Centennial Insurance v. State Farm Mutual Automobile Insurance

¹⁵⁴ BLOOM, Judge. This appeal presents a question not heretofore answered by the Court of Appeals or this Court: What effect may, or must, be given to conflicting “escape” or avoidance of coverage clauses in two liability insurance policies, each of which would provide coverage to the driver of a motor vehicle involved in a collision if no other policy provides coverage but would deny coverage if any other insurance were available? The facts that give rise to this case are basically undisputed and singularly uncomplicated. Criswell Chevrolet, Inc., an automobile dealer, provided Robert Crampton with one of its cars as a “loaner” for Crampton’s temporary use while his automobile was undergoing repairs in Criswell’s shop.

The “loaner,” with Crampton at the wheel, collided with and damaged Patricia Wagstaff’s car, and Ms. Wag-staff filed suit against Crampton and Criswell Chevrolet to recover the cost of repairing her vehicle. Appellant, Centennial Insurance Company, which had issued to Criswell Chevrolet a garage liability policy covering all of the insured’s motor vehicles, brought this declaratory judgment action in the Circuit Court for Montgomery County against Crampton, Wagstaff and State Farm Mutual Automobile Insurance Company, which had issued a standard automobile liability insurance policy to Crampton, covering the car that was being repaired by Criswell Chevrolet. Centennial sought a declaration that State Farm, and not Centennial, is obligated to defend Crampton in Wagstaff’s suit against him and to pay any judgment awarded against Crampton in that suit. Centennial’s policy expressly excludes liability coverage for any customer of its insured unless that customer has no other available insurance, primary, excess or contingent, in which case the Centennial policy would insure the customer, but only up to the compulsory or financial responsibility law limits.

Therefore, since the customer in this case, Crampton, had coverage under his own policy with State Farm while driving a temporary substitute automobile, Centennial insists that its exclusion applies and ¹⁵⁵ State Farm is obligated to defend Crampton in Wagstaff’s suit against him and pay any damages awarded in that suit. On the other hand, since State Farm’s policy does not cover Crampton while he is driving a temporary substitute car owned by anyone in a car business if the owner has liability insurance which is applicable as primary, excess or contingent coverage, and since Centennial’s policy provides at least contingent coverage, State Farm takes the position that Centennial’s policy covers the damages sustained by Ms. Wagstaff’s vehicle. The circuit court ruled in favor of State Farm, and Centennial promptly noted this appeal. Our interpretation of the policies in question leads us to disagree with the positions taken by both insurers and, consequently, to reverse the circuit court.

After providing generally that its liability coverage extends to the use by an insured of a newly acquired car, a temporary substitute car or a non-owned car, the State Farm policy lists several exceptions and limitations to such coverage. The provisions of the State Farm policy applicable to this case are as follows: If There is Other Liability Coverage 3. Temporary Substitute Car, Non-Owned Car, Trailer If a temporary substitute car, a non-owned car or a trailer designed for use with a private passenger car or utility vehicle has other vehicle liability coverage on it, then this coverage is excess. THIS COVERAGE SHALL NOT APPLY: a.

IF THE VEHICLE IS OWNED BY ANY PERSON OR ORGANIZATION IN A CAR BUSINESS: AND b. IF THE INSURED OR THE OWNER HAS OTHER LIABILITY COVERAGE WHICH APPLIES IN WHOLE OR IN PART AS PRIMARY, EXCESS OR CONTINGENT COVERAGE. (Emphasis in original.) There is no dispute that the automobile Crampton was driving was a temporary substitute car and that its owner, ¹⁵⁶ Criswell Chevrolet, was in the car business within the meaning of the State Farm policy. The following provisions in the policy issued by Centennial to Criswell Chevrolet are pertinent to this case: D. WHO IS AN INSURED. b.

Anyone else is an insured while using with your permission a covered auto except: 3. Your customers, if your business is shown in ITEM ONE of the declarations as an auto dealership. However if a customer of yours: (a) Has no other available insurance (whether primary, excess or contingent), he or she is an insured but only up to the compulsory or financial responsibility law limits where'the covered auto is principally garaged. (b) Has other available insurance (whether primary, excess or contingent) less than the compulsory or financial responsibility law limits where the covered auto is principally garaged, he or she is an insured only for the amount by which the compulsory or financial responsibility law limits exceed the limits of his or her other insurance.

(Emphasis in original.) The parties do not dispute that Crampton was a customer of Criswell Chevrolet and that Criswell Chevrolet is an auto dealership. “Other insurance” clauses originated in the field of property insurance as a method of protecting the insurer from the “moral hazard” posed by unscrupulous policyholders who would over-insure, then intentionally destroy property. Note, Automobile Liability Insurance — Effect of Double Coverage and “Other Insurance” Clauses, 38 Minn.L.Rev. 838, 840 (1954) (hereinafter “Note”). Of course, that “moral hazard” does not exist in the area of liability insurance, yet such clauses appear commonly in liability policies as a means to reduce or eliminate the insurer’s loss in the event of concurrent coverage of the same risk. Comment, Con ¹⁵⁷ current Coverage in Automobile Liability Insurance, 65 Colum.L.Rev. 319, 320 (1965) (hereinafter “Comment”).

As noted by the Court of Appeals, such use of other insurance clauses is neither invalid nor unconscionable and has met with uniform judicial recognition. Consolidated Mutual Insurance Co. v. Bankers Insurance Co., 244 Md. 392, 395 , 223 A.2d 594 (1966). Other insurance clauses come in three varieties: (1) the escape clause, whereby coverage is denied in a double insurance situation; (2) the excess clause, whereby the insurer declares itself liable only for any excess amount of the judgment remaining after the other insurer has paid up to the limit of its policy; (3) the pro rata clause, whereby the insurer obligates itself to pay a ratable portion of the loss in the proportion its policy coverage bears to the total coverage protecting the insured. Given these three types of clauses, there exist six possible combinations of clauses that may come into conflict: escape vs. escape; escape vs. excess; escape vs. pro rata; excess vs. excess; excess vs. pro rata; and pro rata vs. pro rata.

The Court of Appeals has had occasion to consider four of the six possible combinations of “other insurance” clauses. In each instance it has taken the approach of resolving such conflicts by construing the policies in the same manner as it would any other contract, Bond v. Pennsylvania National Mutual Ins. Co., 289 Md. 379, 384 , 424 A.2d 765 (1981), and by attempting to reconcile the competing provisions. See e.g., Consolidated Mutual Insurance Co. v. Bankers Insurance Co., supra; Celina Mutual Casualty Co. v. Citizens Casualty Co., 194 Md. 236 , 71 A.2d 20 (1950).

Cf. National Indemnity Co. v. Continental Insurance Co., 61 Md.App. 575 , 487 A.2d 1191 (1985). That process of reconciliation has resulted in four general rules: 1 ¹⁵⁸ 1. In Zurich Insurance Co. v. Continental Casualty Co., 289 Md. 421 , 212 A.2d 96 (1965), the Court held that an excess clause prevailed over a broadly worded escape clause which excluded coverage “if there is other valid and collectible insurance in force for such person or organization either as an insured under a policy applicable with respect to the automobile or otherwise.” But in State Farm Mutual Automobile Insurance Co. v. Universal Underwriters Insurance Co., 270 Md. 591 , 312 A.2d 265 (1973), the Court held that an escape clause, which specifically referred to the existence of excess insurance coverage as activating the escape provision, prevailed over the excess clause. 2.

An excess clause will prevail over a pro rata clause. Consolidated Mutual Insurance Co. v. Bankers Insurance Co., supra. 3. When both policies provide excess coverage only, liability is shared equally by the insurers. Ryder Truck Rental, Inc. v. Schapiro & Whitehouse, Inc., 259 Md. 354, 364-65 , 269 A.2d 826 (1970). 4.

A conflict between two pro rata clauses results in proportional sharing of liability without either insurer being considered primary or excess. Celina Mutual Casualty Co. v. Citizens Casualty Co., supra. In the case sub judice, however, those four rules are of no help because we are presented with an entirely different conflict between other insurance clauses: escape vs. escape. The two escape clauses are, of course, dissimilar in language and approach.

State Farm’s policy covered the insured, Crampton, but sought to avoid that coverage if he ¹⁵⁹ drove a car furnished him by someone in the “car business” as a temporary substitute for his own automobile. Centennial insured the automobile, but sought to avoid coverage if it were driven by a member of a certain class. Despite the differences between them, however, both policies attempt to deny coverage totally in the event there were other available liability insurance coverage but will provide coverage if there is no other available insurance. If we read State Farm’s policy first, Crampton was not covered by it at the time he collided with Ms. Wagstaff’s car because the vehicle he was driving as a temporary substitute automobile was owned by a corporation engaged in a car business and there was at least contingent liability insurance on the car.

But if we read Centennial’s policy first, Crampton, as a customer of the insured, was not covered by that policy because State Farm’s policy provided at least contingent coverage for him. There being no logical reason why a court should choose to read either policy before the other, the two escape provisions are simply irreconcilable and totally incompatible. State Farm would have us resolve the problem by invalidating Centennial’s escape clause as violative of the compulsory insurance provisions of Maryland’s motor vehicle laws, as set forth in Md. Transp. Code Ann., Title 17 (Vehicle Laws — Required Security), §§ 17-101 through 17-301.

It argues that the only permitted exclusions from coverage in an automobile liability policy are those enumerated in Md.Code Ann. art. 48A, §§ 240C-1, 541(c)(2), and 545. Those three sections, however, are totally inapposite to this case. The first, § 240C-1, deals only with cancellation or non-renewal