For Auto Liability Coverage to Attach to ‘Borrowed’ Vehicle, Transaction Must Satisfy Commonsense Meaning of That Term

In an insurance dispute spanning two states, and applying Kentucky law, the Sixth Circuit U.S. Court of Appeals, over a spirited dissent, held there was no coverage for an accident in Los Angeles. The reason: The Mercedes-Benz driven by Davida Sullivan, who was at fault, was not a “borrowed” vehicle at the time of the accident. The decision, filed June 13, 2017, though not recommended for full-text publication under Sixth Circuit rules, is entitled Selective Insurance Company of South Carolina v. Sullivan and Omni Custom Meats, Inc., and is reported at 2017 U.S. App. LEXIS 10686; 2017 Fed App. 0333N.

The facts were that in June, 2007, Selective Insurance Company issued a policy of insurance with business auto and commercial umbrella liability coverages to Omni Custom Meats, Inc., a Kentucky meatpacking company owned by Davida’s parents. The Mercedes-Benz, also owned by the parents, was added to the policy by endorsement as a covered auto well before the accident. It was undisputed that the policy did not expressly name Davida as an insured.

The injured party in the Los Angeles accident, which occurred May 9, 2011, was one James Blake.

The question presented on appeal from a summary judgment in favor of Selective was whether the named insured under the policy of insurance, Omni, had “borrowed” the Mercedes from its owners, Davida’s parents, as the term is used in the insurance policy. The background was that in 2007 Davida’s parents allowed Omni to use the Mercedes for “business purposes.” Davida had started working for Omni in 2001, performing mostly “back office” work from her home in California. Starting in 2009 Omni gave Davida permission to use the Mercedes.

In January, 2011, however, Omni ran out of work for Davida, and she ceased working for the company. Omni provided Davida with a severance package, however, that supplied her with auto and other types of insurance, and granted Davida permission to continue using the Mercedes. Sometime between January and May, 2011, Davida started a jewelry and clothing business in California. Nevertheless, Davida was driving the Mercedes with Omni’s permission on the date of the accident.

The Selective business auto and commercial umbrella liability coverages contained identical definitions of “who is an insured,” both stating, “the following are insureds: a. You for any covered auto. b. Anyone else while using with your permission a covered auto you own, hire or borrow….” (Emphasis added.) In coverage litigation filed by Selective in U.S. district court in Kentucky, the parties agreed that the term “you” in the definitions referred to Omni. Blake asserted that Davida was an insured under Omni’s policy because Omni had “borrowed” the Mercedes from her parents, and Davida used the car with Omni’s permission.

The district court ultimately found that Davida was not an insured under the policy at the time of the accident and consequently Selective had no duty to provide coverage to Davida for the accident.

The Court of Appeals affirmed the district court’s ruling. It held that, although ambiguities in an insurance contract must be resolved in favor of the policyholder, this rule did not apply to the to this case, because under the facts, Omni’s transaction satisfied none of the multiple meanings of the term “borrow” advanced by Blake, the injured party. The Court of Appeals considered each of the proposed meanings in turn.

First the court considered dictionary definitions of the term “borrow,” but all required that Omni’s use of the Mercedes be temporary, or that Omni received the Mercedes with the express or implied intention of returning it. Under the state of the record evidence, however, nothing indicated to the court that Omni’s use of the Mercedes for an indefinite period of time was temporary under this definition. The court found the same mismatch between the facts of this case and those of earlier, reported decisions cited by Blake, starting with a California decision requiring that the borrower exercise dominion and control over the vehicle to qualify as a borrower, also absent here.
Continuing to canvass the definition requirements of the term “borrow”, the court found that the transaction did not confer a benefit at the time of the accident upon Omni, the purported borrower, but only upon Davida, who was running a personal errand in California at the time of the accident. Supporting this conclusion, too, was the absence of evidence suggesting the severance package included any terms limiting Davida’s use of the Mercedes, or any terms allowing Omni to demand that she return the vehicle.

The court rejected, too, the applicability to these facts of Kentucky’s “initial permission” doctrine. That doctrine determines whether a non-owner’s use of a vehicle exceeds the scope of permission given to that person, and allows for insurance coverage even if the use of the vehicle is not within the original contemplation of the parties, or was outside any limitations placed upon the initial grant of permission. Under the doctrine, as long as permission is initially given to a person to use a vehicle, insurance coverage may extend to subsequent vehicle users through the language of the policy’s omnibus clause as long as those subsequent users have permission from the initial borrower to use the vehicle.
The problem with the case establishing that doctrine, the court held, is that the policy issued by Selective did not contain the same “own, hire, or borrow” language as the policy in that case did.

In sum, whether or not Blake’s proposed definitions of the term “borrow” were all reasonable, the facts of the case simply did not satisfy any them, so Omni was not a “borrower” of the Mercedes at the time of the accident.

The court also rejected application of Kentucky’s “reasonable expectations” doctrine to support a finding of coverage in this case. The doctrine holds that the insured is entitled to all the coverage he or she may reasonably expect to be provided under the policy, but generally this principle applies only to alleged ambiguities within the policy, and here, the term “borrow” is not ambiguous. Even if the court were to find that the term is subject to two reasonable interpretations, thus triggering the reasonable expectations doctrine, based on the reasons already given in the opinion, there is no interpretation of “borrow” that could have given rise to a reasonable expectation that the insurance company extended coverage to Davida’s accident. The Court of Appeals affirmed the district court’s order.

A dissenting judge agreed that the only issue regarding coverage was whether Omni was borrowing the Mercedes from its owners at the time of the accident. That judge urged, however, that once Davida ceased her employment with Omni, and it continued paying the additional premium Selective charged for insuring the Mercedes, Omni thereby continued allowing Davida to use the Mercedes as a part of her severance package. Under these circumstances, the dissent argued, a reasonable jury could find that Omni was borrowing the Mercedes from Davida’s parents at the time of the accident.

The dissenting judge agreed with the majority, also, that to qualify as a borrowing possession of the Mercedes must be temporary. But she did not agree that the lack of a specific end date for Davida’s use of the vehicle meant that Omni was not borrowing the Mercedes. Citing a well-recognized insurance treatise, the judge asserted that borrowing may be for an indefinite period of time and may in fact last until either the insured decides to return the automobile or the lender requests its return. (8A Couch on Insurance, § 118:50, p. 118-98.)

The dissent also revealed that Selective had urged the court that even if the policy provided coverage, other policy conditions limited such coverage to the state required minimum limits because Omni failed to disclose to the insurer information regarding the location, driver and use of the Mercedes. The condition was later amended by endorsement to provide that in the event of concealment, misrepresentation or fraud, Selective will only provide coverage up to the minimum limits of liability required in Kentucky. Since Selective pointed to no evidence of intentional misrepresentation or concealment the part of the policyholder, however, nothing in the record established that Selective requested an updated drivers list or garage location after Davida began using the Mercedes in California. (The majority said otherwise.) Therefore, according to the dissent, Selective had not supported the grant of its summary judgment on that basis.