The insureds had already paid almost $1.4 million out of their own pocket as the result of an accident caused by an excluded operator, when on September 16, 2015, the Supreme Judicial Court (“SJC”) issued a decision affirming that they had no optional bodily injury coverage for an accident that occurred after they permitted an excluded operator to use their vehicle.
The SJC decision, Commerce Insurance Co., Inc. v. Gentile, 472 Mass. 1012 (2015) affirmed, with one qualification, the Appeals Court decision in Commerce Insurance Company v. Gentile et al., 85 Mass. App. Ct. 67 (2014
The original Appeals Court decision was a case of first impression relating to the excluded operator form. Agency Checklists’ March 23, 2014 article, “No Optional Liability Coverage If Insured Does Not Honor Operator Exclusion Form’s Terms” and the comments to that article discuss at length the Appeals Court decision and its implications for agents writing automobile insurance.
The SJC decision arose out of a coverage dispute involving a 2006 auto accident. The lawsuit brought against the insureds alleged they had legal liability for allowing their grandson to operate their vehicle. Commerce (now known as “MAPFRE”) provided a legal defense to the lawsuit under the vehicle’s compulsory coverage but issued a reservation of rights letter on the optional bodily injury coverage. With that lawsuit pending, Commerce filed a separate coverage suit seeking a ruling that the Operator exclusion form that applied to the operator who caused the accident voided the $500 thousand optional liability limit that the insureds’ policy otherwise provided.
Grandparent’s allowing grandson to operate their vehicle despite excluded operator agreement
Commerce’s insureds, Lydia and Vittorio Gentile (Gentiles), were the grandparents of one Vittorio Gentile, Jr. (Junior). They owned and registered several vehicles, including a Lexus from their personal residence in Westwood.
Mister and Mrs. Gentile had also built up a small real estate portfolio in addition to their personal residence. They owned a five family rental property with a storefront that housed a beauty salon in Roslindale, a vacation cottage in Centerville on Cape Cod, a duplex rental property in Canton, and another three family rental property with a storefront in Walpole.
The Gentile’s estimated the value of these properties, exclusive of their personal residence, as worth somewhat more than $1,400,000.
The Gentiles also owned a Lexus they insured under an automobile insurance policy (policy) issued by Commerce (Commerce). The policy had been purchased through a local insurance agency, Pollicelli & Mullen. William Mullen was the Gentiles’ insurance agent. He also was a friend and a neighbor of the Gentiles. In late 2004, Mrs. Gentile complained to Mr. Mullen about the high auto insurance premiums she and her husband were paying. Mr. Mullen advised Mrs. Gentile that the major cause of the high premiums resulted from Junior’s miserable driving record – “the worst he had ever seen” ̶ that included motor vehicle violations and at least two motor vehicle accidents. One of which involved a fatality.
As a result of the agent’s advice, the Gentiles decided to remove Junior from their policy to save approximately $900 in additional premium. To exclude Junior from the policy, Mr. Mullen had Mrs. Gentile and Junior sign an “Operator Exclusion Form” that stated:
It is agreed that the person named below [Junior] will not operate the vehicle(s) described below, or any replacement thereof, under any circumstances whatsoever.
Notwithstanding the agreement to never allow Junior to operate their vehicles, Junior on occasion still used his grandparents’ Lexus and ultimately caused a third accident with devastating physical consequences to the other motorists involved as well as devastating financial consequences to his grandparents.
Grandparents become liable for permitting grandson to drive their vehicle even though they had excluded him as an operator
In the early morning hours of December 10, 2006, Junior drove his grandparents’ Lexus 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 grandparents for negligently allowing Junior to use the Lexus after they had become aware of his driving record.
At trial, the issue of the grandparents’ knowledge of Junior’s terrible driving record and whether they permitted him to drive became the main issue for the jury to decide. The Gentiles claimed they did not know about Junior’s record and that they had not given him permission to use the Lexus. The trial judge allowed the jury to hear the testimony of the Gentiles’ insurance agent, Mr. Mullen. He testified by video deposition regarding the discussion around the execution of the operator exclusion form, and on the statements Mrs. Gentile’s made when reporting the accident about Junior having permission to drive the Lexus.
The jury found Junior and the grandparents jointly liable for almost $12 million in damages. Junior was found liable for what he did in driving the vehicle negligently into oncoming traffic. His grandparents were found liable for what they did not do in failing to prohibit Junior from driving their vehicle as they had agreed.
Judgment arising out of grandson’s accident leads to the Gentiles filing for bankruptcy
Following the jury’s verdict that the Gentiles were liable for negligently entrusting their vehicle to Junior, their bank accounts and real property were attached and the court entered an order limiting their spending to $5000 per month. Following legal maneuvering, including a contempt complaint concerning the Gentile’s allegedly having transferred assets in violation of a court order, the Gentile’s filed for personal bankruptcy.
The Gentiles were able to keep their primary residence out of the bankruptcy by taking a reverse mortgage to make an additional payment to the temporary guardian of the 2 persons that their grandson had catastrophically injured. Additionally, they were able to exempt approximately $90,000 in retirement funds from liquidation in the bankruptcy. Otherwise, all of their real property and the Lexus that their grandson drove in the accident were sold at auction. The proceeds totaled in excess of $1,300,000. Approximately $1 million went to the injured parties with the rest going to pay the expenses of the bankruptcy administration.
SJC affirms an executed operator exclusion form becomes a material term of the automobile insurance contract
The SJC decision affirming the original Superior Court judgment and the appeals court ruling simply rested on breach of contract principles. As the SJC stated the issue and the decision they ruled that:
By executing the operator exclusion form, the Gentiles specifically agreed that Junior would not operate the insured motor vehicle “under any circumstances whatsoever.” By allowing Junior to operate their vehicle, or by not preventing him from doing so, the Gentiles committed a breach of this material term of their insurance contract with Commerce.
The SJC the further ruled that:
As a result of this breach, the Gentiles relieved Commerce of a duty to pay the optional coverage for bodily injury.
SJC refuses to endorse that insureds have a “continuing duty to disclose” material changes during the coverage period
The SJC did not entirely endorse all the Appeals Court’s reasoning and rulings. A major part of the Appeals Court’s decision turned on that Court finding that the Gentile’s had a duty of “continuing representation.”
The Appeals Court decision extended common-law principles and G. L. c. 175, § 186 that provides the insurer may be able to deny coverage only for misrepresentations made with actual intent to deceive, or that increased the risk of loss.” Ordinarily, the duty to truthfully disclose material facts only to the application process. Once the policy issued the insured had no duty to disclose to the insurer any subsequent changes in condition that affected the insurer’s risk of loss. The Appeals Court, however, found that insureds did have a duty to disclose that extended beyond the application process and into the coverage period. The Appeals Court’s ruling held that:
“[A]n insured, at a minimum, has a duty to inform the company of a material change during the application period. It does not relieve the policyholder of a duty to do the same during the coverage period”.
The SJC noted that the Appeals Court’s interpretation of this duty to disclose: “…would seem to impose on an insured the responsibility to identify any changes occurring during the coverage period that are material to the insurer’s risk of loss, and to notify the insurer accordingly.
The SJC, however, explicitly declined to rule on whether such duty on insureds existed and instead stated:
We leave for another day the issue whether the duty of continuing representation applies within the coverage period. In this highly regulated area, any expansion of the insured’s duties under a standard automobile insurance policy might be better left to the Division of Insurance.
Agent Takeaways
- The Gentile case may be an extreme, but in any case where an insured seeks to save premiums by executing an excluded operator form an agent and the agency’s personnel should document their disclosures to the insured of the consequences of violating the agreement. The Gentile case offers an object lesson for agents to use. As a result of not adhering to their agreement, the Gentile’s lost over $1.4 million of real property assets that they had built up for retirement.
- Also, an agent should recognize that if an issue ever arises over an insured having negligently entrusted the motor vehicle to an excluded driver, the agency’s files and documentation relating to the excluded operator form will be subpoenaed. The prime evidence for proving the actual knowledge of the insured of the poor driving record of the excluded driver will be, as in the Gentile case, the testimony of the agent and the agency’s files related to the excluded operator agreement.
- Agents should also note, as the SJC did in a footnote, that the standard Massachusetts automobile insurance policy now does require insureds to notify the insurer of certain material changes during the policy period stating: “You must inform us of any changes which may have a material effect on your insurance coverage or premium charges, including the . . . individuals who customarily operate your auto.” This language broadens the disclosure required by insureds and seems to create contractually the “continuing duty to disclose” obligation that the SJC deferred ruling on in the Gentile case.
Copies of SJC Decision
The decision of the SJC is available here: Commerce Insurance v. Gentile
