The U.S. District Court for the Northern District of California recently ruled in United Specialty Insurance Co. v. Bani Auto Group Inc. that United Specialty Insurance Co. did not have a duty to indemnify its insureds in connection with litigation brought by the widow of a man killed while driving a car rented to him by the insureds, based on certain exclusions contained in an auto dealer policy issued by United, and awarded reimbursement of settlement funds advanced by United to fund the settlement.

The Policy

In June 2016, United issued an auto dealer policy to a California auto group and certain related companies that operated a used car dealership and a garage. Included as an additional insured under the policy was another related company that organized exotic car tours in which members of the public could drive exotic and luxury cars over California roads.

The insuring provision of the policy required United to “pay all sums an ‘insured’ legally must pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies, caused by an ‘accident’ and resulting from the ownership, maintenance or use of covered ‘autos.’” However, United had “no duty to defend any ‘insured’ against a ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ … to which this insurance does not apply.” The policy was limited by several exclusions and endorsements. One such exclusion, the “leased, rented, or loaned autos” exclusion, stated that the policy did not apply to “any covered ‘auto’” (1) leased to others; (2) rented to others; or (3) loaned to others.

The Lawsuits

In September 2017, David Wright rented a 2010 Ferrari from the insureds to drive it in one of the insureds’ exotic car tours. Tragically, Wright lost control of the vehicle and was killed when it crashed. Wright’s wife and children later brought two actions against various insureds — a wrongful death suit and a survival action — each filed in California state court.

The insureds tendered the defense of both actions to United, which accepted the tender of the defense of the Wright actions, subject to a reservation of rights, including United’s rights to seek reimbursement from the insureds for defense costs and indemnity paid on uncovered claims.

In the course of litigation, United advised the insureds that it intended to make an offer to settle both actions for the $1 million policy limit, which again was subject to the same reservation of rights. With no objection from the insureds, United made the settlement offer, which was accepted by the plaintiffs, and United paid the policy limits on behalf of the insureds.

Believing that coverage was not available under the policy for the Wright actions, United filed suit in the Northern District of California against the insureds, seeking, among other things: (1) a declaration that certain policy provisions precluded coverage of the Wright actions and therefore that United owed no duty to indemnify the insureds in connection with those actions; and (2) reimbursement of the amounts it paid to settle the Wright actions. United then filed a motion for partial summary judgment on those claims.

The Ruling

United argued that it was entitled to summary judgment on its claim for declaratory relief based on the leased, rented, or loaned autos exclusion identified above. The court agreed, finding that while the policy generally covered claims for bodily injury or property damage “caused by an ‘accident’ and resulting from the ownership, maintenance or use of covered ‘autos,’” no such coverage exists where the covered auto was leased, rented, or loaned to others. Because the 2010 Ferrari that Wright crashed was rented to him by the insureds, and the insureds were unable to proffer any plausible construction on the leased, rented, or loaned autos exclusion that would omit the rental Ferrari-related injuries from its scope, the court determined that the Wright actions were precluded from coverage under the policy.

As to United’s claim for reimbursement of amounts paid to settle the Wright actions on behalf of the insureds, the court also granted summary judgment in favor of United. According to the court, an insurer may settle a lawsuit on behalf of its insureds subject to a reservation of rights, and later seek reimbursement for settlement amounts paid on non-covered claims, so long as the insurer satisfies three prerequisites: (1) a timely and express reservation of rights; (2) an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer; and (3) an express offer to the insureds that they may assume their own defense when the insurer and the insureds disagree whether to accept the proposed settlement. The court determined that United had satisfied all of these prerequisites and dismissed all of the insureds’ counterarguments as meritless.