Curtailing Abuses to the "Reasonable Belief" Exclusion in the Texas Auto Policy
Last Friday, a U.S. District Court in the Northern District of Texas resolved a question of first impression in Texas when it determined that the standard Texas Auto Policy’s “reasonable belief” exclusion, which is inherently a subjective test of what the driver thought about his or her permission to operate the vehicle, requires an objective test of the reasonability of the subjective belief held by the driver. The dispute in Empire Indem. Ins. Co. v. Allstate County Mut. Ins. Co., Slip Copy, 2008 WL 1989452 , N.D.Tex. May 08, 2008), pitted two insurers against each other over which policy – a commercial liability policy or standard Texas auto - was responsible for defense and indemnify costs incurred when a repossession company employee caused a car wreck while street racing a repossessed car. Empire insured the repossession company; Allstate insured the car through the former owner. Allstate contended that the “reasonable belief” exclusion applied. The reasonable belief exclusion applies when any person uses “a vehicle without a reasonable belief that that person is entitled to do so.”
Allstate offered the underlying plaintiffs’ pleadings as support for its position. The underlying plaintiffs, who were injured by the employee, had alleged the employee’s actions involved an extreme degree of risk and the employee was acting with conscious disregard for others. Empire offered extrinsic evidence to show the employee had permission to use the repossessed car and additional evidence on the employee’s subjective belief about his permission to use the vehicle. While the court noted the eight-corners rule, it did not disregard the extrinsic evidence. Instead, by adopting an objective test to guage the reasonability of the purported understanding of the driver's permission to use the vehicle, the court held that the subjective belief of the driver in question must be objectively reasonable. Because the Court found the driver’s testimony failed this test, Allstate’s reliance on the “reasonable belief” exclusion was upheld and Allstate won.
This is an important case because of the ease with which some claimants have abused the reasonable belief/permissive use test. By imposing an objective reasonability standard on an otherwise subjective test, this court recognized the need to more intensely scrutinize some drivers' alleged belief that their use of the vehicle was permissible. It also demonstrates the Court’s creative use of the eight-corners rule in balancing pleadings from an underlying tort case and the testimony of the parties in a coverage case.
