Truth in Leasing Regulations Trump Conflicting Terms of Owner-Operator Agreement

In Argonaut Midwest Ins. Co. v. Morales, 2014 IL App. (1st) 130745 (Sep. 3, 2014), the Appellate Court of Illinois, First District, recently held that an owner-operator’s bobtail insurer did not have a duty to defend or indemnify an authorized motor carrier under its policy where the owner-operator was under dispatch.

This case arose out of an accident on I-294 in Northeastern Illinois wherein an owner-operator driving for Land Truck, Inc., struck a truck carrying three individuals who suffered personal injuries. At the time of the accident, the owner-operator had just picked up his truck from a parking spot he rented and was driving to make a pickup in Waukegan, Illinois after being dispatched by Land Truck. After the individuals filed suit against the owner-operator and Land Truck, the bobtail insurer, Argonaut Midwest sought declaratory judgment including a finding that it had no duty to defend or indemnify Land Truck or the owner-operator.

In support of its declaratory action, the insurer relied on an exclusion in its policy which excluded coverage where the owner-operator’s truck was “used in the business of anyone to whom the auto is rented.” Contrary to the bobtail insurer, Land Truck argued that it never “rented” the owner-operator’s truck for use in its business. Land Truck pointed to a clause in its agreement with the owner-operator which stated “The Contractor shall control and direct, in all respects, the operation of the equipment used in the performance of this Contract.” Land Truck contended, based on its driver contract that the exclusion did not apply.

Relying in part on the Truth in Leasing Regulations set forth in 49 C.F.R. Part 376, the appellate court affirmed the trial court’s conclusion that the bobtail insurer could rely on the “rent” exclusion to refuse to defend or indemnify the authorized motor carrier. The Court emphasized the language contained in 49 C.F.R. §376.12(c)(1) of the Truth in Leasing Regulations which requires written leases between owner-operators and authorized carriers to “provide that the authorized carrier lessee shall have exclusive possession, control and use of the equipment for the duration of the lease…[and] provide that the authorized carrier lessee shall assume complete responsibility for the operation of the equipment for the duration of the lease.”

The Court held that the requirement contained in the Federal regulation that Land Truck have exclusive possession and control over the owner-operator’s truck trumped the conflicting terms of the contract between the owner-operator and Land Truck. As such, since Land Truck had possession and control over the owner-operator’s truck by Federal regulation at the time of the accident, the bobtail insurance exclusion denying coverage where the owner operator’s truck is “used in the business of anyone to whom the auto is rented” applied. As such, the bobtail insurer owed no duty of coverage or defense to Land Truck, the authorized motor carrier.

In Morales, the Court ignored the private contract between the parties and, instead, used the “exclusive possession and control” language in the Truth in Leasing Regulations as a sword to trump the parties’ contract. The reliance on the “exclusive possession and control” language by the Court in Morales could lead to further emphasis by the Courts in other areas such as driver classification. As such, this case will likely have implications for those trucking companies in Illinois that continue to utilize the owner-operator model.