Federal Law Puts Brakes on Vicarious Liability for Auto Rental Firms

By | December 19, 2005

Recent N.Y. $21 Million Award May Be Last of Its Kind in the Nation

A New York court’s $21 million award last month to a young Wall Street trader paralyzed in an accident involving a Budget Rent-a-Car vehicle may be one of the last of its kind.

Inserted among the thousands of road projects in a massive highway bill Congress passed last summer was language annulling state “vicarious liability” laws that hold vehicle rental and leasing companies liable when a driver without sufficient insurance causes a serious accident.

The industry had been pushing for years to get rid of vicarious liability, which generally holds an employer responsible for the acts of an employee. Congress tried to end it in 1996 as part of a larger product liability bill, only to see President Clinton veto the legislation.

Opponents say legislation overriding state laws on the issue protects a prosperous industry at the expense of seriously injured victims who may need a lifetime of medical care.

The Truck Renting and Leasing Association, which has led the effort against vicarious liability, said the new law will save the industry and its customers billions of dollars spent on costly liability awards, attorney fees and supplemental insurance premiums.

“It’s had a very deleterious effect on the industry,” said Peter Vroom, the association’s president and chief executive officer. Contingency plans for serious injuries can be as much as 25 percent of insurance costs, he said, causing some rental and leasing companies either to go out of business or avoid states such as New York that have such laws.

States affected
Even companies in states without vicarious liability laws have had to buy supplemental insurance out of concern a lessee will drive a vehicle to a state where such laws exist.

In addition to New York, 15 states and the District of Columbia had full or limited vicarious liability statues. The others were Arizona, California, Connecticut, Delaware, Florida, Idaho, Iowa, Maine, Michigan, Minnesota, Nevada, Oklahoma, Pennsylvania, Rhode Island and Wisconsin. Those states’ laws were effectively nullified when President Bush signed the highway bill in August. Suits already in the pipeline line will be allowed to go forward.

N.Y. case
In the New York case, a driver who rented a vehicle from Budget in 2000 ran a red light in Manhattan, hitting a van, which struck a 25-year-old pedestrian, Wall Street trader Ethan Ruby. Ruby was paralyzed from the chest down. The court judgment included $2 million for past and $8 million for future pain and suffering, thought to be one of the state’s largest such awards in a personal injury lawsuit.

David Cook, a partner in Kreindler & Kreindler, the New York law firm that represented Ruby, said the action by Congress to abolish vicarious liability was “terribly wrong” because it does not provide an adequate safety net for victims of catastrophic injuries.

Cook said the action shifts the burden of responsibility from the company, which carries business liability insurance, to the driver, who normally does not have sufficient insurance or assets to cover a lifetime of lost income and medical care. Ultimately the burden could fall to the taxpayer, he said, as the victim “is going to be poverty-stricken and become a public charge.”

Congressional vote
Such arguments were made last March when the House, by a 218-201 margin, passed the vicarious liability ban offered by Rep. Sam Graves (R-Mo.), as an amendment to the $286 billion highway bill. Under the provision, rental and leasing companies would still need to carry basic liability insurance and could be held liable if found to be negligent or at fault for an accident.

Graves said increased rental rates resulting from arbitrary damage awards cost consumers $100 million a year.

Republicans supported Graves, while most Democrats voted against it.

Rep. Jerrold Nadler (D-N.Y.), noting that many New Yorkers don’t own cars and thus don’t have car insurance, said nullifying the state laws “would have the disastrous effect of allowing rental car companies to lease vehicles to uninsured drivers with no recourse for innocent victims should an accident occur.”

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