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Sentry Select Insurance Co. v. Fidelity & Guaranty Insurance Co.

May 4, 2009

SENTRY SELECT INSURANCE COMPANY, PLAINTIFF AND PETITIONER,
v.
FIDELITY & GUARANTY INSURANCE COMPANY, DEFENDANT AND RESPONDENT.



Ninth Cir.Ct.App. No. 04-56265. U.S. Dist.Ct. No. CV-02-01055 LSP.

The opinion of the court was delivered by: Baxter, J.

Pursuant to rule 8.548 of the California Rules of Court, we granted the request of the United States Court of Appeals for the Ninth Circuit to address the following question: What is the appropriate test for determining whether an insured is "engaged in the business of renting or leasing motor vehicles without operators" under California Insurance Code, section 11580.9, subdivision (b)?*fn1

Under the version of Insurance Code section 11580.9, subdivision (b) (former subdivision (b))*fn2 controlling in this case, if a leased commercial vehicle is involved in an accident with one or more other vehicles, and its owner, the insured, is "engaged in the business of renting or leasing motor vehicles without operators," then the insured's policy is conclusively presumed to be excess to any other insurance covering the loss. The rule is part of a statutory scheme intended to establish workable, bright line rules for allocating loss among coinsurers in the context of liability policies covering multiple-vehicle accidents. The public policy behind section 11580.9 is to avoid conflicts, litigation, and resulting court congestion in the determination of which liability policies covering multiple vehicles in an accident will provide primary, excess, or sole coverage for the resulting personal injury and property damage. (§ 11580.8.) It has further been observed, "The purpose in shifting the risk of damage from the owner's policy to the commercial lessee's policy recognizes the commercial reality that the profitmaking lessee would be better able to absorb the expense of the policy as a cost of doing business." (Mission Ins. Co. v. Hartford Accident & Indemnity Co., supra, 160 Cal.App.3d at p. 102.)

Two of the appellate court decisions cited in the Ninth Circuit's order - Travelers Indemnity Co. v. Maryland Casualty Co., supra, 41 Cal.App.4th 1538 (Travelers), and McCall v. Great American Ins. Co., supra, 119 Cal.App.3d 993 (McCall) - hold that courts should look to the nature of the insured's primary business in determining whether the insured is "engaged in the business of renting or leasing motor vehicles without operators" within the meaning of former subdivision (b). The other three decisions - Western Carriers Ins. Exchange v. Pacific Ins. Co., supra, 211 Cal.App.3d 112, Mission Ins. Co. v. Hartford Accident & Indemnity Co., supra, 160 Cal.App.3d 97, and Transport Indemnity Co. v. Alo, supra, 118 Cal.App.3d 143 - suggest the focus should be on the factual circumstances surrounding the lease of the particular commercial vehicle involved in the accident when making that determination. This court to date has not rendered a decision interpreting the disputed former statutory language.

In August 2006, one month after the Ninth Circuit requested this court to clarify the test for determining whether an insured is "engaged in the business of renting or leasing motor vehicles without operators" under former subdivision (b), the Legislature amended the statute, deleting the language with which we are here concerned and replacing it with the phrase "who in the course of his or her business rents or leases motor vehicles without operators." (§ 11580.9, subd. (b).) (Stats. 2006, ch. 345, § 1.) This amendment of the statutory language eliminates any ambiguity as to whether the leasing of commercial vehicles must be "a regular part of the insured's business" (see Travelers, supra, 41 Cal.App.4th at p. 1546) in order for the conclusive presumption to apply under the amended language. Section 11580.9, subdivision (b), now clearly provides that the renting or leasing of commercial vehicles without operators in the course of any business can qualify for the conclusive presumption that the insured's coverage is excess, where all the statutory requirements are otherwise met.

As a result of the Legislature's amendment in 2006 of the very language in former subdivision (b) that the Ninth Circuit has asked us to construe, our interpretation of the deleted language would be of limited precedential value. Nor is a definitive construction of the former statutory language necessary to resolve this matter. The insured lessor below, John's Trucking, Inc. (JTI), routinely leased nearly three quarters of its commercial fleet of trailers to independent truckers with whom it contracted for hauling jobs. The lease in question was a business transaction through which JTI received compensation for the lease of two trailers to the lessee, independent trucker Richard Justice (Justice), who in turn made a profit from their use. Such leasing activity cannot within reason be viewed as "merely incidental" to JTI's hauling business. (Travelers, supra, 41 Cal.App.4th at p. 1547.) We conclude that JTI's leasing of the commercial trailers in question plainly qualified under former subdivision (b) for the conclusive presumption that its policy was excess to other insurance covering the loss.

FACTUAL AND PROCEDURAL BACKGROUND

In May 1999, Justice, an independent trucker, was involved in a collision in the City of San Diego with a vehicle driven by April Russo, in which her mother, Patricia Nila, was a passenger. Justice was driving his Peterbilt tractor while pulling two semi-trailers owned by the insured, JTI, pursuant to a subhaul agreement. Russo and Nila brought personal injury actions against Justice and JTI. JTI successfully moved for summary judgment. The John Deere Insurance Company (John Deere), which insured Justice and was an undisputed primary insurer, eventually settled the personal injury actions on his behalf for $600,000, which was less than the policy limits. Thereafter, Sentry Select Insurance Company (Sentry) became John Deere's successor in interest, and was assigned any rights or claims that might be due and owing to John Deere from JTI's insurer, Fidelity & Guaranty Insurance Company (Fidelity), in connection with the litigation. Sentry then brought this diversity action against Fidelity in the United States District Court for the Southern District of California, alleging causes of action for contribution, implied equitable indemnity, and implied contractual indemnity.

Sentry's claims turn on the question whether the insured JTI's lease of the two semi-trailers to Justice is a lease of qualifying commercial vehicles within the meaning of former subdivision (b), which in turn depends on whether JTI was "engaged in the business of renting or leasing motor vehicles without operators," the statutory language in effect at that time. If former subdivision (b) is found applicable to JTI's business and lease of the two semi-trailers to Justice, any coverage for the loss afforded through JTI's Fidelity policy would conclusively be presumed excess to any coverage afforded under the John Deere policy insuring Justice's tractor. Since John Deere settled the third party claims against Justice for less than its policy limits, no contribution or indemnity would be owed by Fidelity to Sentry (as John Deere's successor in interest) if the statutory presumption applies.

JTI's Business and Insurance Coverage

JTI is a carrier company that usually performs its hauling contracts by subcontracting with independent truckers, although it owns a fleet of tractors and trailers. In 1999, the year of the accident in question, JTI owned 12 tractors, sometimes commonly referred to as "power units," and 80 trailers, sometimes referred to as "semi-trailers" when doubled up for towing behind a power unit. Each tractor is designed to pull two trailers. Accordingly, JTI utilized up to 12 tractors and 24 paired trailers, employing its own drivers for those rigs. It routinely leased the remaining 56 trailers to independent contractors pursuant to a standard trailer lease agreement, such as the one executed by Justice and JTI below. During 1999, JTI had approximately 70 active subhaul agreements with various independent contractors it used on a regular basis. Under those agreements, the independent contractors received 95 percent of the fee JTI charged its customers for jobs undertaken while using their own trailers, but only 75 percent if they leased trailers from JTI. Put differently, JTI charged the independent truckers 20% percent of the fee earned on a hauling job for the lease of its trailers. JTI's gross income from trailer rentals to independent contractors during the year in question was nearly $650,000. JTI did not lease its trailers to the general public.

Fidelity insured JTI under a comprehensive general liability policy that specifically described and rated the two trailers owned by JTI and leased to Justice as "covered" vehicles. Justice was not named as an additional insured, nor was his self-owned Peterbilt tractor mentioned or rated under JTI's policy. The policy also contained an "other insurance" clause, which provided that "while a covered 'auto' which is a 'trailer' is connected to another vehicle, the liability coverage this Coverage Form provides for the 'trailer' is: . . . [¶] (1) Excess while it is connected to a motor vehicle you [i.e., JTI] do not own. . . . (2) Primary while it is connected to a covered 'auto' you own."

Justice's Business and Insurance Coverage

Justice is an independent contractor-subhauler who regularly subcontracted with JTI for hauling jobs at the time of the accident. He owned his own tractor but no trailers, and routinely leased two semi-trailers from JTI to perform jobs under their subhaul agreement. That subhaul agreement provided, in part, that "Carrier [JTI] shall have no control over the persons or operations of equipment used or employed by Subhauler [Justice] in providing services under the Agreement." The trailer lease agreement executed with JTI under which Justice was also operating provided, in part, that "During the term of this Trailer Lease Agreement lessee [Justice] shall have sole possession, custody and control of the trailing equipment at all times." Pursuant to that lease agreement, JTI furnished Justice with the two 1979 Fruehauf semi-trailers, license nos. 1UA6363 and 1UA6364, which he used almost exclusively to perform jobs for JTI under the subhaul agreement, with the exception of five or six days when the trailers were being serviced and different ones were provided ...


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