Progressive Northern Insurance Co. v. Argonaut Insurance Co., No. 2010 - 370
(Decided April 26, 2011)
Craig Kelly left his car for service at Tom’s Auto Sales, a garage owned and operated by his parents, and was loaned a vehicle to use free of charge while his car was being serviced. While operating the loaned vehicle Kelly was involved in a motor vehicle accident. The occupants of the other vehicle brought a lawsuit against Kelly. At the time of the accident, Kelly had a personal automobile insurance policy with Progressive with liability limits of $100,000 per person.
Tom’s had a garage insurance policy with Argonaut with liability limits of $25,000 and $750,000, depending upon the circumstances. The Argonaut policy contained an endorsement which limited the policy’s coverage to the financial responsibility law limit of $25,000 when the covered auto is: (1) owned by the named insured; (2) used by a driver not listed on the schedule; (3) used “for purposes that are not necessary or incidental to garage operations”; and (4) used by a driver who has the “right to frequent use” of the covered auto. Argonaut determined that Kelly’s use of the vehicle was personal and he was not a scheduled driver and, therefore, the endorsement applied and it would only provide a defense under the $25,000 limit. It took the position that Progressive’s coverage was primary.
Progressive filed suit against Argonaut claiming that Argonaut was obligated to defend and indemnify Kelly under the $750,000 limit. Both insurers moved for summary judgment.
The trial court ruled that Argonaut was obligated to provide primary coverage up to $750,000 and that Progressive’s coverage was excess. The court also ruled that Progressive must pay a pro rata share of defense costs.
Argonaut appealed arguing that: 1) the endorsement applied to limit its coverage to $25,000; 2) Progressive should contribute to any settlement or judgment on a pro rata basis; and 3) defense costs should be shared equally between the two insurers.
The Court first addressed Argonaut’s position that the endorsement applied to limit its coverage to $25,000. Since the parties agreed that the first two elements of the Argonaut endorsement were met because Kelly was using a covered auto owned by the named insured and he was not a driver listed on the schedule, only the third and fourth elements were in dispute.
The third element required a determination as to whether Kelly was using the auto for purposes that were necessary or incidental to garage operations at the time of the accident. The policy defined “garage operations” as including “the ownership, maintenance or use of the ‘autos’ indicated in Section I of this Coverage Form as covered ‘autos.’” “Garage operations” also includes “all operations necessary or incidental to a garage business.” The Court rejected Progressive’s interpretation of the definition as encompassing all use of the covered autos since that construction would render the endorsement a nullity. Instead, it adopted Argonaut’s construction that “garage operations” include the use of a covered auto for “operations that are necessary or incidental to a garage business” but still concluded that Kelly’s use of the loaner fell within the definition of “garage operations”. Since the vehicle was being loaned by Tom’s to Kelly while his car was being repaired at the garage, his use was incidental to Tom’s business. Thus, the third element of the endorsement was not satisfied and consideration of the fourth “right to frequent use” element was not necessary.
The Court then addressed Argonaut’s argument that the two insurers should contribute to any settlement or judgment on a pro rata basis. The Argonaut policy’s “other insurance” provisions stated that it provides primary insurance “[f]or any covered ‘auto’ you own”. It also provided that “[w]hen this Coverage Form and any other Coverage Form or policy covers on the same basis, either excess or primary, we will pay only our share”. The Progressive “other insurance” clause provides that “any insurance we provide for a …vehicle, other than a covered vehicle…will be excess over any other collectible insurance.” The Court concluded that since the vehicle involved in the accident was owned by Argonaut’s insured, its coverage applied on a primary basis in accordance with its “other insurance” provisions and not on the same basis as the Progressive policy, which provided excess coverage for any vehicle not a covered vehicle. Thus, Argonaut’s coverage was primary and Progressive’s coverage was excess.
Next, the Court rejected Argonaut’s argument that the cost of defense should be shared equally between the two insurers instead of on a pro rata basis as determined by the trial court, noting that the issue was not subsumed in the coverage issue and concluding that Argonaut waived this argument by failing to raise it in the notice of appeal.
Finally, the Court held that the defense cost issue would not be considered under the plain error rule. In order for the plain error rule to apply, the error must be “plain”, “must affect substantial rights” and “must seriously affect the fairness, integrity or public reputation of judicial proceedings”. An error is “plain” if it “was or should have been obvious in the sense that the governing law was clearly settled to the contrary.” Since the Court had never before addressed the issue of allocation of defense costs between a primary and excess insurer, and the trial court relied upon authority from other jurisdictions in reaching its decision to require a pro rata sharing, the law in this jurisdiction was not settled and the plain error rule did not apply.
Stephen J. Schulthess