Elrac, Inc. v. Ward

OPINION OF THE COURT

Can ELRAC, a rental car company, enforce a standard clause in its rental agreements requiring the renter to indemnify it for any injuries caused to third parties by use of the rental car? We hold that ELRAC may not seek indemnification where the damage falls below the minimum insurance that the rental company is required to provide under section 370 (1) of the Vehicle and Traffic Law.

ELRAC, doing business as Enterprise Rent-A-Car, is a self-insured company, having obtained a certificate of self-insurance pursuant to Vehicle and Traffic Law § 370 (3). In its application for the certificate of self-insurance, ELRAC averred, among other things, that its “self-insurance program will provide primary coverage at all times,” and that it “has, and will continue to have, the financial ability to respond to all payments of automobile claims and/or judgments arising out of ownership, maintenance, use or operation of [its] motor vehicles.” ELRAC’s rental agreements contain an indemnification clause, which requires the renter to “defend, indemnify and hold [the company] harmless from any claims, liabilities, costs and expenses arising from the renter’s use, operation or possession of the rented vehicle.” The agreements also state that ELRAC provides no bodily injury or property damage liability insurance, and that the renter’s own insurance applies instead.

Each of the four cases before us involves a similar fact pattern. A person driving a car rented from ELRAC was involved in an accident, causing injury to a third party. The injured party sought damages from ELRAC — the owner of the car—

ELRAC v American Home Assurance Co.

Sergio Sabaris, who was insured by defendant American Home Assurance Company, rented a car from ELRAC and signed the standard indemnification clause. While driving the rental car, Sabaris was involved in an accident. The occupants of the other vehicle were Peter, Etheline and Sharon Warner. The Warners brought personal injury and property damage claims, which ELRAC settled for a total of $22,700 ($6,000 each for injuries to Etheline and Sharon; $8,000 for injuries to Peter; and $2,700 for property damage). ELRAC then brought the present action seeking indemnification from Sabaris under the rental agreement. ELRAC also sought a declaration that American Home Assurance was obligated to defend and indemnify Sabaris.

Supreme Court held that the indemnification clause was unenforceable, stating that the rental company was required by law to provide primary insurance to the renter, and that “any attempt by the lessor to assert its right to contractual indemnification from the lessee after payment to a third party is an attempt to transfer the loss to its own insured and is barred by the antisubrogation rule.” The Appellate Division modified the judgment and held that Sabaris was required to indemnify ELRAC under the rental agreement. The Appellate Division stated that the indemnification clause was “valid and enforceable,” and that ELRAC “is not the primary insurer of the renter of its vehicle * * * and therefore, the antisubrogation rule does not apply” ( 273 AD2d 344 , 345).

We granted leave, and now reverse the Appellate Division orders in all four cases and remit to Supreme Court for ap

We reject ELRAC’s argument that, because it is self-insured, it is not subject to the minimum liability insurance requirements. To be sure, self-insurance is different from insurance in that the self-insurer has assumed the risk of personally satisfying any tort judgments against it (see, Guercio v Hertz Corp., 40 NY2d 680 , 684 [“By undertaking to assure payment of judgments, the owner does not become an ‘insurer’ of anything other than his own ability to pay for damages for which he is legally responsible”]). Here, however, we are called upon to determine the requirements placed on rental companies by section 370 of the Vehicle and Traffic Law. And it is well settled that section 370 imposes the same requirements on rental companies, regardless of whether they self-insure or purchase outside insurance.

In Allstate Ins. Co. v Shaw ( 52 NY2d 818 ), this Court held that companies that self-insure under section 370 (3) must provide the same minimum coverage as companies that purchase insurance policies or post surety bonds under section 370 (1). Specifically, in Allstate, the Court held that a self-insured automobile leasing company was required to provide uninsured motorist coverage, which all motor vehicle liability insurance policies were required to provide under the Insurance Law. The Court stated that the provision in section 370 (3) permitting self-insurance was “in no way intended to decrease the insurance protection presently available” {id., at 820). Indeed, the Court rejected the dissent’s argument that self-insurers were exempt from the minimum coverage require

There is, however, an exception to the right of subrogation, termed the antisubrogation rule. Under that rule, an “insurer has no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered * * * even where the insured has expressly agreed to indemnify the party from whom the insurer’s rights are derived” (Pennsylvania Gen. Ins. Co. v Austin Powder Co., supra, at 468; see also, Jefferson Ins. Co. v Travelers Indem. Co., 92 NY2d 363 ). In other words, an insurer may not step into the shoes of its insured to sue a third-party tortfeasor — if that third party also qualifies as an insured under the same policy — for damages arising from the same risk covered by the policy. This rule applies even if the third-party tortfeasor has expressly agreed to indemnify the insured for the loss. The purpose of this rule is to prevent an insurer from using the right of subrogation to avoid paying coverage that is due under the policy (see, Pennsylvania Gen. Ins. Co. v Austin Powder Co., supra, at 471). Additionally, the antisubrogation rule limits the instances in which an insurer and its insured have adverse interests, which might undercut an insurer’s incentive to provide a vigorous defense to its insured (see, id., at 472).

In Pennsylvania General, defendant Austin Powder rented a truck from Bison Ford and agreed to indemnify Bison for any liability incurred from the use of the vehicle. The rental agreement also required Bison to obtain primary insurance for the truck. The truck exploded while being used by Austin Powder. Bison’s insurer (Liberty Mutual) sought to subrogate itself to Bison’s rights and obtain indemnification from Austin Powder. This Court rejected the indemnification claim, holding that since Austin Powder qualified as an additional insured under the policy purchased by Bison, Liberty Mutual was seeking indemnification from its own insured, in violation of the antisubrogation rule (see, 68 NY2d, at 471-473 ). Similarly, in Jefferson Ins. Co. v Travelers Indem. Co. (supra, 92 NY2d 363 ), this Court held that an insurance company could not step into

While the present cases do not involve subrogation— since ELRAC is not seeking to step into the shoes of its insureds to sue responsible third parties — the policy behind the antisubrogation rule also supports the result here. As in Pennsylvania General, allowing ELRAC to enforce the indemnification agreement for sums up to the statutory minimum coverage requirements would, in effect, permit the insurer “ ‘to pass the incidence of the loss * * * from itself to its own insured and thus avoid the coverage’ ” that it is obligated to provide (Pennsylvania Gen. Ins. Co. v Austin Powder Co., supra, at 471 [quoting Home Ins. Co. v Pinski Bros., 160 Mont 219 , 225-227, 500 P2d 945 , 949]). ELRAC must pay the coverage that it is statutorily bound to provide. Notably, here, if ELRAC had purchased an insurance policy, and its carrier had paid the claims, the antisubrogation rule would bar the carrier from stepping into ELRAC’s shoes and suing the renters to enforce the indemnification agreements for sums up to the statutory minimum required coverage.

Contrary to ELRAC’s contention, self-insurers are not immune from antisubrogation principles (see, Lo Piano v Hunter, 173 Ariz 172 , 174-176, 840 P2d 1037 , 1039-1041 [applying antisubrogation rule to self-insured trust fund]; Group Hospitalization Med. Serv. v Smith, 236 Va 228 , 230-232, 372 SE2d 159 , 160-161 [self-insured health plan was subject to antisubrogation statute]). By electing to self-insure under section 370, ELRAC undertook the obligation to provide primary insurance coverage for itself and its permissive users up to the statutory mínimums. With that, ELRAC undertook all the duties and responsibilities of an insurer. As noted, ELRAC may not, merely because it is a self-insurer, decrease the obligations that it owes to its insureds (see, Allstate Ins. Co. v Shaw, supra, 52 NY2d, at 820).

For amounts above the statutory mínimums, however, ELRAC may enforce the indemnification clause in its rental agreements. ELRAC is not statutorily bound to provide ad

In sum, Vehicle and Traffic Law § 370 requires rental car companies to provide primary insurance to their renters up to the minimum liability limits provided by the statute. Thus, the indemnification clause in ELRAC’s rental agreements, which seeks to disclaim that duty and assign the risk to the renters themselves, is unenforceable to that extent. The indemnification clause, however, if otherwise valid, is enforceable for amounts exceeding the statutory minimum liability requirements. We therefore remit all four cases to Supreme Court for determinations, under the proper legal standard, of the amounts, if any, for which ELRAC may seek indemnification in each case.

Accordingly, in ELRAC v Ward and American Home Assur. Co. v ELRAC, the orders of the Appellate Division should be reversed, with costs, and the cases remitted to Supreme Court for further proceedings not inconsistent with this Opinion. In Ward v ELRAC and ELRAC v American Home Assur. Co., the orders of the Appellate Division, insofar as appealed from, should be reversed, with costs, and the cases remitted to Supreme Court for further proceedings not inconsistent with this Opinion.

Judges Smith, Levine, Ciparick, Wesley, Rosenblatt and Graffeo concur.

In ELRAC v Ward: Order reversed, etc.

In Ward v ELRAC: Order, insofar as appealed from, reversed, etc.