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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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.
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