Court Applies Rental Exclusion To Bar Coverage
August 17, 2011
The 7th U.S. Circuit Court of Appeals recently determined that a rental exclusion in a trucker's policy was effective and applied to bar coverage for the trucker to whom the policy was issued despite that the trucker, who had entered into the lease agreement for use of the truck by a carrier, was not the owner of the vehicle and the owner was not disclosed. Clarendon National Insurance Co. v. Medina. No. 10-1943, 2011 WL 2714093 (7th Cir. July 13, 2011).
The trucker's carrier, Clarendon, was represented by Schindel, Farman, Lipsius, Gardner and Rabinovich LLP, of New York. William L. Barr Jr. of the Law Offices of William L Barr Ltd. represented the claimant.
Background
Guillermo Medina was the driver of the semitrailer tractor truck cab in question. His wife Maria was its owner. Guillermo desired to rent the truck and his services to Town Trucking Co. Federal regulations required that carriers, such as Town, either own their trucking equipment or are into written leases with the "owner" of the equipment. 49 C.F.R. §§376.2(e), 376.11, 376.2(d), 376.12(a).
Guillermo, rather than Maria, nevertheless entered into a contractor operating agreement (COA) with Town, pursuant to which Guillermo agreed to furnish the truck and himself to transport goods on behalf of Town. The COA was entered into with Maria's permission, but without disclosure of her as the truck's owner.
Town maintained liability coverage on drivers using their own equipment in furtherance of Town's business, through a policy issued by Occidental, subject to a $1 million limit. In addition, the COA required Guillermo to obtain a "nontrucking/bobtail" policy, with a minimum limit of $750,000, covering the truck while operating without a trailer outside the service of Town. Guillermo obtained the bobtail policy from Clarendon.
After obtaining the requisite insurance, Guillermo began hauling loads for Town. In November 2006, while returning to Town with a flatbed trailer supplied by Town after making a delivery, the trailer jackknifed and collided with an oncoming pickup truck, killing the driver, Michael Schulman.
Schulman's estate brought suit against the Medinas and Town. The case settled with entry of a consent judgment for $2 million against the defendants with Occidental paying its $1 million policy limit as part of the settlement. The estate agreed that the balance of the settlement was to be paid, if at all, through Guillermo's policy with Clarendon.
Clarendon denied coverage based on late notice and, in addition, based on a rental exclusion in its policy. That exclusion barred coverage for a covered auto "while in the business of anyone to whom the 'auto' is rented." The estate, Town and the Medinas argued that the rental exclusion did not apply, but the district court granted summary judgment for Clarendon. The estate took this appeal.
Rental by Agent
In an opinion by Appellate Judge John Daniel Tinder, the 7th Circuit affirmed. He rejected out of hand the estate's argument that the rental exclusion was ambiguous and then focused on the estate's main argument, namely, that Guillermo's vehicle could not have been "rented" to Town given the fact that Guillermo rather than Maria, the actual owner, signed the COA.
Tinder observed that, while 49 C.F.R. §376.12(a) required that the lease be made between the carrier "and the owner of the equipment," he further noted that Section 376.2(d)(2) of the same regulations defined "owner" broadly to include someone like Guillermo who, without title, had the right to exclusive use of the equipment.
The estate, however, disputed the relevance of Section 376.12(a), contending that the COA was devoid of any indication that Guillermo was acting as anyone else's authorized representative because the COA did not mention Guillermo as signing on behalf of anyone. The fact that it did not, however, according to Tinder, did not mean that the signatories were acting exclusively in their own interests.
Specifically, he noted Illinois case law that recognized that a party may act as an agent on behalf of an undisclosed principal, such that a third party does not know that the agent is contracting on another's behalf. See Kimco Corp. v. Murdoch, Coll & Lillibridge, Inc. 313 Ill. App. 3d 768, 730 N.E.2d 1143 (2000). So, even though Maria held title, Tinder said that it did not follow that Guillermo could not have legitimately been acting on her behalf. In addition, even though an agency relationship is a fact question, where the facts are undisputed, as they were here, the issue could be resolved as a matter of law.
COA as Lease
As for whether the COA was a lease, Tinder said it unquestionably was. Guillermo offered Town use of the truck and his driving services and Town accepted in return for the payment of compensation.
No Public Policy Violation
Tinder also rejected the estate's argument that finding a lease and applying the exclusion would violate public policy. He indicated that the federal motor carrier regulations required carriers to maintain minimum levels of insurance coverage to protect the public from trucking accidents and there was no accusation here that those minimum levels were not complied with. While no amount of money could be adequate to compensate the death of the pickup truck driver, Tinder said consenting parties nevertheless must be able to contract and rely on the agreements they reach. Here the facts indicated that the truck was leased to Town and ignoring the facts and the exclusion would interfere with the parties' expectations, hamper the operation of two facially valid contracts and harm rather than advance public policy.
The court, therefore, affirmed summary judgment in favor of Clarendon.
Key Point
The nondisclosure of a principal in a vehicle rental agreement entered into between an agent for the vehicle's owner and a lessee does not affect the validity of a rental exclusion in a liability policy covering the vehicle.
