An insured under a personal auto policy walks into a rental car agency to rent a car. Along with the car, the agency offers him supplemental liability insurance (SLI) for an additional $10 for each day of the rental period. Gripped by the fear tactics employed by the car rental representative, he elects to buy that optional coverage. Unfortunately, he then is involved in an auto accident that results in a lawsuit against him. When the time comes to settle that lawsuit, which is required to pay first: the insurance company that provided the SLI, or his personal auto insurance?

In Vigilant Insurance Company v. Lincoln General Insurance Company (2008 U.S. Dist. LEXIS 65172), the U.S. District Court (Dist. Nevada) addressed this very issue and held that the SLI insurer should pay first. The Ninth Circuit Court of Appeal recently concurred. At issue were three insurance policies: the SLI policy issued by Lincoln General Insurance Company to Dollar Rent-A-Car but covering rental customers who purchased the supplemental coverage; a personal auto policy issued to the rental customer by GEICO; and an excess auto liability policy issued to the rental customer by Vigilant Insurance Company. Together, the GEICO and Vigilant policies provided $2.5 million of liability protection to its mutual policyholder. The Lincoln General SLI policy provided up to $1 million in coverage to rental customers.

“Other Insurance” Clauses

The following is a brief summary of the coverage provided by each policy: The GEICO policy provided a primary layer of auto liability insurance, covering the insured against claims of bodily injury or property damage arising out of the use of a covered auto. However, for non-owned autos, its “other insurance” clause mandated that its insurance is excess over any other insurance available to the insured.

The Vigilant policy provided auto liability insurance for personal injury and property damage claims in excess of the limits of the underlying GEICO policy. Similar to the GEICO policy, it featured an “other insurance” clause, which rendered it excess over all other insurance in circumstances involving a non-owned vehicle.

The Lincoln General SLI policy—issued to Dollar Rent-A-Car but covering rental customers who purchased the supplemental coverage—provided “excess liability coverage” for “[t]he difference between $1,000,000 combined single limit for each ‘accident’ and the limit of liability or limit of insurance of ‘underlying insurance.’”

In addition, pursuant to its rental contract, Dollar agreed to cover the customer against third-party liability claims for an amount equal to the minimum limits specified by the applicable state’s compulsory auto insurance law (referred to as “primary protection”). Thus, in accordance with Nevada Revised Statute 485.185, Dollar was required to (and did) maintain $15,000 in liability coverage for the car.

The Dollar rental agreement provided that if the customer purchased the optional coverage, “SLI provides you with a separate policy providing excess coverage against such claims for the difference between the primary protection and a maximum combined single limit of $1,000,000 per occurrence for bodily injury, including death and property damage, for other than the vehicle while the vehicle is on rent to you.”

The underlying suit against the rental customer settled for roughly $800,000. As the owner of the vehicle, Dollar maintained compulsory auto coverage in the amount of $15,000 and agreed to pay that amount. However, claiming it provided coverage in excess of the rental customer’s $2.5 million of coverage, Lincoln General refused to pay the balance of the settlement amount. Ultimately, each insurer paid a portion of the settlement while reserving rights to seek reimbursement.

In the ensuing coverage litigation between the rental customer’s personal auto insurers and Lincoln General, the court concluded that Lincoln General’s obligation was triggered immediately upon Dollar’s payment of its $15,000 requirement. The court reasoned that Dollar was the named insured under the SLI policy, and that the policy required the named insured (and only the named insured) to maintain “underlying insurance.” The $15,000 paid by Dollar was the only “underlying insurance.” Although the policy covered rental customers, it did not require them to maintain “underlying insurance.” Thus, Lincoln General’s obligations were independent of any other insurance available to Dollar’s customers.

Lincoln General pointed to a Nevada Supreme Court decision to support its claim that a rental customer’s personal auto policy is primary to the rental agency’s statutorily required insurance. In Alamo Rent-A-Car, Inc. v. State Farm Mut. Auto. Ins. Co., 953 P.2d 1074 (Nev. 1998), the Court held that under the facts of that case, the rental customer’s personal insurance was required to pay before the rental agency’s statutorily required coverage. However, the Court specifically reasoned that a rental agency could be contractually bound to provide primary coverage despite the existence of other insurance. It noted: “A rental agency offers primary insurance only when the renter agrees to purchase an extra protection plan.” Unlike the lessee in Alamo, the rental customer in the Vigilant case did purchase an extra protection plan. Therefore, the District Court (and later the Ninth Circuit Court of Appeal) rejected Lincoln General’s argument.

Moreover, even by considering the respective policies’ “other insurance” clauses—which typically are considered where there potentially is an overlap in coverage—Lincoln General’s arguments nevertheless fell short. The personal auto insurance policies issued to the rental customer expressly provided that for non-owned automobiles, their insurance was excess over any other insurance. On the other hand, the SLI policy provided in pertinent part that it exceeded any other “collectible insurance…available to the insured…except for such other insurance that is purchased specifically to be excess of our limits of insurance.” According to the District Court, and as affirmed by the Ninth Circuit, that is precisely what the personal auto policies were designed to do.

Shifting the Onus

So what do we learn from this case? For starters, if you handle claims on behalf of a personal auto insurer, be aware that the insured’s purchase of SLI may not shield the personal auto insurer from a liability claim. The SLI insurer may refuse to pay first.

Next, when faced with a challenge from an SLI insurer, pay close attention to the SLI policy language—including the coverage grant and “other insurance” provisions—and identify pertinent provisions contained in the underlying rental contract. Also, be cognizant of the applicable state’s law on priority of insurance as well as compulsory insurance for owned autos.

Armed with this information, you may successfully be able to shift the focus back to the SLI insurer.