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Auto Insurance Statutes Unclear Where Rentals are Concerned

January 3, 2017 | DPBC Blawg

Renting a car can be complicated.  Unwinding the insurance issues when a rental in involved in an accident requires untangling the intersection of state and federal law. A new Tennessee Supreme Court ruling gives some guidance.

Tennessee’s Financial Responsibility statutes, Tenn. Code Ann. § 55-12-101 et seq., mandate that Tennessee motorists have auto insurance.  Specifically, a Tennessee motorist can comply with the law in one of three ways:

  1. have a policy of insurance that is either a single limit policy with a limit of not less than $60,000 applicable to one accident or a split-limit policy with a limit of not less than $25,000 for bodily injury to or death of one person, not less than $50,000 for bodily injury to or death of two or more persons in any one accident, and not less than $15,000 for damage to property in any one accident;
  1. deposit cash or execute and file a bond with the Department of Safety in the amount of $60,000; or
  1. certify with the Department of Safety that the motorist is a self-insurer 55-22-111.

The protections afforded by these financial responsibility requirements are enhanced by the Uninsured Motorist Act, Tenn. Code Ann. § 56-7-1201, et seq., which require that uninsured motorist coverage be offered with every auto insurance policy.  These statutes were enacted by the State legislature out of “public concern over the increasing problem arising from property and personal injury damage inflicted by uninsured and financially irresponsible motorists.”  Garrison v. Bickford, 377 S.W.3d 659, 665 (Tenn. 2012) (quoting Shofner v. State Farm Mut. Auto Ins. Co., 494 S.W.2d 756, 758 (Tenn. 1972).

One issue recently addressed by the Tennessee Supreme Court was how the Uninsured Motorist Act interplays with the various laws governing rental cars.  In the case of Martin v. Powers, Plaintiff Edward Martin was injured when he was struck, as a pedestrian, by an individual driving an Enterprise rental car.  Martin v. Powers, No. M2014-00647-SC-R11-CV, -- S.W.3d – (Tenn. Oct. 24, 2016).

Martin was a bar owner in Franklin, Tennessee.  He refused to serve a patron, Gregory Powers, because he appeared intoxicated;  Martin asked Powers to leave the bar and went outside to watch him leave.  Powers then got into a Kia Sorento, which he had rented from Enterprise, and drove it into Martin's knee.

Martin filed suit against Powers, his insurer, and Enterprise.  Martin also served his own uninsured motorist carrier with the lawsuit and a copy of the summons.  Martin's insurer was granted summary judgment based on the fact that the Defendant’s act was intentional.  Enterprise answered the lawsuit, asserting that it could not be vicariously liable for its renter’s conduct pursuant to the Graves Amendment, 49 U.S.C. § 30106, which specifically bars this type of alleged vicarious liability.  Martin ultimately dismissed his lawsuit against Enterprise.

Martin's UM carrier moved for summary judgment in the trial court, arguing that because Plaintiff’s alleged damages did not arise out of the ownership or use of an uninsured motor vehicle, the Plaintiff could not recover for the incident.  The trial court agreed, and the UM Carrier was dismissed.  After the dismissal was affirmed by the Court of Appeals, the Plaintiff requested permission to appeal to the Supreme Court, which was granted.

At issue was whether the rental car qualified as an “uninsured motor vehicle” under the policy.  This question requires construction of the policy, as well as numerous related statutes.  The Court observed that there were potentially two insurable risks: the risks Enterprise incurs as the owner of the rental car (the “Owner Risks”) and the risks Enterprise incurs because it rents its cars (the “Renter Risks”).

The Court concluded that Enterprise qualified under the Financial Responsibility Statute of a self-insurer for the Owner Risks.  In other words, it had proven to the satisfaction of the Department of Safety that it had enough assets to cover a judgment against it that a proper Certificate of Self-Insurance had issued in favor of Enterprise.

With respect to the Renter Risks, however, the Court noted that such risks were an impossibility under the Graves Amendment, which exempts rental car companies from vicarious liability for its renters.  Accordingly, there was no possible risk that could even be insured with respect to the so-called Renters Risks.  In this regard, therefore, Enterprise was “uninsured,” as contemplated by the Uninsured Motorist Statute.

The Supreme Court remanded the case to the trial court for further proceedings.  The practical effect, therefore, is that the Plaintiff’s own UM Carrier will have to defend the lawsuit even though the defendant was insured and the defendant's insurance carrier was not liable and could ultimately be made to compensate Plaintiff under its policy of insurance.

This is a good turn of events for the Plaintiff.  Of course, future such plaintiffs may not be so lucky.  A Supreme Court opinion like this that  has the effect of putting insurance companies potentially on the hook to pay more money than expected to their insureds often gets "reversed" extra-judicially.

For instance, we may begin to see auto insurance policies redrafted to address this ruling.  So, while the ruling applies to this particular policy and similarly drafted policies, future policies may specifically exempt UM coverage for collisions where the other driver is driving a rental car.

Alternatively, we may see the legislature address this ruling by enacting a statute to create a specific exemption for rental cars in the Uninsured Motorist Statute.  The lobby on behalf of the insurance industry is strong and often presents the General Assembly with proposals to “fix” adverse court rulings.  This very thing happened in 2012 when the insurance industry lobby took credit for the enactment of Tenn. Code Ann. § 56-7-135, a law that attempted to gut the Supreme Court ruling in the case of Morrison v. Allen, 338 S.W.3d 417 (Tenn. 2011).

The Plaintiff in the Edwards case will enjoy this victory for now.  But, stay tuned to see if there is any insurance industry or legislative response to this ruling.

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