Not All Policy Definitions Are Created Equal -- Ones Limiting Coverage By Lack of Inclusion Are Not Subject to New York Insurance Law § 3420(D)(2)

CGL – COMMERCIAL AUTO – "HIRED AUTO" & "NON-OWNED AUTO" DEFINITIONS – INSURANCE LAW § 3420(D)(2) – LACK OF INCLUSION
NGM Ins. Co. v Blakely Pumping, Inc.
(2nd Cir., 2/1/2010)

When may a negative or limiting policy definition be considered an exclusion subject to the timely disclaimer and denial requirement of New York Insurance Law § 3420(d)(2)?  When it negates liability coverage that the policy otherwise provides.  In a rare insurance coverage decision from the Second Circuit United States Court of Appeals, the court ruled that not all policy definitions that limit coverage are exclusions.  The two in this case -- the "Hired Auto" and "Non-Owned Auto" definitions -- are not.

New York Insurance Law § 3420(d)(2) provides:

If under a liability policy issued or delivered in [New York State], an insurer shall disclaim liability or deny coverage for death or bodily injury arising out of a motor vehicle accident or any other type of accident occurring within this state, it shall give written notice as soon as is reasonably possible of such disclaimer of liability or denial of coverage to the insured and the injured person or any other claimant.

On November 3, 2005, Brian Blakely crashed his pickup truck into Peter Slingerland’s car in Kingston, New York. Blakely was driving the truck in the course of his work for his company, Blakely Pumping, as he frequently did. Slingerland and his wife brought a personal injury action against both Blakely and Blakely Pumping.

In a letter dated March 18, 2006, Blakely Pumping requested that NGM Insurance Company defend the action pursuant to an insurance policy for "Businessowners Liability Coverage” that Blakely Pumping had purchased from NGM. The policy generally covered liability for personal injuries but contained a section entitled “Exclusions” that expressly negated coverage for damages “arising out of the ownership, maintenance, use or entrustment to others of any ... ‘auto’ ... owned or operated by or rented or loaned to any insured.” Blakely Pumping, however, had also purchased an endorsement from NGM that modified the policy; the Endorsement extended coverage to bodily injury arising from the use of a “Hired Auto” or a “Non-Owned Auto” by the company or one of its employees. The endorsement defined those terms as follows:

“Hired Auto” means any “auto” you lease, hire or borrow. This does not include any “auto” you lease, hire or borrow from any of your “employees” or members of their households, or from any partner or “executive officer” of yours.

“Non-Owned Auto” means any “auto” you do not own, lease, hire or borrow which is used in connection with your business. 

On March 23, 2006, NGM disclaimed coverage, based on the policy’s auto exclusion.  In a letter dated July 24, 2006, counsel for the Slingerlands called NGM’s attention to the endorsement’s extension of coverage for bodily injuries arising out of the use of a “Hired Auto” or “Non-Owned Auto.”  Two weeks later, NGM again disclaimed coverage, this time on the ground that Blakely was an executive officer of Blakely Pumping and, therefore, his pickup truck was neither a “Hired Auto” nor “Non-Owned Auto” as defined in the endorsement.

In July 2007, NGM commenced this action, seeking a declaratory judgment that it was under no obligation to defend or indemnify Blakely Pumping in the underlying Slingerland personal injury action.  On March 24, 2009, after the parties cross-moved for summary judgment, the district court entered a judgment declaring that NGM was indeed obligated to defend and indemnify Blakely Pumping.  Although the court concluded that Blakely Pumping had borrowed the auto of one of its officers and that the accident was therefore not covered under the terms of the policy as modified by the endorsement, the district court found that the policy's "Hired Auto" and "Non-Owned Auto" definitions constituted exclusions of general coverage, thereby triggering the timely disclaimer and denial requirement of New York Insurance Law § 3420(d)(2).  Since NGM originally disclaimed coverage based only on the policy's auto exclusion, the district court ruled that it had "waived" its right to disclaim coverage on other grounds.  Thus, the district court held that NGM’s subsequent notice of disclaimer was ineffective.  NGM appealed to the Second Circuit. 

In REVERSING the district court's ruling, the Second Circuit held that the district court erred in finding that the endorsement’s definitions of “Hired Auto” and “Non-Owned Auto” were exclusions triggering the timely disclaimer or denial requirement of New York Insurance Law § 3420(d)(2):

Determining whether there is no coverage by reason of exclusion as opposed to lack of inclusion can be “problematic."  Worcester Ins. Co. v. Bettenhauser, 95 N.Y.2d 185, 189 (2000).  We find guidance in Planet Insurance Co. v. Bright Bay Classic Vehicles, Inc., 75 N.Y.2d 394 (1990), a case that is particularly applicable to the facts before us.  There, the New York Court of Appeals considered whether definitional language that did not appear in the section of an insurance policy entitled “Exclusions” eliminated coverage by reason of exclusion or lack of inclusion. Defendant Bright Bay obtained the policy in question for its fleet of rental cars. The policy defined “covered rental cars” as those rented for periods of less than 12 months.  Id. at 398. One of Bright Bay’s cars was later involved in an accident while being rented for a 24-month period.  The court found that, although the insurance company disclaimed coverage based on the definition of “covered rental cars” as opposed to a provision in the policy’s “Exclusion” section, the definition’s limiting language still amounted to an exclusion.  Id. at 400. The court explained that the car was initially covered by the policy and only “became ‘uncovered’ upon the happening of a subsequent event: i.e., the rental ... for a lease period other than that prescribed in the policy.”  Id. at 401. Since the car was at one point covered, this was not a case where there “was never a policy in effect covering the involved automobile.”  Id.

In the instant case, the principal issue in dispute is whether the district court erred in finding that the Endorsement’s definitions of “Hired Auto” and “Non-Owned Auto” constitute exclusions requiring a notice of disclaimer.  We conclude that the district court did err in so finding.

The Endorsement did not generally cover auto accidents; it covered only accidents arising from the use of a “Hired Auto” or “Non-Owned Auto.”  Those terms were defined in such a way that an employee’s or officer’s vehicle, like Blakely’s pickup truck, could never be covered. This is not a case then where “the happening of a subsequent event” implicated a definitional term that “uncovered” a formerly covered car.  Id.  Rather, it is a case in which “the policy as written could not have covered the liability in question under any circumstances.” Zappone [v. Home Ins. Co.], 55 N.Y.2d [131] at 134.  In short, there was no coverage “by reason of lack of inclusion,” and thus no notice of disclaimer was required. Id. at 137 (internal quotation marks omitted).

The court also discussed but distinguished the New York Appellate Division's decisions in Greater New York Mutual Insurance Co. v. Miller, 205 A.D.2d 857(3d Dept. 1994) (policy definition of an “insured” negated coverage for drivers who used the auto in question without permission) and United Services Automobile Association v. Meier, 89 A.D.2d 998 (2d Dept. 1982) (policy definitions that negated coverage from individuals engaged in automobile businesses).  In distinguishing the Meier case, the Second Circuit noted:

In fact, the Meier court found that other definitions in the same policy – such as the definitions of “owned vehicle,” “newly acquired vehicle,” and “temporary substitute vehicle” – were not exclusions.  Id. at [454 N.Y.S.2d] 320-21.  According to the court, the failure of the vehicle in question to qualify as one of these defined terms meant that there was never a “contract of insurance with the person or for the vehicle involved in the accident.”  Id. at [454 N.Y.S.2d] 321. We employ identical logic in our analysis.

In New York, noncoverage grounds based on a lack of inclusion are not subject to Insurance Law § 3420(d).  Disclaimers or denials based either on policy exclusions or conditions are.  Although somewhat of a fine distinction, the difference between policy definitions that negate coverage and ones that merely state what is covered is an important one.  The Second Circuit correctly analyzed these definitions in concluding that the policy provided no coverage in the first place for the insured's officer's use of his own pickup truck, which did not meet the policy's definitions of either a hired auto or non-owned auto.

Policy for Dominos Pizza Deliveryman's Personal Auto is Primary

AUTO – OTHER INSURANCE – PRIORITY OF COVERAGES – NON-OWNED AUTO
Eveready Ins. Co. v. Illinois Natl. Ins. Co.
(1st Dept., decided 5/5/2009)

Plaintiff insurer brought this declaratory judgment action todetermine the parties' respective obligations to contribute towards a settlement of an underlying personal injury action, which had stemmed from an accident involving a Dominos Pizza deliveryman's use of his personal auto to deliver a pizza.  Plaintiff insured the deliveryman under a personal auto policy; defendant insured Dominos under a commercial auto policy and took the position that its coverage was excess to plaintiff's.  New York Supreme granted defendant's motion for summary judgment, declaring that defendant was not required to contribute to the underlying settlement in the proportion that the limits of its policy bears to the total of the limits of both its policy and plaintiff's policy. 

Finding the "other insurance" clause of defendant's policy to be clear and unambiguous, the First Department AFFIRMED, holding:

The clear and unambiguous "other insurance" clause of defendant's policy limits its policy to "excess" coverage where a covered accident involves a vehicle not owned by its insured, Dominos Pizza. As it was undisputed that the vehicle involved in the accident belonged to plaintiff's insured, a deliveryman for Dominos Pizza who was making a pizza delivery, defendant is an excess insurer required to contribute to the settlement only after the exhaustion of plaintiff's policy (Federal Ins. Co. v Ryder Truck Rental, 189 AD2d 582, affd 82 NY2d 909 [1994]). There is no merit to plaintiff's argument that this "excess" provision of the other insurance clause is contradicted and negated by the "proportionate payment" provision of the same clause. The latter, by its terms, only applies to coverage that is "on the same basis," i.e., where the policy is primary and there are other primary policies, the policy will pay pro rata with the other primary policies, and where the policy is excess and there are other excess policies, the policy will pay pro rata with the other excess policies (General Acc. Fire & Life Assur. Corp. v Piazza, 4 NY2d 659, 669). Here, plaintiff's policy is primary and defendant's policy is excess.

Second Department Finds No Nonowned Auto Liability Coverage for Accident Involving Rental Vehicle

AUTO – NONOWNED AUTO LIABILITY COVERAGE – "USE" OR "MAINTENANCE" OF AUTO – FURNISHED OR AVAILABLE FOR REGULAR USE – RENTAL VEHICLE
Elrac, Inc., d/b/a Enterprise Rent-A-Car v. GE Capital Ins. Co.
(2nd Dept., decided 12/23/2008)

While a vehicle Carmelo Mazarese used regularly was being repaired, he rented a vehicle from Enterprise-Rent-A-Car.  The rental agreement listed Mazarese as the only authorized driver and provided that the rental car would be returned in 30 days.

On January 12, 2004, the rental car was involved in a motor vehicle accident. At the time of the accident, the rental car was being operated by Mazarese's cousin, Lisa Martinez, who had borrowed the car from Mazarese with his permission, but who was not an authorized driver under the rental agreement.

A month later, defendant Joseph V. Martinez, the father of the defendant Tess Martinez, the infant passenger (also the daughter of the driver) who was riding in the rental vehicle at the time of the accident, commenced a personal injury action entitled Martinez v Elrac, Inc. in Nassau County Supreme Court against ELRAC, Lisa Martinez, and Mazarese (the theory of liability against Mazarese not being disclosed or apparent). Pursuant to an infant's compromise order entered November 10, 2005, in the underlying action, ELRAC, on behalf of itself and Mazarese (whom it represented in the underlying action) settled that action for the sum of $1.1 million.

ELRAC then commenced this action against, among others, GE Capital Insurance Company, Lisa Matrtinez, and Mazarese for declaratory relief seeking indemnification from GE, which had issued a personal auto policy to Mazarese's mother.

GE's policy contained a nonowned auto clause that provided liability coverage for "[a]ny relative of [the named insured] who resides in your household * * * when using a nonowned auto provided that * * * [t]he relative is using the nonowned auto with the owner's permission and for the purpose the owner intended."  GE's policy defined the term "nonowned auto" as "an auto that is not owned by or registered to the [named insureds] or a resident of your household; and is not furnished or available to [the named insureds] or any resident of your household for regular use." "Use" of an auto was defined as "owning, operating, loading, unloading and maintaining the auto."

The issue in this case persumably was whether the GE policy afforded liability coverage to Mazarese, the renter.  This decision contains no discussion of liability coverage under the GE policy for Martinez, the driver.

In REVERSING the lower court's order granting summary judgment to ELRAC, the Second Department found that the nonowned auto provision of GE's policy did not afford liability coverage for the accident:

The exclusion of coverage under certain conditions for a relative residing with an insured when using a nonowned automobile "was designed to protect the company from being subjected 'to greatly added risk without the payment of additional premiums'" (Sperling v Great Am. Indem. Co., 7 NY2d 442, 448, quoting Vern v Merchants Mut. Cas. Co., 21 Misc 2d 51, 52). The purpose of a provision for a nonowned vehicle not for the regular use of an insured is to provide protection to the insured for the occasional or infrequent use of a vehicle not owned by him or her and is not intended as a substitute for insurance on vehicles furnished for the insured's regular use (see Liberty Mut. Ins. Co. v Sentry Ins., 130 AD2d 629, 630; see Liberty Mut. Ins. Co. v Allstate Ins. Co., 237 AD2d 260; Egle v United Servs. Auto. Assn., 158 AD2d 661; Federal Ins. Co. v Allstate Ins. Co., 111 AD2d 146; but see New York Cent. Mut. Fire Ins. Co. v Jennings, 195 AD2d 541). 

In determining whether a vehicle has been furnished for regular use, the general availability and frequency of use are criteria employed by the factfinder (see Liberty Mut. Ins. Co. v Allstate Ins. Co., 237 AD2d 260, 261; Liberty Mut. Ins. Co. v Sentry Ins., 130 AD2d 629, 630; Egle v United Servs. Auto. Assn., 158 AD2d 661, 662-663; McMahon v Boston Old Colony Ins. Co., 67 AD2d 757, 758; compare Hollander v Nationwide Mut. Ins. Co., 60 AD2d 380). 

In his affidavit, Mazarese asserted, inter alia, that at the time of the accident, he did not own a motor vehicle, but the vehicle he used on a daily basis was a 2004 Mercury Mountaineer that was insured by nonparty Geico Insurance Company (hereinafter Geico).  Mazarese had leased the rental vehicle from Elrac as a replacement vehicle while the Mercury Mountaineer was being repaired by the dealer. According to Mazarese, he used the rental vehicle "on an everyday basis." The rental agreement demonstrated that Mazarese rented the vehicle on November 18, 2003, and he returned it on January 13, 2004, the day after the subject accident. Thus, the rental vehicle clearly was available for Mazarese's regular use for 55 days.  Accordingly, under the circumstances of this case, the rental vehicle did not meet the definition of a nonowned vehicle under the GE policy. 

In addition, contrary to the Supreme Court's determination, Mazarese was not maintaining the rental vehicle at the time of the accident by virtue of his having entrusted the vehicle to the driver. "'Maintenance,' as that term is used in an insurance policy, means performance of work on an intrinsic part of the mechanism of the car and its overall function'" (Guishard v General Sec. Ins. Co., 9 NY3d 900, 902, quoting Farmers Fire Ins. Co. v Kingsbury, 105 AD2d 519, 520, citing 6B Appleman, Insurance Law & Practice, § 4315; see Pennsylvania Millers Mut. Ins. Co. v Manco, 63 NY2d 940, 942). Moreover, such entrustment of the rental vehicle to the driver did not constitute use of the rental vehicle as such term is otherwise defined in the GE policy because Mazarese neither owned, nor was he operating, loading, or unloading the rental vehicle at the time of the accident. Thus, the Supreme Court incorrectly concluded that there was coverage for the subject accident under the GE policy. 

The three reasons GE's policy did not afford liability coverage to/for Mazarese are:  (1) the rental vehicle was available for Mazarese's regular use, thus disqualifying it from being a "nonowned auto" as defined by the GE policy; (2) Mazarese's allowing Martinez to use the rental vehicle was not "maintaining" it; and (3) Mazarese's entrustment of the the rental vehicle to Martinez did not constitute his "use" of it.