Illinois Appellate Court Finds That Primary Insurance Coverage Must Pay First Before Umbrella Coverage Payout

On April 7, 2010, Jeffrey and Stephanie Hadary were involved in an automobile crash with Carlos Velez. Velez was driving a car owned by Hertz Corp.  Both the Hadarys and Velez were insured; the Hadarys had insurance through Safeway Insurance Co. They paid a monthly premium of $57. The Hadarys’ policy included underinsured motorist coverage up to $100,000 per person or $300,000 per occurrence.

Velez did not carry insurance through Hertz, but was insured through American Access Casualty Co. for a maximum of $20,000 per person or $40,000 per occurrence.

In line with Illinois law, Hertz was required to insure the operator of its rented cars at a minimum of $50,000 per person or $100,000 per incident. The Hadarys recovered $40,000 from American Access as Velez’s insurer, but this amount did not cover their extensive injuries from this incident.

Because the Hadarys had purchased underinsured motorist coverage from Safeway, the Hadarys sought restitution from Safeway. The underinsured motorist provision obligated Safeway to pay only “after the limits of liability under all applicable bodily injury bonds or policies or other applicable security have been exhausted.”  This “exhaustion clause,” Safeway argued, required that the Hadarys first recover from Hertz.

Safeway filed a declaratory judgment action against the Hadarys and Hertz, seeking a declaration by the court that Safeway was not obligated to pay until the limits of Hertz’s insurance liability limits had been reached.

The trial judge granted partial summary judgment in favor of Safeway, holding that even though Velez had refused coverage through Hertz, “nothing in the rental agreement unambiguously disclaimed[ed] Hertz’s responsibility to provide secondary coverage in the event that the primary coverage is insufficient.”  An appeal was taken by the Hadarys.

In this case, the appellate court looked at the public policy implications of whether the rental car company (Hertz) or the insured’s underinsured motorist coverage (Safeway) should pay the shortfall if a negligent driver’s insurance policy limits were too low.

The appellate court considered that the purpose of the Illinois law requiring Hertz to provide coverage was to protect the public from negligent drivers and rented vehicles and noted that it was “intended to provide some, but not necessarily total, protection.”  The court also stated that underinsured motorist coverage, on the other hand, was intended to “cover the shortfall between the amount of insurance contracted for and the amount received from the liable driver.”

The appeals panel concluded that Safeway’s position would lead to an absurd result, “where a policyholder would receive more benefits in the fortuitous event of being injured by a car owned by a rental company rather than one not owned by a rental car company.”

The appellate court also emphasized this decision provided “economic value in return for having paid certain [underinsured motorist coverage] premiums,” value which would be denied in the alternative interpretation presented by Safeway.

The appellate court found that the Safeway policy was the primary policy and the Hertz policy mandated by Illinois law, was merely an “umbrella policy,” meaning that the Safeway policy applied first and that Hertz’s legally mandated policy would only be reached if neither insurer had provided the level of coverage Hertz was legally mandated to guarantee.  Accordingly, the appellate court reversed in part the trial court’s decision.

Safeway Insurance Co. v. Jeffrey Hadary, et al., 2014 IL App (1st) 132554.

Kreisman Law Offices has been handling automobile crash cases, truck accident cases, motorcycle accident cases and bicycle accident cases for individuals and families who have been harmed, injured or died as a result of the carelessness or negligence of another for more than 40 years in and around Chicago, Cook County and its surrounding areas, including Schaumburg, St. Charles, Aurora, Joliet, Waukegan, Lake Forest, Glenview, Northfield, Rosemont, River Forest, Oak Park, Oak Lawn, Brookfield, Willowbrook, University Park and Flossmoor, Ill.

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