State Farm v. Universal Underwriters Group

Annotate this Case
State Farm v. Universal Underwriters Group, No. 82837 (4/16/98)

Docket No. 82837--Agenda 11--November 1997.
Appellee v. UNIVERSAL UNDERWRITERS GROUP et al., Appellants.
Opinion filed April 16, 1998.

JUSTICE NICKELS delivered the opinion of the court:
In this appeal, we consider whether a car dealer's garage insurance policy
covers the liability of a separately insured customer who is involved in an accident
while test driving one of the dealer's vehicles. In 1994, Rodney Luckhart took a
test drive in a Jeep Cherokee owned by defendant Joyce Pontiac GMC, Jeep-Eagle
and Toyota (Joyce Pontiac). During the test drive, Luckhart negligently collided
with vehicle owned by Vivian Carter and operated by Raun Calinee, both of
whom suffered personal injuries as a result of the accident. Luckhart had
automobile liability coverage under a policy issued by plaintiff, State Farm Mutual
Automobile Insurance Company (State Farm). State Farm paid a total $9,092.15
to Calinee and Carter for property damage and personal injury claims against
Thereafter, State Farm submitted a claim to Joyce Pontiac's insurance carrier,
the defendant herein, Universal Underwriters Group (Universal). State Farm
contended that a garage policy issued by Universal to Joyce Pontiac afforded
primary coverage for Luckhart's liability while test driving the Jeep Cherokee. As
Luckhart's subrogee, State Farm sought reimbursement of the amounts it had paid
to Carter and Calinee. Universal denied the claim, asserting that the garage policy
issued to Joyce Pontiac afforded no coverage to Luckhart in connection with the
accident. State Farm then brought this lawsuit in the circuit court of Du Page
County seeking recovery under the garage policy. On cross-motions for summary
judgment, the trial court entered judgment in favor of State Farm in the amount
$9,092.15. The appellate court affirmed the judgment, holding that Luckhart was
an insured under the garage policy. 285 Ill. App. 3d 115. We allowed Universal's
petition for leave to appeal. 166 Ill. 2d R. 315. With leave of this court, the
Illinois Automobile Dealers Association has filed an amicus curiae brief in
support of Universal and the National Association of Independent Insurers and
Allstate Insurance Company have filed a joint amicus curiae brief in support of
State Farm.

The garage policy issued by Universal provides, in pertinent part, as follows:
1. YOU;
2. Any of YOUR partners, paid employees, directors, stockholders,
executive officers, a member of their household or a member of YOUR
household, while using an AUTO covered by this Coverage Part, or when
legally responsible for its use. The actual use of the AUTO must be by
YOU or within the scope of YOUR permission;
3. Any other person or organization required by law to be an INSURED
while using an AUTO covered by this Coverage Part within the scope of
YOUR permission."
The parties disagree as to whether Luckhart was "required by law to be an
INSURED" within the meaning of the policy and applicable statutes. State Farm
relies on section 7--601 of the Illinois Vehicle Code (Code), which provides: "[n]o
person shall operate, register or maintain registration of, and no owner shall permit
another person to operate, register or maintain registration of, a motor vehicle
designed to be used on a public highway unless the motor vehicle is covered by
a liability insurance policy." 625 ILCS 5/7--601(a) (West 1996). The policy must
provide coverage of at least $20,000 per person for death or bodily injury, $40,000
per accident for death or bodily injury and $15,000 for property damage
("$20,000/$40,000/$15,000"). 625 ILCS 5/7--203, 7--601(a) (West 1996). State
Farm contends that Luckhart was legally required to be an insured under this
provision and he therefore falls within the definition of "INSURED" set forth in
the garage policy issued by Universal. Citing Madison Mutual Insurance Co. v.
Universal Underwriters Group, 251 Ill. App. 3d 13 (1993), State Farm contends
that the garage policy covers any driver who is legally required to have liability
insurance, regardless of whether that driver has liability coverage under some
other policy.
Universal acknowledges that a potential car buyer may not test drive a vehicle
unless he or she is covered by liability insurance in the requisite amount.
However, Universal contends that section 7--601(a) does not specify that the test
driver must be covered under the dealer's policy. Universal relies on Steinberg v.
Universal Underwriters Insurance Co., 272 Ill. App. 3d 79 (1995), which held that
a garage policy with identical language "was intended to cover only uninsured or
underinsured customers, those otherwise `required by law to be an INSURED.' "
Steinberg, 272 Ill. App. 3d at 83.
We agree with State Farm that under Illinois law, a car dealer's liability policy
must provide coverage for test drivers such as Luckhart, and Luckhart was
therefore a person required by law to be an "INSURED" under Joyce Pontiac's
garage policy. A provision in an automobile insurance policy extending liability
coverage to persons who use the named insured's vehicle with his or her
permission is commonly referred to as an omnibus clause. See 7 Am. Jur. 2d
Automobile Insurance sec. 225 (1997). Omnibus clauses are sometimes required
by statute to be included in automobile or motor vehicle liability policies, and
where this is the case, such a clause must be read into every such policy. 7 Am.
Jur. 2d Automobile Insurance sec. 226 (1997).
Section 7--601(a)(1) of the Code requires vehicles to be covered by a "liability
insurance policy." That provision does not specifically indicate whether the policy
must contain an omnibus clause. However, a similar term, "motor vehicle liability
policy," is defined in section 7--317 of the Code as follows:
"sec. 7--317 `Motor vehicle liability policy' defined. (a) Certification.--
A `motor vehicle liability policy', as that term is used in this Act, means
an `owner's policy' or an `operator's policy' of liability insurance, certified
as provided in Section 7--315 or Section 7--316 as proof of financial
responsibility for the future ***.
(b) Owner's Policy.--Such owner's policy of liability insurance:
1. Shall designate *** all motor vehicles with respect to which coverage
is thereby intended to be granted;
2. Shall insure the person named therein and any other person using or
responsible for the use of such motor vehicle or vehicles with the express
or implied permission of the insured." (Emphasis added.) 625 ILCS 5/7--
317 (West 1996).
It is well established that when a statute defines the terms it uses, those terms
must be construed according to the definitions contained in the act. Garza v.
Navistar International Transportation Corp., 172 Ill. 2d 373, 379 (1996).
Accordingly, a liability insurance policy issued to the owner of a vehicle must
cover the named insured and any other person using the vehicle with the named
insured's permission.
We note that the statutory definition above appears in article III of chapter 7
of the Code, which requires that certain motorists submit proof of financial
responsibility for the future as a condition of enjoying driving privileges. See
generally 625 ILCS 5/7--301 through 7--329 (West 1996). Universal argues that
the section 7--317's omnibus clause requirement only applies to liability policies
used as proof of future responsibility in accordance with article III of chapter 7.
We disagree. Under section 7--317, the statutory definition of "motor vehicle
liability policy" applies to that term as it is "used in this Act." The word "Act,"
in turn, refers to the Illinois Vehicle Code, unless the context clearly indicates
another meaning. 625 ILCS 5/1--101.1 (West 1996). Accordingly the definition
set forth in section 7--317 applies throughout the Code and thus applies to the
mandatory insurance requirement set forth in section 7--601(a). The cases
Universal cites in support of its argument are inapposite because they were
decided prior to the enactment of the mandatory insurance statute.
Universal further contends that Joyce Pontiac is excused from the requirements
of the mandatory insurance statute under a statutory exemption for "vehicles
complying with laws which require them to be insured in amounts meeting or
exceeding the minimum amounts required under [section 7--601]." 625 ILCS 5/7--
601(b)(6) (West 1996). Universal argues that as a seller of new vehicles, Joyce
Pontiac is legally required to maintain liability coverage of at least
$100,000/$300,000/$50,000 (see 625 ILCS 5/5--101(b)(6) (West 1996)), which
exceeds the $20,000/$40,000/$15,000 coverage required under the mandatory
insurance statute. We conclude that the exemption which Universal cites applies
only when the insurance required by law provides the type of coverage required
under the mandatory insurance statute. Hence, the insurance must contain an
omnibus clause insuring those driving a vehicle with the owner's permission.
Thus, regardless of whether the exemption applies, the garage policy must still
cover Luckhart's liability.
Accordingly, Luckhart was an insured under the garage policy issued by
Universal. Universal contends, however, that to the extent its policy covered
Luckhart's liability, the policy only provided excess coverage after other insurance
covering Luckhart was exhausted. We note that pursuant to custom in the
insurance industry, primary liability is generally placed on the insurer of the owner
of an automobile rather than on the insurer of the operator. 7A Am. Jur. 2d
Automobile Insurance sec. 543 (1997). Even assuming, arguendo, that Universal
is correct in its interpretation of the language of its garage policy, to give effect
to that language would violate the public policy of this state, as defined by the
General Assembly in the Code. As explained above, the Code mandates that the
insurance policy issued by Universal provide omnibus coverage. In the absence
of any statutory language qualifying that mandate, the statute must be construed
to require primary coverage.

For the foregoing reasons, the judgment of the appellate court is affirmed.


JUSTICE BILANDIC took no part in the consideration or decision of this