Antisubrogation Rule Bars Rental Car Company's Indemnification Action Against Renter for Third-Party's Property Damage

AUTO – RENTAL VEHICLE – UNAUTHORIZED DRIVER – VEHICLE & TRAFFIC LAW § 370 – ANTISUBROGATION RULE
ELRAC, Inc. d/b/a Enterprise Rent a Car v. Russo
(Dist. Ct., Nassau Co., decided 6/10/2008)

I love it when things work the way they're supposed to. Like when a judge decides a default judgment motion based on established legal principles, instead of simply adopting wholesale the moving party's arguments and submissions without regard to the law.

Russo rented a car from ELRAC/Enterprise and, according to the complaint, allowed someone not listed on the rental agreement to drive the rental car. That person had an accident with a non-party's vehicle, causing $1,700 in damage to it. ELRAC paid that damage and brought this action for indemnification against Russo under the provisions of the rental contract.

Russo was served with but failed to answer the complaint, and ELRAC moved for a default judgment. Russo, representing himself pro se according to the decision, did not oppose ELRAC's motion.

Although ELRAC demonstrated both proper service of the complaint on Russo, as well as his failure to answer, Nassau County District Court Judge Andrew Engel not only denied ELRAC's unopposed default judgment motion but dismissed the complaint, noting initially:

The Plaintiff's proof of jurisdiction and the Defendant's default does not impose upon the court "a mandatory, ministerial duty to grant a motion for a default judgment"(citations omitted). To succeed, a plaintiff must demonstrate that it possesses a viable cause of action (citations omitted) by submitting an affidavit of facts and/or a complaint verified by a party with personal knowledge, (citations omitted) "so the court has nonhearsay confirmation of the factual basis constituting a prima facie case[.]"

Judge Engel found the following deficiencies in ELRAC's motion papers:

• the affirmation of ELRAC's counsel, and the complaint verified by counsel (rather than a knowledgeable representative of ELRAC), were of no probative value;
• the affidavit of ELRAC's vehicle repair manager, which did nothing more than discuss, in conclusory terms, the alleged cost of repairing the rental vehicle, had no relevance to this action, which sought recovery for the alleged cost of repairing a third party's vehicle;
• the affidavit of ELRAC's loss control manager did not allege personal knowledge or the source of its allegation that the non-party's vehicle was damaged as "a direct and proximate result of the negligence of the Defendant [Russo] and the unauthorized driver";
• the police accident report submitted by ELRAC's counsel was not in evidentiary form and, therefore, was insufficient to establish Russo's negligence;
• the allegation of ELRAC's loss control manager that ELRAC paid the non-party's damages was unsupported by any proof; and
• the allegation of ELRAC's loss control manager that Russo was contractually obligated to indemnify ELRAC for third-party property damage caused by an unauthorized driver was "without merit."

With respect to the final point -- that Russo could not be held contractually obligated to indemnify ELRAC for third-party property damages of less that $10,000 caused by a driver not listed on or authorized by the rental agreement to drive the rental car -- Judge Engel's analysis and reasoning was spot on:

• NY Vehicle & Traffic Law § 388 makes the owner of a vehicle used or operated in New York State liable for BI or PD resulting from negligence in the use or operation of such vehicle by any person using or operating that vehicle with the express or implied permission of the owner;
• "even in the face of a rental agreement which restricts the use of a vehicle to the lessee, '[a]s a commercial lessor of vehicles, ELRAC is deemed to have constructively consented to the operation of its vehicle by anyone using it with the lessee's permission'";
• ELRAC should not be heard to argue that the driver of its vehicle was unauthorized when, in apparent recognition of this constructive consent, it never raised a claim of lack of permissive use against the non-party's property damage claim and instead paid same;
• under V&T § 370, car rental companies are required to provide their lessees with primary insurance coverage up to the minimum liability limits required by statute ($25,000/$50,000/$10,000), and self-insurers, like ELRAC, are not exempt from this requirement; the coverage provided pursuant to V&T § 370 "must inure to the benefit of any permissive user of the vehicle"; and, finally,
• the "antisubrogation rule" barred ELRAC from enforcing the rental agreement's indemnification provision against Russo up to the $10,000 required property damage liability coverage limit of V&T § 370.

With respect to the antisubrogation rule's applicability in this case, the court held:

Pursuant to the "antisubrogation rule, "[a]n insurer has no right to subrogation against its own insured for a claim arising from the very risk for which the insured was covered. This rule applies even where the insured has expressly agreed to indemnify the party from whom the insurer's rights are derived" (citations omitted)[.] This rule is based, in part, on the potential for conflict of interest between the insurer and the insured, as well as to avoid allowing the insurer " to pass the incidence of the loss ... from itself to its own insured and thus avoid the coverage which its insured purchased" (citations omitted). "While the present case[] doe[es] not involve subrogation - since ELRAC is not seeking to step into the shoes of its insureds to sue responsible third parties - the policy behind the antisubrogation rule [would, nevertheless, preclude the Plaintiff from receiving the recovery it seeks herein]" (citation omitted).

The antisubrogation rule notwithstanding, a car rental company may enforce the indemnification clause in its rental agreement to the extent its liability exceeds the statutory minimum amount of insurance it is required to maintain. (citations omitted) In apparent recognition thereof, the indemnity provision in the Plaintiff's rental agreement herein provides, in pertinent part:

8. Renter's Indemnity Provision: Renter agrees to defend, indemnify, and hold Owner harmless from all losses, liabilities, damages, injury or property damage claim presented by any third party for all amounts in excess of the minimum dollar amounts required to be maintained by the Owner by the applicable motor vehicle financial responsibility laws of the State in which this agreement of rental was executed.

While VTL § 370 once failed to require vehicle owners to maintain a minimum amount of coverage for property damage, referring only to "maximum" coverage, thereby permitting complete indemnification from the lessee, as otherwise permissible by law (citations omitted), this section was amended in 2005, before the date of the lease agreement and accident sub judice, to explicitly provide, in pertinent part:

Every person, firm, association or corporation engaged in the business of carrying or transporting passengers for hire in any motor vehicle or motorcycle, ... , which shall be operated over, upon or along any public street or highway of the state of New York shall file with the Commissioner of motor vehicles for each motor vehicle or motorcycle intended to be so operated evidence, in such form as the commissioner may prescribe, of a corporate surety bond or a policy of insurance, ... , for the payment of a minimum sum, called minimum liability on all judgments for damages because of injury to or destruction of property of others in any one accident, recovered against such person, firm, association or corporation upon claims arising out of the same transaction or transactions connected with the same subject of action, to be apportioned ratably among the judgment creditors according to the amount of their respective judgments for damage or injury caused in the operation, maintenance, use or the defective construction of such motor vehicle or motorcycle as follows:

(b) For damages for and incident to injury to or destruction of property; for each motor vehicle and each motorcycle a bond or insurance policy with a minimum liability of ten thousand dollars. VTL § 370(1)(b)

As before this amendment was enacted, this requirement applies with equal force to automobile rental companies and to self-insurers. See, VTL § 370(3). For this reason, along with a reiteration of the principle of constructive consent by the Court of Appeals, the decisions in ELRAC, Inc. v. Masara, supra, and AIU Insurance Company v. ELRAC, supra, have been been discredited. See, Murdza v. Zimmerman, supra; Lancer Insurance Company v. Republic Franklin Insurance Company, supra.

Based upon the foregoing, even if this court were to overlook the evidentiary insufficiency of the Plaintiff's papers, it is clear that the alleged property damage of $1,700.00 claimed by the Plaintiff falls far below the $10,000.00 of property damage coverage afforded by the Plaintiff to the Defendant, pursuant to VTL § 370. Applying all of the principles of law stated hereinabove to these facts, it is clear that the Plaintiff does not possess a viable cause of action against the Defendant. Accordingly, the Plaintiff's motion is denied and the action is dismissed.

And just who was it who supposedly said: "Je weniger die Leute darüber wissen, wie Würste und Gesetze gemacht werden, desto besser schlafen sie nachts" (The less the people know about how sausages and laws are made, the better they sleep in the night.)? No one should lose any sleep over this decision. Especially pro se defendants like Mr. Russo.