Minnesota holds that car rental company may not by contract make renter's auto insurance policy primarily responsible for accident coverage; rental company policy or self-insurance is primary as it is "closest to the risk" of rental auto mishap

Journal of Risk and Insurance, June, 1998 by Jeffrey W. Stempel

Hertz's rental car operations in Minnesota sought to provide pursuant to the car rental agreement that Hertz would be liable for auto liability claims arising out of the rental only to the extent that the renter or operator of the rented vehicle does not have other automobile liability insurance. Hertz had earlier obtained authorization to operate as a self-insurer pursuant to the terms of the Minnesota No-Fault Automobile Insurance Act, Minn. Stat. 65B.41-.71 (1996). State Farm challenged the Hertz contract as violative of the Act and prevailed before the state Supreme Court. Said the Court:

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 Act's provisions] 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 a 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.

573 N.W. 2d at 688.

The Court thus interpreted the state no-fault statute to require that all users of automobiles provide primary coverage through either purchase of a policy or approved self-insurance, rejecting Hertz's argument that this requirement violated Hertz's freedom of contract to structure its rental agreements to place the burden of insurance upon the renter.

In addition, the Court required that the Hertz self-insurance program must provide primary coverage and that the renter's policy would provide secondary liability coverage. Minnesota law requires that the insurance policy "closest to the risk" be primary for purposes of coordination of benefits. If the policy closest to the risk is insufficient to satisfy the liability claim, the secondary policy is triggered for additional coverage. See Interstate Fire & Cas. Co. v. Auto-Owners Ins. Co., 433 N.W. 2d 82 (Minn. 1988). In making this determination, Hertz v. State Farm and other Minnesota cases examine which policy most specifically describes or contemplates the "accident-causing instrumentality" and "[w]hich premium is reflective of the greater contemplated exposure". 573 N.W. 2d at 689.

Applying these factors to this case, the Hertz self-insurance policy specifically describes the rental vehicle involved in the accident because Hertz is the owner and its self-insurance is specifically available to cover the vehicle at issue, while Powers' [the renter] State Farm policy only describes Powers' personal automobile. . . . because Hertz chose to self-insure, it avoided the payment of premiums to cover its liability. However, it is clear that Powers' State Farm policy did not contemplate primary coverage for more then damage to a rental vehicle, and its premiums are reflective of that fact. . . . the State Farm policy specifically states that its nonowned vehicle coverage is excess and incidental to any other policy covering the vehicle. While Hertz attempts to shift primacy to the State Farm policy through its rental agreement, Hertz's self insurance must provide liability coverage for damages caused by the use of vehicles it owns and offers for rent. Therefore, Hertz's self-insurance coverage is primary even under common law principles.

573 N.W. 2d at 689.

Two Justices concurred specially, suggesting they disagreed with the majority's common law analysis but finding a statutory amendment that became effective a day prior to the rental at issue in the case to be dispositive. Justice Alan Page, widely know for his prior career as a star NFL defensive lineman for the Minnesota Vikings and Chicago Bears, was the lone dissenter, arguing that the majority approach would not provide increased coverage but would merely require Hertz to absorb more of the cost of rental car accidents, with the increased cost "likely to be passed on by Hertz to all of its rental car customers. There is no sound reason why individual renters should not be required to bear the cost of their own liability insurance protection."

Despite its appealing law & economics argument, the Page dissent appears to underestimate the reduction in auto insurance protection effected by the Hertz rental agreement, which would "not grant any defense or indemnity protection under [the agreement if the renter is] 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." 573 N.W. at 686. In Minnesota, like most states, the minimum required insurance is hardly enough to provide full compensation in the event of a serious automobile accident. Consequently, enforcement of the Hertz provision would appear to open the door to rental car accidents in which the third party victim would be able to pursue only the relatively shallow pocket of a minimum level no-fault policy but be effectively barred from full compensation absent active fault by Hertz (e.g., faulty car maintenance contributing to the hypothetical accident) or a tortfeasor renter with sufficient personal assets to pay the claim. Consequently, the Hertz v. State Farm decision would appear not merely to shift coverage burdens but to expand available automobile liability coverage generally.