Court: Rain-ravaged BMWs not covered

What Happened

BMW entered a contract with CARS that provided CARS would wash and maintain some BMW vehicles that were driven on a nearby test track. In the spring of 2007, a large rainstorm blew through the area. Unfortunately, a CARS employee had neglected to roll up the windows on six BMW vehicles that were at the CARS facility. The rain caused more than $600,000 of damages to those vehicles.

BMW filed a claim with Colony based on an endorsement to the CARS policy that named BMW as an additional insured, but “only for liability arising out of the ownership, maintenance and use of” the CARS facility (emphasis added). After an investigation, Colony denied BMW’s claim. A few months later, BMW resubmitted the claim, this time accompanied by evidence showing CARS had officially reprimanded two employees in relation to the rain damage. Colony took a second look at BMW’s claim but did not reach a different conclusion.

Litigation Ensues

During that time, BMW sued CARS for negligence and breach of contract based on the failure to secure the vehicles’ windows before the rain. BMW also filed suit against Colony for bad faith refusal to pay the claim. Colony in turn sought a judicial declaration that it owed no duty to BMW for either defense or indemnity.

Colony argued that its responsibility to BMW only extended to third-party liability coverage. Therefore, since BMW was not seeking coverage for its own liability to a third party, Colony was not obligated to provide indemnity.

BMW claimed that, since they were an additional insured on the CARS policy, they were entitled to coverage for the water loss. At the very minimum, the policy was ambiguous and should therefore be interpreted in favor of coverage. BMW also asserted that, if Colony did not provide coverage for the water-damaged vehicles, the policy would be worthless because CARS could not come into contact with a party to whom BMW could be held liable. Even if none of the claims described above would hold up in court, BMW claimed Colony could still be held liable for bad faith.

The trial judges were not persuaded. They examined the policy and found that, as Colony had stated, BMW was only an additional insured regarding liability coverage. No third-party had come forward attempting to hold BMW liable for the water-damaged vehicles. Since there was no liability claim against BMW for the water damage, Colony’s duty to BMW was not triggered. If Colony had no duty to BMW, the insurer could not be held liable for bad faith. Summary judgment was granted in favor of Colony, and BMW appealed.

Additional Insured Endorsement

BMW pointed out that the premium CARS paid for comprehensive coverage, which was nested within the garage keepers portion of the policy, was entirely separate from the premium it paid for liability coverage. BMW was an additional insured for “for liability arising out of the ownership, maintenance and use of” the CARS facility, which included at least some garage keepers coverage. Since the garage keepers coverage encompassed comprehensive coverage, and BMW had partial garage keepers coverage, it was entitled to comprehensive benefits under the Colony policy. Or, in the alternative, whether BMW was or was not entitled to comprehensive coverage was ambiguous, and the provision therefore must be interpreted in favor of coverage.

The appellate judges disagreed. As Colony had stated, the endorsement tying BMW to CARS’s Colony policy specified that it was only for liability coverage. A necessary element of liability coverage is the insured’s liability to a third party. In the absence of third-party liability, liability coverage will not trigger. BMW’s claim, therefore, could not trigger liability coverage because no third-party was seeking to hold BMW liable for the rain damage to the vehicles.

Bad Faith

Even if it wasn’t entitled to coverage, argued BMW, Colony had “ignor[ed] BMW's correspondence, refus[ed] to provide explanations as to the denial of coverage, and refus[ed] to acknowledge CARS's liability,” actions which, when taken together, pointed to liability for bad faith.

Again, the appellate judges were not convinced. In order to have a successful bad faith claim against an insurer, an insured had to prove that she was entitled to benefits under an insurance policy with the insurer, that the insurer had unreasonably refused to pay those benefits, and that the insured had suffered damages as a result of the insurer’s refusal.

BMW’s bad faith claim against Colony failed this test for two reasons. First, as previously discussed, BMW was not entitled to benefits under the policy because it was not being held liable to a third party. Second, an insurer could not be held liable for bad faith “where [the] insurer has a reasonable ground for contesting a claim” (emphasis added).

In this case, the judges found Colony had had reasonable grounds for both contesting and refusing to pay BMW’s claim based on the absence of third-party liability. Therefore, Colony could not, by law, have acted in bad faith.

Conclusion

Since BMW was not being held liable to a third party, it was not entitled to coverage under CARS’s Colony policy. Since BMW was not entitled to coverage, Colony had reasonable grounds to both contest and deny and claim, and could not, therefore, be held liable for bad faith. The judgment of the trial court was affirmed.

Editor’s Note: Additional insureds are added to an underlying policy because the “additional insured” has an interest in the subject of the insurance that needs to be protected, but is smaller than the named insured’s interest. They are only covered to the extent of the size of their interest. In this case, BMW’s interest was limited to the six vehicles kept on CARS’s premises, so the endorsement only covered what was necessary.

Related:

• How auto insurers can safeguard drivers against predatory tows
• In 2025, auto insurance is a buyer's market
• Vehicle owners most likely to speed in 2025