Auto insurance companies have a responsibility to defend their clients when they are accused of liability. Almost all auto insurance policies make these two promises to their insureds:
- A promise to indemnify, which is pay for the insured’s legal liability, up to the policy limits;
- A promise to defend, meaning the insurer hires legal counsel and defends insured against the lawsuit and cover legal fees.
If an insurer is faced with a covered third-party claim, the insurer is responsible to defend the claim and pay any monetary award entered for that covered claim. Sounds straightforward, but in practice, insurers don’t always make it so easy. There are often exceptions and rules – not all of which may be explicitly spelled out on the policy. When disputes arise, it can impact the third-party case, filed by the person injured in the auto accident.
One such dispute was recently before the U.S. Court of Appeals for the Seventh Circuit, following a serious crash in Illinois. It involves a case of several teenagers and a “borrowed” car. The car belonged to a 16-year-old girl, who borrowed it on August 2013 night in question to go to a party. Another, also 16 and defendant in this action, ultimately obtained the keys to that vehicle. How she got those keys was in dispute, as the girl whose mother owned the car said she never gave them to her, but rather to another friend. Nonetheless, defendant left the party with that vehicle and picked up several passengers – plaintiff among them.
Around 2:30 a.m., defendant crashed into several parked cars. Plaintiff, her passenger, suffered a severe traumatic brain injury as a result of the car accident. Defendant was cited for numerous traffic offenses, including driving after curfew (she had a restricted driver’s license), having more underage passengers in the vehicle than allowable and reckless driving. Neither the driver nor the driver’s family had motor vehicle insurance.
Due to plaintiff’s severe injuries, her mother sued defendant for negligence. Defendant’s mother submitted the lawsuit to the vehicle owner’s insurer. The insurer asked defendant whether she had permission to drive the vehicle. She insisted she did. The case was assigned to an attorney and an investigation began. Insurer received a call from its insured, saying her daughter repeatedly denied giving defendant permission to drive the vehicle.
The insurer refused to offer a defense, finding the driver had no permission to drive the car. In a default judgment, a state court awarded plaintiff $4.6 million. Defendant assigned whatever claim she had against the vehicle owner’s insured to plaintiff. The district court concluded the insurer’s failure to either defend the defendant or seek a declaratory judgment that it had no duty to defend violated the state’s law, which made the insurer liable to pay the entire judgment of $4.6 million, even though the policy only provided a maximum of $25,000 per person per crash.
The insurer appealed, conceding that while it should have defended the driver while reserving the right to decline indemnity, that liability should not exceed the policy cap. The trial court disagreed, but the appellate court reversed, finding the damage award should be capped at the policy limit.
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Hyland v. Liberty Mutual Fire Insurance Co., March 15, 2018, U.S. Court of Appeals for the Seventh Circuit
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