Lease Terms Leaves Defendant Free From Subrogation, Contribution Claims

By Don R. Sampen, published, Chicago Daily Law Bulletin [December 21, 2016]

The 1st District Appellate Court recently held that a commercial auto insurer was not entitled to obtain reimbursement from a self-insured municipal entity, under either a subrogation or contribution theory, due to the terms of a lease between the entity and the insured.

The insurer in Philadelphia Indemnity Insurance Co. v. Pace Suburban Bus Service, 2016 IL App (1st) 151659 (Nov. 17), was represented by Hinshaw & Culbertson LLP. Johnson & Bell Ltd. represented the municipal entity, Pace, a division of the Regional Transportation Authority.

Pace entered into a contract with Countryside Association for People with Disabilities to furnish vehicles for transporting disabled individuals. Under the leasing agreement, Countryside was to furnish its own drivers.

Pace, however, agreed to provide “commercial auto liability coverage” for any claims involving the vehicles. Excluded from coverage under the lease agreement was coverage for “willful and wanton, reckless or intentional conduct” by Countryside employees.

The leasing agreement also provided that Pace’s self-insured retention and any excess insurance it purchased would be primary to any coverage separately acquired by Countryside.

Countryside acquired separate coverage through Philadelphia. Its policy provided, among other things, that for covered autos not owned by Countryside — which included the Pace vehicles — the Philadelphia coverage would be excess over any other collectable insurance.

In 2013, a driver for Countryside mistakenly left a disabled passenger in one of the Pace vehicles for more than five hours when the temperature outside reached 90 degrees. The passenger survived but sustained serious injuries. The driver eventually pleaded guilty to a Class 4 felony for reckless conduct.

The passenger’s family threatened litigation, and Philadelphia settled on behalf of Countryside for $1.5 million. Pace declined to participate in the settlement, citing the willful-reckless exclusion for coverage as provided for in the lease agreement. Philadelphia then brought suit against Pace based on equitable subrogation, equitable contribution, unjust enrichment and an assignment from Countryside of all rights against Pace.

During the course of the litigation, Pace disclosed that it was self-insured for up to $3 million, and that 70 percent of its risk program funding came through sales tax funding. Pace moved to dismiss pursuant to Section 2-619 of the Code of Civil Procedure, which motion the trial court allowed. The court held that it would be against public policy to require Pace to pay from public funds. Philadelphia took this appeal.

Subrogation

In an opinion by Justice Margaret Stanton McBride, the 1st District affirmed. She began her analysis by distinguishing equitable subrogation from equitable contribution. The former places the entire burden for a loss on the party ultimately liable or responsible for the loss and by whom the liability should have been discharged.

The latter, as among co-insurers, permits one insurer who has paid the entire loss or greater than its share to be reimbursed from other insurers who are also liable for the same loss.

Philadelphia’s initial argument on appeal appeared to be that the trial court erred in finding that public policy allowed Pace to avoid its contractual obligations. While McBride expressed support for the trial court’s decision, she said that the equitable subrogation argument was more appropriately decided on the basis for the lease exclusion for reckless conduct.

As to that point, Philadelphia argued that a draft complaint tendered by the injured rider’s attorney contained allegations of negligence, not merely recklessness. McBride rejected that point in part based on the fact that Philadelphia had settled the claim before the complaint was ever filed. So the duty to defend, to which the complaint’s allegations would have been relevant, never became an issue.

In addition, making note of the driver’s criminal conviction, McBride said that the facts as presented to the appellate court could lead only to the conclusion that the driver behaved in a reckless fashion. Since equitable subrogation is used to place the entire burden for a loss on the party responsible, Philadelphia could not rely on various allegations of negligence to contend that Pace was the sole responsible party.

Contribution

She then turned to the claim based on equitable contribution. That claim includes among its required elements proof of coverage for identical parties, insurable interests and risks. McBride said that the claim asserted by Philadelphia failed because the leasing agreement, even if it were considered a policy of insurance, did not cover recklessness. The Philadelphia policy, by contrast, contained no equivalent exclusion. So the leasing agreement and Philadelphia policy did not cover the same risks.

Finally, she rejected the cause of action for unjust enrichment on the ground that Pace had not unjustly retained a benefit. And she rejected the cause of action based on the assignment from Countryside because Philadelphia could only have been assigned rights possessed by Countryside, and Countryside’s contract with Pace provided no basis for recovery.

The court, therefore, affirmed the dismissal in favor of Pace.

Key Points

• An insurer’s claim for equitable subrogation based on the defendant’s contract obligations to the insured fails where, by the terms of the contract, the defendant is not liable for the claim asserted.
• An insurer’s claim for equitable contribution based on the defendant’s contract obligation to the insured to provide insurance coverage fails where the coverage contemplated under the contract involves a risk different from the coverage provided by the claimant insurer.