Insurance exclusions don’t apply unless delivered

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Hon. Richard S. Brown

Where the renter of an automobile was not given a copy of the rental agreement, an exclusion to the insurance coverage in the agreement is unenforceable, the Wisconsin Court of Appeals held on Nov. 19.

Phillip R. Leverance was a repeat client of Enterprise Rent-A-Car who always signed up for Personal Accident Insurance (PAI), which included a $100,000 benefit for accidental death, at a cost of $3 per day. The policy contained an exclusion if the renter was killed while driving drunk.

The insurance was actually handled by Gulf Insurance Company, and the agreement between Gulf and Enterprise required that renters be given copies of the rental agreement.

Leverance had rented cars from Enterprise on nine occasions, and on Nov. 30, 2000, he rented a car again. Enterprise did not prepare the rental agreement, however, until after the office had closed for the day, and so Leverance was not given a copy. In the places where Leverance’s signature was required, the branch manager wrote “SOF” for “signature on file.”

On Dec. 16, Leverance and a passenger, Jacquelyn Kozlik, were killed in an accident involving the rental car. Leverance was driving while intoxicated.

The estates of Kozlik and Leverance brought suit against Gulf Insurance, and Gulf settled with Kozlik’s estate. Gulf did not settle with Leverance’s estate, however, citing the alcohol exclusion.

After a bench trial before Waukesha County Circuit Court Judge Lee S. Dreyfus, the court held that Enterprise breached its contractual duty to deliver the terms and conditions of the agreement to Leverance, and therefore, Gulf was not entitled to assert the exclusion.

Gulf appealed, but the court of appeals affirmed in a decision by Judge Richard S. Brown.

Notice

The court held that, because Leverance did not receive a copy of the rental agreement, Gulf cannot rely on the alcohol exclusion.

Because no Wisconsin cases consider whether an insurer can rely on policy exclusions when it fails to inform the insured of the policy’s coverage and limitations, the court turned to other jurisdictions for guidance, and found unanimous agreement that an insurer may not rely on exclusions when it did not provide the insured with a copy of the policy.

Several of those decisions relied on statutory provisions requiring delivery of the policy, while others held that, even in the absence of such a statute, public policy requires notice to the insured of the essential terms of coverage.

The court quoted extensively from a Michigan case, Gardner v. League Life Ins. Co., 210 N.W.2d 897, 898 (Mich.Ct.App.1973) as follows: “The equity conscience of this Court, having been aroused, finds that it is beyond question that the borrower subjected to eligibility requirements be given notice thereof. The fact that the present insurance scheme, with premiums being paid by the credit union, places each member borrower in the status of a third-party
beneficiary and that each borrower under the group policy has no individual identity cannot change this basic tenet of fairness … The injustice of informing a disabled borrower at the time the claim is filed that he has no insurance protection is obvious and the need for notice is beyond peradventure.”

Adopting the reasoning of the Michigan court, the court of appeals stated, “We agree with these courts that it would be unjust to permit an insurance company to accept premiums and then deny liability based on an exclusion of which the insured was not aware because the insurance company had not informed him or her of the exclusion or given him or her the means to ascertain its existence. Purchasers of insurance policies, like the one at issue here, commonly rely on the assumption that they are fully covered by the insurance that they buy. If an insured is not given a copy of the policy, he or she cannot take whatever action is appropriate to protect his or her interests nor can he or she ensure that the coverage, which he or she thinks has been contracted for, is actually provided. We therefore hold that an insurer may not deny coverage based on limitations or exclusions in a policy, even if clearly stated, where the insured was not otherwise informed of such provisions (cites omitted).”

Prior Practice

The court rejected Gulf’s argument that, because Leverance had received notice of the exclusions from at least one of his prior rental agreements, the exclusion is valid.

Noting that each rental agreement constitutes a separate and distinct contract, the court found the prior notice irrelevant.

The court reasoned, “while it is possible that Leverance may have been previously aware of the alcohol exclusion and may even have assumed that it also applied to the November 30 rental agreement, the fact remains that the November 30 agreement was not a renewal or continuation of the previous agreements; it was an independent contract — and although unlikely, it was possible that the terms of the insurance policy had changed.”

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In a footnote, the court observed that Enterprise could have, but did not, prepare a rental agreement that subsumes all the terms and conditions of prior rental agreements.

Accordingly, the court held that the alcohol exclusion was invalid, and affirmed.

The court also affirmed the award of prejudgment interest pursuant to sec. 807.01, because Gulf rejected a settlement offer from Leverance.

Leverance’s offer referenced the Kozliks as well, which would generally result in ambiguity that defeats prejudgment interest. However, the Kozliks had already settled with Gulf. Thus, the court held that the offer was not ambiguous and affirmed the award of prejudgment interest.

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David Ziemer can be reached by email.