Cases involving “mobile equipment” can be deadly dull.  Given the complex definition of the term, they sometimes call for a tedious analysis.  That was the situation in Penn-Star Inc. Co. v. Zenith Ins. Co., No. 18-1319 (E.D. Cal. Jan. 31, 2020).  Yet, the decision still manages to be interesting.  Given how critical the court was of the policy language – really critical -- the decision should give ISO something to think about.  Granted, it’s just one decision.  But the court was very troubled by the policy language at issue and it may have opened a door for others to challenge the “auto exclusion” on the basis that the “vehicle” in question was “mobile equipment.”    

At issue was coverage for Golden Labor, a labor-services firm that provides farms with laborers.  A farm laborer, obtained though Golden Labor, was driving a tractor when he was involved in an accident with an automobile.  The driver of the automobile was killed and its three passengers were injured.  Golden Labor tendered the subsequent suit to Penn-Star seeking coverage under a general liability policy.  Penn-Star undertook the defense subject to a reservation of rights.  Coverage litigation ensued.

At issue was the applicability of an amended “auto exclusion.”  Specifically, before the court  was the question whether the tractor was an “auto?”  This got into the question whether the tractor was “mobile equipment,” as the definition of “auto” excluded “mobile equipment.”  From there, the definition of “mobile equipment” includes “bulldozers, farm machinery, forklifts and other vehicles designed for use principally off public roads,” but specifically excludes “any land vehicles that are subject to a compulsory or financial responsibility law or other motor vehicle insurance law where it is licensed or principally garaged.”

Penn-Star’s argument was that the tractor is “mobile equipment,” since it is subject to a compulsory or financial responsibility law.

The court concluded that, for two principal reasons, the “auto exclusion” did not apply. 

First, the court took issue with what it saw as the complexity of the policy: “[T]he provisions are not conspicuous. In order to reach the conclusion that the tractor at issue is not covered by the Penn-Star policy because it is a ‘mobile equipment’ subject to financial responsibility laws, the reader of the insurance policy must locate several provisions in a policy that is almost fifty pages long. Initially, the reader must find the auto exclusion, as amended by endorsement, which states that the insurance policy does not apply to bodily injury arising out of the use of any ‘auto.’ Next, the reader must find the definition of ‘auto,’ which explicitly excludes ‘mobile equipment.’ Thereafter, one would have to locate the definition of ‘mobile equipment,’ which explicitly notes that ‘farm machinery’ and ‘other vehicles designed principally for use off public roads’ qualify as ‘mobile equipment.’ At this point, the average insured might reasonably assume that a tractor constitutes farm machinery or an ‘other vehicle designed principally for use off public roads’ and is therefore not within the scope of the auto exclusion.”

But there was still another step, the court observed, as the definition of “mobile equipment” “goes on to exclude from its scope ‘any land vehicles that are subject to a compulsory or financial responsibility law or other motor vehicle insurance law where it is licensed or principally garaged.’ Here, this exclusion is not conspicuous since it is buried in the definitions section of the policy.” 

The court also observed that “the auto exclusion, as amended by the endorsement, does not even alert the policyholder that its scope will or could be expanded by a definition that appears in a different section of the policy and not in the endorsement itself. . . .  In short, the average lay reader would have a difficult time locating the limiting language and is not required to conduct such an arduous search for camouflaged exclusions.  Accordingly, the court concludes that Penn-Star has not met its stringent obligation to alert a policyholder to limitations on anticipated coverage by hiding the disfavored language in an inconspicuous portion of the policy.”

Then, the court concluded that, even if the reader found all of these provisions, they would have difficulty figuring out if the tractor is subject to financial responsibility laws:  “Although ‘Financial Responsibility Law’ may be an obvious reference to the Vehicle Code to lawyers and judges, . . . it is too vague to meet the stringent obligation of the insurer to limit coverage in plain and clear language.  Here, in order for Golden Labor to understand the coverage provided to it, it was expected to either know the financial responsibility law . . . or know the discrete body of statutory law [] set forth within . . . the [California] Vehicle Code.  The Penn-Star policy, however, does not reference the statutes embodying California’s financial responsibility laws, leaving the reader to determine what is meant by that language. Moreover, as demonstrated by Penn-Star’s own motion, even if a reader understood what was meant by that language, in order to reach the conclusion that the tractor at issue is subject to financial responsibility laws, one would need to: (1) locate the definition of ‘motor vehicle’ within California Vehicle Code § 415; (2) conclude that the tractor qualifies as a motor vehicle; and (3) determine whether the tractor, as a motor vehicle, was required to ‘establish financial responsibility’ pursuant to California Vehicle Code §§ 16020 and 16021. (See Doc. No. 32 at 20-21.) Assuming that a reader concluded that a tractor did not qualify as a ‘motor vehicle’ under § 415, one would apparently still need to determine whether the tractor qualifies as an ‘implement of husbandry’ as defined in §§ 36000 and 36015 or a ‘commercial vehicle’ as defined in § 260, both of which purportedly require the vehicle at issue to be registered or comply with financial responsibility law.”

Simply put, as far as the court was concerned, “Penn-Star presumed a level of sophistication and knowledge beyond that of an ordinary layperson and, therefore, the policy provision purporting to limit coverage d[o] not satisfy the requisite plain and clear criteria.”

Indeed, it was noted that Penn-Star’s own claims consultant, following its analysis, had concluded that a tractor is not a commercial vehicle that would be required to maintain proof of financial responsibility.

Not all states have California’s “conspicuous” requirement for purposes of the placement of language in a policy. However, the decision’s analysis, of whether a tractor is “mobile equipment,” could be used by policyholders anywhere to may hay with the complexity of the definition.  This may be especially welcome when it comes to the financial responsibility law aspect of “mobile equipment” and its inter-relationship with the “auto exclusion.”