BUSINESS EXCLUSION VOID IN AUTO POLICY

May 17, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

The old rule of thumb for auto insurance is that "coverage follows the car." So when Mom loans the family car to Junior, and Junior lets his girlfriend drive back from a party, the girlfriend is insured under the parental policy.

This "omnibus coverage" is required in Illinois.

Protecting the reasonable expectations of Illinois citizens, the General Assembly enacted a law that obligates auto insurance policies to provide liability coverage for people who are driving an insured vehicle with permission that can be traced back to someone who is insured under the policy.

But what if Junior uses Mom's car to earn some money delivering pizza? There is a clash between the Illinois statute and a common exclusion.

Auto policies sold to individuals often exclude coverage for drivers who use an insured vehicle to transport persons or property for a fee.

From the perspective of insurance companies, they price and sell Business Auto Policies to cover income-generating activities. But the average insured wouldn't think that Junior would have to buy a Business Auto Policy when using the family vehicle to deliver a few pizzas.

The question in a new case was whether this business exclusion is void under the Illinois statute.

The DuPage County Circuit Court decided that the exclusion applied in a pizza- delivery case, but the Appellate Court reversed. Progressive Universal Insurance Co. of Illinois v. Liberty Mutual Fire Insurance Co., 2004 WL 637768 (Ill.App. 2 Dist.) (March 29).

Ronald Abbinante allegedly hit a pedestrian while using his mother's car to deliver pizza with his mother's permission. And Shirley had an auto policy from Progressive Universal.

The injured pedestrian and his wife obtained insurance benefits from their carrier, Liberty Mutual. And Progressive Universal filed a complaint seeking a declaratory judgment that it wasn't obligated to reimburse Liberty Mutual.

Here are some highlights of Justice John J. Bowman's opinion (with various omissions not noted in the quoted text).

"An insurer's duty to defend its insured is much broader than its duty to indemnify. If the allegations of the underlying complaint, when liberally construed in favor of the insured, potentially fall within a policy's coverage, the insurer has a duty to defend the insured against the underlying complaint. The duty to indemnify arises only if the insured's activity and the resulting loss or damage actually fall within a policy's coverage. The insurer has the burden of establishing that a claim falls within a provision that limits or excludes coverage."

Business exclusions

"Liberty Mutual cites Cincinnati Insurance Co. v. West American Insurance Co., 112 F.Supp.2d 718 (C.D.Ill.2000). There, a postal carrier was using his own vehicle to deliver mail along a rural route when he was involved in a car accident. His insurance policy excluded coverage of injury from the operation of "a vehicle while it is being used to carry persons or property for a fee."

"The postal carrier's compensation for mail delivery was based on the round trip mileage of the postal route and the number of delivery points on that route. The court held that under Illinois law, the clause was ambiguous because the mail was not carried "for a fee" in accordance with the meaning of the provision. Liberty Mutual contends that Progressive's exclusion should similarly be held to be ambiguous.

"However, as Progressive points out, the Cincinnati Insurance Co. court decided that the clause was ambiguous in reference to the facts of that case. [S]ee also, Annotation, R. Sutton, What Constitutes Use of Automobile "to Carry Persons or Property for Fee" within Exclusion of Automobile Insurance Policy, 57 A.L.R.5th 591 (1998) (various jurisdictions have found similar exclusionary clauses to be both ambiguous and unambiguous, depending upon the facts of the cases).

"Here, Progressive's exclusion applies to deliveries made for a fee or compensation and further specifies that it includes, but is not limited to, the "delivery of magazines, newspapers, food, or any other products." Thus, the exclusion is broader and more detailed than the clause at issue in Cincinnati Insurance Co.

"Additionally, the parties do not dispute that Ronald was delivering pizzas when the accident occurred, nor do they dispute that Casale Pizza paid him $1.25 for each pizza that he delivered. Clearly, Ronald was delivering food when the accident took place, and the $1.25 he received for each delivery was either a fee or compensation. Therefore, we hold that, as applied to the facts in this case, the exclusion is not ambiguous."

Illinois public policy

"We next examine whether the exclusion is contrary to public policy. Liberty Mutual argues that the exclusion is void because it conflicts with section 7- 317(b)(2) of the Illinois Vehicle Code.

"That section states that a motor vehicle liability policy '[s]hall insure the person named therein and any other person using or responsible for the use of such motor vehicle or vehicles with the express or implied permission of the insured.'

"This type of coverage is commonly referred to as 'omnibus coverage.' The Supreme Court has stated that section 7-317(b)(2), coupled with Illinois' mandatory insurance law, requires that 'a liability insurance policy issued to the owner of a vehicle must cover the named insured and any other person using the vehicle with the named insured's permission.' State Farm Mutual Automobile Insurance Co. v. Universal Underwriters Group, 182 Ill.2d 240, 244 (1998).

"Liberty Mutual maintains that since Ronald was a permissive driver, Progressive's liability insurance policy was required to cover him for the accident.

"Liberty Mutual cites State Farm Mutual Automobile Insurance Co. v. Smith, 197 Ill.2d 369 (2001). There, the Supreme Court held that an automobile business exclusion in an insurance policy violated public policy because it conflicted with section 7-317(b)(2). The exclusion denied coverage when the vehicle was being repaired, serviced or used by anyone employed or engaged in an automobile business. The Supreme Court stated:

" 'When a vehicle owner gives his vehicle to a person engaged in an automobile business, the owner is also giving that person the express or implied permission to use the vehicle. Therefore, a provision written into an insurance policy that excludes coverage for persons engaged in an automobile business necessarily excludes coverage for persons who are using an insured's vehicle with the insured's express or implied permission. The exclusion thus violates section 7-317(b)(2) of the Illinois Vehicle Code. As stated, an insurance policy provision which conflicts with a statute is void.'

"The Supreme Court stated that the principal purpose of mandatory automobile liability insurance is to protect the public by securing payment of its damages. It further stated that it was expressing no opinion as to whether any other exclusions would be valid.

"Since Smith was decided, the appellate court has validated at least one exclusion. In St. Paul Fire & Marine Insurance Co. v. Smith, 337 Ill.App.3d 1054, 1060 (2003), the appellate court held that the legislature intended to created a limited exception for named driver exclusions. In arriving at its conclusion, the court noted that section 7-602 of the Illinois Vehicle Code, which pertains to insurance cards, recognizes that insurance policies may exclude named drivers from coverage.

"We agree with Liberty Mutual that the exclusion at issue violates public policy. Shirley gave Ronald her express permission to use the vehicle. Under the omnibus coverage mandated by section 7-317(b)(2), Shirley's liability policy was required to cover him.

"The impetus behind mandatory automobile liability insurance is to protect the public by assuring that its damages will be paid, and Progressive's food delivery exclusion contravenes that goal.

"Unlike in St. Paul Fire & Marine Insurance Co., there is no evidence that the legislature intended to allow such an exclusion. Therefore, the exclusion conflicts with the coverage required by the statute.
"Statutes are an expression of public policy, and an insurance policy provision that conflicts with a statute is void.

"Accordingly, Progressive may not rely on the exclusion to deny Ronald liability coverage but instead must defend and indemnify him.

"We note that our holding is limited to requiring liability coverage and does not extend to coverage for damages to the insured vehicle. See Universal Underwriters Group v. Pierson, 337 Ill.App.3d 893, 897 (2003) (public policy requires that injured third party be covered by car owner's insurance policy, but coverage not required for damages to the insured vehicle while driven by permissive user).

"We also note that our holding is consistent with holdings in other jurisdictions that have examined this issue."

Nevertheless, "Progressive argues that Smith is distinguishable from this case because the automobile business exclusion barred coverage for a certain class of people, whereas Progressive's policy excludes coverage for only certain activities. Progressive maintains that a permissive user is governed by the same policy exclusions that apply to the named insured. However, Progressive has not cited any authority for this argument, nor has our research revealed any.

"Furthermore, Progressive's exclusion could be interpreted as barring coverage for all drivers engaged in a delivery business, just as Smith involved an exclusion denying coverage for all drivers engaged in an automobile business.

"We hold that Progressive's exclusion is void as to permissive users because it conflicts with section 7-317(b)(2). As previously stated, the public policy behind the statute is to allow the public to recover its damages, and such an exclusion contravenes this goal.

"Progressive also maintains that if all exclusions for permissive users are prohibited, it could be liable for intentional criminal acts by such drivers.

"This contention is of limited merit because, as a general rule, it is against public policy to indemnify for intentional misconduct. Lincoln Logan Mutual Insurance Co. v. Fornshell, 309 Ill.App.3d 479, 483 (1999). Furthermore, our decision relates only to the exclusion at issue here. We do not address whether other exclusions for permissive users would be valid."

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