Public Employees Mut. Ins. Co. v. Kelly

• Decision Date: 04 March 1991
• Docket Number: No. 25563-1-I,25563-1-I
• Citation: 60 Wn.App. 610,805 P.2d 822
• Court: Washington Court of Appeals
• Parties: PUBLIC EMPLOYEES MUTUAL INSURANCE COMPANY, Respondent, v. Robert KELLY and Nancy Kelly, husband and wife, and the marital community composed thereof, Appellants.

Page 610

60 Wn.App. 610

805 P.2d 822

PUBLIC EMPLOYEES MUTUAL INSURANCE COMPANY, Respondent, v. Robert KELLY and Nancy Kelly, husband and wife, and the

marital community composed thereof, Appellants.

No. 25563-1-I.

Court of Appeals of Washington,

Division 1.

March 4, 1991.

Stafford Frey Cooper & Stewart, John Budlong, Seattle, for appellants.

Merrick, Hofstedt & Lindsey, Sidney R. Snyder, Jr., Seattle, for respondent.

FORREST, Judge.

On January 2, 1985 Richard and Nancy Kelly were seriously injured when struck by a pickup truck driven by Max Pau, an employee of AFC, Inc., while on company business. The registered and legal owner of the pickup was AFC, Inc., but the vehicle was listed on a United Pacific policy issued to Graydon Smith, AFC's president and majority shareholder.

The Kellys sued Pau, the Smiths, and AFC. Pau stated in interrogatories that AFC: (1) was the registered owner of the truck; (2) was the "actual owner"; (3) was benefitted by the use of the vehicle; (4) paid the expenses for the trip that the truck was on; and (5) paid for the insurance, gas, oil, maintenance and repair of the truck. The trial court dismissed the Kellys' claims against the Smiths after the Smiths argued that they were neither the owner of the truck nor the employer of Pau, and thus owed no duty to the Kellys. ¹ Neither United Pacific, Smith, Pau, nor AFC claimed that Smith owned the pickup. The Kellys' case proceeded against AFC and Pau.

The United Pacific policy designating the Smiths as named insureds contains a provision which extends coverage to the following:

(a) With respect to an Owned or Hired Automobile,

(1) the Named Insured;

(2) an executive officer or partner of the Named Insured;

. . . . .

(4) any other person while using such an Automobile with the permission of the Named Insured, provided his Use thereof is within the scope of such permission ...

. . . . .

(b) With respect to a Non-owned Automobile,

(1) the Named Insured;

(2) an executive officer or partner of the Named Insured ...

The United Pacific policy defines an "owned automobile" as "an Automobile (a) owned by the Named Insured...."

The United Pacific liability policy had a limit of $500,000 and listed the particular pickup truck involved in the accident. In addition to the above policy, the Smiths also had a $1,000,000 "umbrella" policy subject to a $10,000 self-insured retention. During settlement negotiations, although the recovery sought exceeded $500,000, United Pacific never issued a reservation of rights letter and never claimed that the umbrella policy was unavailable. In 1987, the Kellys settled for $500,000, paid under the United Pacific automobile liability policy.

Because the Kellys claimed damages in excess of $500,000, they sought additional benefits on their underinsured motorist (UIM) policy with Public Employees Mutual Insurance Company (PEMCO). The Kellys claimed that under the United Pacific policy Pau was uninsured/underinsured because United Pacific was not contractually obligated to cover Pau--despite the settlement of $500,000.

PEMCO refused payment, maintaining that Pau was insured under the United Pacific policies. PEMCO sought a declaratory judgment and moved for an order of partial summary judgment, claiming that it was entitled to a $1,500,000 credit (the combined limits of the Smiths' two United Pacific policies) against any recovery that the Kellys might obtain in underinsured motorist arbitration. The trial court agreed, granting a partial summary judgment against the Kellys. After the parties stipulated that the recovery sought was less than $1,500,000, the court granted full summary judgment dismissing the Kellys' claims against PEMCO. In denying the motion for reconsideration the trial court stated that it believed "Mr. Pau was a permissive user of a vehicle owned by a named insured under the terms of the United Pacific policy." ²

PEMCO asserts that the Smiths, in particular Graydon Smith, was the owner of the pickup and therefore United Pacific was contractually obligated to provide coverage for the accident in question. We disagree. AFC was the legal and equitable owner of the pickup. It paid the operating expenses of the pickup including those for the trip at the time of the accident, the trip was on AFC's behalf, and AFC possessed and controlled the pickup. We conclude that the Smiths did not own the truck.

The respondent argues that because Graydon Smith was a majority owner of AFC and exercised control over AFC's property, in effect the Smiths owned the truck. They cite Progressive Northwest Ins. Co. v. Haker, ³ in which the named insured under the policy was Bonnie Frost, while the title was in the name of Frost's sole proprietorship, Basin Commodities. The court held that Frost's personal policy covered the vehicle owned by the sole proprietorship, because the sole proprietorship was legally indistinguishable from the proprietor, Frost. If AFC were a sole proprietorship, Haker would be authority for PEMCO's claim. But AFC is a corporation and there is no basis advanced for disregarding the corporate entity. Any control Smith may have exercised over the truck is attributable to his capacity as president of AFC, not as an individual, despite the fact that Smith was a majority shareholder. ⁴

While it is true that in some contexts a vehicle "owner" may differ from the owner defined in the motor vehicle code, ⁵ this is not one of them. In the cases cited by PEMCO, the indicia of ownership are divided between competing "owners," whereas in the present case only AFC had indicia of ownership. In Kelly v. Aetna Casualty & Surety Co., ⁶ the named insured, Dr. Schneider, financed a vehicle for his son but retained title in his own name to protect his financial interest. Dr. Schneider was thus in the same position as a financing bank, retaining legal ownership but exercising no control over the vehicle that his son possessed and enjoyed. Not surprisingly, the court held that Dr. Schneider's son "owned" the vehicle, and he was not covered under his father's liability insurance policy.

Smith's lack of ownership is even clearer than Dr. Schneider's, because not only did Smith lack possession and control (in his personal capacity) over the pickup, he also lacked title or registration in his name.

In accord with Kelly v. Aetna, the court in Allstate Ins. Co. v. Neel ⁷ determined that the parents who owned a security interest in their son's automobile after loaning money for its downpayment did not "own"the vehicle for purposes of their insurance coverage, because it was their son who possessed it and exercised control over it.

In Farmers Ins. Co. v. U.S.F. & G. Co., ⁸ the court found that the term "owner" was not limited to the registered owner, but included the possessor. There, the insured, Mr. Haabey, was driving a non-owned vehicle at the request of a person who had borrowed it from a used car lot. Haabey's policy covered him when operating a non-owned vehicle with the owner's permission. The court held that Haabey was entitled to the coverage of his policy because he operated the vehicle with permission of the "owner," i.e., the one in possession of the vehicle although not the one in whose name it was titled. The court noted that the purpose of Haabey's coverage and the extent of the carrier's risk was unaffected by the fact that he received permission from the one in possession rather than directly from the holder of title.

Unlike Haker, Kelly, Neel, and Farmers, where more than one party had indicia of ownership, in the present instance AFC had possession and all the legal and equitable indicia of ownership and Smith had none. Certainly no one argues that ownership would continue after one sells a vehicle even though the vehicle remains on one's policy. It follows that in this case ownership, and therefore coverage, is not established by the mere fact that the pickup was listed on Smith's insurance policy.

Nor can the $500,000 payment by United Pacific create ownership of the vehicle in Smith; ownership is determined at the time of the accident. The record is unclear as to why United Pacific paid the $500,000 settlement when not legally bound to do so, ⁹ but the reason for the payment is irrelevant to the question of who owned the pickup. Because AFC owned the pickup and Smith's policy did not provide coverage of Pau, United Pacific had no contractual obligation to defend Pau or pay a judgment against him. Consequently, we conclude that Pau is uninsured/underinsured.

The dissent argues that because United Pacific handled and settled the Kellys' claim against Smith without a reservation of rights, the Kellys have lost their contractual rights against their UIM carrier, PEMCO, relying principally on Transamerica Ins. Group v. Chubb & Son,

Inc. ¹⁰ The argument is not persuasive. In Chubb, Gamel Construction Company was sued for damages growing out of a landslide. Gamel had policies with Federal Insurance Company (Federal), Transamerica Insurance Company, Reserve Insurance Company and Continental Casualty Company, all of which arguably provided coverage. Defense was tendered to Federal which accepted without a reservation of rights and proceeded to handle the claims for 10 months, at which time they denied coverage. The court held that Federal was estopped to deny coverage as to its insured Gamel because prejudice was presumed by the 10 month delay. As to other carriers, the court remanded for trial to see if prejudice was established, thus estopping Federal to deny coverage as to them. In contrast to Chubb, here there was no prejudice and, hence, no estoppel. Neither Kelly nor PEMCO were prejudiced; indeed, they both benefited in the sum of $500,000. Normally, estoppel as to the insured Smith ¹¹ would make coverage available to the claimant. However, here, as the dissent agrees, Smith is not liable as a matter of law which was established prior to the settlement. The only way Smith's...