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A Better Partnership
June 17, 2009

COA Opinion: Car Dealer's $1 Million Liability Policy is Primary Insurance for Accident During Test Drive

On June 16, 2009, in Auto-Owners Ins. Co. v Martin, No. 281482, the Court of Appeals issued a per curiam opinion finding that the full $1 million policy limit on a used car dealer's garage liability insurance policy was the primary insurance for an accident occurring during a test drive. In doing so, the Court of Appeals reversed the trial court's ruling that the garage liability insurer's primary liability was limited to $20,000.

This ruling results from a declaratory judgment action filed by Auto-Owners (the garage liability insurer) to establish the insurance obligations for this accident. The trial court concluded that Auto-Owners was primarily liable for the first $20,000, and that State Farm (the driver's personal insurer) was then liable for any amount in excess of $20,000, up to its policy limit of $100,000. This ruling was based on an exclusion in the Auto-Owners policy that stated that customers were not insureds under the policy if there was other insurance that satisfied the limits required by the applicable motor vehicle financial responsibility law; and that if there was no such other insurance, the Auto-Owners policy would not pay more than the the limits required by the applicable motor vehicle financial responsibility law. It was undisputed that, under well-established Michigan precedent, Auto-Owners' exclusion was invalid because of the No-Fault Act's requirement that the vehicle owner's policy provide at least $20,000 of primary residual liability coverage for use of a vehicle. But, the trial court concluded that the language of the Auto-Owners policy limited the primary coverage to $20,000.

The Court of Appeals disagreed. It concluded that, given that Auto-Owners knew (or should have known) of the invalidity of its exclusion, the Auto-Owners policy language was ambiguous, and thus insufficient to limit primary coverage to $20,000. Thus, the Court of Appeal held that Auto-Owners is primarily liable up to its full $1 million policy limit. In addition, the Court of Appeals noted that this result comported with the historical precendent establishing that a vehicle owner is responsible for paying for residual liability benefits.

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