The California Supreme Court has held that in the context of a rental car transaction, an excess auto liability insurer satisfies its duty to investigate the insurability of an insured by inspecting the insured’s facially valid driver’s license and verifying the insured’s signature. Therefore, if the insured misrepresents that he has a valid license, the excess insurer can rely on that misrepresentation as a basis for avoiding liability to third parties injured by the insured. ( Philadelphia Indemnity Insurance Company v. Montes-Harris (2006) 40 Cal.4th 151)
Facts
Alric Burke (Burke) lived in Arizona. In approximately April 2001, Arizona authorities suspended his driver’s license and driving privileges.
Two months later, in June 2001, Burke rented a car in California from Budget Rent-A-Car (Budget). Burke showed Budget’s rental agent what appeared to be a valid Arizona driver’s license. Budget’s rental agent photocopied Burke’s license and had Burke sign the rental agreement.
At the time of the rental transaction, Budget was the named insured on a master excess liability policy issued by Philadelphia Indemnity Insurance Company (Philadelphia). The Philadelphia excess policy provided limits of $1 million in excess of the minimum statutory limits of $15,000 per person and $30,000 per occurrence for bodily injury. However, the policy excluded coverage for injuries arising out of the use of a rental car “obtained through fraud or misrepresentation.” Budget had authority to enroll its customers as additional insureds under the policy if the customers so opted, without submitting a written application to Philadelphia.
After inspecting Burke’s license and verifying his signature as required by statute, Budget’s rental agent concluded that Burke was qualified to rent a car. Thus, Budget’s rental agent, acting as Philadelphia’s agent for the limited purpose of offering and selling excess liability insurance, offered Burke the option of buying such insurance. Burke accepted the offer and purchased the excess insurance.
A few days after renting the car, Burke was involved in a car accident in California that injured numerous people (the claimants). The claimants filed a state court action against Budget and Burke to recover damages arising from the accident.
Philadelphia filed a federal court action seeking a judgment that it had no liability for any damages in the underlying personal injury action. The district court ruled that (1) Burke made “at least a negligent misrepresentation” to Budget that he had a valid driver’s license, and (2) Philadelphia’s excess policy excluded coverage for rentals obtained through misrepresentation. The district court thus ruled that Philadelphia had no liability for damages arising from the accident.
The claimants appealed to the Ninth Circuit Court of Appeals. The claimants argued that under Barrera v. State Farm Mutual Automobile Ins. Co. (1969) 71 Cal.2d 659, an auto liability insurer has a duty to conduct a reasonable investigation of the insurability of the insured within a reasonable time of issuance of the policy. The claimants argued that if the insurer breaches its duty under Barrera to investigate insurability, the insurer cannot rely on the insured’s misrepresentations in procuring the policy as a basis for avoiding liability to third parties who are injured by the insured.
While the appeal was pending before the Ninth Circuit, the Ninth Circuit requested that the California Supreme Court address whether an auto insurer’s duty to investigate insurability applies to an excess insurer in the context of a rental car transaction. The Supreme Court agreed to address that question.
Holding
The Supreme Court concluded that where the sale of excess liability insurance in a rental car transaction occurs after the customer presents a facially valid driver’s license and after the license inspection and signature verification requirements of Vehicle Code section 14608 have been met, the excess insurer has no obligation under Barrera to conduct a further inquiry regarding the customer’s driver’s license. The Supreme Court held that in such a situation, if the insurer acts promptly upon discovering that the customer’s driver’s license was in fact suspended, then the excess insurer does not forfeit any right to rely on the customer’s presentation of the invalid license as a basis for avoiding liability to third persons under the excess policy.
Comment
The Supreme Court avoided deciding whether the Barrera duty to investigate insurability generally applies, or does not apply, to all excess automobile liability insurers. Rather, the court assumed for purposes of discussion that the Barrera duty applies to excess insurers, but then concluded that Philadelphia had not breached that duty. Although the question of whether an insurer has conducted a timely and reasonable investigation of insurability is generally a question of fact, the court concluded that here it was a question of law.