National American Insurance v. Progressive Corp.

Citations: 43 F. Supp. 3d 873; 2010 U.S. Dist. LEXIS 146071; 2014 WL 1978470Docket: No. 13 CV 1290

Court: District Court, N.D. Illinois; May 15, 2014; Federal District Court

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NAICO has filed a lawsuit against Progressive Corporation and Artisan Truckers Casualty Company to recover funds it disbursed on behalf of its insured, which NAICO asserts should have been covered by Artisan. The case involves cross-motions for summary judgment, resulting in the granting of NAICO’s motion and the denial of Artisan’s. 

The background details a collision on August 23, 2010, where a semi-truck hit a vehicle driven by Gustavo Bernal, injuring both him and his wife, Maria. Subsequently, the Bernals sued multiple parties, including the truck's owner, Michael Barengolts, and Unlimited Carrier, whose placards were displayed on the truck. A critical issue in the case is the ambiguity surrounding the driver of the truck at the time of the incident.

Two insurance policies are relevant to the litigation: one from NAICO for Unlimited Carrier, which provided liability coverage for damages arising from accidents involving covered vehicles, and another from Artisan for Viktor Barengolts, which outlines liability for damages due to accidents involving insured vehicles. The NAICO policy covers owned and hired vehicles, while the Artisan policy names Viktor as the insured and includes coverage for damages from the use of an insured vehicle.

Viktor is acknowledged as an insured individual under the Artisan policy, which covers the Volvo semi tractor involved in the accident with the Bernals. The Artisan policy incorporates a "Contingent Liability Endorsement" that modifies coverage for bodily and property injury liability under specific conditions. Coverage is excluded if the insured auto is operated for or on behalf of any entity, or for transporting goods during loading or unloading. Despite these limitations, all other terms of the policy remain unchanged.

NAICO initially defended the suit under a reservation of rights and discovered that the lease agreement between Unlimited Carrier and Michael Barengolts was not signed until after the accident. Nevertheless, NAICO defended and settled the lawsuit with the Bernals for nearly $100,000. Following the incident, Viktor sought coverage from Artisan, which denied the claim on the grounds that he was driving for Unlimited Carrier at the time of the accident.

Repeated requests from both Unlimited Carrier's counsel and Viktor's counsel to involve Artisan in the lawsuit were met with refusals. Artisan maintained its stance, citing the Contingent Liability Endorsement as the basis for denying coverage. Even after presenting the unsigned lease as evidence, Artisan continued to deny the tender of defense and indemnity to Viktor and Michael Barengolts, asserting that the lease date did not alter the applicability of the endorsement.

On March 18, 2012, the Barengoltses' counsel communicated disagreement with Artisan's stance. Artisan denied the claims again on May 3, 2012. Following a court ruling in the Bernal lawsuit that left unresolved factual issues regarding whether Michael and Viktor Barengolts were agents of Unlimited Carrier at the incident's time, the Barengoltses' counsel offered defense and indemnity to Artisan, which was again declined. After the Bernal litigation concluded on February 19, 2013, NAICO filed a lawsuit seeking recovery of defense and indemnity costs from Artisan, claiming Artisan breached its obligations to defend and indemnify the Barengoltses. NAICO's complaint includes claims for equitable subrogation, contractual subrogation, and equitable contribution. Artisan countered, denying any obligation and seeking a declaratory judgment that no coverage existed under its policy for the Bernals' claims. The case is currently before the Court on cross motions for summary judgment, with NAICO asserting that the allegations in the Bernals' complaint triggered Artisan's duty to defend, while Artisan contends it had no such duty. Under Illinois law, an insurer's duty to defend is broader than its duty to indemnify, requiring analysis of the complaint's allegations against the policy language to determine if the duty to defend is invoked.

An insurer is obligated to defend the insured if the allegations in the underlying complaint suggest facts that may be covered by the insurance policy. This duty applies even if only one of multiple claims or theories in the complaint falls within the policy's coverage. Both the policy language and the allegations must be interpreted broadly in favor of the insured, with any uncertainties resolved against the insurer. 

In the case involving Gustavo and Maria Bernal, the complaint consists of eight counts related to a collision on August 23, 2010, between their truck and another truck registered to Unlimited Carrier. The Bernals assert damages exceeding $50,000 each, alleging that Viktor Barengolts was operating the tractor as an employee of Unlimited Carrier and engaged in negligent behavior leading to the accident. Additionally, counts III and IV shift the focus to Eduard Gaidishev, also accused of negligence while operating the tractor under the same employment relationship with Unlimited Carrier. Counts V and VI introduce the ownership aspect, claiming that Viktor Barengolts was driving the tractor owned by Michael Barengolts while acting as his agent, again attributing negligence leading to the collision. Each count emphasizes the agency and employment relationship with Unlimited Carrier, indicating a pattern of negligence resulting in injury to the plaintiffs.

Counts VII and VIII of the complaint assert that Gaidishev, rather than Viktor, was operating the tractor as an agent or employee of Michael Barengolts, committing negligent acts that led to the collision and injuries sustained by the Bernals. NAICO contends that the complaint's alternative allegations—regarding whether the truck was driven on behalf of Unlimited Carrier or Michael Barengolts—create a duty for Artisan to defend. Conversely, Artisan argues that all counts indicate the truck was under the authority of Unlimited Carrier, thus negating any duty to defend or indemnify under the insurance policy. Artisan cites the Contingent Liability Endorsement, which excludes coverage when the insured vehicle is operated for anyone else’s benefit.

The court interprets insurance policies based on contract interpretation principles, aiming to discern the parties' intent. The Contingent Liability Endorsement is deemed unambiguous, and an analysis of the Bernals’ claims reveals that counts V, VI, VII, and VIII, which allege negligence by the driver as an agent of Michael Barengolts, may not fall under the exclusion. While Artisan maintains that these claims still suggest the driver was acting within the scope of his employment with Unlimited Carrier, the exclusion specifically pertains to operation for others. 

Counts I through IV clearly indicate the driver was acting as an agent of Unlimited Carrier, thus falling within the exclusion. However, only counts I through IV explicitly state that the driver operated the truck on behalf of Unlimited Carrier, while counts VII and VIII assert that Gaidishev was operating the truck as Michael Barengolts' agent, indicating potential coverage for those specific counts.

Artisan contends that the complaint claims the truck was under Unlimited Carrier's "authority and control" at all relevant times. However, the insurance policy does not exclude coverage based solely on authority and control; it excludes coverage when the truck is operated, maintained, or used on behalf of another party. The truck could be under Unlimited Carrier’s authority due to its placards while being operated for Michael Barengolts or personal reasons. The court finds that despite the placards, the relationship between Michael and Unlimited Carrier was not formalized, indicating the truck was not authorized to carry the placards at that time. Therefore, counts V through VIII of the complaint potentially fall within coverage, and Artisan improperly refused to defend its insured, making its reliance on the Contingent Liability Endorsement unreasonable.

Regarding Artisan's duty to indemnify, the court notes that the duty to defend is broader than the duty to indemnify. Since Artisan has a duty to defend due to the potential coverage of the allegations, it must now be evaluated whether it has a duty to indemnify based on the actual scope of coverage. Artisan argues that "placard liability" exempts it from liability, which holds federally authorized carriers vicariously liable for negligence by drivers operating under lease. While placard liability ensures that victims like the Bernals receive compensation for damages caused by a truck displaying Unlimited Carrier’s logos, it does not determine NAICO's right to seek reimbursement from Artisan for costs incurred in covering those damages. Thus, despite the doctrine of placard liability ensuring compensation for the Bernals, it does not preclude NAICO’s right to recover from Artisan.

Artisan's insurance policy explicitly states that coverage does not apply if the insured tractor is operated for or on behalf of others, regardless of compensation. Determining whether the tractor was used in such a manner during the accident involves examining all available evidence, including depositions and photographic documentation. Evidence suggests the tractor may have been operating for Unlimited Carrier, as it bore their placards at the time of the accident. Conversely, a lease agreement with Unlimited Carrier was not signed until August 31, 2010, after the incident. Michael Barengolts, the operator, testified that he first contacted Unlimited Carrier shortly before the accident and believed the lease should have been finalized earlier. He indicated that he and Viktor were preparing for work with Unlimited Carrier on the morning of the accident, and the tractor had Unlimited Carrier stickers affixed after their initial meeting. However, Barengolts confirmed that no executed lease agreement existed at the time of the accident. After the incident, Artisan inspected the tractor and covered approximately $5,000 in repair costs.

Michael testified that he signed a lease agreement on August 31, understanding it would commence on that date. He indicated that Unlimited Carrier did not inform him he could no longer use his truck for personal or business purposes after affixing the company sticker. Viktor Barengolts, who learned about Unlimited Carrier after completing driving school in May 2010, visited their facility in Lansing, Illinois, and was hired shortly thereafter. He noted that he did not own a truck at that time but signed an owner-operator agreement as part of the standard hiring process in Illinois, clarifying he was hired as a subcontractor.

Viktor stated that prior to the accident, he drove company trucks and planned to drive a Volvo truck purchased by his father. His work routine involved receiving load notifications from the dispatcher, checking the truck for paperwork and repairs, and preparing to pick up loads. He confirmed that Michael's truck had never been at Unlimited Carrier’s Lansing facility before the accident and that they did not bring the truck there on August 20, 2010. A week before the accident, Viktor went to the facility alone to obtain stickers for the Volvo truck, which he applied over the weekend.

On the morning of the accident (August 23), Viktor planned to visit the Lansing facility for work and had communicated with the owner-operator staff manager to confirm his start date. He recalled that on the day of the accident, his father drove him and Eduard to the truck, with Eduard taking the driver’s seat and Viktor sitting in the passenger seat. Shortly after departure, Viktor lay down in the sleeping compartment and later looked out to see Eduard slowing down due to the Bernals' vehicle being completely stopped.

Eduard was driving Michael's truck at the time of the accident. Viktor instructed Eduard to move to the passenger seat and then exited the truck to check on the people involved. A police officer later arrived and instructed Viktor to move the truck to allow traffic to pass. After moving the truck, Eduard exited, appearing agitated. Initially, one police officer requested they move their vehicles, but subsequently, three more police cars arrived. Viktor testified that he informed the police officer he was driving the truck, although he was preoccupied with the vehicle rather than the officer's questions. Following the accident, Viktor received tickets for speeding and failing to reduce speed, to which he pled guilty. The Illinois State Police conducted a "driver vehicle examination report" post-accident.

Viktor indicated uncertainty about whether he would be driving the truck for Unlimited Carrier that day, stating it was a 50-50 chance. Both he and Eduard worked for Unlimited Carrier as drivers, but after Michael purchased the truck, they transitioned to owner/operators. The accident occurred between Viktor's termination as a company driver and his first load as an owner-operator. Although the Owner/Operator Agreement Viktor signed was present, there was no evidence to show it had been terminated prior to the accident. A termination letter dated September 20, 2010, was included in the record. Viktor claimed that at the time of the accident, he was not employed by Unlimited Carrier but was going there for a meeting. He stated he was "not under dispatch and not driving for Unlimited Carrier, Inc. at the time of the accident." 

Viktor testified he was pressured by Unlimited Carrier to take responsibility for the accident and to provide false statements to Artisan, indicating they wanted to dissociate from the incident. He pled guilty to the tickets despite not driving, wanting to resolve the issue quickly. Dovydas "David" Apanavicius, employed by Unlimited Carrier since 2008, testified about his roles as a driver and later as customer relations manager and safety director, where he ensured the company's DOT compliance and managed safety operations.

Apanavicius, the safety director for Unlimited Carrier, testified about the protocol for removing placards from vehicles following the termination of a driver or owner/operator, noting that it was his responsibility to ensure compliance. He stated that Unlimited Carrier had no incidents of placard removal failure upon termination. He recounted a situation where Viktor asked permission to drive Michael's truck, and confirmed that terminated drivers were required to return a binder containing important documents, which Viktor did after ceasing to drive under an agreement dated May 8, 2010. He emphasized that trucks must be placarded before being dispatched under Unlimited Carrier’s freight and acknowledged inspecting Michael's truck for placards, although he could not recall the timing.

Apanavicius noted that he reviewed a police report related to an accident but did not recall when. He testified that Viktor did not visit the Lansing facility on the accident date and that Michael came by weeks later to address damage to his truck, which was non-operational until it passed DOT inspection. He confirmed that Unlimited Carrier and Michael Barengolts had only one lease agreement and stated that logbooks showed Viktor and Eduard operated Michael’s truck in September 2010. At the time of the accident, Viktor was driving for personal reasons, not under dispatch from Unlimited Carrier, and Apanavicius was unaware of who was driving the truck during the accident.

He attempted to obtain a statement from Viktor for insurance purposes and confirmed that neither Viktor, Michael, nor Eduard faced fines for having Unlimited Carrier placards at the time of the accident. He wrote a statement for Viktor asserting he was not operating under Unlimited Carrier’s placard during the incident. Apanavicius learned about the placards post-accident. He expressed skepticism about Viktor's testimony regarding whether he was operating the truck for Unlimited Carrier, recognizing a contradiction in Viktor’s claims. Apanavicius maintained that the truck was not being operated on behalf of Unlimited Carrier at the time of the accident, despite acknowledging that the presence of the placards indicated otherwise.

Michael's testimony indicates that Viktor intended to pick up a load from Unlimited Carrier on the day of the accident, which aligns with Viktor's statements. However, Michael acknowledged that he lacked a signed agreement with Unlimited Carrier at the time, which Apanavieius stated was necessary for operating a truck on the company's behalf. This creates a factual dispute regarding whether the truck was being used for Unlimited Carrier during the incident. Regardless of this issue, the question of whether the Bernals' claim is covered by the Artisan policy is deemed irrelevant at this stage.

Under Illinois law, an insurer has multiple options when a defense is tendered: seeking a declaratory judgment, defending under a reservation of rights, or refusing to defend. If an insurer opts to refuse defense, it risks being held liable if that refusal is later deemed wrongful. An insurer that fails to defend may be estopped from denying coverage in future lawsuits by the insured or their assignee, leading to potential liability for both indemnification and defense costs.

The court must determine the amount Artisan needs to reimburse NAICO for defense and indemnification costs. NAICO claims Artisan should reimburse at least 50% of its incurred expenses related to the Bernal suit or all costs, arguing its policy is excess to Artisan's. Artisan maintains it has no duty to defend or indemnify and thus owes no reimbursement. NAICO's complaint includes claims for contractual subrogation, equitable subrogation, and equitable contribution, with subrogation defined as the substitution of one party in place of another regarding a claim paid involuntarily. The requirements for subrogation include: the third party's primary liability for the loss, the insurer's secondary liability under an insurance policy, and the insurer's payment to the insured, extinguishing the third party's debt.

Wausau Insurance and North American cases establish that under the NAICO policy's "transfer of rights" provision, rights to recover damages are assigned to NAICO if payment is made for covered losses. Viktor Barengolts assigned all claims against Artisan to NAICO on November 18, 2012, enabling NAICO to pursue subrogation. Artisan's policy designated coverage as primary for specifically described insured vehicles, while NAICO's policy provided primary coverage for vehicles owned by Unlimited Carrier and excess coverage for others. Michael's truck was specifically listed in Artisan's policy, making Artisan responsible for primary coverage. The court concluded that NAICO is entitled to reimbursement for defending the Barengolts in the Bernals’ lawsuit, as Artisan breached its duty to defend. Consequently, Artisan is estopped from asserting any coverage defenses, and NAICO's motion for summary judgment is granted while Artisan's is denied. The exact reimbursement amount is undecided, pending a status hearing scheduled for June 11, 2014. Artisan does not contest that Michael Barengolts, as a named insured, is included under the policy.