Ramos a/a/o Benavides v The Hertz Corporation

U.S. District Court, D. Colorado, 2018 WL 4635972 (Notice of Appeal filed)  

This lawsuit arises out of a collision between an ordinary passenger car and a Hertz rental car. The Hertz car was being operated by a person with a revoked license, who had borrowed it from the named renter. The renter had declined liability insurance at the time of the rental. The injured plaintiff entered into an agreement with the Hertz driver whereby the driver assigned his “bad faith” rights against Hertz to the plaintiff in exchange for a stipulated judgment and a promise not to sue him (but instead to enforce it against Hertz). Plaintiff then brought this bad faith suit against Hertz. Hertz asserted that under Colorado law a rental car company is exempt from the requirement to provide liability insurance, and that because the renter here declined to purchase any, it owes nothing to plaintiff. Hertz also alleged that the stipulated judgment was the result of collusion. Plaintiff moved to strike Hertz’s defenses. The U.S. District Court held that (1) Colorado law is unclear as to whether rental cars must provide liability insurance; and (2) Hertz has the right to try to prove that the stipulated judgment between plaintiff and the driver was the product of collusion.­—LNR

This insurance bad-faith case arises out of a head-on automobile collision that occurred in Adams County, Colorado in 2014. The Plaintiff, Ramos was injured in the crash. The alleged at-fault vehicle was a rental car, owned by Hertz. At the time of the accident, the rental vehicle was not being driven by the renter, Allen George. Mr. George, apparently, had given the rented car to Mario Benavides to drive.

According to Hertz, Benavides was under the influence of drugs at the time he was driving the borrowed rental vehicle. Hertz alleged that the reason Mr. George had rented the car from Hertz was because Mr. Benavides had crashed Mr. George’s Pontiac Grand Prix only a few days earlier. Benavides’ Colorado driver’s license had also been revoked (under the habitual traffic offender statute) prior to his asking Mr. George to borrow the rented car, allegedly making Benavides’ operation of Hertz’s car a felony offense. Benavides allegedly had numerous prior intoxication and driving under the influence convictions.

When George rented the vehicle from Hertz, he expressly declined any insurance coverage in the rental agreement.

On August 3, 2014, Plaintiff requested that Hertz tender the alleged policy limit of $25,000, based on Plaintiff’s assertion that Hertz was obligated by law to insure its rental vehicle, regardless of whether the renter (Mr. George) declined coverage.

One issue in this case is whether Hertz, as owner of the vehicle, was required by Colorado law to insure the car, despite the fact that the renter had declined insurance. Another issue is, assuming without deciding that the renter who declined insurance (George) was nevertheless insured by operation of law, whether that insurance would have transferred to an arguably permissive user (Benavides), who was barred by Colorado law from driving because he lacked a valid driver’s license.

Hertz disputed that it was mandated by law to provide insurance to Mr. George, since Mr. George had declined insurance on the rental agreement. Hertz also disputed that Mr. Benavides was a permissive user. Hertz alleged that Mr. Benavides was instead a “converter,” in part because Benavides likely failed to disclose his lack of a valid driver’s license to George when borrowing the car.

“But,” wrote the Judge, “the case gets even more complicated.” Hertz refused to tender $25,000 to Plaintiff within the deadline set for a response and, just over a month later, the injured Plaintiff sued Mr. Benavides in state court in Adams County for her injuries. The state court case was then resolved in part by the execution of a Nunn agreement [see footnote] between Plaintiff and Mr. Benavides. Per the Nunn agreement, Mr. Benavides assigned his claims against Hertz (for breach of contract and for insurance bad faith) to Plaintiff in exchange for Plaintiff’s agreement not to execute any judgment beyond available insurance policy limits against Benavides’ personal assets. In that agreement, Benavides and Plaintiff also purportedly agreed to proceed to an arbitration to determine the amount of damages to which Plaintiff would be entitled.

The arbitration was scheduled. Plaintiff alleges Hertz was invited to participate and appear to present a defense on behalf of Benavides. Hertz did not appear at the arbitration. Neither did Benavides. As a result, the arbitrator was presented with only evidence from Plaintiff, Plaintiff’s witnesses, and Plaintiff’s experts. That arbitration resulted in a $3.426 million judgment against Benavides and in favor of Plaintiff.

In her Complaint, Plaintiff purports to step into the shoes of Mr. Benavides (having been assigned his claims against Hertz) and insists that “as a consequence of the misconduct by Hertz – including its failure to resolve the case against Benavides within the policy limits without delay – Mr. Benavides was deprived of the opportunity to put the matters at issue behind him and has now been exposed to a high adverse judgment against him.” Plaintiff asserts that having been assigned Mr. Benavides’ rights to any claims against Hertz for collection of the judgment entered after the state court arbitration, she has the right to prosecute those claims in a civil action against Hertz, and retain the proceeds of such action.

Plaintiff states that she is seeking $3.426 million in damages from Hertz plus interest which continues to accrue, plus non-economic damages for Hertz’s alleged bad faith. Thus, a demand for $25,000 in alleged insurance policy limits has transmogrified into a claim for nearly $3.5 million-plus in damages (and potentially multiples of that, given the bad faith claims in the case).

Hertz recites multiple reasons why it is not liable to Plaintiff for anything, much less the $3.5 million+ being sought. Some of these reasons constitute “straight denials of Plaintiff’s assertions.” For example, Plaintiff asserts that at the time of the collision, the vehicle operated by Mr. Benavides “was insured by Hertz.” Hertz denies that allegation. “This is not an affirmative defense. Plaintiff will have to prove at trial (or via a motion pre-trial) that the vehicle was insured by Hertz,” ruled the Court.

Similarly, Hertz denies that it has somehow “exposed” Mr. Benavides to a high adverse judgment against him. “This, again, is not an affirmative defense, but merely a denial of something Plaintiff will have to affirmatively prove.”

“Other Hertz defenses do appear to be classic affirmative defenses that will require proof of facts (or legal argument) by the Defendant at trial or on motion that, if proven, would negate Plaintiff’s claims…. First, Hertz asserts the affirmative defense of “fraud and collusion,” alleging that Mr. Benavides, Plaintiff, Plaintiff’s attorney Mr. Ridder, and the arbitrator colluded to generate a grossly overinflated and unjust damage award through the arbitration process, colluding to conduct a ‘kangaroo court,’ which only admitted and considered one-sided and exaggerated evidence.”

“Second, Hertz asserts the defense of fraud against Mr. Benavides in obtaining permission, if any, to operate the Hertz rental vehicle from Mr. George, because Mr. Benavides concealed and failed to inform Mr. George that his driver’s license had been revoked. Because Plaintiff, as an assignee, stands in the shoes of Mr. Benavides, if Mr. Benavides had no insurance because of fraud, then Plaintiff has no claim to insurance coverage.”

“Third, Hertz asserts the defense of failure of consideration for the contract of insurance with Hertz, if any. Hertz asserts that because Mr. George (and certainly Mr. Benavides) failed to purchase any liability coverage, Hertz received no consideration and was not obligated to provide insurance.”

“Fourth, Hertz asserts the defense of illegality, pleading in the alternative that if Mr. George knew that Mr. Benavides’ license had been revoked and let him use the rental car anyway, then any “permission” would have been void as illegal.”

“Fifth, again pleading in the alternative, Hertz alleges that if Mr. Benavides were somehow covered by Hertz’s insurance, Mr. Benavides failed to cooperate with Hertz in the defense by failing to report the accident and failing to provide any defense to the arbitration proceeding.”

“Sixth, Hertz asserts the criminal acts exclusion to any insurance that Mr. Benavides may have had with Hertz by his criminal acts in operating the rental car in an intoxicated or drugged condition.”

“Seventh, Hertz asserts that Mr. Benavides was not a permissive user, but instead a converter of the rental car, which invalidates any applicable liability insurance coverage.”

“Eighth, Hertz asserts that the rental agreement between it and Mr. George specifically prohibited Mr. George from permitting anyone else to operate Hertz’s rental car, and, as such, any permission given was invalid and void.”

“Ninth…, Hertz asserts that the arbitration in the underlying litigation was not conducted by a neutral arbitrator, was not an adversarial proceeding, and has no legitimacy or value in establishing the amount of damages against Hertz in this case.”

“Tenth, Hertz asserts that because the renter declined liability insurance coverage when he rented the car, there was no Hertz insurance coverage on the date of the accident.”

Eleventh, Hertz asserts that it is not required to provide the minimum compulsory liability coverage stated in Colo. Rev. Stat. § 10-4-619(1) because it is a motor vehicle rental company, as provided by Colo. Rev. Stat. § 10-4-608(1)(c), and therefore there is no statutorily required insurance from Hertz in this case.”

Plaintiff has moved to strike Hertz’s affirmative defenses.

The Court held, “There are questions of fact here. And any questions of law are unclear and in dispute. In her motion to strike, Plaintiff herself cites evidence or documents from outside the pleadings that she alleges merit consideration in determining whether, under the circumstances of this case, Hertz insured this car when it was being driven by Mr. Benavides. With respect to the pure legal issue, whether a rental car company is required under Colorado law to provide liability insurance for a vehicle where the renting party declines coverage, it is enough to say that this is a legal question the answer to which is unclear and in dispute. Hertz emphasizes that the Colorado statutory provisions that appear to mandate insurance coverage for all owned vehicles, Colo. Rev. Stat. § 10-4-619 and § 10-4-620, also appear to exempt policies that arise “out of a motor vehicle rental agreement.” (citing exemption language appearing in Colo. Rev. Stat. § 10-4-608 and § 10-4-601(10) ). Plaintiff responds that a decision by the Colorado Supreme Court, Aetna Cas. & Sur. Co. v. McMichael, 906 P.2d 92, 99 (Colo. 1995), limits the applicability of the exemptions. But that case was decided in the context of Uninsured/Underinsured Motorist coverage and not the mandatory insurance requirements of § 10-4-619 and § 10-4-620.”

The Court is not prepared to decide this important legal question, to which there is no immediate clear answer, on a motion to strike…. The parties have neither briefed nor adequately explained the language referring to the “motor vehicle rental agreement” exception to Colorado’s compulsory coverage requirements. Briefing on the legislative history of that language may be necessary to resolve the issue and the Court would welcome such briefing at the appropriate procedural moment.

Absent a clear answer to the question, the Court declines to strike Hertz’s defenses that the rental vehicle was not insured, that Hertz was not obligated to insure the vehicle when Mr. George declined coverage, or that to whatever extent coverage did exist, it did not extend to Mr. Benavides because of his alleged status as a converter.

With respect to Hertz’s defenses relating to alleged fraud or collusion in the arbitration award, the Court also will decline to strike those defenses. In the Nunn case that provided the conceptual framework for the agreement reached between Plaintiff and Mr. Benavides, the Colorado Supreme Court was explicit in recognizing the dangers of fraud or collusion in generating an excessive or unreasonable stipulated judgment that could then be used against the insurer, without the insurer being able to defend itself. See Nunn, 244 P.3d at 123.

But the court was reluctant to rule that all stipulated judgments are per se unenforceable against an insurer because of the “mere specter or fraud or collusion.” Instead, the court noted that “the existence of fraud or collusion can be determined at trial like any other issue of fact,” that “our system of justice is adequately equipped to discern the existence of fraud and collusion,” and “the stipulated judgment thus is not binding on the insurer until after an adversarial proceeding before a neutral factfinder, providing the insurer with an opportunity to defend itself at trial.”

The Colorado Supreme Court also noted that the actual amount of damages for which an insurer will be liable will depend on whether the stipulated judgment was reasonable. Thus, even if the Plaintiff in this case meets her burden of proving that there was an insurance policy in place, and that Mr. Benavides was covered by and the beneficiary of that policy, and that Hertz acted in bad faith, the actual amount of damages for which Hertz would be liable would depend on whether the stipulated judgement (or in this case, the judgment based on the arbitration award), was reasonable. Per the Nunn decision, Plaintiff will have the additional burden of proving that the $3.5 million arbitration award and associated judgment “is a reasonable reflection of the worth of her personal injury claims against Benavides, and thus the proper measure of damages for her bad faith claim against Hertz.”

In moving to strike Hertz’s affirmative defense of “fraud and collusion,” Plaintiff essentially seeks to take away from Hertz the one protection that the Colorado Supreme Court thought was important in these kinds of cases—the ability to show that there was something not right about an unreasonably large, unilaterally (or collusively) determined damages figure. The Court declines to do so.

In this case, Hertz’s affirmative defense of “fraud and collusion” has more to do with the arguably unreasonable result of the arbitration and the unilateral nature of the arbitration process, where only evidence submitted by Plaintiff was considered and not subject to any meaningful cross examination. Plaintiff has sufficient notice of the allegations to adequately prepare a response. As to Plaintiff’s argument that Hertz has failed to provide the “who, what, where, and when” of the alleged fraud, this is not a typical fraudulent misrepresentation claim. Instead, the allegation appears to be that the outcome of the arbitration was corrupt or, at minimum, unreasonable. Plaintiff has enough information from this allegation to be able to defend the arbitration process and the reasonableness of the result. Whether the result of the arbitration was reasonable or not, and whether it was a result of fraud and collusion, or merely the result of an otherwise fair process that Hertz declined to participate in, to its own detriment, will be decided as a matter of fact at a later time. The Court will not strike it as a defense at this early stage of the case.

For the foregoing reasons, it is hereby ORDERED that Plaintiff’s Motion to Strike Affirmative Defenses is denied.

Footnote: In Colorado, a “Nunn Agreement” (see Nunn v Mid-Century Ins. Co., 244 P3d 116) is an agreement between an injured automobile claimant and an insured owner/driver whereby the latter assigns his potential bad faith claim against his insurer to the plaintiff in exchange for a covenant not to enforce a judgment against him.