“I’m so sorry. As it stands now, you are not covered for that damage, and there is absolutely nothing that can be done about that!” This line comes from a popular Seinfeld episode, where Jerry finds out he is on the hook for $2,866 in damages to his rental vehicle. Though a scene of comedic relief, this situation is all too familiar for many renters. When renting a car, consumers are faced with the dilemma of whether or not they should purchase a protection plan to cover any damage incurred while the car is in use. Before driving out and upon return, the rental company looks over the car carefully, taking note of any scratches, dings, and dents. Consumers often leave with many questions. Is the protection plan sold by the rental company really worth it? Will my personal auto plan cover any damage or liability stemming from the use of the rental? Though there is often no clear answer, the Rhode Island Supreme Court recently provided some guidance in Christy’s Auto Rentals, Inc. v. Massachusetts Homeland Ins. Co. et al.1

In 2012, an employee of a barbeque vendor rented a box truck from Christy’s Auto Rentals, Inc. for use at a seasonal fair. The employee declined to purchase the “Liability Protection” that was offered by Christy’s. The rental agreement, signed by the employee, contained a clause whereby he “agreed to be responsible for all damage or loss [caused] to others.” While parking the van at the fair, the employee hit a nearby concession trailer causing $1,300 in damage. Christy’s reimbursed the trailer owner for the cost of the damage, and then sued the employee responsible for the damage as well as his insurer (“Homeland”). Christy’s sought indemnification from the employee under the terms of the rental agreement, while it also sought a declaration that Homeland was responsible for coverage under the policy. Homeland argued that the policy did not cover the $1,300 in damages and, more importantly, argued that Christy’s lacked standing to bring a direct action against the insurer. The lower court ruled in favor of Homeland and Christy’s timely appealed to the Rhode Island Supreme Court.

The Court affirmed the ruling below, finding first that Homeland had not waived its defense of standing by not pleading it in the initial answer. More directly, however, the court also found that Christy’s did not have standing to pursue an action directly against Homeland as the employee’s insurer. Since Christy’s was not a party to the contract of insurance between the employee and Homeland, it did not have standing to seek interpretation and enforcement of the contract. The Court advised that Christy’s should seek indemnification from the employee first, and if unsuccessful in collecting a judgment against the employee, it could proceed with a suit against Homeland: “If Christy’s succeeds in obtaining a judgment against [the employee] and is unable to collect on that judgment from him, it would then have a legally cognizable interest that is no longer hypothetical.” 2

Though Christy’s was able to seek indemnification from the employee because of the indemnification clause in the rental agreement, it could not pursue any sort of compensation from the employee’s insurer until it obtained a judgment against the employee directly. Whether or not Homeland’s policy covers damage caused by the insured in a rental vehicle is a different story, one that the Rhode Island Supreme Court did not reach. It did note, however, that the issue would only be ripe for adjudication if Christy’s is unable to collect from the employee.

This decision provides more clarity for consumers, insurers, and rental companies in the context of vehicle rentals and in insurance disputes in general. In Rhode Island, when an individual rents a vehicle, his or her insurer is not in privity with the rental company.3 If there is damage to the rental vehicle, the rental company must first seek indemnification from the renting party. It may not, however, pursue indemnification directly from the driver’s insurer when it lacks privity or an assignment of rights. In a more general context, an injured party does not have standing to bring an action against the liable party’s insurer before it obtains judgment against the liable party and is unsuccessful in collecting.

While this opinion provides some guidance in the area of rental car liability, there is no clear-cut answer as to how far your own insurance extends for rental property. It is important to review the coverage under your personal policy and the coverages offered under the rental company’s short-term plans. The reach of this decision goes beyond just the rental car context, however. The court held generally that where no privity exists between an insurer and a party seeking indemnification, that party may not seek a declaration of rights until it has unsuccessfully attempted to collect a judgment from the insured. Though the employee might file a claim and pursue indemnification from his insurer, the rental company may not. The decision puts a barrier between parties seeking indemnification and the insurers of liable parties, requiring them to first enforce a judgment against the insured before seeking compensation from the insurer.