Friday, December 8, 2006
Rental Car Agent Need Not Question Facially Valid License—S.C.
By Tina Bay, Staff Writer
Before selling excess liability policies in rental car transactions, insurance agents who have inspected a customer’s driver’s license and verified his or her signature need not investigate the actual status of the license if it appears valid, the Supreme Court ruled yesterday.
The unanimous ruling was issued in response to a request by the U.S. Court of Appeals for the Ninth Circuit, which sought the high court’s input before deciding an appeal by three victims of a 2001 car accident in Marina Del Rey.
Blanca Montes-Harris and her two children were injured when a rental car, driven by Arizona resident Alric Burke at a high rate of speed, caused a three-car collision including her car. Among the alleged injuries were serious head trauma suffered by the younger child and soft tissue injuries and emotional distress suffered by the mother.
In addition to occupants of the other two cars, several pedestrians were also injured in the accident.
Burke had rented the vehicle from Budget Rent-A-Car, which sold him an excess liability insurance policy issued by Philadelphia Indemnity Insurance Company. The policy provided $1 million in third party liability coverage, over the statutory minimum of $15,000 per person and $30,000 to cover bodily injury.
The rental car agent had found Burke qualified to rent the car after inspecting his license—which appeared valid on its face—and verifying his signature. In fact, however, Burke’s license and driving privileges had been suspended by Arizona two months earlier.
Montes-Harris, individually and on her children’s behalf, sued Burke and Budget—whose liability was limited to $30,000 by statute—in Los Angeles Superior Court.
Before the plaintiffs could sue Philadelphia for additional damages pursuant to the $1 million excess liability policy Burke purchased through the Budget agent, the insurance company sought a declaratory judgment in federal court that it had no liability for damages. An exclusion in the policy stated that coverage was inapplicable to rental vehicles “obtained through fraud or misrepresentation,” Philadelphia argued.
Following a bench trial, U.S. District Judge Ronald Lew of the Central District of California declared Philadelphia free of liability because Burke had obtained his rental car from Budget based on “at least a negligent misrepresentation” about the validity of his driver’s license.
Citing the California Supreme Court’s ruling in Barrera v. State Farm Mutual Automobile Insurance Company (1969) 71 Cal.2d 659, the plaintiffs filed an application for relief, which Lew denied.
In Barrera, the court held that a primary insurer has the duty to reasonably and timely investigate the insurability of its insured, and cannot avoid liability based on a misrepresentation that it failed to discover through investigation.
Duty to Investigate
Before ruling on Lew’s decision, the Ninth Circuit asked the high court whether the Barerra duty extended to an excess insurer in the context of rental car transactions.
The court declined to decide whether the duty applied generally to all excess automobile liability insurers, instead narrowly ruling on the facts of Burke’s case: as long as an insurer fulfills its license inspection and signature verification duties under Vehicle Code Sec. 14608(b), it may rely on an insured’s misrepresentation, the justices said.
Writing for the court, Justice Marvin Baxter said by complying with Sec. 14608(b), an excess insurer “conducts its business in a manner that is fully consistent with what the Legislature views as a ‘reasonable effort or inquiry to determine whether the prospective driver possesses a valid driver’s license’ in the rental car context.”
The justice noted:
“Although the claimants raised the possibility that rental companies, as agents for excess insurers, could be equipped to perform license checks with the DMV, they acknowledged that allowing private companies access to DMV records may raise grave concerns about the privacy rights of rental customers, and also may cause congestion of DMV’s computer systems and delay for rental car companies and their customers.”
Moreover, the jurist said, requiring rental car agents to ask customers whether their driver’s licenses have been suspended or revoked may be ineffective where a customer is unaware that suspension or revocation has occurred.
Bruce David Abel, who argued the case for Montes-Harris, said the decision left open an issue that legislators ought to address.
“The court did not actually decide whether the Barrera rule would apply to excess liability insurance carriers in all contexts, but… indicates that this is something the legislature should be looking at, to determine whether an excess liability insurer in a rental car context should conduct an investigation beyond that which is required by statute of the rental car company,” Abel said.
Abel added that the court’s decision did not necessarily sound the death knell for his clients’ case, since the Ninth Circuit said only that the state high court’s ruling “might,” not “would,” affect the appeal’s outcome.
Additionally, Baxter noted in his opinion that “other legal or equitable principles might or might not preclude enforcement of the exclusion clause in Philadelphia’s policy.”
Counsel for the insurance company could not be reached.
The case is Philadelphia Indemnity Insurance Company v. Montes-Harris, 06 S.O.S. 5956.
Copyright 2006, Metropolitan News Company