Supreme Court of California Justia
Citation 40 Cal. 4th 151, 146 P.3d 1251, 51 Cal. Rptr. 3d 709

Philadelphia Indemnity Ins. v. Montes-Harris

Filed 12/7/06

IN THE SUPREME COURT OF CALIFORNIA

PHILADELPHIA INDEMNITY
INSURANCE COMPANY,
S130717
Plaintiff and Respondent, )
Ninth
Cir.Ct.App.
Nos.
03-56651, 03-56652
BLANCA MONTES-HARRIS et al., )
U.S.
Dist.Ct.
No. CV 02-3616 RSWL
Defendants and Appellants.

Pursuant to rule 29.8 of the California Rules of Court, we granted the
request of the United States Court of Appeals for the Ninth Circuit for a decision
addressing the following question: Does the duty of an insurer to investigate the
insurability of an insured, as recognized by the California Supreme Court in
Barrera v. State Farm Mut. Automobile Ins. Co. (1969) 71 Cal.2d 659 (Barrera),
apply to an automobile liability insurer that issues an excess liability insurance
policy in the context of a rental car transaction?
Subject to our reservation of the specific question whether the Barrera duty
to investigate insurability applies, as a general matter, to automobile insurers
issuing excess liability insurance, we conclude that where, as here, the sale of
excess liability insurance in a rental car transaction occurs after the rental car
customer presents a facially valid driver’s license and after the license inspection
and signature verification requirements of Vehicle Code section 14608,
subdivision (b), have been met, the excess insurer has no obligation to conduct a
1


further inquiry regarding the validity of the customer’s driver’s license. In such a
situation, if the excess insurer acts promptly upon discovery that the customer’s
facially valid driver’s license was in fact suspended, then the excess insurer does
not forfeit any statutory or contractual right to rely on the customer’s presentation
of the invalid license as a basis for avoiding liability to third persons under the
excess policy.
FACTUAL AND PROCEDURAL BACKGROUND
The relevant facts, as stated in the Ninth Circuit’s formal order and from
our own review of the record, are as follows.
In June 2001, an Arizona resident named Alric Burke rented a car in
California from Budget Rent-A-Car (Budget). He presented what appeared to be a
valid Arizona driver’s license. Budget’s rental agent made a photocopy of the
license and asked Burke to sign the rental agreement.
At the time of the rental transaction, Philadelphia Indemnity Insurance
Company (Philadelphia) had issued a master excess policy of supplemental
liability insurance that provided $1 million in third party liability coverage, in
excess of the minimum statutory amounts of $15,000 per person and $30,000 per
occurrence for bodily injury required under the Financial Responsibility Law
(Veh. Code,1 § 16000 et seq.). That policy, to which we refer herein as an “excess
liability policy” or “excess policy,” identified Budget as the policyholder. Budget,
in turn, had authority under the excess policy to enroll its rental car customers
under that policy as additional insureds, if the customers so opted, without
submitting a written application to Philadelphia. Notably, the excess policy

1
All further unlabeled statutory references are to this code.
2


excluded coverage for injury arising out of the use of a rental car obtained through
fraud or misrepresentation.2
Here, Budget’s rental agent found Burke qualified to rent a car after
inspecting his driver’s license, which appeared facially valid, and verifying his
signature. The rental agent, then acting as an agent for Philadelphia for the limited
purpose of offering and selling excess liability insurance, offered Burke the option
of buying such insurance. Burke accepted the offer and purchased the excess
insurance.
As it turned out, Arizona had suspended Burke’s driver’s license and
driving privilege over two months earlier. Four days after renting the car, Burke
was involved in a car accident in California that injured a number of people,
including Javier Cortez, Blanca Montes-Harris, Monica Arredondo, and Camilla
Toni Harris (the claimants). The claimants filed suit in state court against Budget
and Burke to recover damages arising out of the accident.3
Meanwhile, Philadelphia commenced an action in federal district court,
seeking a judgment declaring it had no liability for damages. A bench trial was
held, and the district court determined, as part of its findings of fact and
conclusions of law, that: (1) Burke made “at least a negligent misrepresentation”
to Budget that he had a valid driver’s license; and (2) the excess liability policy

2
In a section entitled “EXCLUSIONS,” the policy provided: “This
insurance does not apply to any of the following: [¶] 1. ‘Bodily injury’ or
property damage arising out of the use, or permitting the use, of a ‘rental vehicle’:
[¶] . . . [¶] c. That was obtained through fraud or misrepresentation.”
3
In its briefing on the merits and at oral argument, Philadelphia made an
undisputed representation that Budget has already provided or offered the
claimants with the minimum coverage amounts required under the Financial
Responsibility Law.
3


excluded coverage for rentals obtained through misrepresentation. Accordingly,
the court declared Philadelphia had no liability for damages arising out of the
accident.
The claimants filed an application for relief from the district court
judgment. They requested relief on the basis of Barrera, supra, 71 Cal.2d 659,
and United Services Automobile Assn. v. Pegos (2003) 107 Cal.App.4th 392
(Pegos), which together establish that an automobile liability insurer has a
nondelegable duty to undertake a reasonable investigation of insurability within a
reasonable period of time of the issuance of a policy in order to preserve the
ability to rescind the policy based on the insured’s misrepresentations and thereby
avoid liability on the policy to a third person whom the insured injures. The
district court denied the application, and the claimants appealed.
The Ninth Circuit filed an order requesting that this court address whether
Barrera’s recognition of a duty on the part of an insurer to investigate insurability
applies to an excess insurer in the context of a rental car transaction.
DISCUSSION
In California, the Insurance Code has long provided that either party to a
contract of insurance may rescind on the basis of the other’s misrepresentation.
“If a representation is false in a material point, whether affirmative or promissory,
the injured party is entitled to rescind the contract from the time the representation
becomes false.” (Ins. Code, § 359, added by Stats. 1935, ch. 145, p. 506; see also
Ins. Code, § 331 [same remedy for concealment].) Moreover, the injured party
may rescind, even though the misstatements “were the result of negligence, or,
indeed, the product of innocence.” (Barrera, supra, 71 Cal.2d at pp. 665-666, fn.
4; Telford v. New York Life Ins. Co. (1937) 9 Cal.2d 103, 105; see also Ins. Code,
§ 331 [same in concealment context].) When an insurer opts to rescind a liability
policy on this basis, and does so in conformity with all of the requirements
4
imposed by law (e.g., Ins. Code, § 650), the insurer generally may avoid liability
on the policy to the insured or to any third party injured by the insured.
Our decision in Barrera, supra, 71 Cal.2d 659, a case that did not involve a
rental car transaction, held that public policy considerations warrant an important
qualification on an insurer’s right to rescind in the context of automobile liability
insurance. As explained more fully below, Barrera recognized that an automobile
liability insurer has a duty to reasonably and timely investigate the insurability of
its insured, and that the insurer cannot take advantage of a breach of that duty in
order to avoid liability on a policy to an innocent victim of the insured.
Before proceeding to Barrera’s analysis, we acknowledge the insurer’s
contention here that it is not seeking rescission of a policy based on the insured’s
misrepresentation. Rather, Philadelphia claims, it seeks to enforce a policy clause
that excludes coverage for injuries arising out of the use of a car rental obtained
through fraud or misrepresentation.4 (See ante, fn. 2.) While that distinction may
carry weight in other contexts, it is not determinative here. Were we to conclude,
as a matter of substantive law, that an excess liability insurer has a duty to
investigate the insurability of a rental car customer, such a duty could not be
“ ‘ “circumvented, defeated, or modified by any provision which the insurer may
have elected to place in its contract in derogation of or in conflict therewith.” ’ ”
(Metz v. Universal Underwriters Ins. Co. (1973) 10 Cal.3d 45, 52, fn. 7, quoting
Wildman v. Government Employees’ Ins. Co. (1957) 48 Cal.2d 31, 39.)

4
Although the claimants contend Philadelphia is seeking rescission, the
district court determined Philadelphia was not liable for damages arising out of
Burke’s accident after finding that the excess policy excluded coverage for rentals
obtained through misrepresentation or fraud.
5


In Barrera, the plaintiff had previously obtained a judgment for damages
caused by a negligent driver. When she sued the driver’s automobile liability
insurer to compel payment of that judgment, the insurer filed a cross-complaint
seeking a declaration that the insurance policy it had issued was void ab initio.
The trial court entered judgment for the insurer on both the complaint and the
cross-complaint, finding rescission of the insurance policy justified because: (1)
the insurer had issued the policy in reliance on a material misrepresentation made
by the insured; and (2) the insurer acted promptly to rescind upon discovery of the
insured’s misrepresentation. (Barrera, supra, 71 Cal.2d at p. 662.)
In reversing that judgment, Barrera declared: “We conclude that an
automobile liability insurer must undertake a reasonable investigation of the
insured’s insurability within a reasonable period of time from the acceptance of
the application and the issuance of a policy. This duty directly inures to the
benefit of third persons injured by the insured. Such an injured party, who has
obtained an unsatisfied judgment against the insured, may properly proceed
against the insurer; the insurer cannot then successfully defend upon the ground of
its own failure reasonably to investigate the application.” (Barrera, supra, 71
Cal.2d at p. 663.)
Barrera’s recognition of this duty on the part of automobile liability
insurers rested on a combination of three public policy considerations: the quasi-
public nature of the insurance business generally; the public policy underlying the
Financial Responsibility Law (former § 16000 et seq., added by Stats. 1959, ch. 3,
p. 1635 et seq.; see now § 16000 et seq., added by Stats. 1974, ch. 1409, p. 3096 et
seq.); and the fact that such a duty is consistent with the extracontractual duty of
all insurers to act promptly to accept or reject applications for insurance. These
considerations are discussed below.
6
The first consideration Barrera addressed was the “ ‘quasi-public’ ” nature
of the insurance business and the “insurer’s role as a public service entity.”
(Barrera, supra, 71 Cal.2d at p. 669, italics omitted.) As Barrera observed, “the
rights and obligations of the insurer cannot be determined solely on the basis of
rules pertaining to private contracts negotiated by individual parties of relatively
equal bargaining strength.” (Ibid.) In this regard, “[t]he reasonable expectation of
both the public and the insured is that the insurer will duly perform its basic
commitment: to provide insurance.” (Ibid.) “With respect to an insurance policy
voidable under the Insurance Code, if an automobile liability insurer can
perpetually postpone the investigation of insurability and concurrently retain its
right to rescind until the injured person secures a judgment against the insured and
sues the carrier, then the insurer can accept compensation without running any risk
whatsoever.” (Id. at p. 670.) “Furthermore, under such a rule, the carrier would
be permitted to deal with the insured as though he were insured, and thus to lead
him to believe that he was in fact insured.” (Ibid.)
Barrera next considered the public policy underlying the Financial
Responsibility Law. The decision observed that, unlike ordinary indemnity
insurance, which primarily protects the insured, the law governing automobile
liability insurance was enacted to protect the public, that is, such insurance
represents protection “for those who suffer injury or death on the highway from
financially irresponsible drivers.” (Barrera, supra, 71 Cal.2d at p. 672.)
Mindful that the chief purpose of the Financial Responsibility Law is to
“ ‘provide compensation for those injured through no fault of their own,’ ”
Barrera sought to avoid a rule that, in practice, would (1) produce the “dangerous
condition” that car owners and operators would drive with the erroneous belief
they are insured, and (2) frustrate the expectation of those using the streets and
highways that insurance companies would conduct their business in such a way as
7
to fulfill, not thwart, the law’s public policy purpose. (Barrera, supra, 71 Cal.2d
at pp. 671-672.) The only way to meet this latter expectation, Barrera reasoned,
was to recognize a duty on the part of automobile liability insurers to undertake a
reasonable and timely investigation of insurability and to penalize breach of that
duty by loss of the right to rescission. (Id. at pp. 672-673.)
Finally, Barrera concluded that a duty of investigation for automobile
liability insurers would be consistent with a line of decisions imposing an
extracontractual duty on all insurers to act promptly to accept or reject
applications for insurance. (Barrera, supra, 71 Cal.2d at pp. 673-674 [citing cases
involving life insurers and supplemental disability insurers, among others].) As in
the prompt action context, Barrera noted, principles of fairness and sound
business practice support such a duty where automobile liability insurance policies
are concerned. (Id. at p. 674.)
In finding that these public policy considerations support a duty to
reasonably and timely investigate insurability, Barrera emphasized the duty inures
directly to the class of potential victims of the insured. Thus, when an automobile
liability insurer “breaches that duty, it may not defeat recovery by the injured
person, who has recovered a judgment against the insured, by relying on an
untimely attempt to rescind.” (Barrera, supra, 71 Cal.2d at p. 675.) Significantly,
however, the insurer, upon satisfying such a judgment, retains a right to either
prosecute a cause of action against the insured for damages for the latter’s
misrepresentations, or rely on the misrepresentations as a defense in any action by
the insured. (Id. at p. 681; see Pegos, supra, 107 Cal.App.4th at p. 395, fn. 1.)
Barrera concluded by reversing the judgment and remanding the matter for
further proceedings. Barrera explained that, ordinarily, it is a question of fact
whether or not an insurer breaches its duty to reasonably and timely investigate
insurability. (Barrera, supra, 71 Cal.2d at p. 681.) In that case, the
8
reasonableness of the defendant insurer’s failure to investigate the insured’s
driving record would depend on various factors, including: (1) the cost of
obtaining that information from the Department of Motor Vehicles (DMV); (2) the
availability of that information from the DMV or elsewhere; (3) the general
administrative burden of making such an investigation; and (4) whether the
defendant insurer had a practice of delaying investigation until the presentation of
a significant claim on the insurance policy. (Id. at p. 682 & fn. 17.)
Here, there is a disagreement over whether, as in the Barrera case, the
insurer should have an obligation to investigate insurability. Philadelphia argues
that the public policy underlying the Financial Responsibility Law is to protect
those who use the highways and streets by requiring minimum liability coverage
of $15,000 per person and $30,000 per accident for bodily injury or death, and
$5,000 per accident for property damage (§ 16056), and that this public policy
does not support application of the Barrera rule to insurers that sell supplemental
liability insurance in excess of those mandated statutory amounts. In support of
this position, Philadelphia asserts that the Legislature enacted a provision allowing
excess policies to contain exclusions that, if included in primary mandatory
coverage policies, would be void as against public policy. (Ins. Code, § 11580.1,
subd. (a).) Philadelphia further argues that, in the context of excess insurance sold
as part of a rental car transaction, compliance with the mandate of section 14608
to inspect the driver’s license and verify the signature of a rental car customer
should be deemed sufficient to satisfy any duty to investigate insurability
regarding the validity of a customer’s driver’s license.
Conversely, the claimants argue that Barrera did not limit its holding to
primary insurers that provide automobile liability insurance coverage in the
minimum statutory amounts required by the Financial Responsibility Law. In
their view, Barrera’s reasoning concerning the public’s reasonable expectation
9
that insurers will perform their basic commitment to provide insurance is just as
applicable to insurers such as Philadelphia that sell excess automobile liability
insurance. It is the claimants’ position that, under Barrera, it would be unfair to
allow excess insurers that did not reasonably investigate insurability to keep the
money they received in payment for such coverage but to not compensate the
people injured by the drivers they insure.
Whether excess automobile liability policies, as a general matter, warrant
different treatment than automobile liability policies providing the minimum
statutory coverage presents a difficult question that has significant implications for
a wide range of cases beyond the rental car context, including long-term
automobile leasing and long-term excess coverage for private automobile
ownership and use. In this case, we decline to decide whether the Barrera duty to
investigate insurability generally applies, or does not apply, to all excess
automobile liability insurers. Rather, assuming for purposes of argument that the
Barrera duty is generally applicable where excess insurance is concerned, we
conclude Philadelphia did not breach that duty as a matter of law. Specifically, we
hold that an insurer selling supplemental liability coverage in excess of the
minimum statutory amounts, in the context of a rental transaction, does not forfeit
any statutory or contractual right to rely on a rental car customer’s
misrepresentation in tendering a facially valid but suspended driver’s license as a
basis for avoiding liability under an excess policy, if there has been compliance
with the mandate of section 14608 to inspect the driver’s license and verify the
signature of the customer.
As courts have long recognized, the statutory provisions addressing vehicle
use by unlicensed drivers represent a legislatively expressed public policy to
provide protection to members of the public upon the streets and highways.
(Hartford Accident & Indemnity Co. v. Abdullah (1979) 94 Cal.App.3d 81, 93, fn.
10
4; see Shifflette v. Walkup Drayage etc. Co. (1946) 74 Cal.App.2d 903, 907.) In
this regard, section 14604 prohibits an owner of a motor vehicle from knowingly
allowing another person to drive its vehicle without first determining that the
person possesses a valid and appropriate driver’s license.5 Section 14604
specifies, however, that “an owner is required only to make a reasonable effort or
inquiry” in this determination and “is not required to inquire of the [DMV]
whether the prospective driver possesses a valid driver’s license.” (§ 14604, subd.
(a), italics added.) As relevant here, section 14604, subdivision (b), further
clarifies that a rental car company “is deemed to be in compliance” with the
reasonable-effort-or-inquiry mandate of the foregoing provision if, before renting
to a person, it visually inspects the person’s driver’s license and verifies the
person’s signature in accordance with section 14608.6
Significantly, the enactment of section 14604 in 1994 was part of an overall
legislative effort to address the serious public safety danger posed by unlicensed

5
Section 14604 provides: “[¶] (a) No owner of a motor vehicle may
knowingly allow another person to drive the vehicle upon a highway unless the
owner determines that the person possesses a valid driver’s license that authorizes
the person to operate the vehicle. For purposes of this section, an owner is
required only to make a reasonable effort or inquiry to determine whether the
prospective driver possesses a valid driver’s license before allowing him or her to
operate the owner’s vehicle. An owner is not required to inquire of the department
whether the prospective driver possesses a valid driver’s license. [¶] (b) A rental
company is deemed to be in compliance with subdivision (a) if the company rents
the vehicle in accordance with Sections 14608 and 14609.”
6
Section 14608 states in pertinent part: “No person shall rent a motor
vehicle to another unless: [¶] (a) The person to whom the vehicle is rented is
licensed under this code or is a nonresident who is licensed under the laws of the
state or country of his or her residence. [¶] (b) The person renting to another
person has inspected the driver’s license of the person to whom the vehicle is to be
rented and compared the signature thereon with the signature of that person
written in his or her presence. . . .”
11


drivers and drivers with suspended or revoked licenses.7 Because section 14604
specifically addresses rental car situations, that provision is reasonably viewed as
reflecting a legislative policy decision that, given the unique nature and
operational constraints of the rental car business, compliance with the inspection
duties set forth in section 14608, subdivision (b), is an appropriate safeguard
against the problem of unlicensed drivers in the rental car context.8 Thus, when an
insurer makes its excess liability insurance available to a rental car customer only
after the rental car agent complies with the license inspection and signature
verification requirements of section 14608, subdivision (b), the excess insurer
conducts its business in a manner that is fully consistent with what the Legislature
views as a “reasonable effort or inquiry to determine whether the prospective
driver possesses a valid driver’s license” in the rental car context. (§ 14604, subd.
(a); see § 14604, subd. (b).)
At oral argument, we asked the claimants what additional investigation
should be required of excess insurers to ferret out rental car customers whose
driver’s licenses appear facially valid but in fact are suspended or revoked.
Although the claimants raised the possibility that rental car companies, as agents
for excess insurers, could be equipped to perform license checks with the DMV,

7
In enacting section 14604, the Legislature considered estimates by the
DMV that, at any given time, approximately 720,000 driver’s licenses issued to
Californians are suspended or revoked, that “75 percent of suspended/revoked
drivers ignore the law and continue to drive illegally,” and that these drivers are
“four times as likely to be involved in a fatal accident as properly licensed
drivers.” (Assem. Com. on Transportation, analysis of Sen. Bill No. 1758 (1993-
1994 Reg. Sess.) as amended June 21, 1994, p. 2.)
8
Section 14604, subdivision (b), additionally requires rental car companies
to maintain records of their rental car transactions in accordance with section
14609.
12


they acknowledged that allowing private companies access to DMV records may
raise grave concerns about the privacy rights of rental customers, and also may
cause congestion of DMV’s computer systems and delay for rental car companies
and their customers.9 The claimants additionally suggested that rental car agents
should affirmatively ask potential rental customers whether their driver’s licenses
have been suspended or revoked, and whether they have moved in the last year
without notifying the DMV. They conceded, however, that such questioning
might not be effective in those cases where, as here, a customer tenders a facially
valid license that he or she knows or has reason to know has been suspended or
revoked.
As Philadelphia points out, the Legislature surely is aware that rental car
companies, as owners of vehicles, typically supply the mandatory Financial
Responsibility Law coverage as part of the rental transaction. Yet, armed with
that knowledge, the Legislature has determined that a rental car company “is
deemed to be in compliance” with the requirement that an owner make a
reasonable effort or inquiry to determine whether a prospective driver possesses a
valid driver’s license if, before renting to a customer, it visually inspects the
customer’s driver’s license and verifies the customer’s signature in accordance
with section 14608, subdivision (b), and also maintains records in accordance with
section 14609. (§ 14604, subd. (b).) Because the Legislature has not seen fit to
require DMV license checks or other specific investigatory measures on the part of
an owner and typical provider of mandatory coverage in the rental car context, we
shall decline to judicially impose such obligations on the offeror of optional excess

9
We note the further concern that such factors, coupled with the costs of
implementing such access, also may reduce the availability of excess liability
insurance, or deter its purchase.
13


coverage for purposes of preserving its rights to rescind an excess policy or invoke
an exclusion clause based on a rental car customer’s presentation of a facially
valid but suspended driver’s license. Moreover, while the Legislature might
consider after this opinion whether further investigation should be required of a
rental car company, and by extension an excess insurer, we remain mindful that
the Legislature stands in the best position to identify and weigh the competing
consumer, business, and public safety considerations that present themselves in the
rental car context.
Here, there is no dispute that Budget’s rental car agent, who acted as an
agent for Philadelphia for the limited purpose of facilitating the excess insurance
transaction, rented a car and offered the excess policy to Burke only after Burke
presented a facially valid Arizona driver’s license, and the agent inspected the
license and verified Burke’s signature in compliance with section 14608,
subdivision (b). Under these circumstances, Philadelphia’s failure to conduct a
further inquiry into the validity of Burke’s license did not result in a forfeiture of
its contractual rights under the excess policy’s exclusion for accidents caused by
the use of a vehicle obtained through fraud or misrepresentation.
14
CONCLUSION
We conclude that, where, as here, the sale of an excess policy of
supplemental liability insurance in a rental car transaction occurs after the rental
car customer presents a facially valid driver’s license and after the license
inspection and signature verification requirements of section 14608, subdivision
(b), have been met, the excess insurer has no obligation to conduct a further
inquiry regarding the validity of the customer’s driver’s license and does not
forfeit any statutory or contractual right to rely on the customer’s presentation of a
facially valid but suspended license as a basis for avoiding liability to third
persons under the excess policy. Put another way, if coverage under the excess
policy is sold to a rental car customer in reasonable reliance on the rental car
agent’s inspection of the customer’s driver’s license and signature, and if the
insurer acts promptly upon discovery of the customer’s misrepresentation
concerning the validity of the license presented, the insurer may be able to avoid
liability on the excess policy to third parties injured by the customer.10

BAXTER, J.
WE CONCUR:

GEORGE, C.J.
KENNARD, J.
WERDEGAR, J.
CHIN, J.
MORENO, J.
CORRIGAN, J.

10
In reaching this conclusion, we express no opinion as to whether other legal
or equitable principles might or might not preclude enforcement of the exclusion
clause in Philadelphia’s policy.
15



See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Philadelphia Indemnity Insurance Co. v. Montes-Harris
__________________________________________________________________________________

Unpublished Opinion


Original Appeal
Original Proceeding
XXX (on certification pursuant to rule 29.5, Cal. Rules of Court)
Review Granted
Rehearing Granted

__________________________________________________________________________________

Opinion No.

S130717
Date Filed: December 7, 2006
__________________________________________________________________________________

Court:


County:
Judge:


__________________________________________________________________________________

Attorneys for Appellant:

Hindin & Abel, Robert Marc Hindin, Bruce David Abel, Snow Tuyet Vuong and Douglas William Davis
for Defendants and Appellants Blanca Montes-Harris et al.

Law Offices of David R. Denis, David Robert Denis and M. Michael Saint-George for Defendant and
Appellant Javier Cortez.

__________________________________________________________________________________

Attorneys for Respondent:

Greenspan, Glasser & Rosson, David M. Glasser; Conner & Winters, James E. Green, Jr., and Julia
Forrester-Sellers for Plaintiff and Respondent.



Counsel who argued in Supreme Court (not intended for publication with opinion):

Bruce David Abel
Hindin & Abel
11601 Wilshire Boulevard, Suite 2490
Los Angeles, CA 90025
(310) 473-0337

M. Michael Saint-George
Law Offices of David R. Denis
350 S. Figueroa Street, Suite 250
Los Angeles, CA 90071
(213) 625-0033

James E. Green, Jr.
Conner & Winters
15 East Fifth Street, Suite 3700
Tulsa, Ok 74103-4344
(918) 586-5711


Opinion Information
Date:Citation:Docket Number:
Thu, 12/07/200640 Cal. 4th 151, 146 P.3d 1251, 51 Cal. Rptr. 3d 709S130717

Parties
1Philadelphia Indemnity Insurance Company (Plaintiff and Respondent)
Represented by David M. Glasser
Greenspan Glasser & Rosson
300 Corporate Pointe, Suite 375
Culver City, CA

2Philadelphia Indemnity Insurance Company (Plaintiff and Respondent)
Represented by James E. Green
Conner & Winters
4000 One Williams Center
Tulsa, OK

3Montes-Harris, Blanca (Defendant and Appellant)
Represented by Snow Tuyet Vuong
Hindin & Abel LLP
11601 Wilshire Blvd., Suite 2490
Los Angeles, CA

4Montes-Harris, Blanca (Defendant and Appellant)
Represented by Bruce David Abel
Hindin & Abel, LLP
11601 Wilshire Boulevard, Suite 2490
Los Angeles, CA

5Montes-Harris, Blanca (Defendant and Appellant)
Represented by Douglas William Davis
Hindin & Abel, LLP
11601 Wilshire Blvd., Suite 2490
Los Angeles, CA

6Montes-Harris, Blanca (Defendant and Appellant)
Represented by Robert Marc Hindin
Hindin & Abel, LLP
11601 Wilshire Boulevard, Suite 2490
Los Angeles, CA

7Cortez, Javier (Defendant and Appellant)
Represented by David Robert Denis
Law Offices of David R. Denis, P.C.
350 S. Figueroa Street, Suite 250
Los Angeles, CA

8Cortez, Javier (Defendant and Appellant)
Represented by M. Michael Saint-George
Law Offices of David R. Denis, P.C.
350 S. Figueroa Street, Suite 250
Los Angeles, CA

9United States Court Of Appeals For The Ninth Circuit (Overview party)
P.O. Box 193939
San Francisco, CA 94119

10Arredondo, Monica (Defendant and Appellant)
11Harris, Camilla Toni (Defendant and Appellant)

Opinion Authors
OpinionJustice Marvin R. Baxter

Disposition
Dec 7 2006Opinion filed

Dockets
Jan 14 2005Received:
  from U.S. Ninth Circuit Court of Appeals: certified general docket; Order; Brief of Cortez; Brief of Montes-Harris et al.; Consolidated Answer Brief and Joint Reply Brief.
Jan 14 2005Request to answer question of state law filed
  by U.S. Court of Appeals for the Ninth Circuit
Feb 22 2005Application to appear as counsel pro hac vice filed
  James E. Green, Jr. to appear as counsel pro hac vice on behalf of appellee {Philadelphia Indemnity Insurance Company}.
Mar 2 2005Request for certification granted
  Application to appear pro hace vice granted. The request, made pursuant to California Rules of Court, rule 29.8, that this court decide a question of California law presented in a matter pending in the Ninth Circuit Court of Appeals, is granted. For purposes of briefing and oral argument, federal district court defendants and appellants Blanca Montes-Harris et al., are deemed petitioners to this court. George, C.J., was absent and did not participate. Votes: Kennard, ACJ, Baxter, Werdegar, and Moreno, JJ.
Mar 2 2005Letter sent to:
  certification of interested entities or persons letter w/form sent to counsel.
Mar 17 2005Certification of interested entities or persons filed
  by counsel for respondent (Philadelphia Indemnity Insurance Co.).
Mar 29 2005Request for extension of time filed
  to file opening Brief of Appellants Blanca Montes-Harris, Monica Arrendondo, Camilla Toni Harris and Javier Cortez asking to April 6, 2005.
Mar 29 2005Certification of interested entities or persons filed
  for appellants Blanca Montes-Harris, Camilla Toni Harris, Monica Arredondo
Mar 30 2005Certification of interested entities or persons filed
  for appellant Javier Cortez.
Apr 1 2005Opening brief on the merits filed
  Appellants BLANCA MONTES-HARRIS, MONICA ARREDOND, and CAMILLA TNI HARRIS.
Apr 1 2005Received:
  appellant Blanca Montes-Harris; Monica Arredondo and camilla Toni Harris p.o.s. re:application for ext. of time.
Apr 4 2005Extension of time granted
  to and including April 6, 2005 for appellants to file opening brief on the merits.
Apr 7 2005Opening brief on the merits filed
  by counsel for appellant (Javier Cortez). (40.1b)
Apr 29 2005Answer brief on the merits filed
  by counsel for (Philadelphia Indemnity Ins. Co.)
May 19 2005Time for filing final brief expired; case fully briefed
 
Jun 17 2005Filed letter from:
  counsel for respondent (Philadelphia Indemnity Ins. Co.) notifying the court of a typographical error that appears on the proof of service attached to its answer brief filed on 4/29/05.
Jun 22 2005Received:
  Application for Relief from Default for failure to file appellants' reply brief
Jun 27 2005Reply brief filed (case not yet fully briefed)
  By counsel for appellants, Blanca Montes - Harris and Monica Arredondo and Camilla Toni Harris (w/permission)
Jul 1 2005Reply brief filed (case fully briefed)
  Atty Denis for appellant Javier Cortez (w/permission - see application for relief rcv'd on 6/22/05)
Jul 11 2005Received:
  Amended POS of Application for relief from default from counsel for appellants
Jul 11 2005Received:
  amended p.o.s. for Reply brief appellant's Blanca Montes - Harris and Monica Arredondo and Camilla Toni Harris
Jul 11 2005Received:
  p.o. for app/default re: Reply Brief appellant's Blanca Montes - Haris and MOnica Arredondo and Camilla Toni Harris
Dec 16 2005Change of contact information filed for:
  law firm of Connors & Winters, counsel for Philadelphia Indemnity Insurance Company
May 15 2006Note:
  Spoke to Linda Christy, secretary to Atty Jim Green. Their office will expediate to this office an add'l 7-copies of their brief entitled "Consolidated Answering Brief of Appellee Philadelphia Indemnity Insurance Company" filed on January 27, 2004, in U.S. Court of Appeal.
Sep 5 2006Case ordered on calendar
  October 3, 2006, at 1:30 p.m., in Santa Barbara
Sep 18 2006Filed letter from:
  Bruce David Abel, counsel for Montes-Harris et al. Requesting to divide oral argument time between counsel for Montes-Harris et al. (20 minutes) and counsel for Javier Cortez (10 minutes).
Sep 20 2006Order filed
  The request of counsel for appellants in the above-referenced cause to allow two counsel to argue on behalf of appellants at oral argument is hereby granted. The request of appellants to allocate to counsel for Blanca Montes-Harris et al. 20 minutes, & counsel for Javier Cortez 10 minutes of appellants' 30-minute allotted time for oral argument is granted.
Sep 22 2006Request for judicial notice filed (granted case)
  Blanca Montes-Harris, Monica Arredondo, Camilla Harris, appellants Snow Tuyet Vuong, counsel
Sep 27 2006Request for judicial notice granted
  The "Motion of Defendants and Appellants Blanca Montes-Harris, Monica Arredondo, and Camilla Toni Harris for an Order to Obtain Judicial Notice," filed on September 22, 2006, is granted.
Sep 28 2006Request for judicial notice filed (granted case)
  By Atty Snow Vuong counsel for Blanca Montes-Harris et al., defendants and appellants.
Oct 2 2006Request for Extended Media coverage Filed
  Len Wood of Santa Maria Times.
Oct 2 2006Request for Extended Media coverage Granted
 
Oct 3 2006Cause argued and submitted
 
Dec 7 2006Received:
  letter from Atty James Green for respondent, Philadelphia Indemnity Insurance Company, notifying the Court of a recent decision issued by the Supreme Court of Mississippi on November 30, 2006.
Dec 7 2006Opinion filed
  Authored by: Baxter, J. We Concur: George, C.J.; Kennard, Werdegar, Chin, Moreno and Corrigan, Justices.
Jan 26 2007Letter sent to counsel: opinion now final
  Also, a copy of letter sent to the U.S. Ninth Circuit Court of Appeal

Briefs
Apr 1 2005Opening brief on the merits filed
 
Apr 7 2005Opening brief on the merits filed
 
Apr 29 2005Answer brief on the merits filed
 
Jun 27 2005Reply brief filed (case not yet fully briefed)
 
Jul 1 2005Reply brief filed (case fully briefed)
 
Brief Downloads
application/pdf icon
Answer Brief of Respondent Philadelphia Indemnity Insurance Company.pdf (435700 bytes)
application/pdf icon
phila1.pdf (163836 bytes) - Opening brief on merits for Montes-Harris et al.
application/pdf icon
phila3.pdf (435700 bytes) - Answer brief for Philadelphia Indemnity
application/pdf icon
phila4.pdf (144423 bytes) - Reply brief for Montes-Harris et al.
If you'd like to submit a brief document to be included for this opinion, please submit an e-mail to the SCOCAL website
May 30, 2011
Annotated by daisy sanchez

FACTS:
This case arises from the Ninth Circuit’s filing of an order requesting that the California Supreme Court determine the investigation requirements for excess policy insurers in the rental car context.

Philadelphia Indemnity Insurance Company (“Philadelphia”) issued a supplemental automobile liability insurance policy in excess of the statutory minimum amounts (hereinafter “excess policy”). Budget Rent-A-Car (“Budget”) was identified as the policy holder of the supplemental insurance. Budget has authority to extend the coverage to its customers, if the customer opts in, without sending a written application to Philadelphia. The excess policy expressly stated that coverage was not extended to injuries caused by the use of a rental car that had been obtained through misrepresentation or fraud.

Alric Burke rented a car from Budget. Prior to signing the rental agreement, Budget’s rental car agent inspected his driver’s license and verified his signature. The driver’s license appeared facially valid. Burke accepted and purchased the offer to opt into the excess policy.

In fact, Burke’s driver’s license and driving privileges had been suspended two months earlier. Several days after renting the car, Burke was involved in a car accident while driving the Budget rental car which injured several people. The injured third parties (“claimants”) filed suit against Burke and Budget to recover damages from the accident.

At the same time, Philadelphia filed an “action in federal district court seeking a judgment declaring it had no liability for damages.”

PROCEDURAL HISTORY:
In a bench trial, the district court, declared that Philadelphia had no liability for damages caused by the accident. “The claimants filed an application for relief from the district court judgment” based on Barrera v. State Farm Mut. Automobile Ins. Co., 71 Cal.2d 659 (1969). Barrera established that in order for an insurer to retain its right to rescind the insurance agreement based on the insured’s misrepresentations, the insurer must have undertaken a “reasonable investigation of insurability within a reasonable period of time of the issuance of the policy.” If the insurer fails to make such an investigation, then it is still liable for injuries to a third party caused by the insured. The district court denied the application for relief. The claimants appealed.

The Ninth Circuit filed an order requesting that the Supreme Court of California decide whether the duty to investigate insurability, established in Barrera, applies in the context of rental car transactions.

ISSUE:
Does the duty of an insurer to investigate insurability established in Barrera apply to insurers in the context of excess policies issued in rental car transactions?

HOLDING:
The court declined to decide whether the Barrera duty to investigate applies to all excess automobile liability insurers.

Instead, it held that insurers that sell supplemental automobile liability insurance in excess of the statutory minimum, in the rental car context, do not lose their right to rescind the insurance policy based on a rental car customer’s misrepresentation in offering a facially valid but suspended driver’s license, if the customer’s driver’s license has been inspected and his/her signature has been verified, in compliance with Vehicle Code § 14608.

ANALYSIS:
The Supreme Court of California declined to determine whether the Barrera duty applied to excess policy insurers in the context of rental car transactions. It, instead, deferred to the California Legislature’s intent to determine what duties such insurers have.

The court cited Vehicle Code § 14604 as the Legislature’s views regarding what inspection requirements should be imposed in rental car situations. Vehicle Code § 14604 expressly states that an owner of a vehicle is not required to inquire with the Department of Motor Vehicles as to the validity of an individual’s driver’s license before allowing another person to drive his car. A vehicle owner is only required to make a “reasonable effort or inquiry” to determine whether the person is licensed to drive. Furthermore, section 14604 provides that a rental car company is deemed in compliance with the duty to make a reasonable effort or inquiry if, “before renting to a person, it visually inspects the person’s driver’s license and verifies the person’s signature” as required by section 14608.

The court reasoned that since the Legislature has not required such insurers, or other individuals, to conduct DMV license checks or “other specific investigatory measures,” then it will decline to judicially impose those duties.

RULING: (Baxter)
Philadelphia is not liable to third parties for the injury caused by the insured.

CONCURRING: (George, Kennard, Werdegar, Chin, Moreno, Corrigan)

TAGS: rental car, liability insurance, excess policy, statutory minimum, liability, third parties, duty to investigate insurability, inquire, insurability, driver’s license, signature, reasonable effort, compliance, rent, inspect, signature, DMV, license checks, rescind, insurance policy, misrepresentation, fraud, supplemental insurance,

KEY RELATED CASES AND STATUTES:
Barrera v. State Farm Mut. Automobile Ins. Co., 71 Cal.2d 659 (1969)
http://scholar.google.com/scholar_case?case=11885078697688444183&q=Barre...
Vehicle Code § 14604
Vehicle Code § 14608
Vehicle Code §16000 et seq.