‘Initial Permission Rule’ Applies in Rental Car Context, Judge Says

By Don R. Sampen, published, Chicago Daily Law Bulletin, October 15, 2024

The U.S. District Court for the Central District of Illinois recently held that the “initial permission rule” would apply to determine if the user of a rental car, other than the rentee, is an additional insured under the policy covering the rental car company’s vehicles.

The case is National Interstate Insurance Co. v. Moore, No. 22-cv-3188, 2024 U.S. Dist. Lexis 160518 (Sept. 6). The insurer, National, was represented by Canty Novy Bertkau Gordon LLC of Chicago. Law Offices of Frederic W. Nessler and Associates of Springfield represented the underlying claimants. Wood Smith Henning & Berman LLP of Chicago represented US Choice Auto Rental System, which held the insurance policy.

Urgent Rent-A-Car was an additional named insured under the National policy issued to US Choice. In 2020, Urgent rented a car to Tatiyana Rambo for a week. After she drove the vehicle to her residence where she lived with Ladeja Frazier, Frazier took the car to pick up relatives.

Police began following Frazier and signaled for her to stop. Instead, Frazier accelerated, failed to stop at stop signs, and eventually became involved in an accident with another car, causing bodily injuries.

Representatives of the injured persons brought suit against Urgent, Rambo and Frazier. They all defaulted, with the court holding that they would be bound by any final order in this declaratory judgment action brought by National against the claimants and others.

National filed a motion for summary judgment in the declaratory action seeking a determination that it had no coverage obligations. Its policy recognized that rentees of vehicles from Urgent would qualify as insureds, and the court proceeded on the assumption that Rambo had potential primary coverage.

The issue thus became whether Frazier, who was not a rentee, was an insured. National argued she was not because users who were not rentees were not identified in the policy as insureds. The underlying claimant representatives, however, argued that Frazier should qualify as an insured because she was a permitted user.

Analysis

In an opinion by Judge Sue E. Myerscough, the district court held that Frazier could qualify as an insured if the facts showed she used the rental car with express or implied permission from Rambo.

Acknowledging that Frazier did not qualify as an insured by the policy language, Myerscough nonetheless looked to determine whether Illinois public policy and Illinois law required that “an omnibus permissive user clause” had to be read into National’s policy.

She found relevant section 9-101 of the Illinois Vehicle Code, 625 ILCS 5/9-101, which requires car rental agencies to provide proof of financial responsibility for their vehicles. In compliance with the statute, the National policy provided coverage for the vehicles that Urgent, as an additional named insured, rented to its customers. Myerscough then turned to section 9-105, which mandates that the insurance must cover any customer or “any person operating the motor vehicle with the customer’s express or implied consent.”

Myerscough construed Maryland Casualty Co. v. Iowa National Mutual Insurance Co., 54 Ill. 2d 333 (1973), as articulating the “initial permission rule.” That rule, according to the judge, applies to insurance policies containing an “omnibus clause,” such as is provided for by section 9-105. The rule dictates that once the named insured on such a policy gives permission to another to use the vehicle, any subsequent driver is covered under the policy as long as that driver does not engage in theft or tortious conversion to gain access to the automobile.

Hence, whether the initial permission rule would apply to make Frazier an insured turned on whether she engaged in theft or conversion to obtain the car. That remained an open fact question, for Rambo had testified that she did not give permission to Frazier.

Myerscough went on to hold that language in Rambo’s rental agreement with Urgent that restricted use of the vehicle to the person renting it could not circumvent application of the initial permission rule, which was written into law and part of public policy. She observed, however, that if a car rental agency elects to give proof of financial responsibility through a certificate of self-insurance, rather than an insurance policy, then section 9-105 would not apply.

National raised an exclusion under its policy applicable to, among other things, a “deliberate crime or deliberate illegal act of any kind.” National contended the exclusion applied because Frazier was fleeing from the police at the time of the accident.

Myerscough responded that these types of intentional-act exclusions under Illinois law generally required not only an intentional but also a specific intent to harm a third party. While Frazier had pleaded guilty to several crimes, none of them involved an intent to harm, and therefore, wrote Myerscough, a fact issue existed whether the exclusion would apply.

For these reasons the court denied National’s motion for summary judgment.

Key Point

Under Illinois law, when a car rental agency purchases insurance coverage to fulfill its financial responsibility obligation under the Illinois Insurance Code, the initial permission rule may apply such that any person using the vehicle with the express or implied permission of the rentee will be regarded as an insured.