During its May term, the Illinois Supreme Court heard oral argument in Nelson v. Artley, which poses a question of considerable importance to the rental car industry: can a self-insured rental company be held liable without limitation for its customers’ accidents if the customer defaults? Our detailed summary of the underlying facts and lower court holdings in Nelson is here.

Nelson arises from a default judgment for $600,000 against the renter-driver of one of the defendant’s cars. The plaintiff began “citation” proceedings against the rental company in hopes of collecting the entire judgment.

The rental company argued that its maximum liability was $100,000, and that since it had already paid the other two injured parties $75,000, it owed the plaintiff $25,000 at most. The plaintiff filed a petition for a turnover order, alleging 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 argued that Federal law preempted any possible liability over $100,000. The Circuit Court granted the plaintiff’s position, but limited the total amount to $25,000. The Appellate Court reversed.

Counsel for the rental company began, arguing that the case involves construing the Vehicle Code. The statute requires rental companies to file proof of security with the Secretary of State demonstrating that it can compensate injured parties where drivers are either uninsured or underinsured. The statute sets forth three ways in which this can be done – by filing: (1) a liability insurance policy; (2) a surety bond; or (3) a certificate of self-insurance issued by the Director of the Department of Insurance. The defendant has always proceeded through self-insurance, believing that the statute requires self-insurers to pay the same limit an insurer would be required to pay. The Fourth District so held ten years ago in Fellhauer v. Alhorn, and the defendant’s contract reflects that understanding. But the First District rejected Felhauer, holding that a self-insurer must pay the entirety of the judgment. Counsel argued that nothing in the statute supports that; at best, the statute is ambiguous by silence, but the only reasonable construction is that a self-insurer’s obligation is the same as an insurer. Justice Karmeier asked what the limit on a bond would be, and counsel answered $100,000. Justice Karmeier commented that a single individual could collect $100,000 from a bond-holder, but $50,000 from an agency with an insurance policy. Counsel responded that a bond can’t be written that way – it must be written for a single amount. Justice Karmeier suggested that the legislature had recognized that people would be treated differently depending on the situation. Counsel responded that that’s only true of one claimant cases – here, there are multiple claimants. In such cases, the amount available under insurance and bonds would be the same. Justice Karmeier asked whether it has any relevance that the Illinois Administrative Code provides that proof of financial responsibility may be given by a certificate of self-insurance. Counsel answered that it was only relevant to show that that’s one way to satisfy the obligation under Chapter 9 of the Vehicle Code. There is no claim of direct liability involved, counsel pointed out. The only issue was the company’s duty to provide some protection for the injured party. Justice Burke asked whether the defendant assumed financial responsibility for third party claims up to $2 million by listing that amount in the self-insured application. Counsel responded no, the application related to claims of direct liability. Justice Burke asked whether the defendant could have limited its liability in the rental agreement. Counsel responded that the defendant did so – the agreement says that the company’s financial responsibility is limited to the levels set forth in the applicable financial responsibility laws. Justice Thomas asked whether the bond limit was set at $100,000 in case another claimant comes forward. Counsel answered no, there’s simply a mechanical requirement that the bond be written for an amount certain. There was no conceivable reason why self-insurance would trigger unlimited exposure, counsel argued. Moreover, unlimited liability on a rental car company runs afoul of the federal Graves amendment, which was enacted shortly after Felhauer. The statute preempts any state statute imposing vicarious liability on a rental car company for a driver’s tort. Justice Karmeier asked whether the Graves amendment barred any liability whatsoever, and counsel responded that there are exceptions for direct negligence and financial responsibility statutes.

Counsel for the plaintiff followed, arguing that the statute was clear and unambiguous. Liability can only be limited by the rental agreement, counsel argued. The defendant’s agreement referred to state law limits, but there are no state law limits. Justice Kilbride asked if the statute doesn’t impose unlimited liability, what does it mean? Counsel responded that even if the statute wasn’t interpreted by its clear meaning – imposing no limit at all – it was confusing and should be construed against the drafter. Chief Justice Garman asked why the legislature would want victims to get access to better coverage depending on the rental company involved? Counsel answered that the legislature intended to protect the public, and gave rental companies the choice of how to approach the issue. The Chief Justice again asked whether a victim would be better off being hit by an uninsured driver of one of the defendant’s cars than a customer of a rental car company which carried insurance. Counsel answered that the result depends on the form of coverage used by the rental company. Nothing in the statute precludes the company from buying more than the minimum. The Chief Justice asked counsel to assume that everyone involved carried minimum coverage – the victim would be better off to get hit by a car owned by a self-insurer. Counsel answered that there were several reasons why the legislature would prefer that rental companies get insurance. Justice Thomas asked whether counsel’s position would make the option of self-insurance useless – why would a rental company ever self-insure if the potential liability was limitless? Counsel disagreed, saying that companies would continue to self-insure based on a cost-benefit analysis. Justice Thomas wondered why companies would take that step and risk unlimited, unknowable vicarious liability. Counsel answered that the company could insure for the excess. Justice Thomas asked why the legislature would add the option of self-insurance if it would create unlimited liability. Counsel answered that there was not enough in the record to know the economic consequences. It may be that most judgments will be low enough that self-insurance would be a viable option. Justice Karmeier asked whether the statute was focused on rental car companies or protecting injured parties. Counsel said that the law was intended to protect the public. Justice Karmeier noted that Felhauer quoted from a New Jersey Supreme Court case equating insurance and self-insurance, suggesting that limits should be the same. Counsel answered that the legislature could have included a liability limitation, but it didn’t. The plain language of the statute provides no limitation. The interests of the driving public far outweigh the defendant’s interests, counsel argued. Counsel concluded by arguing that the defendant’s position violates both Illinois law and public policy. The Vehicle Code imposes financial responsibility, and the defendant chose to comply with the statute through self-insurance.

In rebuttal, counsel for the defendant argued that there was no conceivable rational basis for the difference in results proposed by the plaintiff. Counsel argued that all the cases he cited regarding the Graves amendment involved financial responsibility statutes, and nothing in the defendant’s state filing assumed any kind of liability.

We expect Nelson to be decided in four to six months.

Image courtesy of Flickr by Sludge G (no changes).