Lessor Liability: Fact or Fiction
(and What Good is Insurance)?
Volumes could be (and have been) written about whether a finance lessor will be treated like a lender or an owner should the leased equipment harm someone.
Without getting into the theory involved, courts in many states recognize that there is a difference between an equipment lessor/renter, such as a rental car agency, and a party taking title solely in order to provide financing. The former, leasing from inventory, is most often charged with ensuring that the equipment is safe. These lessors may be liable for equipment which is defective or is, by its nature, hazardous. The latter, finance lessors, are most often treated like lenders for whom the equipment is merely collateral.
As many of us know, the line was blurred in the case of automobile leasing for many years, until Congress enacted the Graves Amendment, under which state laws permitting recovery against vehicle lessors without a showing of negligence were overridden. Under the federal law, a motor vehicle lessor can still be found liable under certain circumstances, most notably if it is shown to be actually negligent.
As predicted, there has been a spate of lawsuits since the Graves Amendment trying to establish that the lessor of a motor vehicle is negligent in some fashion. For this reason, motor vehicle lessors should not rest too easy because of the federal law. Indications that equipment might be defective, such as letters from the lessee complaining that the brakes are not functioning properly, manufacturer recall notices, and reports indicating that a model vehicle has safety issues should be taken very seriously. Inspections should be handled carefully and should pay particular attention to maintenance of safety features. Any indication that the lessee is not monitoring its employee's driving records, using only licensed servicers and drivers or any other irregularly should be dealt with promptly. Above all, liability insurance requirements should be strictly enforced.
This brings about another, too often misunderstood issue regarding insurance. While we advise that the lessor always obtain a certificate of insurance showing that the lessee has the required liability coverage before closing, courts have consistently held that a false insurance certificate, or one that does not fully disclose limitations of the lessee's policy, is not binding on the insurance company. In other words, if the insurance does not actually cover the lessor as additional insured or does not provide the coverage indicated in the Certificate, the lessor might have recourse against the insurance agent issuing the Certificate but has no claim against the insurance company for insurance that does not actually exist.
The only safe practice when dealing with a lessee who may not be able to honor its indemnification obligations on hazardous equipment such as aircraft, motor vehicles or anything environmentally-sensitive, is to obtain an actual policy endorsement from the insurance company.
