Panel counsel for certain automobile insurers in the Chicago area known for insuring high risk drivers are fond of saying that they have never lost a case where their insurer denied coverage based on a “reasonable belief” exclusion. However, one such insurer will not be able to make that claim much longer based on the favorable ruling Jennifer Medenwald of our Chicago office obtained on that issue on behalf of another insurance carrier.
In Founders Ins. Co. v. Dunigan, et al., Case No. 06 CH 17627 (Cir. Ct., Cook Cnty., IL 2008), an argument was crafted using case law, policy interpretation and public policy to prevent one insurer from foisting the costs of its lenient underwriting practices onto other insurers, and ultimately onto the driving public. Other insurers should consider adopting the same arguments in cases involving “reasonable belief” exclusions to avoid having to pay for damages rightfully owed by insurers of high risk drivers who injure the property and persons of others.
A typical “reasonable belief” exclusion states that coverage is excluded for “anyone using a vehicle without a reasonable belief that the person is entitled to do so.” That exclusion was broadly interpreted in the case of Century Nat'l Ins. Co. v. Tracy, 339 Ill. App. 3d 173 (2nd Dist. 2003), to preclude coverage for a driver who was using the insured auto while his driver’s license was suspended, under a set of fairly extreme facts. Certain insurers thereafter adopted the practice of denying coverage whenever the driver of their insured vehicle does not have a valid driver’s license.
In Tracy, Century National issued an automobile policy to a company owned by James and Debra Tracy for their pick-up truck. Debra was the only individual listed as a driver on the application for insurance. The Century National policy contained an endorsement for Illinois underinsured motorist coverage (“UIM”), which contained an exclusion of coverage for “anyone using a vehicle without a reasonable belief that the person is entitled to do so.” Driver James’ driver’s license had suspended for 14 years at the time of the underlying accident and he had been arrested several times for driving with a suspended license. When the insurance agent prepared the application, the agent knew James did not have a valid license, and in fact told both James and Debra that James would not be covered by the Century National policy if he operated the truck.
James was involved in an accident while driving the truck and was injured. He collected $50,000 from the other driver’s insurance company and sought an additional amount under the Century National policy’s UIM coverage. Century National denied coverage and filed a declaratory judgment action, alleging that James was not covered by the Century National policy. Century National moved for summary judgment based on the “reasonable belief” exclusion, arguing that because James did not have a valid license at the time of the accident, he could not have reasonably believed that he was entitled to use the pick-up. The trial court granted that motion in favor of Century National and an appeal ensued.
On appeal, James argued that the Century National policy did not contain an exclusion explicitly precluding coverage for unlicensed drivers. The Appellate Court for the Second District rejected this argument, citing Economy Fire & Casualty Co. v. State Farm Mutual Insurance Co, 153 Ill. App. 3d 378 (2nd Dist. 1987). James also argued that his failure to possess a valid driver’s license did not in and of itself demonstrate that he could not have a reasonable belief that he was entitled to drive the insured vehicle. The appellate court noted that no Illinois court had decided whether the absence of a driver’s license alone was enough for the exclusion to apply. The court then discussed the facts of several other cases involving “reasonable belief” exclusions, including Economy Fire v. State Farm, noting that the lack of a driver’s license in that case was but a single factor in determining the applicability of the “reasonable belief” exclusion.
The Second District Appellate Court held that, under the facts, the Century National policy’s “reasonable belief” exclusion clearly encompassed unlicensed drivers, noting that James had not possessed a valid driver’s license for 14 years at the time of the accident, had been arrested several times and had been told by the agent that he would not be covered by the policy.
Further, the Appellate Court noted:
Moreover, a finding in favor of defendants [James and Debra] would violate public policy. [...] The public policy of Illinois is well known and well understood: a driver must possess a valid driver’s license to operate a motor vehicle in Illinois. [Citation omitted.] A driver who operates a motor vehicle with a revoked or suspended license is guilty of a misdemeanor. [Citation omitted.] Nothing in the insurance policy could overcome James’s legal inability to drive. Therefore, a finding that James reasonably believed that he could use the vehicle, even though he did not have a valid driver’s license, would violate Illinois public policy. 339 Ill. App. 3d at 176-77.
Several courts have cited Tracy as supporting the proposition that and individual without a valid driver’s license cannot reasonably believe that he or she is entitled to use a motor vehicle in Illinois. See, e.g., Cincinnati Ins. Co. v. Uhring, No. 05-CV-0602-DRH, 2006 U.S. Dist. LEXIS 92145, at *8-9 (S.D. Ill. Dec. 20, 2006); Grinnell Select Ins. Co. v. Glodo, No. 05-4178-JLF, 2006 U.S. Dist. LEXIS 65003, at *6-8 (S.D. Ill. Sept. 12, 2006).
Two other Illinois cases have interpreted the “reasonable belief” exclusion. In both Economy Fire & Casualty Co. v. Kubik, 142 Ill. App. 3d 906 (1st Dist. 1986), and Hartford Ins. Co. v. Jackson, 206 Ill. App. 3d 465 (2nd Dist. 1990), the Illinois Appellate Court held that “reasonable belief” exclusions were subject to more than one reasonable interpretation and, therefore, ambiguous based on the vagueness created by the manner in which the insurers in those cases used the term “family member” and “any person” interchangeably throughout the policy exclusion sections. In cases with similar policy provisions and facts to those in the Kubik and Jackson cases, those decisions can be used to defeat the application of the “reasonable belief” exclusions, precluding those insurers from escaping responsibility for their insured poor risk drivers.
As noted, some insurers use Tracy to argue that “reasonable belief” exclusions preclude coverage whenever the insured vehicle is used by a driver without a valid driver’s license, without considering any further facts in the claim. Ironically, the Tracy court’s discussion of the facts in other cases interpreting “reasonable belief” exclusions, and its reliance on the facts in support of its own holding, provide a means to argue against applying “reasonable belief” exclusions solely on the basis of an unlicensed driver.
In the Founders v. Dunigan case handled by our Chicago office, Founders sought a declaration that it did not owe coverage to driver Tanisia Dunigan for an underlying lawsuit (“the Lence action”), under an automobile liability insurance policy Founders issued to Tony Smith. The Lence action arose from an accident involving several vehicles, including an automobile that was owned by Tony Smith, operated by Ms. Dunigan and insured under a Founders auto policy. Founders sought a further declaration that it owed no coverage for the losses of other drivers involved in the accident, including our client State Farm and its insureds (collectively, “State Farm”).
Founders filed a Motion for Summary Judgment, relying on the Tracy case to argue that since Ms. Dunigan purportedly did not have a valid driver’s license at the time of the subject accident, she could not have reasonably believed that she was “entitled to” use Mr. Smith’s car and a “reasonable belief” exclusion in Founders’ policy from precluded coverage.
In opposition to Founders’ motion for summary judgment and in support of a counter- motion for summary judgment, State Farm presented a multi-part argument. State Farm argued that the language of Founders’ “reasonable belief” exclusion was vague and indefinite as applied to drivers without valid licenses because the phrase “entitled to” in the exclusion did not specifically refer to “legally entitled” use of the vehicle, and could simply mean having permission to drive the vehicle. In that case, the facts showed that Ms. Dunigan was a permissive user of Mr. Smith’s vehicle and could reasonably have believed that she was thereby entitled to use the vehicle. State Farm noted that Founders could have easily included a specific exclusion for claims involving non-licensed drivers but chose not to do so.
State Farm also pointed to the numerous factual differences between the case at bar and the Tracy case. These included that the driver in Tracy sought UIM coverage and that the license of the driver in Tracy had been suspended for 14 years. State Farm further noted that the Economy Fire v. State Farm case, the precedent relied on by the court in Tracy, expressly stated that the lack of a driver’s license was but a single factor to be used in determining the application of a “reasonable belief” exclusion.
It was also argued that Founders’ coverage position was contrary to Illinois’ mandatory insurance requirements, including the requirement of coverage for a permissive user under Illinois law. Finally, State Farm argued that Founders was estopped to deny coverage due its mishandling of Ms. Dunigan’s defense in the underlying Lence action. That argument was based on the fact that the same defense counsel was appointed by Founders to represent both Mr. Smith and Ms. Dunigan for a period of time, and that counsel argued that Mr. Smith was not liable because Ms. Dunigan had used his vehicle without his permission.
After arguments on cross motions for summary judgment, the trial court verbally indicated that he would deny Founders’ motion and grant State Farm’s motion. The court intends to issue a written memorandum and opinion in December 2008. Founders may choose to appeal this ruling, and several other cases involving “reasonable belief” exclusions are presently before the Illinois First District Appellate Court in a consolidated appeal involving Safeway v. Fernandez, Appeal No. 08-2042; Founders v. Vallarta, Appeal No. 08-0208; Founders v. Levan, Appeal No. 08-2059; Founders v. Honchar, Appeal No. 08-0415; and Founders v. Munoz, Appeal No. 07-0792. However, the result of the Founders v. Dunigan case shows that, with the right arguments and a thoughtful jurist, coverage for claims involving unlicensed drivers is not automatically precluded under a “reasonable belief” exclusion where the facts do not support the application of the exclusion.
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Michele Oshman, an associate in our Chicago office, is a member of the firm’s Appellate and Insurance Coverage practice groups. Michele concentrates her practice in the areas of insurance coverage and complex defense litigation. She has represented the interests of insurance companies in state and federal courts throughout the country, including disputes over coverage for underlying mass tort, professional liability, environmental, asbestos, construction defects, product liability, medical, municipal liability and other claims. Michele has also defended manufacturers in product liability cases, including nationwide class action matters, and has done reinsurance related work.
If you have any questions regarding this article, please contact Michele via moshman@querrey.com, or via 312-540-7590.
