Insurance Law

Automobile Liability Insurance – New Appleman on Insurance Law Library Edition, Chapter 63

By Lane Finch, Member, Hand Arendall LLC

"The automobile is so much a part of American life that there are few activities in which the 'use of an automobile' does not play a part somewhere in the chain of events."[1]  In 2009 there were more than 5.5 million police-reported motor vehicle crashes in the United States.  Over 1.5 million of those resulted in injury and almost 31,000 accidents resulted in death, according to the National Highway Transportation Safety Administration.  A minor "fender bender" can easily result in a repair bill exceeding $1,000.  The legal fees to defend a lawsuit arising from an automobile accident would be financially crippling to all but the wealthiest Americans.  Those few facts point out the importance of automobile liability insurance.  This chapter will discuss the liability coverage extended under a typical automobile liability policy as well as the various limits on that coverage.

Section 63.01 notes that automobile insurance policies provide various coverages. The typical automobile policy protects against financial loss in the event of an accident by reimbursing the insured for property damage, medical expenses, and resulting liability to third parties.  Not only is such coverage prudent, almost all states require an automobile owner to have liability insurance.  These laws are known "financial responsibility laws."  For example, the California Compulsory Financial Responsibility Law requires every driver and every owner of a motor vehicle to maintain financial responsibility (e.g., liability coverage) at all times.  That requirement can be met by a motor vehicle liability insurance policy, depositing $35,000 with the California Department of Motor Vehicles ("DMV"), obtaining a surety bond for $35,000, or obtaining a DMV-issued self-insurance certificate.  Insurance is the most common way to meet the financial responsibility requirements while also protecting the insured's assets.

Section 63.02 addresses indemnity and defense coverage provided by automobile liability policies. Automobile liability insurance protects against claims for bodily injury and property damage that arise out of the use, maintenance, or ownership of an automobile.  Under the insurance contract, the insurer agrees to defend and indemnify the insured with regard to any lawsuit asserting a covered claim.

Section 63.02[1] analyzes coverage for bodily injury. The "bodily injury" covered is physical harm to the body, sickness, disease, and death.  Most policies also cover the related claims for emotional distress and mental anguish.  However, there are some limitations on coverage for non-physical injury, making it important to analyze the policy language as well as applicable state law.  "Bodily injury" coverage also protects the insured against derivative claims, such as claims for loss of consortium and loss of services.

Section 63.02[2] explains that property damage liability coverage protects against claims for property damage arising out of the maintenance, use, or ownership of an automobile.  The most typical covered claims are repair claims and loss of use claims.

Section 63.02[3] analyzes coverage for other costs, including litigation-related costs. In addition to the indemnity coverage for bodily injury and property damage, the automobile policy requires the insurer to defend the insured against any lawsuit arising from a covered automobile accident.  In essence, an insurer will hire defense counsel to represent the insured in all phases of the litigation and it will pay for all related defense costs.  In the event there is a coverage dispute, the insurer may defend the insured under what is called a "reservation of rights."  In that situation, the insurer reserves its right to withdraw the defense or deny indemnity as to some or all of the claims.  In many states and under many circumstances, the insured is entitled to independent counsel, paid for by the insurer, where there is such a coverage dispute.

The insurer is not relieved of its duty to defend until it legitimately exhausts the policy limits through settlement or payment of a judgment.  Until then, the insurer is responsible for all defense costs and those defense costs do not affect the liability limits available to settle or pay indemnity claims.  Further, covered defense costs include things such as costs related to the appeal of covered claims, interest on a covered judgment until paid, and certain other expenses incurred by the insured in cooperating with the insurer in defense of the claim.

The coverage under an automobile liability policy is not without limits.  Section 63.03 points out that first of all, it is limited to covered vehicles.  Section 63.03[1][a] and [b] explain that typically that means the insured's personal automobile, a replacement automobile, a substitute automobile, and a non-owned automobile, in certain circumstances.  For example, the policy will cover liability arising from the use of a substitute vehicle when the insured's vehicle is out of service for any reason.  The policy will also cover a replacement automobile, for a limited period of time, when the insured sells one automobile and buys another.

While non-owned automobiles are typically covered, there are restrictions on that coverage.  Section 63.03[1][c] discusses those restrictions. For example, most policies do not cover a non-owned automobile owned by a resident relative of the insured or one which is available or furnished to the insured for his or her regular use.

In addition to personal automobile liability coverage, various commercial policies, or fleet coverage, is available. (See Section 63.03[2].) Those policies act, by and large, like the personal automobile policy providing indemnity and defense for covered accidents.  One key difference is there may be a schedule of covered and/or non-covered vehicles as well as a schedule of covered and/or non-covered drivers.  Additionally, federal and state law may mandate additional coverage endorsements to insure the motoring public against any financial judgment recovered against an interstate motor carrier for liability resulting from the negligent operation, maintenance, or use of a motor vehicle subject to certain federal or state laws.

Section 63.04 explores issues concerning who is covered by automobile liability insurance.  Financial responsibility laws require an "omnibus provision" in the policy.  That provision extends coverage to persons in addition to the named insured.  If such a clause is not expressly included in the policy, it will be inserted as a matter of law.  The typical omnibus clause encompasses the named insured's spouse, if a resident of the insured's household, anyone else residing in the named insured's household, and permissive users of the insured's vehicle.  Surprisingly, determinations about residency and permission are not as straightforward as one might expect.  In looking at those issues the courts generally err in favor of coverage in light of public policy favoring coverage protecting innocent motorists embodied in the financial responsibility laws.  For example, in determining permissive use some states have adopted the colorfully named "hell or high water rule."  That rule extends coverage as long as the driver had some initial permission to use the vehicle.  Thus, the scope of permission, once granted, is virtually unlimited, short of conversion or theft of the vehicle.

One threshold question is did the bodily injury or property damage arise out of the ownership, maintenance, or use of an insured automobile?  Section 63.05 addresses what activities are covered by automobile liability policies.  The phrase "ownership, maintenance, or use" has spawned a significant amount of coverage litigation because of the ubiquity of the automobile.  Generally, the court will look to whether the accident arose out the normal use of an automobile and whether the automobile, itself, produced the injury.  That is not to say that coverage is limited to accidents arising out of the insured's driving.  Coverage is normally extended to injuries occurring while entering or exiting and loading or unloading a covered vehicle.

Most coverage litigation relating to automobile liability policies involves the policy exclusions.  Section 63.06 delves into the nature and scope of numerous typical exclusions. An automobile liability policy does not usually cover bodily injury or property damage where the insured intended that harm.  The policy covers damage suffered by third parties, and typically does not extend to the insured's own property, property being transported by the insured, or property over which the insured has charge, such as a rental vehicle.  Bodily injury to an insured's employee is typically excluded but not injury to the insured's household employees.

Coverage is also barred in some instances for the business use of the insured's automobile.  However, public policy often precludes the application of the business use exclusion.  A subset of the business use exclusion is an exclusion for liability arising from the use of a covered automobile by someone in the business of selling, servicing, repairing, parking, or storing automobiles.  The so-called automobile business exclusion is widely upheld and broadly applied to include activities ranging from traditional repair and service activities to activities at the car wash.  Another exclusion similar to the business use exclusion is the exclusion of coverage for livery or "for hire" services.  Thus, whenever an otherwise insured automobile is used to carry passengers or property for hire, coverage is excluded.  However, this exclusion typically does not apply to share-the-expense carpools.

The flip side of permissive user coverage is the exclusion for liability arising out the use of the vehicle without permission.  While "permission" is usually liberally found and broadly applied, where there is no permission, there is no coverage.  Where the use is permissive, the policy may have a "step-down provision" which, in essence, provides that where coverage otherwise exceeds the minimum limits required by financial responsibility laws, only the minimum limits apply to a loss involving a permissive user other than the insured or a relative of the insured.

The problem of underage drivers is usually taking care of with a youthful driver limitation or exclusion.  Such limits or exclusions are enforceable as the insurer has the right to restrict coverage in light of the greater risks associated with youthful drivers.

Another "increased risk" exclusion is the exclusion for racing or similar activities.  However, the courts do not uniformly define what constitutes "racing" for the purpose of this type of exclusions.  Sometimes, these exclusions are limited to formal racing events and, other times, the exclusion applies even to an impromptu race on a public roadway.

Automobile liability policies typically have a criminal acts exclusion, but that is normally limited to felony activity and any attempt to flee from, evade, or avoid arrest or detection by the police.  The applicability of the criminal act exclusion usually turns on the policy language and the exclusion will be conservatively applied in a manner consistent with the public policy of compensating the innocent victims of automobile accidents.

Then there is the issue of excluded vehicles.  The typical automobile policy does not cover off-road and farm type vehicles, vehicles with less than four wheels, golf carts, uninsured vehicles owned by family members or available for the insured's regular use, or leased vehicles.

Section 63.07 observes that automobile liability policies do not exclude coverage for driving while intoxicated per se.  Illegal and dangerous, yes; barred from coverage, no.  An intoxication exclusion is invalid under most, or all, financial responsibility laws.  However, where the intoxication leads to the conviction of a felony, the criminal act exclusion may apply.  The invalidity of an intoxication exclusion will not save coverage where the criminal exclusion act applies.

The typical auto policy limits coverage to accidents occurring in the United States, its possessions and territories, and Canada.  Use outside of the permitted territory will result in no coverage.  Use outside of the insured's home state will not bar coverage.  However, many auto policies have an out-of-state coverage and conformity clause which, in essence, amends the policy to provide coverage required by the law of the state where the accident occurs.  Thus, if the insured is involved in an out-of-state accident, the limits of liability will conform to the financial responsibility laws of the state where the accident occurred, regardless of whether those limits are higher or lower than the limits stated in the policy. (See Sections 63.08 and 63.09.)

As stated initially, the duty to defend is, perhaps, the most valuable coverage extended under the automobile liability policy.  Sections 63.10 and 63.11 analyze the duty to defend.  That duty is triggered whenever there is potential coverage.  Determining the duty to defend for an auto policy follows the general rules for making such a determination.  Some states apply a "four corners" test considering only the complaint to determine if the duty to defend is triggered.  Other states apply an "eight corners" test, looking at the complaint and the policy terms.  Still other states, look beyond the pleadings and consider evidence that would be admissible at trial to make the coverage determination.

In some instances, the insurer will defend an action where the insured is at risk for an excess-of-limits verdict.  In that situation, the insurer has an implied duty to settle, where rational, to protect the insured from any excessive risk of liability above the policy limits.  Where there are multiple claimants following an accident, there is often the danger of insufficient limits.  In that circumstance, the insurer must demonstrate a concern for protecting its insured's interest over its own.  In trying to settle where there are multiple claims and insufficient limits, the insurer is generally allowed to enter into reasonable settlements with some claimants, even if that depletes the limits of coverage available for other claimants.  Some states allow the insurer to follow a "first to settle" rule, some states encourage a "pro rata distribution" and other states apply a "first to judgment" rule, which gives priority to the first claimant to obtain a judgment.  The first to settle rule is the most rational and most consistent with policy considerations in that it encourages settlement rather than protracted litigation.

Whenever the insurer hires defense counsel to represent the insured, it creates a "tripartite relationship," which is a three-way relationship between the insurer, the insured, and the retained defense attorney (see Section 63.13).  Generally, that does not cause any ethical issues.  However, when the insurer is defending under a reservation of rights or some other conflict arises, it is incumbent upon defense counsel to recognize that his or her "client" is the insured and not the carrier.  In certain situations, such a conflict obligates the insurer to allow the insured to select independent counsel, to be paid for by the carrier.

Section 63.13 examines the scope of the insurer's duty to indemnify.  As is often said, the duty to defend is broader than the duty to indemnify.  That means that while the insurer may defend a lawsuit, it will not be required to indemnify the insured as to non-covered claims.  However, as long as the insured is legally responsibility for covered bodily injury or property damage, the insurer will be required to indemnify the insured up to the policy limits.  The indemnity requirement extends to both economic damages, meaning those damages compensating the claimant for actual economic or pecuniary loss, and to non-economic damages, such as pain and suffering, permanent impairment, etc.

The insured has certain duties under the policy.  Section 63.14 surveys the insured's duties after an accident. The insured's main duties are to notify the insurer of the claim and to cooperate with the insurer during the pendency of the claim.  The insured's breach of those duties may jeopardize coverage.  However, the insurer is generally required to prove a material breach by the insured of his or her duties which results in actual prejudice to the carrier.  Short of that, the insurer generally cannot deny coverage because of the insured's actions or inactions following an accident.

The automobile liability policy is always subject to monetary limitations.  Section 63.16 explores issues surrounding the principle that the insurer's indemnity obligation is limited by the limits of liability stated in the policy.  Those limits are typically expressed as "per person" and "per accident" limits.  Thus, a claim by any one person (which includes any derivative claim) is limited to the "per person" amount.  Where there are multiple claims, the insurance company is not required to indemnify above the "per accident" limit.  On occasion, determining how many "accidents" have occurred is problematic.  The fact that multiple vehicles are insured under the policy does not affect the liability of limits available to respond to third party liability claims.  However, if there are multiple collisions, that may trigger multiple limits.  Determining the number of occurrences is generally based on the time space continuum between the collisions and the insured driver's level of control over the vehicle."[2]  When collisions are nearly simultaneous or separated only by a very short period of time during which time the insured does not regain control over his or her vehicle, the court will normally find just one accident.  On the other hand, if a series of collisions are separated by a period of time during which the insured either maintains or regains control over his or her vehicle, the court is likely to find multiple occurrences, triggering multiple "per accident" limits.

In addition to the multi-vehicle, multi-limit question, there occasionally arises a question about which insurer is responsible if there are multiple policies covering the driver and the vehicle.  (See Section 63.17.)  The policy will likely have an "other insurance clause" to address this.  Not surprisingly, the "other insurance" is also likely to have an "other insurance clause."  When there are such conflicting clauses, the courts are split on which insurer will pay and how the coverage will be prorated.  The most logical approach was recently stated by the Kentucky Supreme Court which applied a very succinct rule:  Coverage for the vehicle is deemed the primary insurer and the insurerinsuring the driver is deemed the excess carrier.

There is often the possibility of bad faith on the part of the insurer because of the ubiquity of the automobile in American culture and the many possible combinations of applicable coverages and exclusions.  That is the subject of Section 63.18.  The generally applicable law on bad faith also applies to automobile liability policies.  Thus, wherever the insurer has a contractual obligation to pay under the policy and lacks a reasonable basis for its denial of the claim, it is subject to a claim of bad faith. Similarly, where the insurer is grossly negligent in failing to settle a third-party liability claim against the insured, it may be found to have acted in bad faith.  And, in some jurisdictions, where the insurer is defending under a reservation of rights or non-waiver agreement, it may have an enhanced duty to defend.  In those few states recognizing an enhanced duty to defend, a carrier's obligations include the duty to thoroughly investigate the cause of the accident and the nature and severity and claimant's injuries, retain competent defense counsel, make sure that the insured is treated as defense counsel's sole client, keep the insured informed of all relevant developments and the progress of the lawsuit (including all settlement demands and offers), and to refrain from taking any action motivated by a greater concern for the carrier's own interest than the interest of the insured.

Finally, the other principles generally applicable to determining coverage also apply to determining coverage under an automobile policy.  Under those principles, the most important place to start when assessing coverage for liability arising out of an automobile accident is the policy itself.  Except where the automobile liability policy conflicts with financial responsibility laws or other public policy considerations, it is the policy language that controls and determines the rights and responsibilities of the insurer and the insured.

[1] CA-Truck Ins. Exch. v. Webb, 63 Cal. Rptr. 791, 794 (Cal. Ct. App. 1967)

[2] KS-Am. Family Mut. Ins. Co. v. Wilkins, 179 P.3d 1104, 1110 (Kan. 2008).

Lane Finch has advised on insurance coverage, defended bad faith claims, and litigated first-party and third-party insurance claims in Alabama and California for almost 25 years.  He is a member of Hand Arendall LLC in Birmingham, Alabama. Mr. Finch earned a J.D. at the University of California, Hastings College of Law.  He is active in DRI's Insurance Law Committee as a member of various steering committees, past chair of the Insurance Coverage and Claims Institute, Regional Editor for DRI's Bad Faith Compendium, and as a frequent speaker and author on insurance law.  Mr. Finch was an adjunct professor at the University of Alabama at Birmingham (School of Business) and was a visiting professor at Anshan Normal University in Anshan, People's Republic of China, where he taught American Business Law and Intellectual Property Rights.  The author wishes to thank his associate, Kelly Thrasher Fox, for her invaluable assistance.

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