Non-trucking-use coverage exclusion valid only where policy states exclusion is effective if vehicle's lessee is insured

Law Reporter, May 1999

Royal Indem. Co. v. Providence Wash. Ins. Co., _ N.Y.S. 2d _, No. 192, 1998 WL 887684 (Dec. 22, 1998).

The New York Court of Appeals held that a non-truckinguse coverage exclusion in a commercial vehicle owner's insurance policy is valid under state law only where the policy states that the exclusion is effective only if the vehicle's lessee is insured.

Here, a trucking company leased a tractor-trailer. Under the lease agreement, the lessee obtained truckers' liability insurance and the owner, a non-trucking-use policy. While working for the lessee, the tractor-trailer's driver hit and injured a bicyclist who sued both the owner and lessee. The lessee's insurer paid the settlement amount but sought 50 percent indemnity from the owner's insurer. The trial court granted plaintiffs motion for summary judgment. On appeal, the Second Circuit Court of Appeals certified two questions to the state high court: ( 1 ) whether a nontrucking-use exclusion in an owner's insurance policy is valid despite the absence of express language stating the exclusion is only effective if the lessee is required to obtain insurance coverage and (2) if the exclusion does not entirely exclude coverage, whether it limits liability to the minimum required by the state.

Answering both questions in the negative, the state high court noted that on its face, the owner's policy violated the state statutory requirement under N.Y. VEH. & TR.

388(4) that all insurance policies contain an indemnification provision for death or injury resulting from negligent use of a vehicle by a person with the owner's permission. The court cited case law holding that a non-trucking-use exclusion not expressly limited to circumstances where the lessee has trucking-use insurance violates public policy

Defendant showed it had followed its standard underwriting procedure not to issue a policy with the exclusion until the owner provided proof that the lessee had truckers' liability insurance. However, the court said the policy was still not in compliance with the statutory requirement because the exclusion would have applied had the lessee not had such insurance. The court said that while an initial gap in coverage might be foreclosed by the owner's underwriting procedure, the coverage might not be in effect at a later date due to cancellation or lapse of the lessee's policy

Finding the owner's policy void as against public policy, the court concluded it must be read as if the exclusion did not exist. Because the policy did not state coverage was limited to the statutory minimum, the court declined to read such an interpretation into the policy.

Plaintiff's Counsel: John V. Fabiani Jr., New York, N.Y.

[ Comment: Finding the New York Court of Appeals' answers to the certified questions dispositive, the Second Circuit Court of Appeals affirmed the trial court's judgment. Royal Indem. Co. v. Providence Wash. Ins. Co. _ F.3d _, No. 97-7301, 1998 WL 43699 (2d Cir. Jan. 8, 1999).]