Excluded driver form upheld by the appeals court and Insureds lose $500,000 in liability insurance.
In a case of first impression, the Massachusetts Appeals Court has ruled that insureds can lose their optional bodily injury coverage under an automobile policy if an excluded driver operates their vehicle and causes an accident.
The decision, Commerce Insurance Company v. Gentile et al., 85 Mass. App. Ct. 67 (2014) arose out of a coverage dispute involving a 2006 auto accident. The accident lawsuit brought against the insureds alleged they had legal liability for allowing their grandson to operate their vehicle. Commerce provided a defense to this lawsuit under the vehicles compulsory coverage and a reservation of rights. However, in a separate coverage suit, Commerce also requested a court ruling that an Operator Exclusion Form that applied to the operator who caused the accident voided the $500,000 thousand optional liability limit the insureds’ policy otherwise provided.
Grandparents made grandson an excluded operator to save premium
Commerce’s insureds, Lydia and Vittorio Gentile (the Gentiles), were the grandparents of one Vittorio Gentile, Jr. (Junior). The Gentiles owned and registered several vehicles, including a Lexus from their home address in Westwood. Although Junior was 24, and living elsewhere, the Gentiles listed him along with other grandchildren, as operators on their automobile insurance policy.
In late 2004, Mrs. Gentile complained to her agent about the high premiums for auto insurance she and her husband were paying. The agent later testified that he had advised her that the major cause of the high premiums resulted from Junior’s miserable driving record. He furthermore stated to them that as long as they maintained Junior as a listed driver they were going to pay more based on his driving record.
As a result of this discussion, Mrs. Gentile and Junior signed and submitted to Commerce the standard Operator Exclusion Form. That form stated “It is agreed that [Junior] will not operate [the Gentiles’vehicle[s]…. under any circumstances whatsoever.”
After receiving Junior’s Operator Exclusion Form, Commerce renewed the Gentile’s policy twice without requiring any renewal application. On each renewal the declaration page of the policy identified Junior under the heading “Operator Status” as “E” for excluded. Commerce did not use Junior’s extensive surcharge information in rating the Gentiles’ policy and thereafter issued the Gentiles’ policy with a reduced premium. The additional yearly premium for listing Junior on the policy for that year would have cost the Gentiles approximately $900.
The accident
In the early morning hours of December 10, 2006, the now 26-year-old Junior drove his grandparents’ Lexus sports utility vehicle into oncoming traffic and hit head-on a vehicle carrying two persons. Both persons in the vehicle suffered catastrophic injuries with one left permanently unable to walk or speak.
The guardian for the incapacitated victims sued Junior for negligence and the Gentiles, along with other claims, for negligently allowing Junior to use the Lexus after they had become aware of his terrible driving record.
At trial, the issue was of whether the Gentiles had knowledge of Junior’s driving record. This issue was critical to determining whether or not G.L. c. 231, § 85 applied to the case which makes the registered owner liable for persons using their vehicle when that use was with permission. The Gentiles claimed they did not know about Junior’s driving record and that they had not given him permission to use the Lexus. The Superior Court allowed the jury to hear the testimony of the Gentiles’ insurance agent. He testified by video deposition regarding the discussion around the execution of the Operator Exclusion Form. He also testified about the statements Mrs. Gentile’s made when reporting the accident about Junior and having permission to drive the Lexus.
The jury found Junior and the grandparents jointly liable for $12 million in damages. The more seriously injured victim received an award of $9.5 million while the other victim received an award of $2.5 million.
Appeals Court decides insured signing the Operator Exclusion Form makes an enforceable promise to the insurance carrier
The Appeals Court classified the Operator Exclusion Form as a bargained for promise that an insured has to keep in order to maintain their right to the policy’s optional coverage. The Court stated that “In exchange for a reduced premium, [the Gentile insureds] promised to exclude Junior from operation of the 1999 Lexus”. The jury verdict, however, showed that the Gentiles breached that promise. That breach of the terms of the Operator Exclusion Form, the Court decided, excuses Commerce from its obligation to provide any optional coverage.
Going further, the Appeals Court ruled that the failure to exclude Junior from operating the Lexus amounted to a material misrepresentation. The Court found that while no intent to deceive may have existed when the Operator Exclusion Form was signed, the Gentiles were unable to keep their promise to exclude Junior operating their vehicle “in all circumstances whatsoever.” That failure, the Court ruled, ripened into a misrepresentation affecting the degree of risk and the level of the premium.
Since this failure to exclude Junior from using the vehicle affected the premium of the policy, the Court found that the failure was material. Therefore, it concluded that Commerce had the right to avoid paying any of the $500,000 limit for optional liability. The Court based this ruling on the provision in The Standard Massachusetts Automobile Insurance Policy that states: “…if I or someone on my behalf provides false, deceptive, misleading or incomplete information in any application or policy change request, and if such false, deceptive, misleading or incomplete information increases the company’s risk of loss, the company may refuse to pay claims under any or all of the [o]ptional [i]nsurance [p]arts of this policy.”.
Insured had duty to advise insurance company regarding excluded operator using vehicle
The Appeals Court also ruled that even though Commerce had not sent annual renewals that the insureds still had the duty to inform Commerce during the policy period if there were any material change in the conditions of the risk. The Court reconciled this statement with a contrary general rule that the same court had stated in another case. In the case, Quincy Mutual Fire Ins. Co. v. Quisset Properties, Inc., 69 Mass. App. Ct. 147 (2007) an insured renewed a commercial auto policy through a company at a substantially lower annual premium for over four years after the company had been dissolved. Following a collision causing catastrophic injury to a third party, the insurer sought to void the policy for a material misrepresentation. The Appeals Court reversed the Superior Court judgment in favor of the insurer and held that unless there were a special or express agreement otherwise, that an insurer had the duty to make inquiries about material changes in the risk and that an insured’s silence about changed circumstances did not constitute a misrepresentation that the insurer could use to avoid coverage.
In this case, however, the Appeals Court held this general rule relating to an insured’s silence about changed circumstances did not apply because the signed Operator Exclusion Form constituted an exceptional “special agreement” or “express agreement” as to the duty of the insured to advise the insurance company of changed circumstances.
In addition, the Court found that since the annual renewal declarations page issued by Commerce placed an “E” beside Junior’s name to inform the Gentiles of his continuing exclusion and the basis for their ongoing lower premium, the exclusionary provision continued through any renewal in the absence of inquiry by the company.
The decision did affirm that compulsory bodily injury limits still apply by operation of G.L. c. 175, 113A notwithstanding the Operator Exclusion Form.
Agent Takeaways
- This decision clearly rules that the Operator Exclusion Form creates a policy exclusion that is extrinsic to the insurance policy itself. Since, as here, an insured seeking to reduce his or her premium will execute the form as a separate undertaking after consulting with his or her agent, the agent should adequately document the discussion. Note that in the underlying negligence suit the agent became involved as a witness.
- If the insurance company disclaims liability on optional liability coverage because of an Operator Exclusion Form, the agent’s now uninsured client and any plaintiff recovering a judgment against this client will look for a “deep pocket” to sue. Good documentation will insure that an agent does not become involved in a lawsuit over who said what when the insured signed the Operator Exclusion Form.
