs) argued that the plain meaning of "hire" and "permission" encompassed the driver as an insured, the insurers argued otherwise. They maintained that the bus lessee was an independent contractor for whom the driver worked and, therefore, was not using the chartered bus with the university's permission. They also argued that the university did not "hire" the chartered bus, therefore excluding the driver as an "insured."

When a person otherwise falls within the definition of an insured, such person can still be excluded under any of the five listed exceptions under the Persons Insured (omnibus) provision of the commercial (BAP) policy. As noted, however, none of these exceptions was applicable:

(1) The omnibus clause excepts from coverage the owner of an auto that is hired or borrowed. The bus driver did not own the bus or rent or lend it to the university.

(2) This clause also excludes an employee driving his or her auto or an auto of a family member. Neither the bus driver nor a family member owned the chartered bus.

(3) The omnibus clause precludes, as an insured, anyone selling, servicing, repairing, parking or storing autos. The driver was doing none of these functions.

(4) Excepted from this clause was anyone, not an employee, who is moving property to and from the covered auto. The driver was not moving property to and from a covered vehicle.

(5) The omnibus clause also excludes partnership members and members of a limited liability company when driving an auto owned by the partner or member or a member of his or her household. The driver was not a partner or member of any entity involved in this case.

Based on the foregoing, the Ohio Supreme Court thought the omnibus clause appeared straightforward and clear, given that the clause applied to the case before it—that is, the university hired the bus from the lessee and granted its driver permission to use it. Whether the insurer intended the omnibus clause to apply, the court stated, was immaterial because the language of the policy supported the conclusion that the driver was an insured.

The court also held that the university hired the bus, based on the following facts:

First, when the person in charge of handling the transportation (baseball coach James Grandey) requested a bus from Executive (lessee), he had a certain size in mind and specifically requested a bus large enough to hold the entire team.

Second, the lessee sought and received the university's express permission to allow the driver in question to operate the bus.

Third, Grandey had the authority to direct the driver to stop if he were to drive dangerously. He could also order the driver to stop for any reason.

Finally, when it was discovered that the DVD player was not working properly, he had the driver stop the bus and fix the player.

The foregoing, the court said, were facts that collectively established the requisite level of control and possession to meet the test of a hired vehicle. Thus, it was the high court's decision that the university hired the bus and that the driver was operating the bus with the university's permission. Accordingly, the driver was considered to be an insured under the university's commercial auto policy.

Impact of case

With the university's commercial auto policy judged to be applicable to this matter, its limits became payable, along with the umbrella and excess liability limits of the other policies which applied follow form to the primary policy of the Hartford.

From the standpoint of the future, the potential impact of this decision was described by one justice who dissented with the majority's opinion, saying: "Today's opinion unreasonably extends coverage to a third party and effectively opens the door for similar claims under other scenarios because the omnibus clause is standard in many insurance policies."

An example given by this justice was said to be taken from American's brief prepared for the trial: "An attorney hails a taxi and asks the driver to drive her to the airport. On the way, the driver loses control of the taxi and negligently causes an accident that injures numerous people. Or a bride and groom climb into a waiting limousine to get to their reception. The chauffer falls asleep at the wheel and causes an accident. Finally, a church contracts with a bus company to transport its members to a social event. The bus driver causes an accident on the way."

Based on the majority's interpretation of the omnibus clause, the dissenting justice stated that the taxi company, limousine company, bus company and their drivers could all rely on the customers' liability insurance to supplement their own coverage. This would be the result, he added, even though the drivers in these situations are not intended to be an insured under the omnibus clause of a customer's auto policy.

Conclusion

There is old saying that if an insurer does not intend to provide coverage, it should draft its policy wording to make that intent clear. When one reads the provisions of the business auto policy, there is no denying that the driver of a hired auto, who does nothing more than operate that vehicle, is considered to be an insured.

Since, as the dissenting justice said, the door is now open for similar claims under a variety of scenarios, insurers—and perhaps even ISO—will eventually change the policy wording, first by endorsement, to make sure coverage is excluded for similar claims.

Rest assured that any such change will not be solely at the satisfaction of the insurers. Insureds, such as colleges and universities, that charter land, water and aircraft will want to restrict coverage so as not to trigger the limits of their own auto insurance coverages. This will be the thinking among insureds, particularly if insurance premiums are likely to be affected by these kinds of claims.

Producers, therefore, should expect some changes to be introduced in the coming months making clear precisely what coverage is not intended under commercial auto policies relating to hired vehicles.