Opinion ID: 2769803
Heading Depth: 2
Heading Rank: 2

Heading: Compulsory Insurance Doctrine

Text: Having concluded the ordinance applied to PALS, we turn to whether the ordinance affects Westchester’s obligation to pay Northwest. Ordinarily, an injured party’s right to recover depends on the insured’s coverage, and an insurer’s obligation to indemnify the insured depends on the insured satisfying its policy responsibilities. See Franklin v. Carpenter, 244 N.W.2d 492, 495 (Minn. 1976) (noting that with liability insurance “the rights of the [injured third parties] are derived from those of the insured” (alteration in original) (quotation omitted)). However, “[i]n the case of liability policies issued pursuant to, and in compliance with, compulsory insurance or financial responsibility statutes, the rule followed generally . . . is that the injured person is not subject to defenses arising out of the breach of conditions subsequent to the accident even though they would be available to the insurer as against the insured.” 7A Steven Plitt, et al., Couch on Insurance § 106:27 (3d ed. 2014); accord Young v. Allstate Ins. Co., 282 S.E.2d 115, 116 (Ga. 1981) (stating this is the majority rule); Kambeitz v. Acuity Ins. Co., 772 N.W.2d 632, 638 (N.D. 2009). This is because “such statutes are for the benefit of members of the public and not of the insured,” Couch on Insurance, supra § 106:27, and most courts reason the “beneficial purpose of compulsory insurance would be thwarted in the event the insurer be permitted technical defenses under the policy relating to conditions” the performance of which the injured person is wholly unable to control, Royal Indem. Co. v. Olmstead, 193 F.2d 451, 453 (9th Cir. 1951). See Gabrelcik v. Nat’l Indem. Co., 131 N.W.2d 534, 536 n.7 (Minn. 1964) (citing several of these cases and explaining, “The rationale is that the licensing authority requires insurance coverage for the public’s protection and this rule prevents thwarting that objective”); see also Young, 282 S.E.2d at 116; Cotner v. Grissley, 447 S.W.2d 603, 605 (Ky. 1969). -7- Nearly fifty years ago, the Minnesota Supreme Court considered a case involving a driver who maintained liability coverage consistent with his obligation under Minn. Stat. § 170.40, subd. 6(1) (1969), but who, after a collision, “fail[ed] to notify the insurer that the car involved in the accident was a replacement of the one originally insured.” Nimeth v. Felling, 165 N.W.2d 237, 238 (Minn. 1969). Despite the insured’s failing, the Minnesota Supreme Court permitted the injured third party to recover from the insurer directly, relying on the “ample authority to the effect that the insurer on a compulsory insurance liability policy may be held liable to one injured by the insured notwithstanding the fact that the insured himself has lost his rights under the policy by failure to comply with its terms and conditions.” Id. at 239. Because the liability policy was statutorily mandated and the injured party was “a member of the public for whose benefit the legislature has required issuance of” the policy in the first place, “[t]he rights of the injured person [we]re independent of and [we]re not derived from those of the insured.” Id. (emphasis added). The court also reasoned that the legislature expressly incorporated these principles into the statute itself, which stated that the insurer’s liability “shall become absolute whenever injury or damage covered by said motor vehicle liability policy occurs; . . . and no violation of said policy shall defeat or void said policy,” Minn. Stat. § 170.40, subd. 6(1) (emphasis added). See Nimeth, 165 N.W.2d at 239. Although the compulsory insurance doctrine appears generally accepted among jurisdictions, particularly with respect to auto insurance, it has not often been applied in other contexts. Given the unusual circumstances here, Westchester identifies a number of issues which make the doctrine’s application in this case a close question.
Westchester points to the absence of language in the ordinance making the insurer’s liability “‘absolute’ upon the occurrence of a covered incident” or “stat[ing] that post-incident conduct of the insured cannot void coverage.” See, e.g., Minn. Stat. § 170.40, subd. 6(1). While this language does distinguish the ordinance here -8- from the statute in Nimeth, it fails to put the present situation beyond the rationale of the compulsory insurance doctrine. “Most of the cases dealing with this question involve statutes or policies specifically depriving the insurer of the kind of defense urged here,” Royal Indem., 193 F.2d at 454, but the reasons for denying the insurer these defenses do not necessarily depend on specific statutory language—the rationale instead focuses on effectuating the statute’s purpose. See Kambeitz, 772 N.W.2d at 638 (deciding the doctrine can be “based either on specific statutory provisions or the overriding purpose of statutory schemes”). For this reason, courts have applied the doctrine where the ordinance’s clear purpose was to protect a class of the public to which the injured party belongs. See Royal Indem., 193 F.2d at 454; Young, 282 S.E.2d at 117; Allen v. Canal Ins. Co., 433 S.W.2d 352, 354 (Ky. 1968); Ott v. Am. Fid. & Cas. Co., 159 S.E. 635, 636 (S.C. 1931). Although Westchester contends the ordinance exists for other reasons, we agree with the district court that the Clark County ordinance is intended at least in part to “protect[] injured third parties such as [Northwest].” Westchester also correctly observes that courts encounter the compulsory insurance doctrine most often in the context of statutes requiring auto liability insurance. The doctrine, however, is not necessarily limited to that paradigm, see, e.g., Capitol Indem. Corp. v. Lowe, 166 F.3d 346 (10th Cir. 1998) (unpublished table decision), and Westchester has not provided a case suggesting otherwise. Westchester next maintains “Northwest was not an injured member of the general public” and “PALS was not an entity either serving or directly interacting with members of the general public.” The ordinance’s protected class need not embrace the general public in its entirety because the doctrine applies insofar as the injured party belongs to the protected segment of the public. See Royal Indem., 193 F.2d at 453 (declaring that for the doctrine to apply, the plaintiff must be “an injured member of the public within the class sought to be protected by statute” (emphasis added)); see, e.g., Dave Ostrem Imports, Inc. v. Globe Am. Cas./GRE Ins. Grp., 586 -9- N.W.2d 366, 368 (Iowa 1998) (“motoring public”); Great Am. Ins. Co. v. Brad Movers, Inc., 382 N.E.2d 623, 626 (Ill. Ct. App. 1978) (“members of the public utilizing public warehouses”). The class protected here is anyone whose property is “in the care, custody and control of the operator on the airport,” Clark County Code § 20.10.020(c), whether it be a commercial aircraft or otherwise.4
Westchester next makes a number of arguments drawing attention to the contractual relationship between PALS and Northwest. Westchester first proposes this case is unlike the negligent driver situation (where this doctrine most often arises) because PALS injured its “contracting partner” in the context of a “private contractual relationship.” Westchester neglects to demonstrate how this fact undermines the doctrine’s application. The ordinance protects “any non-owned property in the care, custody and control of the operator on the airport,” see Clark County Code § 20.10.020(c) (emphasis added), giving no regard to the presence or absence of an ongoing business relationship. Westchester mainly contends the compulsory insurance doctrine does not apply “where injured parties have some other avenue available . . . to recover compensation” or where it is not “‘wholly outside the ability of the injured person’ to secure performance by the tortfeasor of policy conditions such as notice and cooperation.” (Quoting Royal Indem., 193 F.2d at 453). We do not disagree with this reasoning as a logical matter, but the record here does not suggest Northwest had any other unexplored avenue of compensation for the damages sought here or any 4 Westchester also reasons the Clark County ordinance “does not apply to a broad class of actors analogous to parties seeking a license to sell propane to the public at retail, operating a public warehouse, providing taxicab services to the public or operating a motor vehicle on public roads,” but we do not understand (and Westchester does not explain) how the number of prospective insureds is relevant to the rationale behind the compulsory insurance doctrine. -10- effective means of securing PALS’s compliance with the policy conditions. The simple existence of a continuing business relationship with PALS did not necessarily give Northwest control over whether the policy conditions were met. First, to the extent Westchester claims Northwest had “its own insurance,” Northwest actually recovered only part of its loss, and the district court took this source of compensation into account, awarding Northwest only for the uncompensated portion of damages—$4,089,446.32. Second, Westchester asserts Northwest must have known the identity of PALS’s insurer and could have supplied notice itself because, under their agreement, Northwest was contractually entitled to know the identity of PALS’s insurer. Relying only on these contractual rights, Westchester faults Northwest for failing to provide earlier notice to Westchester when “Northwest was fully aware of who PALS’ insurer was, and fully able to give Westchester notice.” Yet Westchester provides no record citation to support this assertion, and we find no indication in the record that Northwest actually succeeded in obtaining this information from PALS. Third, although Northwest did continue its business relationship with PALS, it is wrong to assume, as Westchester does, that Northwest could have leveraged its business as PALS’s customer or its contractual rights to prod PALS into satisfying the policy conditions. Westchester even suggests Northwest should have threatened to terminate its business agreement with PALS. There is no evidence of undue delay or laxity on Northwest’s part. And given PALS’s and its owner’s proven record of failing to respond to communications, court summonses, civil complaints, and subpoenas (all of which led to two unfavorable default judgments), we cannot assume Northwest could have done more to ensure PALS’s cooperation even if it had learned sooner of Westchester’s policy. Nor is it reasonable to assume Northwest could walk away and terminate its business relationship with PALS outright, even if it was within Northwest’s contractual rights to do so. -11- Throughout late 2003 and early 2004, Northwest and its insurer made Westchester aware of Northwest’s claim, requested Westchester’s coverage position, and provided considerable documentation of the incident. After reviewing Northwest’s claim and information, Westchester agreed the incident occurred within the scope of the policy, identifying the only defects as being the absence of notice from PALS and PALS’s lack of cooperation. By summer 2004, Westchester determined the claim was not covered due to lack of notice from PALS. Thereafter, Westchester did not respond to Northwest’s June 30, 2004, request for a coverage position or Northwest’s November 15, 2004, letter informing Westchester of the Minnesota state court litigation and the impending possibility of a default judgment. On this record, we find little fault with Northwest’s communication with Westchester. Neither the Minnesota Supreme Court nor any other court we could find has considered whether to apply the compulsory insurance doctrine in circumstances as unusual as those presented here. Yet the doctrine has been applied with significant consistency across multiple jurisdictions. Applying the reasoning and principles from those cases, we predict the Minnesota Supreme Court would find in Northwest’s favor. We do not perceive a principled reason why the Minnesota Supreme Court would place this case outside the rationale of Minnesota’s compulsory insurance doctrine. Finally, this doctrine exists at a balance point between the interests of the injured party in recovering and the insurer in obtaining prompt notice and cooperation. That being the case, it is certainly relevant in our assessment of this unusual scenario that (1) beginning soon after Northwest learned of the Westchester policy and over a year before Northwest filed suit, Northwest gave Westchester actual notice of its claim, the lawsuit, and the possibility of a default judgment, and (2) it was Westchester who spurned the notice from Northwest, discontinued communications, and, despite its actual knowledge, chose not to participate in the Minnesota litigation. -12-