Whether it’s a teenager heading to the mall or a co-worker running a quick errand, it’s common for people to borrow cars.
As common as it is, though, most people don’t understand the potential liabilities of lending a vehicle to someone who gets into an accident, says Kevin Lynch, an assistant professor of insurance at The American College in Pennsylvania.
“Many people assume that someone driving their car is responsible,” Lynch says. “But the fact is it’s your car, it’s your insurance coverage and it’s your responsibility.”
Insurance follows the car
To better understand the liabilities, the general rule of thumb is: Insurance follows the vehicle.
If someone borrows your car, your car insurance would provide the primary coverage in any accident where the driver was at fault. In the event your liability coverage isn’t sufficient to cover the losses, you could be liable for the amount the insurance doesn’t cover.
“If all the people in the car get injured, and the costs exceed the maximum coverage, guess who is getting invited to the litigation party?” says Frank Darras, an insurance attorney in California. “The answer is you, the lender, because when you lend your car you lend your insurance.”
But the laws vary from state to state, and courts have differed in their interpretations of these laws, generating considerable confusion. However, recent court decisions are helping bring more clarity to what's been a somewhat murky area of the law.
Court rulings shed light
On July 31, the Michigan Supreme Court reversed two appealed court decisions involving separate cases when cars were borrowed without permission and wound up being crashed.
In the first case, Craig Smith Jr. was injured while driving a vehicle owned by his father, Craig Smith Sr., according to court documents.
Craig Sr. had forbidden Craig Jr. from driving his vehicle since he didn't have a valid driver’s license, according to court documents. Craig Sr. had entrusted the vehicle to Craig Jr.’s girlfriend, Kathleen Chirco, to help them perform landscaping services, stressing that she wasn't supposed to let Craig Jr. drive the car. Nonetheless, Craig drank alcohol one night, pressured Chirco into handing over the keys and later crashed the car into a tree.
Spectrum Health Hospitals, which paid Craig Jr.’s medical expenses, sued Farm Bureau Mutual Insurance Co. of Michigan – Craig Sr.’s insurer – to recover payment. A lower court ruled in favor of Spectrum Health, and an appeals court upheld the decision, concluding Craig Jr. had not taken the vehicle unlawfully. But the Supreme Court overturned the decision, ruling Craig Jr. took the vehicle unlawfully and was not entitled to medical benefits.
In the second case, Ryan DeYoung had racked up three drunk driving convictions and had repeatedly lost his driver's license, court records show. Ryan’s wife, Nicole, owned and insured the family’s vehicles with Progressive Marathon Insurance Co. and had named her husband as an excluded driver on the policy. On the night of Sept. 17, 2008, Ryan came home drunk, took the keys to one of their cars and shortly afterward was badly injured in an accident. Ryan, then 26, incurred more than $53,000 in medical bills at Spectrum Health Hospital and another $232,000 at Mary Free Bed Rehabilitation Hospital.
Progressive denied coverage, arguing Ryan was injured while using an unlawfully taken vehicle. A lower court ruled in favor of Progressive, but an appeals court reversed the decision, concluding it had no alternative but to follow legal precedents involving the “family-joyriding exception,” a legal theory that involves the unauthorized taking of someone’s car by a relative who didn't intend to steal it. However, the Michigan Supreme Court overturned that decision.
“The question for the Supreme Court of Michigan was, ‘Can a person recover under their own personal injury protection benefits when joyriding or taking the vehicle without the owner’s permission?’ ” Darras says. “And the Supreme Court finally ruled that, ‘No, they could not recover unless they reasonable believed they could take or use the vehicle.’ ”
Dyck Van Koevering, general counsel for the nonprofit Insurance Institute of Michigan, says the rulings are another step toward clearing up confusion about what insurance covers when a vehicle owner lets someone borrow their car and may help guide court rulings around the country.
“The hope is that you can get to the point where most people can pick up the law, read it and have a fair understanding that it means what it says,” Van Koevering says. “I think these cases are another step in the right direction.”
Weighing the liability
Throughout the country, state laws that dictate when drivers are liable and when they are not, Lynch says. All too often, Lynch says, insurers are forced to pay claims where “plainly they are not liable.”
As a result of the Michigan rulings, Lynch expects to see more explicit definitions in car insurance policies about exactly what's covered when someone lends a car to another person.
In the meantime, Lynch advises people to carefully weigh potential liabilities when deciding whether to let someone use a vehicle.
“I’m 62 years old and I’ve lent my car maybe to two people in my lifetime,” Lynch says. “It’s not something I would do lightly.”