North Pacific Insurance v. American Manufacturers Mutual Insurance

Citations: 200 Or. App. 473; 115 P.3d 970; 2005 Ore. App. LEXIS 810Docket: 0208-07903; A122602

Court: Court of Appeals of Oregon; July 6, 2005; Oregon; State Appellate Court

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North Pacific Insurance Company initiated a declaratory judgment action against American Manufacturers Mutual Insurance Company, claiming that American was obligated to defend and indemnify Brad Morgan and Linda Likens in a tort claim filed by Robert Farrell, stemming from an automobile accident. The trial court denied North Pacific's partial summary judgment request, granted American's cross-motion for summary judgment, and dismissed North Pacific's case. North Pacific appealed the decision.

The facts are largely undisputed: Jerry Brown Company leased a 1999 Chevrolet Suburban from Felco Auto Lease, with American insuring Brown during the lease. In January 2001, Brown sold the Suburban to Troy Likens, who agreed to maintain full insurance coverage from the purchase date forward. However, Brown did not inform Felco of the sale, which violated the lease terms prohibiting the transfer of leasehold interests. Despite this, Likens continued to make payments to Brown, who forwarded them to Felco.

In May 2001, Morgan, driving the Suburban with Linda Likens as a passenger, was involved in a collision with Farrell. The vehicle’s title still listed Felco as the lessor and Brown as the lessee at the time of the accident. Following the incident, North Pacific defended Morgan and Likens and ultimately settled with Farrell for $650,000. North Pacific sought a declaration that American had a duty to defend and indemnify them under Brown's insurance policy, arguing that Morgan and Likens were insureds because the vehicle was considered 'hired' and they had Brown's permission to use it. The trial court found no such duty existed, leading to the dismissal of North Pacific's action, which was upheld on appeal.

'Hired' autos under American’s policy include vehicles that are leased, hired, rented, or borrowed. The policy defines an insured as anyone using a covered auto with the owner’s permission. Coverage applies for all damages due to bodily injury or property damage resulting from the use of a covered auto. North Pacific argues that the vehicle was a hired auto because Brown was still leasing it from Felco at the time of the accident, noting that the lease prohibited Brown from transferring rights without Felco's consent, payments were made to Brown, and Brown did not inform Felco about the sale to Likens. Consequently, North Pacific asserts that the lease remained effective, classifying the vehicle as a hired auto under American’s policy.

Conversely, American contends that the sale of the vehicle to Likens by Brown represented a transfer of all leasehold interests, thereby eliminating Brown's rights to control the vehicle or grant permission for its use. American argues that, since Brown had no residual rights at the time of the accident, the vehicle was not operated with Brown’s permission, disqualifying Morgan and Likens as insureds under the policy. 

The determination of coverage for Likens and Morgan hinges on the interpretation of American’s policy. Generally, the construction of an insurance policy is a legal question, but ambiguity or the use of technical terms can create a factual question. The goal is to ascertain the parties' intent from the perspective of an ordinary insurance purchaser. The term 'permission' is undefined in the policy, but its ordinary meaning encompasses the act of permitting or granting formal consent. Thus, the analysis seeks to uncover what Brown and American intended regarding permission in the context of their insurance agreement.

'Permission' and 'consent' are deemed synonymous in the context of omnibus clauses in car insurance policies, as established in Mathews v. Federated Service Ins. Co. The term 'permission' implies that the grantor has the authority to allow use of the vehicle and that the vehicle remains the insured's property, with an expectation of its return. In the analyzed case, it is determined that the parties did not intend for 'permission' to encompass the sale of Brown’s interest in the vehicle to Likens. The bill of sale and related testimony clearly indicate a transfer of ownership from Brown to Likens, contradicting any notion of continued permission for use. The existence of a lease between Brown and Felco does not affect the transfer of ownership, as ownership entails possession and control, which Brown relinquished. North Pacific's argument regarding the lease and Brown's liability does not align with the risks covered by the insurance policy, which insures against the use of property by the insured rather than contractual liabilities. Consequently, without any remaining interest in the vehicle, the risk from Likens' use was not covered under the policy. The ruling is affirmed, distinguishing between the rights of a lessee and those of a transferee with full ownership.