Monday, February 15, 2010

No Liability Clause of Car Dealership's Garage Liability Policy Found to Negate Coverage for Driver of Loaner Vehicle

Progressive Cas. Ins. Co. v. Harco Natl. Ins. Co.
(4th Dept., decided 2/11/2010)

Jason Webb borrowed a loaner vehicle from Burdick Pontiac-GMC while his own vehicle was being repaired by the car dealership. His son, Justin Webb, was driving the loaner vehicle when he collided with a vehicle operated by Andrea Walker. Walker thereafter commenced the underlying against Justin Webb and Burdick seeking damages for injuries that she allegedly sustained in the accident.

The loaner vehicle was insured under a garage liability policy issued to Burdick by Harco National Insurance Company, and the Webbs were insured under a family motor vehicle policy issued by plaintiff, Progressive Casualty Insurance Company. The Harco policy contained what is commonly known as a "no liability clause," which provided coverage to a customer of its insured only if the customer "[h]as no other available insurance (whether primary, excess or contingent)" or "[h]as other available insurance (whether primary, excess or contingent) less than the compulsory or financial responsibility law limits where the covered auto' is principally garaged." The Progressive policy contained an "excess" clause, which stated that any insurance provided for a vehicle, other than a covered vehicle, "will be excess over any other valid and collectible insurance."

Progressive commenced this action seeking a declaration that Harco was obligated to provide primary coverage to defend and indemnify Justin Webb in the underlying action, and Harco asserted a counterclaim seeking a declaration that Progressive is the primary insurance carrier for Webb and thus was obligated to defend and indemnify him to the limits of its policy. Onondaga County Supreme Court granted Progressive's motion for summary judgment declaring that Harco was obligated to provide primary coverage to Justin Webb and that Progressive's coverage was excess to Harco's.  Harco appealed.

In REVERSING the order appealed from and declaring that Progressive owed primary coverage to Justin Webb and Harco owed no coverage, the Fourth Department gave effect to the no liability clause of the Harco policy:
We agree with Harco and Burdick that the Webb defendants are excluded from coverage pursuant to the express terms of the Harco policy. Under the Harco policy, a customer is excluded from the definition of an "insured" unless the customer possesses insufficient insurance to meet the minimum requirements set forth in New York's financial responsibility laws. In granting the motion of Progressive, the court relied on the general rule that, "[i]n cases in which one insurance policy has a no liability clause and the other insurance policy has an excess clause, . . . the no liability clause is not given effect" (Kipper v Universal Underwriters Group, 304 AD2d 62, 65; see Utica Mut. Ins. Co. v Travelers Ins. Co., 213 AD2d 983, 984). That was error, inasmuch as "[a]n exception to the general rule arises [where, as here,] the no liability clause expressly provides that other available insurance' includes both primary and excess insurance coverage. In that case, the no liability clause is given effect and the excess insurance carrier is the primary carrier" (Kipper, 304 AD2d at 65; see Mills v Liberty Mut. Ins. Co., 36 AD2d 445, affd 30 NY2d 546; Davis v De Frank, 33 AD2d 236, 241, affd 27 NY2d 924). Here, the Harco policy specifically provides that "other available insurance" includes "primary, excess or contingent insurance" (emphasis added), and it is undisputed that the liability limits contained in the Progressive policy exceed the minimum statutory requirements. Thus, the exception to the general rule applies, the no liability clause contained in the Harco policy is given effect, and Progressive is the primary insurer for the Webb defendants (see Davis, 33 AD2d at 241). 
The appellate court also rejected Progressive's argument that the "Other Insurance" clause of the Harco policy rendered Harco liable for coverage in this case:
Contrary to the contention of Progressive, that clause does not in fact render Harco liable to provide insurance coverage with respect to all vehicles owned by Burdick. Rather, it simply clarifies that, where coverage exists under the substantive provisions of the Harco policy, coverage is primary with respect to all vehicles owned by Burdick and excess with respect to non-owned vehicles. 
Finally, and although the court twice stated that Justin Webb was "excluded" from coverage pursuant to the Harco policy's restrictive definition of an  insured, the Fourth Department also rejected Progressive's contention that Harco had a duty to provide a timely disclaimer for the subject accident:
Finally, because the Harco policy does not provide coverage for the Webb defendants, there is no merit to Progressive's contention that Harco had a duty to provide a timely disclaimer for the subject accident (see State Farm Mut. Auto. Ins. Co. v John Deere Ins. Co., 288 AD2d 294, 297). Thus, even assuming, arguendo, that the written disclaimer provided by Harco was insufficient, we conclude that "the failure to disclaim coverage does not create coverage which the policy was not written to provide" (Zappone v Home Ins. Co., 55 NY2d 131, 134). 
I'm confused.  Why would Walker have sued the father, Jason Webb?  This decision contains contradictory references (compare "Walker thereafter commenced the underlying action against Justin Webb and Burdick seeking damages" to "Harco is not obligated to defend or indemnify the Webb defendants in the underlying action").  In all likelihood, Jason Webb was not named as a defendant in the underlying action, only his son, Justin Webb, was as the loaner vehicle's driver, along with the vehicle's owner, Burdick.  And Justin was not Burdick's customer; his father, Jason, was.  Shouldn't that have made a difference?  If Justin wasn't Burdick's customer, the "your customers" exception to coverage for permissive users of Burdick's vehicles should not have applied.  Surely Progressive argued that point, but, as sometimes happens, the Fourth Department did not address it, like it had in its decision in Graphic Arts Mut. Ins. Co. v Russell, 50 AD3d 1611 (4th Dept. 2008). 


Beth E. claim rep in Buffalo said...

Thank you for this. My company has a number of dealer and garage policies and we have had to reference the "no liability" or what we have heard called as the 'escape clause' in the policy on a number of occasions. I have a claim currently slated for Arbitration. The man who took the loaner from the dealer while having repairs made to his car let his girlfriend's daughter use the car. We believe his personal lines policy would be primary for liability in that standard ISO policy language would make the loaner a temporary substitute while his car was off the road for repairs, thus making it an insured vehicle, and then permissive users of that vehicle become insureds. The ISO language provides coverage as excess except in the absence of any other coverage. The escape clause means there is no other coverage, therefore the personal lines policy takes over. To summarize, the man was given a loaner he was responsible for. He let his girlfriend's daughter drive it and she hit a parked car. The policy for the customer responsible for the loaner should take primary. If you have time I would love to hear your thoughts on this position.

Roy A. Mura said...

Thanks for your comment, Beth.

In the scenario you describe, if your policy does indeed contain a "no liability" or "escape" clause -- whether appearing as an exclusion to the Who Is An Insured clause of customers who have their own liability insurance of at least the mandatory minimum limits, or as part of the dealer or garage policy's Other Insurance Condition -- the customer's personal auto policy should afford primary 3rd-party liability coverage for damage to the parked car. Your analysis of the vehicle as a TSA is a good one, making the driver's permissive use of it covered under the customer's personal auto policy. Unless the Other Insurance clause of the customer's personal auto policy treats TSAs as covered autos for purposes of primary coverage, the personal auto insurer will probably take an excess position. Note that the Other Insurance condition of Part A--Liability Coverage found on page 4 of 13 of the PP 00 01 01 05 form provides that "any insurance we provide for a vehicle you do not own, including any vehicle while used as a temporary substitute for 'your covered auto', shall be excess over any other collectible insurance."

If your company's insurance is not "collectible" due to the operation of a no liability or escape clause, however, the personal auto policy's excess coverage should drop down to become primary.

The issue of whether the customer's girlfriend's daughter can be considered a "customer" under the dealer's policy, however, is one that may give you some pause or trouble. There's really no definitive case law on that issue in New York.

If you would like me to take a look at what you and your company regards as the no liability or escape clause that renders your company's owned-auto coverage inapplicable or uncollectible, and the customer's personal auto policy's coverage primary, please email it to me at and I'll give you my opinion on whether it supports your company's position.

By itself, the fact that the loaner was being used as a TSA, however, will probably not be enough to make the personal auto policy primary for 3rd-party PD coverage. You'll need to use a combination of your policy language and the personal auto policy's other insurance clause to do that.

Larry Rogak said...

The standard garage liability policy, with what I have always called the "customer exclusion" (you call it the "no liability clause") is the only valid exception to the general rule that in New York, coverage follows the vehicle. So long as the customer has his own liability insurance, there is no coverage for him under the garage policy. In this case, the court had the opportunity to draw a distinction between a customer and a permissive driver whom the customer allows to use the vehicle. It declined to do so, and in fact there is nothing in the "customer exclusion" that would draw such a distinction. When the customer has his own auto policy, that policy is the exclusive source of liability coverage for the loaner or test-drive car.

Unknown said...

How about this twist: Would the "No Liability" or "Customer" clause of Garage Liability policy likewise negate UM/SUM coverage for driver of loaner vehicle in the event she is in accident with an un[der] insured motorist? The clause is located in the Garage "Liability" coverage definitions. If it does not appear in definitions of "insureds" contained in the SUM endorsement attached to the policy, could it be that the garage carrier could escape liability coverage but be primary for SUM?