Hertz Corp. v. State Farm Mut. Ins. Co.

• Decision Date: 28 January 1998
• Docket Number: No. C3-96-2050,C3-96-2050
• Citation: 573 N.W.2d 686
• Parties: The HERTZ CORPORATION, Respondent, v. STATE FARM MUTUAL INSURANCE COMPANY, petitioner, Appellant.
• Court: Minnesota Supreme Court

Page 686

573 N.W.2d 686

The HERTZ CORPORATION, Respondent, v. STATE FARM MUTUAL INSURANCE COMPANY, petitioner, Appellant.

No. C3-96-2050.

Supreme Court of Minnesota.

Jan. 28, 1998.

Syllabus by the Court

1. A car rental agreement that provides that the self-insured rental agency is liable only in the event that the renter or operator of the rented vehicle does not have other automobile liability insurance coverage violates the Minnesota No-Fault Act.

2. In determining priority of coverages, the self-insured rental agency's coverage is primary, while the renter's nonowned vehicle coverage arising from his or her own insurance policy is secondary pursuant to both Minn.Stat. § 65B.49, subd. 3(3)(d) (1996), and the common law "closest to the risk" doctrine.

Kay Nord Hunt, Lommen, Nelson, Cole & Stageberg, P.A., Minneapolis, Linc S. Deter, Brett W. Olander & Associates, St. Paul, for appellant.

Michael A. Koziol, Ditzler & Koziol, Minneapolis, for respondent.

Heard, considered, and decided by the court en banc.

OPINION

GARDEBRING, Justice.

This case involves the application of the Minnesota No-Fault Act in the context of rental cars. Specifically, we are asked to determine whether a self-insured rental car agency may meet its obligations under the Minnesota No-Fault Automobile Insurance Act, Minn.Stat. §§ 65B.41-.71(1996) ("No-Fault Act"), by providing liability coverage only in the event that the renter or operator of the rented vehicle does not have other liability coverage arising from his or her own automobile policy.

Jeffrey Powers rented an automobile from Hertz in August 1994. While driving the rental car, he was involved in an accident, which gave rise to negligence claims against him for property damage and personal injury. At the time of rental, Powers declined to purchase the Liability Insurance Supplement (LIS), which, for an additional fee, provided full liability coverage for automobile renters. The rental agreement provided that:

If you do not purchase liability insurance supplement (LIS) * * * at the commencement of the rental and an accident results from the use of the car, your insurance and the insurance of the operator of the car will be primary. This means that Hertz will not grant any defense or indemnity protection under this paragraph if either you or the operator of the car are covered by any valid and collectible automobile liability insurance, whether primary, excess or contingent, with limits at least equal to the minimum required by the applicable state financial responsibility law. If neither you nor the operator of the car have such insurance, Hertz will grant you and any authorized operator of the car limited protection under the terms and conditions stated in subparagraphs 10(a) above and 10(c) below.

The intended import of this provision was apparently to make the Hertz self-insurance coverage effective only if the renter or operator of the rented vehicle had no automobile liability insurance.

Powers had personal automobile liability insurance through State Farm for coverage on his 1985 Ford Bronco II. Powers renewed his State Farm policy on March 22, 1994, for a six-month term and the policy was in effect at the time of the accident. The State Farm policy, which has liability coverage with limits at $50,000 per person and $100,000 per occurrence, provided: "The liability coverage extends to the use, by an insured, of a * * * non-owned car." The policy further stated that "[i]f a * * * non-owned car has other vehicle liability coverage on it, then this coverage is excess."

Hertz brought a declaratory judgment action against State Farm, asserting that State Farm has the primary duty to defend and indemnify Powers against the claims arising from the accident involving the rented vehicle. In granting Hertz's motion for summary judgment, the trial court held that the Hertz rental agreement was a valid and enforceable contract that did not provide Powers with liability coverage at the time of the accident. It also held that the Hertz rental agreement did not violate the No-Fault Act because it guaranteed liability coverage if the renter or operator was not insured. It concluded that Minn.Stat. § 65B.49, subd. 3(3)(d), the statute dictating priority of coverage, did not apply because Hertz did not provide liability coverage at all on these facts. The trial court further concluded that Minn.Stat. § 65B.49, subd. 3(3)(d) did not apply because it took effect on August 1, 1994, after the March 1994 renewal date of the Powers' State Farm policy. Finally, the trial court held that State Farm, and not Hertz, was responsible for defending and indemnifying Powers for the claims arising out of the accident.

The court of appeals affirmed the trial court, holding that the Hertz rental agreement satisfied the purpose of the No-Fault Act because Hertz provided liability coverage in the event that the renter or operator did not have other automobile liability insurance. Because the court of appeals held the Hertz rental agreement was valid and enforceable, it did not reach the issue of priority of coverage under the No-Fault Act. State Farm now appeals, arguing that the Hertz rental agreement violates the No-Fault Act, because Hertz, a self-insurer, was required to maintain liability coverage on the vehicles that it owns. We reverse.

In our review of the summary judgment, we must determine "whether there are any genuine issues of material fact and whether the trial court erred in its application of the law." Interstate Fire & Cas. Co. v. Auto-Owners Ins. Co., 433 N.W.2d 82, 84 (Minn.1988). Because the facts are undisputed, this case raises only issues of statutory and contract interpretation, which are questions of law subject to de novo review. Garrick v. Northland Ins. Co., 469 N.W.2d 709, 711 (Minn.1991).

The No-Fault Act requires that every Minnesota automobile owner maintain a "plan of reparation security," with specific, statutorily set minimum benefits, including liability coverage. Minn.Stat. § 65B.48, subd. 1; see also Minn.Stat. § 65B.49, subd. 3(1) (stating the minimum benefits required). That obligation may, of course, be met either by the purchase of a commercial automobile liability insurance policy under Minn.Stat. § 65B.48, subd. 2, or by qualification as a self-insured entity, under Minn.Stat. § 65B.48, subd. 3. In this case, Hertz met its obligation by seeking and receiving the authorization of the commissioner of commerce to operate as a self-insured entity. In seeking that approval, Hertz agreed to "discharge fully and promptly all payments and obligations which are now due or shall become due under the provisions of the Minnesota No-Fault Automobile Insurance Act and amendments thereto."

State Farm asserts that Hertz's rental agreement violates the No-Fault Act because it allows Hertz to provide "contingent" liability coverage on vehicles it owns, although Hertz is statutorily required, as a self-insured owner of the vehicles, to maintain liability coverage, regardless of whether the renter or operator of a rented vehicle is otherwise insured. In response, Hertz argues that there is no violation of the No-Fault Act because there are no circumstances under which a Hertz vehicle would be uninsured. We disagree. A self-insured car rental agency does not meet its obligations as an automobile owner under the No-Fault Act by thrusting upon the renter its responsibility to provide liability coverage--that is, by providing liability coverage only in the event that the renter is without liability coverage.

The statutory provisions at issue--Minn. Stat. §§ 65B.48, subd. 1 and 65B.49, subd. 3(2)--do not on their face require that an automobile owner maintain coverage that is not contingent upon the presence of other coverage. Nevertheless, it is inconsistent with the general purpose of the No-Fault Act to read the statute in the manner advocated by Hertz. Hertz's interpretation of the Act would create a practical exemption to the broad statutory mandate that all automobile owners carry liability insurance, an exemption nowhere evident in the language of the statute.

Further, the distinction relied upon by Hertz and the court of appeals, that the statutory requirements on Hertz are different because it is self-insured, is contrary to our reading of the NoFault Act in other cases. We have said that "[s]elf-insurance is the functional equivalent of a commercial insurance policy. * * * The purpose of either form of insurance is to compensate victims appropriately. The certificate filed with the commissioner [of commerce] is the functional equivalent of an insurance policy." McClain v. Begley, 465 N.W.2d 680, 682 (Minn.1991). Further, in his concurring opinion in McClain, Justice Simonett concluded that, in considering the application of the No-Fault Act to self-insureds, we should "treat the self-insurer as if it had purchased a policy of auto liability insurance for each of its vehicles with itself as the named insured. Such a policy, if purchased, would contain an omnibus clause extending coverage to permissive drivers as additional unnamed insureds." Id. at 684. Applying this conceptual approach here, one could identify Powers as a permissive driver of the rented vehicle, whose liability would be fully covered by virtue of the omnibus clause. ¹

Further, we find no merit in Hertz's argument that this construction of the No-Fault Act violates its freedom of contract. Legislation may impact contractual obligations, if certain conditions are met. Generally speaking, "[t]he federal constitutional prohibition against contract impairment, U.S. Const., art. I, § 10, cl. 1, has been construed to mean that the state reserves some power to modify contract terms when the public interest requires." Christensen v. Minneapolis Mun. Employees Retirement Bd., 331 N.W.2d 740, 750 (Minn.1983). The legislature, therefore, can alter contract terms by enacting statutes as long as the...