Court of Appeals to Zipcar: Your Excess Liability Coverage Is Illusory

If you are not yet familiar with Zipcar, you will be shortly. In the last week, Zipcar appeared in a District I Court of Appeals decision and opened for business at O’Hare Field. Wisconsin has Zipcar locations in Milwaukee and Madison.

Zipcar is a “car sharing” business – as opposed to traditional car rental agencies. “Car sharing” with Zipcar is typically short term car rental – for a few hours, or a day or two. Zipcar requires an annual fee to become a “Club Member” to lease a Zipcar. Short term rentals include gas, up to 180 miles per day and insurance coverage.

Zipcar’s insurance coverage was the subject of a recent unpublished decision by the Court of Appeals in Hernandez v. Liberty Mutual, 2013 AP 1286. Hernandez was severely injured when struck by a Club Member operating a Zipcar.

Liberty Mutual issued a commercial insurance policy providing liability coverage in the amount of $300,000 for Zipcar Club Members operating Zipcar vehicles. (“Liability Policy”). Liberty also issued an Excess Insurance Policy to Zipcar (“Excess Policy”); per its declaration page, it specifically listed the underlying Liability Policy of $300,000 as the sole underlying policy to which the Excess Policy applied. Liberty Mutual tendered the $300,000 Liability Policy limits to Hernandez. However, Liberty denied coverage under its Excess Policy, citing the Other-Insurance Clause contained in the Wisconsin Endorsement attached to the Excess Policy.

Hernandez filed suit seeking declaratory judgment. The Circuit Court ruled in Hernandez’ favor, finding the Excess Policy illusory. Hernandez then obtained a judgment of $50,000 under the Excess Policy. Liberty appealed.

The sole issue on appeal was whether the plain language of the Excess Policy issued by Liberty to Zipcar was illusory. ¶15. In an opinion by Judge Brennan, the Court of Appeals concluded the Excess Policy was illusory and affirmed the Circuit Court’s decision. Judge Kessler concurred; Judge Fine dissented.

Under the terms of the Liability Policy, Club Members are covered insureds. However, under the terms of the Excess Policy, the same Club Members using Zipcars are not covered insureds.

On appeal the parties agreed that the Excess Policy’s definition of “insured” violates Wisconsin Statute § 632.32(3)(a) which requires “[c]overage provided to the named insured appl[y] in the same manner and under the same provisions to any person using any motor vehicle described in the policy when the use is for purposes and in the manner described in the policy.”

Liberty contended that to comply with § 632.32(3)(a) it included the Wisconsin Endorsement in the Excess Policy which amended the Excess Policy’s definition of an “insured.” The Wisconsin Endorsement included an “Other-Insurance Clause” which provided the Excess Policy “shall not apply when there is other valid and collectible insurance with at least the limits required by the Wisconsin Financial Responsibility Law . . .” ¶21.

The Court of Appeals concluded that the Other-Insurance Clause in the Wisconsin Endorsement operates to exclude all persons who qualify as “insureds.” The Court summarized its reasoning: “In short, Liberty cannot: (1) require Zipcar to maintain the Liability Policy to receive coverage under the Excess Policy; and then (2) exclude all insureds under the Excess Policy based upon coverage under the Liability Policy pursuant to the Other-Insurance Clause [of the Excess Policy]. To do so renders the Excess Policy illusory. See Gillund, 323 Wis. 2d 1, ¶19. As such, we need not reach the questions of whether Wis. Stat. §632.32(5)(c) permits an insurer to exclude some permissive users under the Other-Insurance Clause based upon coverage under a primary liability policy.”¶27.

“Where coverage is illusory, we have concluded that the contract should be reformed so that it comports with the insured’s reasonable expectations.” Gillund, 323 Wis. 2d 1, ¶19.  Hernandez, ¶28.

Although unpublished, the Hernandez decision could have a significant impact for serious injury cases involving Wisconsin Club Members driving Zipcars. Zipcar is growing quickly, particularly in university settings. Madison has six Zipcar locations and 11 in the Milwaukee area.

While Zipcar started as an alternative to traditional car rental agencies, in March 2013 the Avis Budget group purchased Zipcar for $500 million. At this time, Zipcar has approximately 800,000 Club Members.

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