Title: Farmers Insurance Exchange v. Enterprise Leasing Co.

State: virginia

Issuer: Virginia Supreme Court

Document:

1 
 
Present:  Kinser, C.J., Lemons, Goodwyn, Millette, and Mims, 
JJ., and Koontz, S.J. 
 
FARMERS INSURANCE EXCHANGE 
 
 
 
 
 
 
 
       OPINION BY 
v. 
Record No. 100082 
   
   JUSTICE LEROY F. MILLETTE, JR. 
 
 
 
 
 
 
 
 
April 21, 2011 
ENTERPRISE LEASING COMPANY, ET AL. 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
Leslie M. Alden, Judge 
 
 
In this appeal, we consider whether a self-insured rental 
car company may seek indemnification from its renter for 
damages the company paid to a third party due to the renter’s 
negligence in an automobile accident.  We also consider whether 
the renter’s insurer is required, under the terms of its 
policy, to reimburse the rental car company for damages it 
satisfied on behalf of the insured.  We answer these questions 
affirmatively. 
I. BACKGROUND 
 
The relevant facts of this case are not in dispute.  Bataa 
Baasanjav rented an automobile from Enterprise Leasing Company 
(Enterprise), a self-insured rental car company.  Enterprise’s 
lease agreement (lease agreement) with Baasanjav provided him 
the option of purchasing supplemental liability protection 
(SLP) for an additional cost.  The SLP provides liability 
protection to renters and is issued by a separate insurance 
company.  Baasanjav declined to purchase the SLP.  The lease 
2 
 
agreement also contained an indemnification provision, which 
stated in part: 
Indemnification by Renter.  Renter shall defend, 
indemnify and hold Owner harmless from all losses, 
liabilities, damages, injuries, claims, demands, 
costs, attorney fees, and other expenses incurred by 
Owner in any manner from this rental transaction, or 
from the use of Vehicle by any person, including 
claims of, or liabilities to, third parties.  Renter 
may present a claim to Renter’s insurance carrier for 
such events or losses; but in any event, Renter shall 
have final responsibility to Owner for all such 
losses. 
 
 
Baasanjav was insured under an automobile insurance policy 
(the Farmers policy) issued by Farmers Insurance Exchange 
(Farmers).  The Farmers policy provided that Farmers would “pay 
on behalf of the insured all sums which the insured shall 
become legally obligated to pay as damages because of . . . 
injury to or destruction of property . . . arising out of the 
ownership, maintenance or use of the owned automobile.”  Under 
the terms of the policy, the definition of an “owned 
automobile” includes a “temporary substitute automobile,” which 
is defined as “any automobile . . . not owned by the named 
insured, while temporarily used with the permission of the 
owner as a substitute for the owned automobile . . . when 
withdrawn from normal use because of its . . . repair.”  The 
vehicle Baasanjav rented from Enterprise qualified as a 
“temporary substitute automobile,” and thus was an “owned 
3 
 
automobile,” because Baasanjav rented the vehicle from 
Enterprise as a temporary substitute while his vehicle was 
being repaired due to an accident.  
 
The Farmers policy also contained an “Other Insurance” 
clause, which stated in relevant part: 
[T]he insurance [provided by Farmers] with respect to 
a temporary substitute automobile or non-owned 
automobile shall be excess insurance over any other 
and collectible insurance. 
 
(Emphasis added). 
Baasanjav was involved in an accident with another driver 
while driving the Enterprise rental car.  The parties 
stipulated that Baasanjav was liable for the damages to the 
other driver’s car, which totaled $5,000.34.  Enterprise paid 
this sum to the other driver.  Enterprise then sent a letter to 
Baasanjav notifying him that it claimed a right of indemnity 
from him for the payment made to the other driver.  Baasanjav 
refused to indemnify Enterprise. 
 
Farmers filed a complaint for declaratory relief asking 
the circuit court to determine whether Enterprise had a right 
to recover from Farmers or Baasanjav, or both, under the terms 
of the Farmers policy and the lease agreement.  Farmers sought 
a declaration that Enterprise had no right to recover from 
Farmers or Baasanjav.  Farmers also asked the court to declare 
that Enterprise must provide primary liability coverage for the 
4 
 
damages.  Enterprise filed an answer and a counterclaim for 
declaratory relief, asking the court to declare that Baasanjav 
must indemnify Enterprise pursuant to the indemnification 
provision of the lease agreement.  Enterprise also asked the 
circuit court to declare that Farmers must reimburse Enterprise 
for the sum that Enterprise paid to the third party on behalf 
of Baasanjav.  
 
The parties filed a stipulation of facts, and Enterprise 
filed a motion for summary judgment.  In a letter opinion, the 
circuit court, citing our decision in USAA Cas. Ins. Co. v. 
Hertz, 265 Va. 450, 578 S.E.2d 775 (2003), noted that “the 
Virginia Supreme Court unambiguously stated that a rental car 
company, such as Enterprise, is required to lease cars that 
carry primary liability insurance coverage.”  Continuing, the 
circuit court stated that “Hertz, however, did not answer the 
question presented in this case which is whether a rental car 
company, such as Enterprise, which leases cars under a 
certificate of self-insurance, may seek indemnification from 
its renters for losses incurred when the renter’s negligence 
causes damage to a third party.”  The court concluded that 
enforcement of the indemnity provision does not contravene the 
holding in Hertz and that Enterprise may seek indemnification 
from Baasanjav. 
5 
 
The court also ruled that, under the terms of its policy, 
Farmers is liable for the amount Enterprise paid to the other 
driver.  The court noted that the rental car qualified as an 
“owned automobile,” contractually obligating Farmers to pay the 
damages caused by Baasanjav in the accident.  The court 
rejected Farmers’ argument that the policy’s “Other Insurance” 
clause applied, ruling that self-insurance is not “collectible 
insurance” under that clause.  The circuit court entered a 
final order granting Enterprise’s motion for summary judgment 
for the reasons set forth in its letter opinion.  We granted 
Farmers this appeal. 
II. DISCUSSION 
A. Standard of Review 
In this case, the circuit court granted Enterprise’s 
motion for summary judgment relying on stipulated facts.  We 
review de novo the circuit court’s application of the law to 
the undisputed facts.  Johnson v. Hart, 279 Va. 617, 623, 692 
S.E.2d 239, 242 (2010). 
B. Indemnity Provision 
 
Farmers argues that the circuit court’s ruling contravenes 
our decision in Hertz.  According to Farmers, Hertz holds that 
a self-insured rental car company, such as Enterprise, must 
provide primary bodily injury and property damage liability 
6 
 
insurance coverage to its renters.  Farmers contends that the 
circuit court ignored this requirement by ruling that 
Enterprise could seek indemnity from Baasanjav, and ultimately 
from Farmers, as Baasanjav’s insurer.  This ruling, Farmers 
maintains, renders Enterprise’s coverage “tertiary,” rather 
than primary, as required by Hertz.  Farmers also asserts the 
circuit court’s ruling violates the anti-subrogation rule 
because it allows an insurer to seek indemnity from its 
insured. 
 
In response, Enterprise argues that the circuit court’s 
decision is consistent with our decision in Hertz.  Enterprise 
contends that it complied with the directive in Hertz – that a 
self-insured rental car company provide primary coverage to its 
renters – by promptly paying the third party’s damages for 
which Baasanjav was liable.  According to Enterprise, Hertz 
does not bar a self-insured rental car company from seeking 
indemnity from its renters for damages caused by the renters’ 
negligence.  We agree with Enterprise. 
 
In Hertz, we considered whether a self-insured rental car 
company must provide primary liability coverage to its renters.  
After analyzing the relevant statutory provisions applicable to 
self-insured rental car companies, we held that those 
provisions 
7 
 
evince a clear legislative intent that a company 
renting a motor vehicle without a driver in Virginia 
must assure that the vehicle has the statutory 
minimum liability insurance coverage.  Such intent is 
in keeping with the long-standing public policy to 
assure that motor vehicles driven on the highways of 
Virginia are subject to a minimum level of primary 
liability insurance in order to provide for the 
protection and compensation of innocent parties 
injured in motor vehicle accidents. 
 
265 Va. at 457, 578 S.E.2d at 778-79.  Thus, we concluded that 
“a self-insurer engaged ‘in the business of renting automobiles 
and trucks without drivers,’ may not lawfully rent one of its 
vehicles unless that vehicle is insured with the statutorily 
mandated amount of primary bodily injury and property damages 
liability coverage.”  Id. at 458, 578 S.E.2d at 779 (quoting 
Code § 46.2-108(D)) (emphasis in original). 
 
Our decision in Hertz was based on the public policy to 
assure that innocent parties injured in automobile accidents in 
Virginia are afforded a minimum level of protection.  To give 
effect to this policy, we held that self-insured rental car 
companies must provide primary bodily and property damage 
liability coverage in the amounts statutorily mandated.  In 
this case, Enterprise fulfilled that obligation by promptly 
paying the damages incurred by the third party driver as a 
result of Baasanjav’s negligence. 
It is Farmers’ contention that in Hertz, in addition to 
requiring self-insured rental car companies to provide primary 
8 
 
liability insurance coverage, we also resolved issues of 
priority between self-insured rental car companies and renters’ 
insurers.  Farmers points to our language in Hertz that the 
obligation to provide primary liability insurance coverage 
imposed on the self-insured rental car company “could not be 
delegated to [the renter’s insurer] through [the self-insured 
rental car company’s] rental car agreement.”  Id. at 458, 578 
S.E.2d at 779.  Thus, it is Farmers’ position that the 
interpretation of the relevant statutory scheme as explicated 
in Hertz required the self-insured rental car company to afford 
primary coverage in relation to the renter and the renter’s 
insurer. 
Contrary to Farmers’ contention, we did not address the 
issue of reimbursement between the renter’s insurance company 
and the self-insured car rental company in Hertz.  In fact, we 
limited our holding “to a declaration that [the rental car 
company] is required to provide primary liability coverage and 
a defense to [the renter] in the event [the third party] makes 
a claim against him.”  Id. at 459, 578 S.E.2d at 779.  This 
case, therefore, presents an issue that was not before us in 
Hertz:  whether a self-insured rental car company may seek 
indemnification from its renters for damages caused by the 
renters’ negligence once the rental car company has satisfied 
9 
 
its obligation to afford primary bodily injury and property 
damage coverage as required by Hertz. 
 
An indemnification provision in an agreement is nothing 
more than a contract between parties to pre-determine the 
allocation of a potential risk of loss.  Estes Express Lines, 
Inc. v. Chopper Express, Inc., 273 Va. 358, 366, 641 S.E.2d 
476, 479 (2007).  Virginia law favors the making of contracts 
between competent parties for a valid purpose.  Shuttleworth, 
Ruloff & Giordano, P.C. v. Nutter, 254 Va. 494, 498, 493 S.E.2d 
364, 366 (1997).  A party to an indemnification agreement is 
entitled to enforce the agreement according to its agreed 
terms.  Safeway, Inc. v. DPI Midatlantic, Inc., 270 Va. 285, 
290, 619 S.E.2d 76, 79 (2005). 
 
In Estes, we held that an indemnification provision in a 
vehicle lease agreement was not void as against public policy.  
273 Va. at 367, 641 S.E.2d at 480.  In holding that the 
indemnification provision was enforceable, we stated that “it 
is evident that enforcement of an indemnity provision does not 
jeopardize in any way the injured party’s ability to recover.”  
Id. at 366, 641 S.E.2d at 480. 
 
Baasanjav and Enterprise agreed to such an indemnification 
provision as part of the lease agreement.  When Baasanjav 
rented the temporary substitute automobile from Enterprise, he 
10 
 
made a choice concerning his responsibility to Enterprise for 
damages to third parties due to his own negligence.  Baasanjav 
could have purchased the SLP, which would have afforded him 
independent insurance against his obligation to indemnify 
Enterprise for the damages paid to the third party.  By 
declining to purchase the SLP, Baasanjav subjected himself to 
the terms of the indemnification provision, which required him 
to indemnify Enterprise for damages paid to the third party. 
 
Our holding does not, as Farmers contends, violate the 
anti-subrogation rule.  The anti-subrogation rule provides that 
an insurance company may not seek indemnification from its 
insured.  Walker v. Vanderpool, 225 Va. 266, 271, 302 S.E.2d 
669, 672 (1983) (“where the plaintiff has contracted to protect 
the defendant from a loss by procuring insurance, the plaintiff 
(or his subrogee) may not recover for that loss from the 
defendant even if the loss is caused by the defendant’s 
negligence.”).  The essence of the anti-subrogation rule is 
that although an “insurer who has paid the loss resulting from 
a peril insured against may be subrogated to all the claims 
which the insured may have against any person by whose 
negligence the injury was caused[, the right of subrogation] 
does not apply in a case where the injury was caused by the 
negligence of the insured himself.”  Sherwood Trucking, Inc. v. 
11 
 
Carolina Cas. Ins. Co., 552 F.2d 568, 572-73 (4th Cir. 1977) 
(citation and quotation marks omitted). 
 
Farmers’ reliance on this rule is misplaced because the 
rule applies to insurers, not self-insurers, such as 
Enterprise.  We have recognized that there is a distinction 
between insurance companies and self-insurers.  Yellow Cab Co. 
of Virginia v. Adinolfi, 204 Va. 815, 818, 134 S.E.2d 308, 310 
(1964).  Likewise, there is a distinction between self-
insurance and insurance.  “Insurance is a matter of contract.”  
Id. (internal quotation marks omitted).  “A necessary element 
of insurance is the existence of a contract between insurer and 
insured.”  Id.  With self-insurance, there is neither an 
insured nor an insurer.  In fact, self-insurance does not 
involve the transfer of a risk of loss, but rather a retention 
of that risk, making it the “antithesis of insurance.”  
Physicians Ins. Co. v. Grandview Hosp. and Med. Ctr., 542 
N.E.2d 706, 707 (Ohio Ct. App. 1988).  In effect, self-
insurance operates as “assurance” that judgments will be paid.  
Northern Indiana Pub. Serv. Co. v. Bloom, 847 N.E.2d 175, 185 
(Ind. 2006). 
Enterprise retained the risk of loss due to the negligence 
of its renters by electing to operate as a self-insurer 
pursuant to Code § 46.2-368.  Enterprise does not issue 
12 
 
insurance policies, collect premiums, or file insurance rates 
with the State Corporation Commission’s Bureau of Insurance.  
Additionally, Enterprise does not maintain reserves and pay 
insurance premium taxes, as insurers are required to do.  
Therefore, Enterprise is not an insurance company, and, for 
this reason, the anti-subrogation rule does not prohibit 
Enterprise from seeking indemnification from Baasanjav pursuant 
to the indemnification provision of the lease agreement. 
C. Farmers’ Duty to Reimburse Enterprise 
 
Having determined that Baasanjav is obligated to indemnify 
Enterprise for damages it paid to a third party for Baasanjav’s 
negligence, our final inquiry is whether Farmers has a duty to 
reimburse Enterprise pursuant to the terms of the Farmers 
policy. 
Farmers argues that the circuit court erred in ruling that 
self-insurance was not “collectible insurance” under the “Other 
Insurance” clause in the Farmers policy.  Farmers contends that 
self-insurance qualifies as “collectible insurance.”  
Continuing this argument, Farmers asserts that it should not be 
held liable to either Baasanjav or Enterprise because its 
obligation is limited to excess coverage pursuant to the “Other 
Insurance” clause.  We disagree. 
13 
 
 
Under the plain language of the “Other Insurance” 
provision, if there is other “collectible insurance” available 
to Baasanjav, the coverage provided by Farmers is limited to 
excess coverage.  To resolve this issue, we must determine 
whether self-insurance constitutes “collectible insurance.”  As 
explained earlier, self-insurance is not the equivalent of 
insurance under Virginia law.  Accordingly, we hold that 
Enterprise’s self-insurance does not constitute “collectible 
insurance” within the meaning of the “Other Insurance” 
provision. 
 
This position is shared by a number of jurisdictions that 
have held that self-insurance is not insurance as that term is 
used in “other insurance” clauses.  See, e.g., St. John’s Reg’l 
Health Ctr. v. American Cas. Co., 980 F.2d 1222, 1224-25 (8th 
Cir. 1992); Wake County Hosp. Sys., Inc. v. National Cas. Co., 
804 F.Supp. 768, 776 (E.D. N.C. 1992); Universal Underwriters 
Ins. Co. v. Marriott Homes, Inc., 238 So.2d 730, 732 (Ala. 
1970); State v. Continental Cas. Co., 879 P.2d 1111, 1116 
(Idaho 1994); State Farm Mut. Auto. Ins. Co. v. Universal Atlas 
Cement Co., 406 So.2d 1184, 1186-87 (Fla. Dist. Ct. App. 1981).  
Therefore, because self-insurance is not insurance for purposes 
of invoking the excess coverage restriction in the Farmers 
policy, the circuit court did not err in ruling that Farmers is 
14 
 
required to reimburse Enterprise for the damages caused by 
Baasanjav’s negligence. 
III. CONCLUSION 
 
For the reasons stated above, we will affirm the judgment 
of the circuit court. 
Affirmed.