2016-00194651-CU-PA

Collin Matthew Dunn vs. Joseph Richard Holesapple

Nature of Proceeding: Motion for Summary Judgment

Filed By: Biesty, James T.

Defendant Holesapple’s Motion for Summary Judgment on the Complaint in Subrogation is denied.

Defendant’s Request for Judicial Notice of the Complaint is granted.

Defendant’s Objections to Evidence, Declaration of Michele Barnes are overruled.

The standards governing a motion for summary judgment are well-established. A defendant moving for summary judgment or summary adjudication may demonstrate

that the plaintiff’s cause of action has no merit by showing that (1) one or more elements of the cause of action cannot be established, or (2) there is a complete defense to that cause of action. (Code Civ. Proc. § 437c(f)(2), (p)(2); Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843, 849.) This showing must be supported by evidence, such as affidavits, declarations, admissions, interrogatory answers, depositions, and matters of which judicial notice may be taken. (Code Civ. Proc. § 437c(p)(2); Aguilar, 25 Cal.4th at 850, 855.)

A defendant moving for summary judgment or summary adjudication bears the burden of showing that the causes of action have no merit or that there are one or more complete defenses to them. (Code Civ. Proc. § 437c(p)(2).) Specifically, a motion for summary adjudication is appropriate if one or more “cause of action has no merit.” (Id.

§ 437c(f)(1).) A judge must grant a motion for summary judgment if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to judgment as a matter of law. (Id. § 437c(c); Mann v. Cracchiolo (1985) 38 Cal.3d 18, 35.) Summary judgment is properly granted only if the moving party’s evidence establishes that there is no issue of material fact to be tried. (Lipson v. Superior Court (1982) 31 Cal.3d 362, 374.) Once the moving party meets this burden of production, the burden shifts to the opposing party to produce admissible evidence demonstrating the existence of a triable issue of material fact. ( Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 849.) A judge may not grant summary judgment when any material factual issue is disputed. (O’Riordan v. Federal Kemper Life Assur. (2005) 36 Cal.4th 281, 289.)

The issues raised by a motion for summary adjudication or summary judgment are framed by the pleadings. (Dromy v. Lukovsky (2013) 219 Cal.App.4th 278, 282; Lennar Northeast Partners v. Buice (1996) 49 Cal.App.4th 1576, 1582.)

This case arises out of an accident that occurred when defendant Joseph R. Holesapple (“Holesapple”) was test driving a car on May 30, 2014. The defendant drove off the road in a new Audi A7, went over a guardrail, and hit a bush. The car was deemed a total loss. The automobile was owned by Motorcars West LLC dba the Auto Gallery. The vehicle was insured under an automobile inventory coverage insurance policy issued by the Motors Insurance Corporation (“Motors”). (See Exhibit

B) Motors paid Auto Gallery $80,036 for damage to the Audi. Motors asked Holesapple to pay the balance. Holesapple, through his collision insurance policy with Allstate, paid $21,836.75 to Motors. Motors filed this subrogation action for negligence against Holesapple to recover the remaining $60,669.25 for the damage to the Audi. The subrogation action has been consolidated with the underlying personal injury action in which the passenger in Audi A7, Collin Matthew Dunn, is suing Holesapple for injuries sustained in the accident.

Under California law, an insurer cannot subrogate against its own insured. St. Paul Fire & Marine Ins. Co. v. Murray Plumbing & Heating Corp. (1976) 65 Cal.App.3d 66, 75-76 [in a case of first impression, embracing the “principle that an insurer may not subrogate against a coinsured of its subrogor”]; Truck Ins. Exchange v. County of Los Angeles (2002) 95 Cal.App.4th 13 [“An insurer has no right of equitable subrogation against its own insured.”] The crux of the instant inquiry is whether, therefore, under the Motors “inventory coverage”, Holesapple has established he is an “insured” under the subject policy.

Generally, the interpretation of an insurance policy is a question of law. Waller v Truck

Ins. Exch. Inc. (1995) 11 Cal.4th 1, 18. Where policy language is unambiguous, the Court need not proceed further with its analysis. Waller, supra, at 18. Insurance policies are contracts and, therefore, governed in the first instance by the rules of construction applicable to contracts. Montrose Chem. Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 666. It is a fundamental rule of policy interpretation that the provisions of an insurance contract are given effect according to their “plain meaning”- i.e. the terms are read in their “ordinary and popular sense” in the context of the policy as a whole and the circumstances of the case. Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264. Thus, “[t]he language of a contract is to govern its interpretation, if the language is clear and explicit and does not involve an absurdity.” Cal. Civ. Code § 1638.

With these rules fixed firmly in mind, Holesapple contends that he is an insured under the dealer’s Inventory policy, and therefore cannot be sued in subrogation. The policy provides that coverage would be provided for a loss, unless excluded, to a covered auto caused by collision. (UMF 8; see also Ex. B, Def’t Appx., p. 4 of 10, Part II-Coverages) As defined in the “definitions” of the policy (Ex. B, p. 2 of 10), “Collision” “means loss, unless excluded, to a covered auto striking or being struck by another vehicle or object, or the upset of a covered auto.” (UMF 9) Additionally, “Loss” is defined as “direct and accidental loss or damages to covered autos resulting from a single cause or event.” (Ex. B, p. 3 of 10). The policy contains the following provision under the General Conditions section: “No Benefit to Bailee. We will not recognize any assignment or grant any coverage for the benefit of any person or organization holding, storing, or transporting covered autos for a fee regardless of any other provision of this policy.”(UMF 10) Of note, the owner of the car dealerships, PMC, was the only named insured. The “Inventory Coverage” “Automobile Physical Damage Policy Declarations” reflects the “named insured” as PMC LLC; Potamkin Baytown Hy LLC DBA Baytown Hyundai”. Auto Gallery and other specific dealerships were added in a named insured endorsement. The policy does not include a definition of “insured persons.” (UMF 11) Of course, “[t]The fact that a term is not defined in the [policy] does not make it ambiguous.” Bay Cities Paving & Grading, Inc. v. Lawyers’ Mut.Ins. Co. (1993) 5 Cal.4th 854, 866.

Moreover, the “Automobile Physical Damage Policy” (Ex. B, p. 2 of10) states at the outset: “PLEASE READ THIS POLICY CAREFULLY. []THIS POLICY DOES NOT

PROVIDE BODILY INJURY LIABILITY, PROPERTY DAMAGE LIABILITY, OR ANY OTHER COVERAGE FOR WHICH A SPECIFIC PREMIUM CHARGE IS NOT MADE. THIS POLICY DOES NOT SATISFY FINANCIAL RESPONSIBILITY LAWS OR STATUTORY REQUIREMENTS FOR NO-FAULT COVERAGES.” [emphasis in original]

Holesapple contends that because he was a permissive driver and because the policy contained the non-assignment to bailees for hire provision, that he must necessarily be considered an insured under the policy because he was not a bailee for hire. Thus, he relies on the conditions of the policy to create coverage.

Holesapple relies on three out of state published opinions that held that the insurer may not subrogate against the driver who damaged the dealer’s vehicle. There is no California authority on point.

Motors Ins. Corp. v. Africk (N.Y.A.D. 2 Dept. 2008) 865 N.Y.S.2d 618,620.

In this case, a car dealership lent a vehicle to Africk while it was servicing his vehicle. Africk damaged the loaned vehicle in a one-car collision. Motors (the same insurer as in this case) paid the dealership for the damage to its vehicle under Motors’ comprehensive and collision policy, and filed a subrogation action against Africk to recover the amount it had paid the dealership. The court held that Motors had no right to subrogate against its own insured: “For the purposes of the antisubrogation rule, a permissive user of an insured vehicle is treated no differently than a named insured. Thus, the insurer is seeking recovery from a permissive user, authorized by its insured, for a claim arising from the very risk for which the insured was covered, an outcome barred by the anti-subrogation rule. Motors Ins. Corp. v. Africk (N.YA.D. 2 Dept. 2008) 865 N.Y.S.2d 618,620. However, as noted in the opposition, the policy in that case covered loss to an auto caused by failure of a person in lawful possession of a covered auto to return it to the dealer.

Judge Motor Corp. v. Graham (1988 N.Y.) 144 A.D.2d 998

In Judge, Collins was test driving an automobile owned by Judge Motor Corp., and was involved in a collision with a vehicle driven by co-defendant, Graham. The insurer, Hartford, paid Judge for damage to the vehicle pursuant to the terms of the collision coverage portion of the policy it issued to Judge. Hartford then filed a subrogation action against Collins and Graham. Like Motors’ policy, Hartford’s policy did not

include a definition of “insured persons.” Hartford argued that Collins was not an insured person under the collision portion of its policy. The court disagreed, concluding that, at the very least, the policy’s “bailee for hire” “exclusion” created an ambiguity as to whether one who is a bailee not for hire is an insured person, and that ambiguity was resolved in favor of finding that the test driver was an insured. However, as explained in the dissent, the bailee provision was not an “exclusion”, but rather a condition.

Frontier Ford v. Carabba (1987 Wash.) 50 Wash.App. 210,747 P.2d 1099.

In Frontier Ford, the insurance policy also contained no definition of “insured” under the physical damage/collision portion of the policy. It also contained similar language to the Motors policy in this case regarding bailees for hire. The policy stated under the heading “No Benefit to Bailee-Physical Damage Insurance Only” that the insurer would not recognize any assignment or grant any coverage for the benefit of any person transporting the property for a fee. The Court held that a prospective customer who was involved in an accident while test driving a vehicle qualified as an additional insured under the auto dealership’s policy and that the dealership’s insurer could not subrogate against the driver. The court rejected the insurer’s argument that the policy insured only the automobiles, not persons, because it contained the “no benefit to bailee” provision, which it characterized as an “exclusion.” Frontier at 1103.

As stated above, the issue to be addressed in this motion is whether Holesapple has established that he is an insured under the undisputed terms of the policy. The Court finds that Holesapple has not met his burden on this motion to show that he is an insured under the terms of the policy. Therefore, Holesapple’s motion for summary judgment on the subrogation complaint is denied.

In opposition, Motors contends that the inventory only collision insurance policy issued to a car dealership, where the only named insured is the owner of the car dealership,

and where the test driver has no insurable interest in the vehicle, cannot be interpreted in a manner to be a policy for the benefit of a negligent test driver. In this case, the Policy contains no liability provisions that would cover Holesapple as a permissive user. This Policy also specifically contemplates the carrier’s rights to subrogation to the rights of the dealer. Motors contends that at the very least there are triable issues of fact as to whether a negligent test driver can be deemed an insured under this policy.

In opposition, Motors submits the declaration of Michelle Barnes, Senior Subrogation Analyst at Motors, to support its contention that Holesapple is not an insured under the policy.

Motors provided an Inventory Coverage Physical Damage Policy (the “Policy”) to its Named Insured, PMC LLC, Potamkin Baytown Hy LLC dba Baytown Hyundai (“PMC); PMC owns numerous automobile dealerships, including Motorcars West, LLC, dba The Auto Gallery (the “Auto Gallery). The Policy covered the physical inventory of automobiles at PMC’s Auto Gallery location as well as other locations and provided no liability coverage. The policy does not provide bodily injury liability or property damage liability. The named insured is set forth on the Declarations page is PMC LLC: Potamkin Baytown Hy LLC dba Baytown Hyundai. (See Declarations and Policy Page 2)

Part II of the Policy, entitled “Coverages” contains, among other provisions, the “Coverage” and “Exclusions” sections of the Policy. Under the “Inventory Collision” coverage, the Policy provides: “We will pay for loss, unless excluded, to a covered auto caused by a collision.” [emphasis added] As previously indicated, a “collision” is defined as one involving a covered auto which in turn is defined as a vehicle owned by PMC. No “exclusions” listed in the “Exclusions” section of 9 the Policy are pertinent to the issues in this case. (Barnes Decl. para. 14; Exhibit “A” attached thereto.)

Part III of the Policy, entitled “Conditions”, contains in subpart A, entitled

“Loss Conditions, at paragraph 7, entitled “Our Right to Recover from Others”, in a highlighted box, the following language: “Our Right to Recover from Others. If we make any payment, we are entitled to recover what we paid from other parties. If any person to or for whom we make payment under this policy has rights to recover damages from another, those rights are transferred to us. This person or organization must do everything necessary to secure our rights and must do nothing to impair them.”

The No Benefit to Bailee language, relied on by Holesapple to support his theory that he is an insured is listed under the “General Conditions” set forth in the policy. It is not listed under the Exclusions to the policy but is, under the Conditions, a prohibition against assignment. By including this provision in the inventory collision policy, Motors is making clear that it will not honor any assumption by its named insured, typically pursuant to a bill of lading, of any liability of a bailee that the insured hires to transport a covered vehicle or any attempt by its insured to transfer the insured’s own coverage under the policy to a bailee for hire transporting a covered vehicle. There is no insured other than PMC, the named insured. The policy covers property and not a person. Only the dealership has an interest in the property being covered. As Barnes states, this is the risk that Motor’s assumed and “our understanding” of the plain language of the policy issued to PMC. (Barnes Decl. para 9- 19)

Motors points to the out of state authorities that have held that a negligent test driver is not an additional insured under an “inventory-only” collision policy because those policies are intended to benefit only the insured auto dealer. In contrast, the negligent test driver, who has no insurable interest in the vehicle, is not intended to be, and is not, an additional insured under such policies.

In Aetna Cas. & Sur. Co. v. Pennsylvania Nat. Mut. Cas. Ins. Co.. 316 N.C. 368 22 (1986), the North Carolina Supreme Court explained the difference between collision coverage and liability coverage. In that case, the vehicle at issue was owned by an auto dealer, Imports of High Point, Inc., and covered under a business auto collision policy. Bell, a friend of the dealership owner’s son, was involved in an accident while driving a dealership vehicle. He unsuccessfully argued that the auto dealer’s collision insurance carrier could not subrogate against him for his negligence in causing damage to the vehicle. The North Carolina Supreme Court, citing Couch on Insurance, observed”

“… Since the coverage in controversy was for damage from collision, only the owner, Imports, had an insurable interest in the car. [Imports] was indemnified by Penn pursuant to Penn’s obligation under the collision coverage clause for the property damage to the Mercedes. Because Bell does not hold legal title to the Mercedes and has no equitable or economic interest in the car, he has no insurable interest with respect to collision coverage. Thus, plaintiffs’ argument that permissive use exempts Bell from liability for compensation to Perm for the damage to the car is not relevant to the controversy arising out of the facts before us. (Id. at 370-371)

“[O]f central importance in this case is the fact that Penn’s policy is one of collision

insurance and not liability insurance. The issues of who is an “insured” and of
permissive use are critical in the resolution of a dispute involving automobile liability
insurance policies but not in cases involving automobile collision coverage; liability
insurance covers whomever may be construed as an “insured” under the terms of the
policy and permission is relevant in determining whether the acts of the driver are
insured by the policy. Collision insurance is basically a contract of indemnity which
merely covers physical damage to a specific insured vehicle-here, the Mercedes [the
insured vehicle] itself-irrespective of who is driving. l0A Couch on Insurance 2d §
42:221 (rev. ed. 1983); 7 Am.Jur.2d Automobile Insurance §§ 157, 172 (1980); Annot.,
Automobile Insurance-Accident-Collisions, 105 A.L.R. 1426, 1431 (1936).” (Aetna Cas.

& Sur. Co. V. Pennsvlvania Nat. Mut. Cas. Ins. Co.. supra. 316 N.C. at 370.) See also Universal Underwriters Group v Pierson (2003) 337 Ill App. 3d 893, 897.

In Western Motor Company. Inc.v Koehn, et al (1988) 242 Kan. 402 the court held that a dealership’s insurer could advance a subrogation action against a test driver of vehicle owned by the dealership for a collision loss caused by the negligence of the test driver, stating:

“An insurer’s right of subrogation is derived from the insurance contract. Farmers Ins. Co. v. Farm Bureau Mut. Ins. Co., 227 Kan. 533, 608 P.2d 923 (1980). An insurer claiming the right of subrogation stands in the shoes of its insured, and any defenses against the insured are likewise good against the insurer. Shelman v. Western Casualty & Surety Co., 1 Kan. App. 2d 44, Syl. ¶ 5, 562 P.2d 453, rev. denied 221 Kan. 757 (1977). By definition, an insurer can have no right of subrogation against its own insured since its insured is not a third party but one to whom a duty to pay a loss is owed. In addition, it is generally stated that no right of subrogation arises against a

person who is not a named insured but holds the status of an additional insured under the policy since it must have been the intention of the parties to protect this additional insured from the consequences of his negligence by including him in the insurance coverage. Transamerica Ins. Co. v. Gage Plumbing and Heating Co., 433 F.2d 1051 (10th Cir. 1970) (applying Kansas law); 16 Couch on Insurance 2d § 61:137 (rev. ed. 1983). Therefore, to determine whether an insurer is barred from claiming a right of subrogation against a particular person, the insurance contract must be examined to determine whether it was the intention of the parties to include the person within [*9] the scope of the policy’s coverage.” Koehn, 242 Kan. at 405.

“Looking solely at the language of Coverage Part 300, there is no reason to conclude the insurer and insured intended individuals in defendant’s position to receive the protection of the insurance. The coverage protects specific covered property rather than applying to the action of a particular individual who could be characterized as an ‘insured.. . . “Our interpretation of the specific wording of Universal’s policy is also consistent with the general authority from other jurisdictions. l0A Couch on Insurance 2d § 42:223 (rev. ed. 1982). Although each case depends heavily on the particular contract language involved, those involving loss to insured property under collision coverage, as opposed to liability, have generally held the insurer could assert subrogation rights against a third party tortfeasor. These cases tend to either construe the policy definition of “insured” as not including or excluding the tortfeasor (see, e.g.. Auto Driveaway Company v Aetna Cas. & Sur. Co.. 19 Ariz. App. 224, 506 P.2d 264 [1973]; Dairyland Ins. Co. v. Munson. 292 Minn. 141, 193 N.W.2d 476 [1972] ), or they examine the type of coverage involved and determine it does not protect the interests of anyone but the owner of the insured property. See e.g.. Highlands Ins. Co. v. Fischer. 122 Ariz. 394, 595 P.2d 186 (Ct.App.l979); Aetna Cas. and Surety Co. v. Penn. Nat. Mut. Cas. Ins. Co.. 316 N.C. 368, 341 S.E.2d 548 (N.C. 1986). (Western Motor Company. Inc v. Koehn. et al.. supra. 242 Kan. at 407-408)

Although Holesapple is correct in noting that the policy in Koehn stated that there was no benefit to any bailee, the Court finds the reasoning in the unpublished case of Schofield Bros. Inc. v Graham 1993 Kan.App. Unpub. LEXIS 641 Court:Court of Appeals Date: April 23, 1993, persuasive. In that case, as in this case, the condition applied only to prohibit assignment to a bailee for hire. Although the court found the bailment clause in Scholfield’s policy to be “troublesome,” the court concluded that in construing the language of the policy, the driver was not simply not covered by the casualty insurance and had no insurable interest in the vehicle. “It seems irrational to conclude that a person with no insurable interest in property, who would not under the language of the policy be an insured, can benefit from a casualty insurance policy merely because she is not specifically excluded.” Schofield, at p. 11. The Court agrees with this reasoning and finds that in this case, the prohibition of assignment of the insured’s rights under the Conditions does not make Holesapple an insured under the policy.

The Court is persuaded by the analysis in Aetna and Scholfield. In distinguishing Holesapple’s authority, it must be noted that in Judge Motor Corp and Frontier Ford, the courts found an ambiguity in the policies resulting from what they determined to be a paid bailee “exclusion,” opining that the exclusion of a paid bailee implied the inclusion of a non-paid bailee (the negligent test driver) as an insured. The Court believes those cases incorrectly determined that the bailee provision condition was an “exclusion” to the policy. No such exclusion exists in the Motors policy here. Moreover, in Frontier Ford, unlike in this case, the test driver was also found to be an

insured under other provisions of the policy, including the “customer” provision of the dealer’s policy as well as the liability portion of the policy.

Again, the bailee provision is not an “Exclusion” under the policy but rather a Condition. Conditions are not exclusions. See, Certain Underwriters v. Engs Motor Truck Co., (1982) 135 Cal. App. 3d 831, 836 [“An exclusion or exception in an insurance policy is a refusal by the insurer to assume a particular risk, while a condition provides for avoidance of liability if it is breached. (3 Long, The Law of Liability Insurance (1981) § 17.15, pp. 17-39, 17-40.) The policy at issue here on its face plainly distinguishes between its exclusions and its conditions with unambiguous boldface headings.”] Thus, exclusions affect a coverage analysis only if the claim falls within the scope of the insuring clause: Before even considering exclusions, a court must examine coverage provisions to determine whether a claim falls within the policy’s promise to pay. Waller v Truck Ins. Exchange, Inc. , supra, at p.16. Contrary to an exclusion, a condition neither confers or excludes coverage for a particular risk, but rather, imposes certain duties on the insured in order to obtain the coverage provided by the policy North American Capacity Ins. Co v Claremont Liability Ins. Co. (2009) 177 Cal.App.4th 272, 289-290.

In this case, it is undisputed that the bailee language is listed as a Condition and not an Exclusion. In the context of analyzing whether Holesapple is an insured under the policy, the court must first determine under the insuring provisions if he is an insured, before the exclusions are applied. Since there is no language defining anyone but PMC as an “insured” under the inventory policy, it is unreasonable to construe the “condition” regarding a hired bailee as an “exclusion” of a bailee for hire as an “insured,” since there is no language in the policy that defines any type of bailee as an insured.

The Court reject’s Holesapple’s argument that the Aetna case is “contrary to California law” because Insurance Code § 281 creates an insurable interest for Holesapple.

Insurable interest is defined in Insurance Code section 281 to be ”[e]very interest in property, or any relation thereto, or liability in respect thereof, of such a nature that a contemplated peril might directly damnify the insured, is an insurable interest. (emphasis added) Insurance Code section 281. Holesapple contends that being liable for the damage to the vehicle in subrogation would cause him to sustain an financial loss. However, the salient issue in this case is whether Holesapple is an insured under the policy, not whether he would have an insurable interest if he were an insured. The Shade Foods case (Shade Foods Inc. v Innovative Products Sales & Marketing, Inc. (2000) 78 Cal.App. 847), relied on by Holesapple, is not germane because in that case it was undisputed that the party claiming coverage for property damage to the almond clusters were insureds under the policy.

The Court must consider the language of a contract as a whole and interpret the language in context, rather than interpret a provision in isolation. (Civil Code § 1641.) A policy provision further cannot be construed in such a way that the construction would nullify other policy provisions. By arguing that Motors’ Inventory Only Insurance Policy covers all individuals who drive an insured vehicle, except “bailees for hire,” Holesapple misinterprets the plain language of the Policy to add as insureds individuals contrary to the plain terms of the policy. Plaintiff has not met his burden to show that he is an insured under the policy. The evidence submitted by Motors supports the inference that the understanding, expectation, and intent, of Motors was to not insure test drivers such as Holesapple.

Therefore, as Holesapple has not met his burden to show that he was an insured under the inventory only policy, the Motion for Summary Judgment is denied.