Some people who lease cars apply for car insurance with lower limits for themselves and higher limits to cover the leasing company’s requirements.  This is accomplished through a Lessor Liability Endorsement.  In a recent case, a putative class action was brought against insurance companies by lessees who sought damages alleging that the coverage provided was illusory because it provided coverage only for vicarious liability against lessors and that a federal statute, the Graves Amendment, 49 U.S.C. § 30106(a), bars claims of vicarious liability against vehicle lessors.

In Hallums v. Infiity Insurance Co., No. 18-12138 (11th Cir. Dec. 17, 2019), a putative class action was brought by lessees against auto insurers claiming that the insurance provided was illusory.  The district court held that the insurance policy, and the Lessor Liability Endorsement specifically, was not illusory and granted summary judgment to the insurance companies.  The 11th Circuit affirmed.

The claim for illusory coverage stems from the Graves Amendment, which precludes claims of vicarious liability against vehicle lessors.  The leases required a certain level of insurance coverage and if the lessee did not obtain the coverage the lease could be terminated and the vehicle repossessed. The policyholders claimed that because of the Graves Amendment, the endorsement provided no coverage for the lessors and was illusory because it insured no risk for which the insured can be liable.  The endorsement provided as follows:

This additional coverage will apply to damages your lessor becomes legally obligated to pay that arise from and are legally related to a loss covered under your policy.  The coverage provided by this endorsement . . . is available only to indemnify your lessor pursuant to the terms listed herein.”

The endorsement was approved by the Florida Office of Insurance along with the rates for the coverage.

In affirming the grant of summary judgment in favor of the insurers, the circuit court chose “door number two” of the three reasons the insurers put forth for why there is coverage.  The endorsement was not illusory, according to the insurance companies because: (1) it provided coverage for more than just vicarious liability (the court did not reach this issue); (2) it imposed upon the insurers a duty to defend lessors from claims of vicarious liability (the “door” chosen); and (3) the action was barred by the filed rate doctrine (a nice issue, but the court did not reach it).

The court found that the duty to defend under Florida law (as it is in most states) was broader than the duty to indemnify and that the insurers had the duty to defend the lessors even if the claim was solely one of vicarious liability.  The Graves Amendment, held the court, is a defense to liability, not coverage, so for duty-to-defend purposes it did not matter that the endorsement may only protect against claims foreclosed by the statute.  The broadness of the duty to defend, said the court, extended to plainly meritorious claims as well as claims for which coverage may not clearly exist under the policy.  Thus, the insurance companies had the duty to defend regardless of whether the lawsuits alleging acts within the endorsement’s scope were likely or even able to succeed in court.

The court concluded that because the endorsement imposed a duty to defend lessors from claims of vicarious liability, the endorsement was not illusory.