Federal Insurance v. Allstate Insurance

Levine, J., delivered the opinion of the Court. This appeal arises primarily from a dispute between two automobile liability insurers over who should bear the initial brunt of several personal injury claims. A third insurance company is also embroiled, but its fortunes ride on the outcome of the main contest. The case commenced with an action for declaratory judgment filed in the Circuit Court for Prince George's County by appellants, Federal Insurance Company (Federal), and its named insured, Max Schwartz (Schwartz), against appellees, Allstate Insurance Company (Allstate), Market Insurance Company (Market), and a number of individuals whose identities will be developed during the course of this opinion.

The trial judge (Couch, J.) fastened responsibility on the insurance companies in this order: first, primary coverage on Allstate; next, Market for excess to the full extent of its policy limits; and finally, Federal to the extent that any judgments might exceed the combined limits of the Allstate and Market policies. On appeal, the Court of Special A ppeals held in Allstate Ins. Co. v. Federal Ins. Co., 23 Md. App. 105 , 326 A. 2d 29 (1974), that the trial court had been substantially correct, but modified the priorities between the insurers.

Because this case presents important questions pertaining to automobile liability insurance not previously decided by this Court, we granted a Writ of Certiorari. In early January of 1972, Max Schwartz, a resident of Brooklyn, New York, was planning a winter vacation in Florida. Desiring to have his Cadillac automobile with him during his visit, he made arrangements to have it ⁴⁶³ transported by one of the appellees herein, Dominick Spinelli, trading as Direct Way Auto Shippers (Direct Way), a carrier authorized by the Interstate Commerce Commission (the I.C.C.) to engage in the business known in the motor carrier industry as a “driveaway service.” Schwartz contacted Direct Way in response to an advertisement in the New York Times soliciting potential automobile shippers. For this service, Schwartz agreed to pay Direct Way the sum of $90 pursuant to the tariff which the latter had filed with the I.C.C. The transaction was evidenced by a bill of lading in which Schwartz, as the shipper, “guarantee[d]” that his automobile was insured “for coverages of ten thousand to twenty thousand dollars for bodily injuries . . . .” In addition, he consented to have “the driver . . . transport persons authorized by the carrier, but not for hire.” (emphasis added).

The last provision is the only reference in the bill of lading to anyone but “the driver.” Direct Way, as the carrier, agreed that it would “obtain and provide a licensed driver to drive the vehicle to the indicated destination.” In addition to the bill of lading, Schwartz and Direct Way executed a “shipping order form & freight bill.” At the very top is the inscription “ ‘Ship the Fully Insured Direct Way.’ ” Elsewhere, there appears the following: “Direct Way covers your automobile with complete insurance protection. This includes public liability . . . .” (all emphasis added). As with the bill of lading, all references to the driver are in the singular. Simultaneously with the appearance of the advertisement in the New York Times, Direct Way was sponsoring a solicitation for automobile drivers in “The Village Voice,” a publication aimed at young adults who might be interested in low-budget transportation to Florida. 1 Another of the appellees, Richard C. Frank (Frank), responded to this advertisement, and signified his wish to drive an automobile owned by one of Direct Way’s customers to Florida.

The ⁴⁶⁴ “Driver Agreement And Instructions” which he signed also refers to the driver consistently in the singular, and does not make any mention of other persons, either as possible occupants or as operators of the automobile being transported. On January 8, 1972, Schwartz’s automobile was picked up at his home by a Direct Way employee who checked its condition before issuing the bill of lading. 2 The employee acknowledges that nothing was said to Schwartz about other persons, in addition to the “contract” driver, being in the car. Indeed, as we have indicated, he insists that these matters were not even discussed. On January 10, Frank, unaccompanied by anyone else, took delivery of the Schwartz automobile from Direct Way’s manager at the latter’s residence.

He was allotted four days in which to deliver the car to its Florida destination. There was never any discussion between him and any of the Direct Way personnel concerning the possible presence of other occupants — including additional drivers — in the automobile. This means that Direct Way neither granted Frank permission to have other drivers or passengers, nor prohibited him from doing so. As it happened, Frank picked up his girl friend and James Straz (Straz), another appellee, immediately on obtaining possession of the automobile in accordance with plans that had been made several weeks before.

Those prearrangements included an agreement to share travel expenses. The three then departed for Florida with Frank at the wheel. Near the southern end of the New Jersey Turnpike, he was relieved by Straz. While the latter was driving through Prince George’s County on the Baltimore-Washington Parkway, the car apparently went out of control and crossed the median strip, resulting in a ⁴⁶⁵ four-car collision and a bevy of personal injury claims.

The remaining appellees are persons making such claims. On the date of the accident, Schwartz carried an automobile insurance policy with Federal, which included the Cadillac as an “owned automobile,” specifying maximum limits of $100,000 for “each person” and $300,000 for “each occurrence.” The policy contained a “persons insured” provision which, in relevant part, states: “The following are insured under Part I: “(a) with respect to the owned automobile, “(1) the named insured and any resident of the same household, “(2) any other person using such automobile with the permission of the named insured, provided his actual operation or (if he is not operating) nis other actual use thereof is within the scope of such peryn,ission, and “(3) any other person or organization but only with respect to his or its liability because of acts or omissions of an insured under (a) (1) or (2) above;” (emphasis added). Elsewhere, the policy contains an “Other Insurance” clause which states: “If the insured has other insurance against a loss covered by Part I of this policy the company shall not be liable under this policy for a greater proportion of such loss than the applicable limit of 'liability stated in the declarations bears to the total applicable limit of liability of all valid and collectible insurance against such loss; At this same time, Direct Way held two insurance policies. The first, issued by Allstate, specifies maximum limits of liability in the sums of $50,000 for “Each Person” and $100,000 for “Each Occurrence.” By its express terms, the policy was written in contemplation of Direct Way’s ⁴⁶⁶ operation as an interstate motor carrier.

This policy contains a “persons insured” provision which states in relevant part: “Each of the following is an Insured under this insurance to the extent set forth below: “(a) the Named insured; “(b) any partner or executive officer thereof, but with respect to a non-owned automobile only while such automobile is being used in the business of the Named Insured; “(c) any other person while using an owned automobile or a hired automobile with the permission of the Named Insured, provided his actual operation or (if he is not operating) his other actual use thereof is within the scope of such permission .... “(d) any other person or organization but only with respect to his or its liability because of acts or omissions of an Insured under (a), (b) or (c) above. “None of the following is an Insured: “(ii) the owner or lessee (of whom the Named Insured is a sub-lessee) of a hired automobile or the owner of a non-owned automobile, or any agent or employee of any such owner or lessee;” (emphasis added). The Allstate policy also contains this clause: “Excess Insurance — Hired and Non-Owned Automobiles “With respect to a hired automobile or a non-owned automobile, this insurance shall be excess insurance over any other valid and collectible insurance to the Insured.” ⁴⁶⁷ In addition to these provisions in the basic policy, Allstate issued an endorsement in compliance with I.C.C. regulations, which provides as follows: “In consideration of the premium stated in the policy to which, this endorsement is attached, the Company hereby agrees to pay, within the limits of liability hereinafter provided, any final judgment recovered against the insured for bodily injury to or death of any person, or loss of or damage to property of others . . . resulting from negligence in the operation, maintenance, or use of motor vehicles under certificate of public convenience and necessity or permit issued to the insured by the Interstate Commerce Commission,. . . “Within the limits of liability hereinafter provided it is further understood and agreed that no condition, provision, stipulation, or limitation contained in the policy, or any other endorsement thereon or violation thereof, or of this endorsement, by the insured, shall relieve the Company from liability hereunder.... “The Company shall not be liable for amounts in excess of the following for each accident: [$25,000 per person, $100,000 per accident] . . . .’’(emphasis added). In addition to the coverage afforded by Allstate, Direct Way held an “excess” policy with Market, which included the following language: “In consideration of the payment of premium stated in the Declaration, the Company agrees to indemnify the Insured in accordance with the applicable insuring agreements of the Primary Insurance against loss subject to the limits stated in Item 5, Section I of the Declarations and as fully ⁴⁶⁸ and to all intents and purposes as though the Primary Insurance had been issued for the limits set forth in Item 5, Section III of the Declarations. This policy shall apply only to coverages for which an amount is indicated in Item 5, Section I and then only in excess of the corresponding amount as indicated in Item 5, Section II of the Declarations.” Although “Item 5” of the “Declarations” does not specify the applicable limits, a separate endorsement provides that the Market coverage should be “the difference between $500,000 as a result of any one occurrence, or in the aggregate, and [the underlying limits of the Allstate policy].” The endorsement concludes with this reference: “as set forth in [the policy] issued by the Allstate Insurance Company.” Since it is written for the express purpose of affording excess coverage only, the Market policy does not contain an “other insurance” clause.

After Federal brought its declaratory judgment action in the circuit court, one of the injury claimants filed a motion for summary judgment. In ruling on that motion, the court held that all three of the insurance companies must extend coverage to Schwartz, Direct Way, Frank and Straz. In so holding, it fixed the following priorities in succession: 1) Allstate provides primary coverage to the limits of its policy. 2) Then Market affords coverage, as excess to the Allstate policy, to the full extent of its limits. 3) Federal, as excess over the combined limits of the Allstate and Market policies, is then liable to the full limits of its policy. As we indicated earlier, the Court of Special Appeals affirmed the circuit court with respect to the coverages provided, but altered the priorities in the following manner: 1) Allstate provides coverage up to the limits of the I.C.C. endorsement, namely $25,000 each person, $100,000 each occurrence. ⁴⁶⁹ 2) Then Federal affords coverage to the full extent of its policy limits. 3) Allstate, as an excess carrier, is then responsible to the full extent of its unused policy proceeds. 4) Market, as an excess carrier, is then held to the full extent of its policy.

On appeal to this Court, Federal contends that in light of the I.C.C. endorsement, Allstate’s policy is primary to the full extent of its policy limits, and not merely to the extent of the endorsement. Consequently, Market’s policy, which is in essence an endorsement on the Allstate policy providing excess coverage up to $500,000, follows immediately behind the Allstate policy. Finally, Federal claims that it provides excess insurance only after the limits under both the Allstate and Market policies have been exceeded. Additionally, appellants argue that Federal’s policy does not extend any coverage to Direct Way, Straz, or Frank, since the scope of the permission granted by Schwartz was exceeded when Straz took the wheel.

Therefore, they conclude, the Federal policy applies only to the liability, if any, of Schwartz. Predictably, Allstate counters each of these contentions. Furthermore, in its cross-appeal, Allstate maintains that its policy does not cover Schwartz, Frank or Straz, but applies only to the liability of Direct Way. It also insists that regardless of the I.C.C. endorsement, any coverage that it does supply is excess over that provided by Federal.

The personal injury claimants, happy with the result below, and desirous of keeping all the insurers in the case as to all parties who may be liable for negligence, agree in all aspects with the decision of the Court of Special Appeals. (1) Coverage Under The Allstate Policy Since Direct Way is the named insured under the Allstate policy, it is manifestly an insured under section (a) of the “persons insured” provisions. ⁴⁷⁰ The critical question here is whether Straz and Frank also are insured under section (c) of the “persons insured” clause of the policy. Clearly, Direct Way, the named insured, gave permission to Frank to drive the car to Florida. There was, however, no express permission given Frank to carry passengers or to allow another person to drive the vehicle.

We have had several occasions to consider the effect of similar omnibus clauses in automobile insurance policies. In Casualty Co. v. Mitnick, 180 Md. 604 , 26 A. 2d 393 (1942), the named insured had given permission to a Mrs. Phillips to use his automobile. At the time of the accident, she was riding in the car as a passenger while it was being driven by a friend. The Court concluded that Mrs. Phillips was an insured, since she was using the automobile, saying: “. . .

It is argued that the words ‘person using,’ and ‘use,’ in the omnibus clause, refer to the actual driving of the car, not to taking the car out and controlling the trip while driven by another. But using a car in the ordinary acceptation of the words seems clearly to include a borrower’s making use of it by riding while driven by another. Mrs. Phillips was ‘still the director of the enterprise, still the custodian of the instrumentality confided to [her] keeping, still the master of the ship.’ . . .” 180 Md. at 607 (brackets in original). Similarly, in Melvin v. American Auto.

Ins. Co., 232 Md. 476, 478-79 , 194 A. 2d 269 (1963), we said: “We see no reason to limit the meaning of the words ‘actual use’ to the operation of a vehicle, where the operator is the agent or servant of another and subject to his immediate and present direction and control. . . .” Since Frank, the first permittee of Direct Way, was in the car while enroute to Florida at the time of the accident, it was still being used for the purpose for which it was given to Frank. Because Frank was the “custodian of the instrumentality confided” to him, it is clear under the ⁴⁷¹ Maryland cases that he was using the automobile. Accordingly, Frank is an insured under the Allstate policy.

The question which we have not previously had occasion to consider is whether a second permittee is also an insured under an omnibus clause such as the one here on the grounds that he is using the automobile “with the permission of the named insured.” Previous cases that have extended coverage to the second permittee were based on an omnibus clause naming, as an insured, any person “legally responsible” for the use of the automobile, provided the actual use was with the permission of the named insured. See Melvin v. American Auto. Ins. Co., supra; Maryland Indem.

Ins. v. Kornke, 21 Md. App. 178 , 319 A. 2d 603 (1974). In such cases, the second permittee was covered because, as the operator of the vehicle, he was “legally responsible” for the use, although the actual use was by the first permittee. The Allstate policy in question here does not contain such a phrase; consequently, the second permittee (Straz) is covered only if he was using the automobile with the implied permission of Direct Way. In discussing this question, 7 Am.

Jur.2d, Automobile Insurance, § 117 (1963), states: “The ‘general rule’ that a permittee may not allow a third party to ‘use’ the named insured’s car has generally been held not to preclude recovery under the omnibus clause where (1) the original permittee is riding in the car with the second permittee at the time of the accident, or (2) the second permittee, in using the vehicle, is serving some purpose of the original permittee. The