A dealership leases a vehicle to a customer under a 48 month lease agreement. The lease is assigned to Honda Lease Trust, a leasing company, and administered by American Honda Finance Company. If the lessee-customer negligently causes an accident and injures a third party during the term of the lease, is the lessor (dealership or assignee) also liable to the injured party? Does the lessor have to afford any liability insurance protecting the lessee-customer against the claims of the injured party?
An initial review of Minnesota law would appear to impose vicarious liability on the vehicle lessor and require the vehicle lessor to maintain liability coverage on the leased vehicle that would also protect the lessee against the claims of the injured party.
First, Minnesota requires a vehicle owner to maintain bodily injury and property damage liability insurance on the vehicle in the minimum amounts of $30,000/60,000/$10,000. Minn. Stat. §§ 65B.48, subd. 1; 65B.49, subd. 3.
Second, although Minnesota statutes do not specifically require a vehicle owners policy extend liability protection to permissive users (i.e., omnibus coverage), Minnesota courts have held that vehicle owner policies must afford omnibus coverage in the minimum limits required by law. See e.g., State Farm Mut. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160, 163-64 (Minn. Ct. App. 2001); Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483, 487 (Minn.App.1994).
Third, Minnesota is also one of a dozen jurisdictions that have imposed vicarious liability on vehicle owners. Under a vicarious liability law, the vehicle owner is liable for injuries and damages caused by a permissive user solely by reason of its status as vehicle owner. See Minn. Stat. §169.09, subd. 5a (“[whenever any motor vehicle shall be operated within this state, by any person other than the owner, with the consent of the owner, express or implied, the operator thereof shall in case of accident, be deemed the agent of the owner of such motor vehicle in the operation thereof”).
Based on these statutes, Minnesota law would appear to impose vicarious liability on the vehicle lessor and also require the lessor to maintain liability insurance that would protect the lessee in the minimum amounts of $30,000/$60,000/$10,000. However, that is not the case. Since the enactment of the Minnesota No-Fault Act in 1974, vehicle owners that lease vehicles for a term of six months or more are not deemed the owner for purposes of insuring the vehicle or for purposes of vicarious liability. Minnesota Statute § 65B.43, subd. 4 provides as follows:
“Owner” means a person, other than a lienholder or secured party, who owns or holds legal title to a motor vehicle or is entitled to the use and possession of a motor vehicle subject to a security interest held by another person. If a motor vehicle is the subject of a lease having an initial term of six months or longer, the lessee shall be deemed the owner for the purposes of sections 65B.41 to 65B.71, and 169.09, subdivision 5a, notwithstanding the fact that the lessor retains title to the vehicle and notwithstanding the fact that the lessee may be the owner for the purposes of chapter 168A.
Of course, even if Minnesota Statute § 65B.43, subd. 4 did not insulate vehicle lessors from vicarious liability for accidents caused by the lessee, the federal Graves Amendment, 49 U.S.C. § 30106(a) (2006), would do so. The Graves Amendment provides,
An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if—
(1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and
(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).
Although there are far more cases which have preempted state law vicarious liability claims against car rental companies, several courts have recognized that the Graves Amendment preempts state laws imposing vicarious liability on long-term lessors as well. See e.g., Rosado v. DaimlerChrysler Fin. Servs. Trust, 112 So. 3d 1165 (Fla. 2013) (Graves Amendment preempts vicarious liability under Florida Statute 324.021(9)(b)(1) which defines when a long-term lessor remains the owner of a leased motor vehicle for purposes of vicarious liability under Florida’s dangerous instrumentality doctrine); Rodriguez v. Testa, 296 Conn. 1, 993 A.2d 955 (2010) (Graves Amendment preempts Connecticut statute imposing vicarious liability on the lessor of a motor vehicle for damages caused by the negligent acts of the lessee); Carton v. Gen. Motor Acceptance Corp., 611 F.3d 451, 455 (8th Cir. 2010) (applying Iowa law) (“[e]ven if Iowa Code § 321.493 did not prohibit Appellants’ vicarious liability claims against GMAC, the Graves Amendment would preempt Iowa law and prohibit Appellants’ claims”); Merchants Ins. Grp. v. Mitsubishi Motor Credit Ass’n, 356 F. App’x 548, 551 (2d Cir. 2009) (“if Merchants’ suit against MMCA was commenced after the Graves Amendment’s effective date, the Graves Amendment preempts New York law and precludes Merchants’ claim”); Green v. Toyota Motor CreditCorp, 605 F. Supp. 2d 430 (E.D.N.Y. 2009) (Graves Amendment preempts New York Veh. & Tr. Law § 388(1) which created a cause of action for vicarious liability against even remote title owners and lessors such as TMCC and thereby bars recovery against leasing companies based on vicarious liability); Seymour v. Penske Truck Leasing Co., L.P., 2007 WL 2212609 (S.D.Ga. July 30, 2007).
Thus, under Minnesota law, a vehicle lessor has no vicarious liability for the lessee’s negligent operation of the vehicle during the lease term and has no obligation to provide liability insurance with respect to the leased vehicle. Unless the vehicle lessor has voluntarily purchased liability insurance on the leased vehicle which also extends protection to the lessee (i.e., omnibus coverage) — the sole source of liability coverage for the lessee’s accident will be the policy insuring the only liable party—the lessee.
A vehicle lessor may, of course, incur liability for its own active negligence if that negligence was also a cause of the accident. Neither Minn. Stat. § 65B.43, subd. 4 nor the Graves Amendment insulate a vehicle lessor against claims of direct negligence that may arise when the vehicle is initially leased, such as negligent inspection or negligent entrustment. However, such claims will be evaluated cautiously by courts in light of Congress’s clear intent to forestall suits against vehicle lessors.
Negligent entrustment claims are quite difficult to prove against vehicle lessors. Minnesota adopted the tort of negligent entrustment as it applies to the entrustment of a chattel to an incompetent or inexperienced person in Axelson v. Williamson, 324 N.W.2d 241 (Minn. 1982) (adopting Restatement (Second) of Torts § 390 (1977)). To prevail on this claim, the injured party would have to prove the lessor knew the lessee posed an “unreasonable risk of physical harm to others.” Id. See also, Carton v. Gen. Motor Acceptance Corp., 611 F.3d 451, 453-59 (8th Cir. 2010) (applying Iowa law) (evidence of lessee’s “financial irresponsibility and failure to obtain insurance” was not sufficient to establish negligent entrustment claim because such evidence would not support claim that lessee “pose[d] an unreasonable risk of physical harm to others”); Guinn v. Great W. Cas. Co., 2010 WL 4811042, at *6 (W.D. Okla. Nov. 19, 2010) (“[l]iability for negligent entrustment of a vehicle may be imposed only where person knew or reasonably should have known that the other driver was careless, reckless and incompetent”). A Minnesota lessor may have a duty to check the potential lessee’s driver’s license to ensure that it is facially valid. However, in the absence of a legal obligation (duty) to perform more stringent screening procedures, such as requesting driving records or conducting criminal record searches, the injured party would have difficulty proving the lessor knew the lessee posed an “unreasonable risk of physical harm to others” at the time the vehicle was leased.
This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2015.