Contingent Liability Endorsement in Vehicle Policy
By Don R. Sampen, published, Chicago Daily Law Bulletin [September 16, 2015]
The 7th U.S Circuit Court of Appeals, applying Illinois law, recently held that an insurer is obligated to defend an insured alleged to be vicariously liable for a driver’s negligent operation of a vehicle, even if another entity also may have had vicarious liability and a policy endorsement negated coverage if the vehicle was being operated “on behalf of” someone else.
The insurer in National American Insurance Co. v. Artisan and Truckers Casualty Co., 2015 U.S. App. Lexis 13724 (7th Cir., Aug. 6), was represented by Chilton, Yambert & Porter LLP of Waukegan. SmithAmundsen LLC represented another insurer, National American Insurance Co., seeking recovery against Artisan on subrogation, contribution and other grounds.
In 2010, Viktor Barengolts was involved in a traffic accident while driving a tractor-trailer truck. The truck was owned by his father, Michael Barengolts. The truck displayed placards for Unlimited Carrier at the time of the accident. In fact, however, Michael Barengolts had not signed a lease with Unlimited Carrier for use of the truck until after the accident. Display of the placards thus appears to have been unauthorized.
The underlying claimants brought suit against Viktor and Michael Barengolts and Unlimited Carrier. In different counts, the claimants alleged that Unlimited Carrier or, alternatively, Michael Barengolts was the principal of Viktor Barengolts. In the counts alleging that Michael Barengolts was the principal, the claimants also alleged that Unlimited Carrier “exercised authority and control” over the truck.
Victor and Michael Barengolts tendered to their insurer, Artisan and Truckers Casualty Co., whose policy covered the truck and also listed Viktor and Michael Barengolts as insureds.
Artisan nevertheless denied coverage. It did so on the basis of a contingent liability endorsement (CLE). The endorsement provided that coverage did not apply “when the insured auto is being operated, maintained or used for or on behalf of anyone else.”
In light of the allegations in the complaint, Artisan took the position that the truck was being operated on behalf of Unlimited Carrier, despite the fact that Michael Barengolts was alleged to be the principal of Victor Barengolts in some counts.
Unlimited Carrier’s insurer, National American Insurance Co., provided a defense, and after settling the underlying claim, it brought the instant declaratory action against Artisan seeking recovery of defense and indemnity costs.
On summary judgment, the U.S. District Court found in favor of National and against Artisan. Artisan brought this appeal.
In an opinion by Judge Michael S. Kanne, the 7th Circuit affirmed. He initially determined that the counts of the underlying complaint alleging that Michael Barengolts was the principal of Viktor Barengolts fell within the scope of coverage of the Artisan policy.
Kanne pointed out that, since the lease with Unlimited Carrier was not signed until after the accident, these counts were pleaded consistent with the presumption that the driver of a vehicle is an agent of the vehicle’s owner.
Artisan nonetheless contended that these same counts alleged that Unlimited Carrier “exercised authority and control,” and, moreover, with the placards having been placed on the truck, Unlimited Carrier was ultimately liable under the theory of placard liability.
Artisan, therefore, took the position that under the complaint’s allegations and pursuant to the CLE, it had no duty to defend.
Kanne disagreed. He pointed out that Artisan’s argument may be relevant to the duty to indemnify, but that the duty to defend is broader. He further noted that the purpose of placard liability, as originated under the Interstate Commerce Act, is to allow potential claimants to quickly identify a potential defendant – but that others may also be at fault and liable for the claim.
Moreover, Kanne said, while the underlying complaint alleged that Unlimited Carrier maintained “authority and control” over the truck, the CLE did not negate coverage based on “authority and control.” Rather, it negated coverage when the truck “is being operated, maintained or used on behalf of” an uncovered person.
According to Kanne, liberal construction of the complaint required a construction of the allegations in favor of defending Viktor and Michael Barengolts. The context also showed that these counts were different from other counts expressly alleging vicarious liability against Unlimited Carrier.
Finally, Kanne found that because Artisan had violated its duty to defend, it would be estopped under Illinois law from denying indemnity. It was therefore required to reimburse National for both defense and settlement costs.
The court therefore affirmed in favor of National.
According to this decision, a contingent liability provision in a vehicle liability policy negating coverage where the vehicle is being operated “on behalf of” a non-insured is not necessarily triggered where the non-insured is alleged merely to maintain “authority and control” over the vehicle.