Third Circuit Addresses Insured Status for Lessor of Commercial Auto

by Traub Lieberman Straus & Shrewsberry LLP
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In its recent decision in Koons v. XL Insurance Company, 2013 U.S. App. LEXIS 5870 (3d. Cir. Mar. 25, 2013), the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, had occasion to consider concepts of ownership and lessor liability in the context of a commercial auto liability policy.
The Koons decision involved two separate business entities with a common ownership. Stephen Koons owned Miller Concrete and ran it as a sole proprietorship. Miller Concrete’s sole business was selling and installing underground septic tanks. Koons also was the sole shareholder of a separately run business, Ches-Mont Disposal, a waste collection enterprise. In 2001, Miller Concrete purchased a trash disposal truck and immediately leased it to Ches-Mont. While Ches-Mont did not actually make payments to Miller Concrete under the lease, there was no dispute that the truck was only used by Ches-Mont and was only useful to Ches-Mont’s business. While the lease between Ches-Mont and Miller Concrete expired in 2004, Ches-Mont maintained sole and uninterrupted possession of the vehicle thereafter and, in fact, the Pennsylvania Department of Transportation continued to identify the vehicle as being owned by Miller Concrete but leased by Ches-Mont. All vehicle maintenance and repair was performed by Ches-Mont rather than by Miller Concrete. Ches-Mont was later involved in a corporate restructuring whereby it became a subsidiary of a holding company owned by Koons and two other investors.
The underlying lawsuit pertained the 2008 death of a Ches-Mont employee while operating the truck. The employee’s estate sued Koons individually as the owner of the truck. Ches-Mont was not named as a defendant, and the estate did not specifically identify Koons as a defendant based on his relationship with Ches-Mont. Instead, Koons’ alleged liability was premised solely based on his purported ownership of the vehicle. XL, as the auto insurer for Ches-Mont, denied coverage to Koons on the theory that he did not qualify as an insured under its policy. That policy defined insured to be the Named Insured as well as “3. your [the Named Insured‟s] partners, joint venture members, executive officers, employees, directors, stockholders or volunteers while acting within the scope of their duties as such.” The United States District Court for the Eastern District of Pennsylvania held in favor of XL on summary judgment, concluding that no reasonable jury could conclude that Koons had purchased the truck in his role as the owner of Ches-Mont and therefore he was not being sued for conduct committed while acting within the scope of his duties on behalf of Ches-Mont.
On appeal, the Third Circuit concluded that the lower court erred in holding that there was no evidence in the record from which a jury could conclude that that Koons purchased and leased the truck in his capacity as the founder and sole owner of Ches-Mont. Looking to the facts alleged, the court reasoned that there was sufficient evidence from which a jury could infer that Koons’ purchase of the truck was in his capacity as the original founder and owner of Ches-Mont. As the court explained:
The Truck is specially designed for waste disposal purposes; it is a trash truck. The Truck was purchased by Koons d/b/a Miller Concrete, even though Miller Concrete sold and installed septic tanks. At the time of purchase, Koons was also the sole owner of Ches-Mont Disposal, a waste disposal company. The fact that Koons purchased a specially designed trash disposal truck, and at the time owned both a septic tank company and a trash disposal company, would allow a reasonable jury to infer that he purchased the trash disposal truck "in his capacity as the founder and sole owner" of the trash disposal company, rather than for the benefit of the tank installment company.
The court found additional support for this potential inference based on the lease arrangement and the fact that the vehicle was at all times owned, operated and maintained by Ches-Mont rather than Miller Concrete. These facts, explained the court, would allow a reasonable jury to infer that Koons was being sued in his capacity as an owned of Ches-Mont such that summary judgment in XL’s favor was inappropriate. As the court stated, “[t]o conclude otherwise, we would have to hold that every reasonable jury would find that Koons had purchased the $136,000 trash disposal truck and provided it to the trash disposal company that he owned, without compensation, for reasons other than his ownership of the company. We are unwilling to do so.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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