In the closing days of its November term, the Illinois Supreme Court agreed to decide an issue of considerable importance for Illinois’ car rental industry: can a self-insured car rental company be held liable without limitation for its customers’ accidents if the customer defaults?  In Nelson v. Artley, Division Two of the First District Appellate Court held that the answer is yes.

Nelson arises from an automobile accident involving a customer of the defendant. The circuit court entered a default judgment for $600,000 against the renter-driver of one car and in favor of the plaintiff. The plaintiff then began “citation” proceedings against the rental company, attempting to collect the entire judgment.

The rental company answered that its maximum liability for any accident of one of its renters was $100,000 pursuant to the rental agreement, case law and the Illinois Vehicle Code. Since it had already paid the other two injured parties $75,000 in connection with the accident, the rental company said its maximum liability was $25,000. The defendant attached a certificate of self-insurance and a copy of its rental agreement to the answer.

The plaintiff filed a petition for a turnover order against the rental company, seeking the full $600,000 plus interest and costs. The petition alleged that the rental company had represented in its certificate of self-insurance that it retained a risk of loss for third-party liability claims of up to $2 million per occurrence. The rental company responded by once again arguing that Illinois law limited its maximum per-accident exposure to $100,000, and in any case, to the extent that the Code permitted unlimited liability, it would be preempted by Federal law. The circuit court granted plaintiff’s petition, but limited the total amount to $25,000. The Appellate Court reversed.

The Vehicle Code provides that any car rental company operating in the state must provide proof of its financial responsibility. There are three ways to do so: file a bond, an insurance policy or a certificate of self-insurance issued by the Director of the Department of Insurance. A bond must be in the amount of $100,000, and conditioned on the rental company’s payment of any judgment against it arising from its renters’ accidents. A compliant insurance company must provide that the carrier will cover any accident involving one of the company’s cars, up to $50,000 for accidents involving one person, and $100,000 for accidents involving more than one.

Although Chapter 9 doesn’t specify the requirements for proof of financial responsibility for companies choosing to self-insure, there are relevant provisions in Chapter 7 of the Code. Chapter 7 provides that the Director may issue a certificate of self-insurance if the company demonstrates the ability to pay any judgment against it arising out of an accident involving a renter, and may cancel the certificate if it fails to pay such a judgment within 30 days. The court conceded that since no judgment had been entered against the rental company as a defendant for damages, the plain language of the Code didn’t appear to make the company liable for any part of the default judgment. But that was absurd, the Court found – that would mean that a self-insurer would have no potential liability, while other rental companies would be required to bear the burden of maintaining a bond or insurance policy.

The court turned to the mandatory insurance statutes covering vehicles in general for further guidance about the meaning of the Vehicle Code. The court noted that those statutes exempt certain vehicle owners from the requirement of mandatory coverage on each vehicle – owners carrying a certificate of self-insurance. Such entities are required to pay all judgments against it. The court then concluded that if a self-insurer under the mandatory vehicle insurance statutes must pay all judgments against it, self-insuring rental companies should bear a similar risk in conjunction with their customers.   If a rental company wishes to limit its liability under the Code, the Court wrote, it could carry an insurance policy or bond instead of self-insuring. By interpreting the Code to provide that a self-insuring rental company is potentially liable for its renters’ accidents without limitation, the Court concluded that it was also vindicating the legislative purpose of protecting the public from financially irresponsible drivers of rental cars. The Court acknowledged that companies choosing to post bonds or insurance policies potentially had significantly less exposure, but argued that this was intentional on the Legislature’s part – that the Legislature’s view was that bonds and insurance policies would provide a minimum level of protection, while those companies who were financially able would provide more through self-insurance.

The Court finally turned to the rental company’s argument that if the Vehicle Code provided for unlimited liability, it was preempted by federal law. The federal Graves Amendment (49 U.S.C. § 30106(a)) provides that a rental car company cannot be liable for harm to persons or property arising from the use, operation or possession of one of its vehicle if there is no negligence or criminal wrongdoing by the rental company. The court found no conflict between its holding and the Graves Amendment, holding that the only reason that the rental company was liable for its customers’ default judgments without limitation was that it had voluntarily chosen to be self-insured, rather than proving financial responsibility through posting an insurance policy or a bond.

We expect Nelson to be decided in eight to ten months.

Image courtesy of Flickr by Order_242 (no changes).