State Farm Mutual Automobile Insurance v. Agency Rent-A-Car, Inc.

Citations: 138 Ariz. 201; 677 P.2d 1309; 1983 Ariz. App. LEXIS 678Docket: No. 1 CA-CIV 6705

Court: Court of Appeals of Arizona; November 1, 1983; Arizona; State Appellate Court

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A.R.S. 28-324 mandates that rental car agencies, such as Agency Rent-A-Car, Inc., are primarily responsible for obtaining and maintaining automobile insurance for vehicles rented to the public. The trial court granted summary judgment in favor of State Farm Mutual Automobile Insurance Company and its insured, Kent Chatterton, affirming that Agency could not seek indemnification from Chatterton after he caused damage to another vehicle while renting from Agency. 

Chatterton had rented a car on September 5, 1979, under an agreement stating that the customer’s existing insurance would cover liability and property damage, and that Agency was not providing additional insurance. When State Farm compensated the owner of the damaged vehicle, it sought reimbursement from Agency, which refused. The court's ruling highlighted that A.R.S. 28-324 explicitly requires car rental businesses to maintain liability insurance for their renters, irrespective of whether they are self-insured. 

Agency's argument that being a self-insurer exempted it from this obligation was rejected; it was determined that the statutory language is clear and does not differentiate between traditional insurance and self-insurance. The court emphasized the legislative intent behind the statute to protect the public from potential financial harm caused by drivers of rented vehicles. The court relied on previous case law, asserting that the legislature did not intend to allow rental agencies to evade primary liability through self-insurance options.

The facts and holding in Lowry are distinguishable from the current case. In Lowry, the lessor and lessee agreed that the lessee would obtain and maintain liability and physical damage insurance for leased vehicles, with the lessor named as an additional insured. The lessee complied and provided insurance certificates to the lessor, who forwarded them to the Arizona Highway Department. Despite being a named insured, the lessor was deemed non-compliant with A.R.S. 28-324, which requires the owner to procure necessary insurance. The court concluded that as long as the vehicle was insured and the owner was named, the statute's purpose was fulfilled, rejecting the notion that the owner must directly contract for insurance.

In the present case, the Agency attempted to shift primary liability to Chatterton’s insurance but is not a named insured under Chatterton’s State Farm policy. The policy only provides excess coverage, thus affirming that under A.R.S. 28-324, the Agency had primary responsibility for Chatterton’s operations. Since State Farm's payment was within the required coverage, they are entitled to reimbursement of $1,968.22. The trial court's finding that the Agency cannot indemnify itself from Chatterton is upheld. The Agency had the option to pass on insurance costs through increased rental fees but chose to contract away its statutory obligations and must now bear the loss. The judgment is affirmed. A.R.S. 28-324(A) outlines the insurance requirements for vehicle owners engaged in rental operations.