'Omnibus Clause' Doesn't Apply To Rental
January 13, 2009
The 1st District Appellate Court recently held that the "omnibus clause" in an automobile insurance policy -- requiring coverage for persons driving with the per-mission of the insured -- does not require the insurer of a private vehicle to de-fend an action by a car rental company against the insured, who rented a vehicle from the company, and a person to whom the insured gave permission to drive the rented vehicle, for collision damage to the vehicle caused while such other person was driving. State Farm Mutual Automobile Insurance Co. v. Enterprise Leasing Co. of Chicago, 2008 WL 4981357 (1st Dist. Nov. 21, 2008).
The insurer, State Farm, was represented by Querrey & Harrow of Chicago. Much, Shelist, Denenberg, Ament & Rubenstein P.C represented the car rental company, En-terprise.
Constance Taylor rented a Land Rover Discovery from Enterprise in 2003. She paid for collision damage waiver coverage for the vehicle, but she did not list any other driver as authorized to use the vehicle in the rental contract. The CDW pro-vided that it would be voided if the vehicle were operated by a driver not author-ized under the contract.
At the time of the rental, Taylor had automobile insurance with State Farm on a vehicle owned by her, a 1998 Chevrolet Cavalier. No additional insureds or insured vehicles were listed on the policy.
Taylor gave permission to Lesean Doby to drive the rented Discovery, and while driving it, Doby had an accident when she swerved to avoid hitting deer. The Dis-covery incurred more damage than it was valued, and Enterprise subsequently made payment demands of Taylor and Doby for $28,430, which was an amount equal to the value of the vehicle plus towing costs.
After receiving no payment, Enterprise contacted State Farm advising it that Tay-lor had voided the CDW and was responsible for all damages for the claim. State Farm then sent Taylor a letter denying coverage because Taylor was not driving or occupying the rental car at the time of the accident.
In 2004, Enterprise filed suit against Taylor and Doby, seeking damages for breach of contract against Taylor and for negligence and property damage against Doby. Both defendants failed to appear, and default orders were entered against them. In 2005, Enterprise wrote to State Farm to advise it of Taylor's default and to demand that it defend her in the action.
In 2006, State Farm appeared in the underlying action to represent Taylor pursuant to a reservation of rights. Shortly thereafter, State Farm filed the instant action seeking a determination that it owed no coverage to Taylor or Doby. Enterprise filed a counterclaim asking for a declaration that coverage existed.
State Farm moved for summary judgment, which the trial court allowed in July 2007, and Enterprise took this appeal.
In an opinion by Justice Margaret Stanton McBride, the 1st District affirmed. She initially addressed Enterprise's argument that State Farm had a duty to provide coverage under the omnibus clause of the policy issued to Taylor. An omnibus clause is one which extends liability coverage to all persons who use the named insured's vehicle with his or her permission.
For the exact terms of the omnibus clause, Enterprise relied on language in the Illinois Safety and Family Financial Responsibility Law, which mandates the inclu-sion of such a clause in automobile insurance policies. McBride acknowledged that the statute itself may be read to be a part of every automobile insurance policy.
Section 7-601(a) of the law, 625 ILCS 5/7-601(a), requires that all persons oper-ating an automobile have liability insurance, and section 7-317(b), in turn, lists the specific requirements for the insurance, including the omnibus clause. It re-quires that each policy, under 7-317(b)(1), designate the motor vehicles with re-spect to which the coverage is issued; under 7-317(b)(2), insure the named insured and any other person "using or responsible for the use of" the designated vehicle with permission of the named insured; and, under 7- 317(b)(3), insure the named in-sured, and all persons using by permission of the named insured, for the use of any motor vehicle owned by the named insured.
Enterprise relied on State Farm Mutual Automobile Ins. Co. v. Universal Underwrit-ers Group, 182 Ill.2d 240 (1998), in support of its position that State Farm had a coverage obligation. In that case the Supreme Court determined that the omnibus clause requirement applied to a car dealer's liability policy, thereby providing coverage for test-drivers. Emphasizing the language "using or responsible for the use of," Enterprise argued that the same logic should apply to rental vehicles.
McBride responded that Enterprise's argument ignored the rest of the statute. She observed that the "using or responsible for the use of" language in section 7-317(b)(2) refers to the use of "such" vehicle which was earlier described in sec-tion 7-317(b)(1) as having been designated for coverage, and not to all vehicles being used with permission. In addition, the omnibus clause in section 7-317(b)(3) is limited to vehicles "owned" by the named insured. The vehicle in this case was not owned by Taylor.
McBride further noted that the Financial Responsibility Law does not even apply to non-owned rental vehicles, because the legislature designated separate provisions to apply. She cited State Farm Mutual Automobile Ins. Co. v. Hertz Claim Management Corp., 338 Ill.App.3d 712 (2003), for a description of some of the applicable pro-visions, which include a requirement that owners of for-rent vehicles provide in-creased minimum liability coverage for all customers. See, e.g., 625 ILCS 5/9-105.
She therefore concluded that State Farm had no duty to defend or indemnify Taylor or Doby for the damage to the Discovery.
Enterprise further argued that State Farm should be estopped from denying coverage because it did not defend Doby and did not issue a clear reservation of rights with respect to its defense of Taylor. McBride observed that State Farm did, in fact, provide a defense under a reservation of rights and, in addition, filed the instant declaratory judgment action.
Even if these actions were untimely, McBride said that the estoppel doctrine still does not apply, because it only applies when an insurer has breached its duty to defend. It has no application if the insurer has no duty to defend, as was the case here.
The court therefore affirmed summary judgment in favor of State Farm.
