Every day, vehicle insureds file claims with their insurers as a result of accidents involving the insured’s vehicle or a vehicle that the insured was driving when the accident occurred. In examining these claims, the insurer must decide, of all the involved parties, whose insurance policy is primary. The answer to this question depends on the respective policy provisions.
Where one policy provides coverage for a certain situation and the other does not, the policy that provides for that situation is considered "primary" and, therefore, covers the claim and the related damages up to the policy limits before another policy is called upon to contribute on an "excess" basis. Where each policy provides for the same coverage in the same situation, the policies are considered "mutually repugnant" and the coverages are determined to be co-primary.
However, many legal issues arise regarding whose policy should be primary, pursuant to public policy, in certain situations. The Illinois Supreme Court simplified this issue in 1998 in State Farm v. Universal Underwriters Group ("State Farm v. Universal"),1 in cases where claims were made by vehicle owners whose vehicles were being driven by "permissive users" at the time of the accident. Automobile liability coverage for any person driving the insured vehicle with the express or implied permission of the insured is commonly referred to as "omnibus coverage."2
Public Policy. Provisions in insurance policies that contravene public policy are void and unenforceable.3 While the term "public policy" lacks precise definition, it may be stated as a general legal principle that no one may do that which has a tendency to injure the public welfare. Thus if the application of an insurance provision is such "that its enforcement would be contrary to the public interest,"4 it may be said to be against public policy. Where a provision in an insurance policy is unambiguous and does not violate public policy, it must be construed and enforced as written.5 When construing the language of an insurance policy, the court’s primary objective is to ascertain and give effect to the intentions of the parties as expressed in their agreement; if the terms found within the policy are clear and unambiguous, they must be given their plain and ordinary meaning.6
State Farm v. Universal. Prior to State Farm v. Universal, Illinois appellate courts disagreed as to whether permissive users were insureds under the vehicle owners’ policy, whether the vehicle owner’s or permissive user’s policy should be primary, and as to the amount of liability coverage dealerships are required to carry on their vehicles. In State Farm v. Universal, the Illinois Supreme Court found that a liability insurance policy issued to a vehicle owner must cover the named insured and any other person using the vehicle with the named insured’s permission, or a "permissive user."7
Specifically at issue in State Farm v. Universal was whether car dealerships who allow potential customers to test drive their vehicles must provide primary liability coverage when a "test driver" is involved in an accident while driving the dealership’s vehicle. The Court found that car dealerships must provide liability coverage as a matter of public policy, as it is in the best interest of Illinois residents that vehicle owners maintain liability insurance to cover bodily injury claims.8 Further, the Court found that the vehicle owner’s policy must provide the statutorily mandated amount of liability coverage and that the vehicle owner’s policy will be sole and primary over all other triggered policies, regardless of the "other insurance" provisions of the policies.9
Illinois Vehicle Code. Prior to State Farm v. Universal, the general provisions of the Illinois Vehicle Code did not set forth any requirements for insuring permissive users of vehicles. Because the code was silent on this issue, the Court was authorized to rule on it and found that the vehicle owner’s policy must provide sole primary coverage.10 Subsequent to the ruling in State Farm v. Universal, the Illinois legislature amended the Illinois Vehicle code to reflect its holding.11
Under §7-317(b)(2) and (b)(3) of the Illinois Vehicle Code, a vehicle owner’s liability policy must insure the named insured and all permissive users of the vehicle.12 Moreover, a vehicle owner must maintain liability insurance that covers bodily injury or death and property damage with minimum limits of $20,000 per person, $40,000 per accident and $15,000 for damage to property ("20/40/15").13 Under Sections 5-101(b)(6) and 5-102(b)(4) of the Illinois Vehicle Code, new and used car dealerships must maintain liability insurance on their vehicles with minimum limits of $100,000 for bodily injury to, or death of, any person, $300,000 for bodily injury to, or death of, two or more persons in any one accident, and $50,000 for damage to property ("100/300/50").14
Application of State Farm v. Universal. While State Farm v. Universal answered a lot of questions relating to permissive users and liability insurance policies, it also created a variety of uncertainties. For instance, State Farm v. Universal addressed test-drivers, but does it apply to a permissive user of a "loaner vehicle," that is, a vehicle loaned by a dealership to a customer who is having her own vehicle repaired by the dealership? The Fourth District found that it did in Country Mut. Ins. Co. v. Federated Mutual Ins. Co.15
In the same case, the Fourth District extended the Illinois Supreme Court’s holding in State Farm v. Universal to apply even where the permissive user signed an agreement with the dealership that the user’s automobile insurance would constitute the primary coverage in the event of a loss.16 Additionally, under the "initial permission" rule, if the named insured has initially given permission to another to use the insured vehicle, departure from the authorized use does not terminate the initial permission and the dealership’s policy continues to be primary over the permissive user’s policy.17 For instance, if a dealership loans a vehicle to a father while his car is being repaired, and then the father allows his son to drive the same vehicle, his son is also a permissive user under the dealership’s policy.
Following State Farm v. Universal, the question still remained whether a vehicle owner’s policy is required to provide full coverage on the vehicle up to the policy’s limits or whether the liability limits could be reduced by way of a "step-down" provision. A "step-down" provision lowers the liability limits based on who was operating the vehicle at the time of the accident.18 For instance, for accidents that happen when a permissive user was driving the insured vehicle, some insurance policies lower the liability limits from what is covered if an accident happens when a named insured is driving the vehicle.
In September of 2007, the Illinois Supreme Court, in State Farm v. Illinois Farmers, found that step-down provisions do not violate public policy because there is no language in the Illinois Insurance Code that requires a liability insurance policy providing the named insured with coverage in excess of the statutory minimum to provide the same level of coverage to permissive users.19 Since State Farm v. Illinois Farmers was decided, the Illinois Legislature enacted a new section of the Illinois Insurance Code, which went into effect on January 1, 2008, that mandates that "any policy of private passenger automobile must provide the same limits of…coverage to all persons insured under that policy, whether or not an insured person is a named insured or permissive user under the policy."20
Exceptions to State Farm v. Universal. In interpreting State Farm v. Universal, courts and the Illinois Legislature identified and implemented exceptions to the general rule. For example, while a car dealer’s liability insurer will remain solely primary for all test-driven vehicles, this is not the case for all loaner vehicles.21 If a permissive user driving a dealership’s loaned vehicle has liability insurance with limits less than 100/300/50, the car dealer’s liability insurer remains solely primary for an accident involving the loaner vehicle.22 If the permissive user’s liability is over 100/300/50, that user’s liability insurer will be primary and the dealership’s liability insurer will be secondary, or excess.23
Further, the State Farm v. Universal holding remains inapplicable to car rental situations; that is, when a driver pays for the use of a rental company’s vehicle.24 Illinois courts continue to rely upon the provisions in the Illinois Vehicle Code applicable to vehicles owned and rented out by rental car companies and a "freedom of contract" rationale in finding that rental car companies are not required to provide mandatory primary coverage on the vehicles they own.25
Farm Bureau Mut. Ins. Co. v. Alamo Rent-A-Car presented a situation to the First District in which a car rental company, Alamo, leased a vehicle to a driver.26 In that case, the court decided that its primary focus should be on the contract between the rental car company and its customer, and not on the insurance policies of both parties.27 The Fifth District has also held that the Illinois Vehicle Code provisions on leased vehicles do not require rental companies or agencies to provide primary insurance as long as such coverage is available from another source.28
The State Farm v. Universal holding is also inapplicable to collision insurance claims, which are for damage to the owner’s vehicle.29 Because the Vehicle Code does not require collision coverage for the insured vehicle when it is being driven by a named insured, it would be inconsistent to require that coverage with the insured vehicle is being driven by a permissive user.30 Coverage for collision claims is dependent on whether a permissive user is an insured by definition in the owner’s collision policy.31
Conclusion. While State Farm v. Universal is now ten years old, it remains relevant, as it applies to all automobile liability coverage, including personal lines policies, and not just test-drive and loaner vehicles. The Court was clear in State Farm v. Universal that it did not base its decision on the vehicle owner being a car dealership, but it relied on the statutory language in the Illinois Vehicle Code and the public policy underlying the relevant provisions therein.32 For that reason, State Farm v. Universal has great breadth and will be analyzed for years to come. As coverage counsel, we ask ourselves what other automobile liability policy provisions or exclusions are subject to attack based on State Farm v. Universal?n
1 182 Ill.2d 240 (1998)
2 State Farm v. Hertz, 338 Ill.App.3d 712, 716 (5th Dist. 2003).
3 State Farm v. Smith, 197 Ill.2d 369, 372 (2001).
4 O’Hara v. Ahlgren, 127 Ill.2d 333, 341 (1989).
5 Andreou and Casson. Ltd. v. Liberty Ins. Underwriters, Inc., 337 Ill.App.3d 352 (1st Dist. 2007)
6 Pekin Ins. Co. v. Estate of Goben, 303 Ill.App.3d 639, 642 (5th Dist. 1989).
7 State Farm v. Universal, 182 Ill.2d at 244.
8 Id. at 245.
9 Id. at 246.
11 See 625 ILCS 5/5-101 and 625 ILCS 5/5-102.
12 625 ILCS 5/7-317(b)(2); 625 ILCS 5/7-317(b)(3).
13 625 ILCS 5/7-601(a); 625 ILCS 5/7-203.
14 625 ILCS 5/5-101(b)(6); 625 ILCS 5/5-102(b)(4).
15 316 Ill.App.3d 182 (4th Dist. 2000).
16 Country Mut. Ins. Co. v. Federated Mut. Ins. Co., 316 Ill.App.3d 182 (4th Dist. 2000).
17 Id. at 188.
18 State Farm Mut. Auto. Ins. Co. v. Illinois Farmers Ins. Co., 226 Ill.2d 395, 398 (2007).
19 Id. at 403.
20 215 ILCS 5/143.13a
21 625 ILCS 5/5-101(b)(6); 625 ILCS 5/5-102(b)(4).
24 Farm Bureau Mut. Ins. Co. v. Alamo Rent-A-Car, 319 Ill.App.3d 382 (1st Dist. 2000).
25 Id. at 387.
27 Id. at 388-90.
28 State Farm v. Hertz Claim Mgmt. Corp., 338 Ill.App.3d 712 (5th Dist. 2003).
29 Universal Underwriters Group v. Pierson, 337 Ill.App.3d 893 (1st Dist. 2003); Farmers Auto Ins. Assn. v. Universal Underwriters Ins. Co., 348 Ill.App.3d 418 (1st Dist. 2004).
30 Universal Underwriters Group v. Pierson, 337 Ill.App.3d at 897-98.
32 State Farm v. Universal, 182 Ill.2d at 244-46.
Jennifer L. Moore is an associate with the law firm of Momkus McCluskey, LLC, concentrating her practice in insurance coverage, commercial litigation, civil litigation, and domestic relations. She received her Bachelor’s Degree, magna cum laude, from the University of Kentucky and her Juris Doctor from Tulane University Law School.