Written by Jessica F. Garro
Two recent insurance coverage cases highlight the ever important characterization of activities undertaken by the independent contractors frequently engaged by motor carriers.
The fine line between whether or not a contractor is conducting those activities as part of “the business of” the carrier can mean the difference between a loss being born by the carrier’s own insurer or the contractor’s insurer.
In Progressive Premier Insurance Co. of Illinois v. Emiljanowicz, 2013 IL App (1st) 113664, a contractor entered into an agreement to lease a truck he owned to a carrier “for the purpose of hauling freight.” At the same time the agreement was executed, the carrier’s president instructed the contractor to have his truck inspected by a mechanic.
That same day, the contractor drove the truck to pick up a friend and take the truck to a mechanic. On his way to pick up the friend, the contractor collided with another vehicle.
At the time of the accident, the contractor was covered by an insurance policy issued by Progressive, but the policy contained a contingent liability endorsement that stated it did not apply when the contractor was operating the vehicle on behalf of anyone else or any organization. A different insurer, Occidential, issued a liability insurance policy to the carrier that covered all vehicles in service for them, but only when the vehicle is an “auto” in use exclusively for transporting freight for their services.
When the victim of the accident sued the contractor, Progressive defended him under a reservation of rights. After the case settled, Progressive filed a declaratory action against Occidential, seeking reimbursement for the defense and settlement of the claims. The trial court ruled in favor of Progressive.
The appellate court affirmed. In doing so, it applied a two‐factor test to determine whether a vehicle is being used “in the business” of a corporation: (1) Whether the contractor agreement provides that the insured corporation has exclusive possession, control and use of a leased vehicle (note that federal regulations governing motor carriers require this language in all authorized carrier leases, 49 C.F.R. Section 376.12(c)) and (2) whether at the time of the accident, the vehicle was operating on directions of the corporation.
Occidental argued that its policy did not meet the second prong of the test because the contractor was not operating on direction of the carrier at the time of the accident, but instead was on his way to pick up a friend. The court disagreed, noting that the record reflected that the contractor was picking up his friend for no other reason than to take the truck to get repaired and ultimately held that Occidential, the carrier’s insurer, was responsible for both the contractor’s defense costs and the settlement.
The Wisconsin Supreme Court recently reached the opposite conclusion in Casey v. Smith, 353 Wis.2d 354 (2014). The contractor in Casey also leased a tractor‐trailer he owned to a carrier pursuant to a contractor agreement. The carrier obtained a commercial automobile policy from Great West.
The contractor was covered by a non‐trucking use policy issued by Acceptance, which excluded coverage for the vehicle while being “operated, maintained or used to carry property in any business or en route to or from such business purpose.”
While en route to get the tractor‐trailer’s grille and oil filler tube repaired on his day off work, the contractor was involved in a three‐vehicle accident. The driver of one of the other vehicles sued the contractor, naming both insurers as defendants.
A dispute arose between Great West and Acceptance as to which of their policies covered the plaintiff’s claims. The circuit court granted summary judgment in favor of Great West, the appeals court affirmed and review was accepted by the Wisconsin Supreme Court.
Similar to Progressive, the threshold question was whether the contractor was operating “in the business of” the carrier when the accident occurred. However, the Wisconsin Supreme Court did not apply the simplistic “operating on directions of the carrier” test that is used in Illinois. It instead adopted a test articulated by the 7th U.S. Circuit Court of Appeals in Hartford Insurance Co. v. Occidental Fire & Casualty Co., 908 F.2d 235 (7th Cir. 1990).
Under the Hartford test, which applied Wisconsin law, to be considered operating “in the business of” a carrier, the vehicle must be “used to further the commercial interests of the lessee.” Relevant factors in making such a determination include the terms of the lease agreement, any instructions from the lessee and the nature and extent of the repairs.
Applying the Hartford test, the Wisconsin Supreme Court agreed that the contractor’s insurer was liable for the loss.
The court noted that the lease at issue required the contractor to maintain “the equipment in the state of repair required by all applicable regulations.” Since the repairs to the grille and oil filler tube were not required to comply with federal regulations, the court determined that such repairs were not necessary to fulfill the contractor’s duties under the lease.
The court noted that the contractor was not acting pursuant to orders from the carrier at the time of the incident, and indeed, the carrier was unaware that the contractor was getting the repairs done.
It further stressed that the damage to the grille had not put the tractor out of service or prevented the contractor from accepting or completing hauls for the carrier (as the contractor had in fact been accepting loads for about a month with a damaged grille).
Carriers and insurers alike should be aware of the differences between these ever‐important tests used to determine whether independent contractors are engaged “in the business of” the carrier. Arguably, had the carrier in Casey instructed the contractor to get the minor repairs taken care of, under the more simplistic test used in Illinois, the contractor’s drive en route to the mechanic likely would have been considered to have occurred “in the business of” the carrier, irrespective of whether the repairs were minor or required under the contract.
A prudent insured should require its broker to verify coverage based on such nuances of state law.