Minnesota Federal Court: Non-Business Use Exclusion Precludes Coverage Under Excess Insurance Policy.

A Minnesota Federal Court recently held that a non-business use exclusion for a commercial umbrella policy applied to claims arising from an accident involving a company vehicle.  In Commerce & Industry Insurance Co. v. Great American Insurance Co., No. CIV. 13-854 DWF/TNL (D. Minn. Dec. 1, 2014), U.S. District Court Judge Donovan Frank applied “Non-Business Activities” exclusion in a commercial umbrella policy issued by Great American Insurance.  Arnold Paster (Paster), in a company car owned by Paster Enterprises, collided with and severely injured a motorcyclist.

Phoenix Insurance (primary) and Defendant Great American issued commercial auto policies to Paster Enterprises insuring the subject company car.  The driver was insured under a personal auto policy issued by Commerce & Industry and a personal umbrella policy issued by Chartis Insurance (Plaintiffs).  Plaintiffs, the personal lines insurers, brought a declaratory judgment action against Great American seeking a priority-of-coverage determination.

The Plaintiffs argued the Great American policy afforded coverage and was primary because: (1) Paster used the vehicle with permission and was therefore an “insured”; (2) the Insuring Agreement and Auto Liability Endorsement afforded coverage; (3) the Non-business Activities Exclusion did not apply because it was superseded by the “follow-form” terms in the Auto Liability Endorsement; and (4) the Exclusion did not apply because the Auto Liability Endorsement “followed form” with the Phoenix policy, which did not contain an exclusion of non-business activities.

Judge Frank disagreed, and held the Great American policy did not afford coverage for the accident.  The Court first considered the interplay of the Auto Liability Endorsement and Non-Business Activities Exclusion.  The Exclusion provided “[a]ny liability for or arising out of any domestic or non-business activities of any ‘Insured’” was excluded.  The Court found the Exclusion governed over the “follow-form” provision in the Auto Liability Endorsement because that qualifying phrase, “[t]his endorsement does not change any other provision of the policy,” did not negate the exclusion’s effect on other policy provisions.  Instead, the qualifying phrase contemplates that other policy provisions, including the Exclusion, remain in effect.  To hold otherwise would render the Non-Business Activates Exclusion superfluous.

The Court next held Paster was using the company car for a “non-business activity” at the time of the accident.  Paster Enterprises’ President provided an affidavit that Paster was not employed by the company and was not using the vehicle for a business purpose.  Because there was no material fact on Paster’s non-business purpose use, the Court granted summary judgment for Great American.

This decision is significant for its recognition that a “follow-form” provision in an endorsement does not override or negate an otherwise plain and unambiguous exclusion.  Instead, only endorsements which expressly alter the provisions of the policy can negate exclusions.  The decision should also give excess insurers pause to carefully consider distinctions between their policies and any underlying policy when making coverage determinations.

We will continue to monitor this and other decisions involving excess insurers and priority-of-coverage disputes.  If you have any questions about this, or any other matter, please contact Matt Johnson, Bob Kuderer or Tom Brock.