Loaner Car Liability: New MA Supreme Court Decision Has Insurance Implications
A recent Massachusetts Supreme Judicial Court (SJC) case has clarified an issue that has been a grey area for Massachusetts insurance law of interest to agents, underwriters, and claims personnel. The question at hand: Does the federal Graves Amendment, which shields rental car companies from liability for accidents caused by customers, extend its protection to automobile dealerships lending courtesy vehicles to their customers without charge? When a dealership’s customer struck a pedestrian while driving a free loaner car, the stage was set to resolve this question. The SJC took up the resulting negligence case’s appeal, analyzing whether the Graves Amendment would protect the dealership from vicarious responsibility for its customer’s negligence. In doing so, the SJC established a useful precedent on the liability risks associated with a business model used widely by dealerships and other auto-repair-related businesses.
The following detailed summary reviews the facts, legal arguments, and court rulings that provided an expansive interpretation of the Graves Amendment in our state. It offers key insights for Massachusetts insurance professionals regarding liability for loaner vehicle accidents and how this ruling may affect insurance liability issues dealerships and similar auto repair entities buying goodwill from their customers with free use of a loaner car.
The facts leading to the SJC’s decision on courtesy vehicle liability
In August 2016, Mr. Kolawole Oke brought his Mercedes to MBF Auto, LLC, doing business as Mercedes Benz of Caldwell (MBF Auto), an auto dealership in New Jersey, for repairs expected to take more than 3 hours. As part of its business model, MBF Auto maintained a fleet of around 125 courtesy vehicles to lend to customers like Mr. Oke, free of charge, while MBF Auto’s repair shop serviced their vehicles. MBF Auto’s purpose in providing free loaners was to convenience their auto repair customers, build goodwill, encourage continued business, and repair referrals from its customers.
Before providing Mr. Oke with a courtesy vehicle, MBF Auto required Mr. Oke to present his driver’s license, proof of insurance, and a credit card. Mr. Oke also had to sign a “courtesy car agreement” listing the vehicle details, specifying a “$0.00” rental rate, restricting Mr. Oke’s use of the loaner to within 100 miles of MBF Auto’s location. The agreement also stated in bold capital letters that Mr. Oke was the “ONLY PERSON AUTHORIZED TO OPERATE VEHICLE.”
Mr. Oke also signed a “loaner car authorization form,” representing he had a valid license and agreed to return the vehicle within 24 hours after being notified by MBF Auto that it had completed the repairs to his vehicle. The agreements also provided that Mr. Oke would hold MBF Auto harmless for any claims arising from his use of its loaner vehicle. As part of the transactions, Mr. Oke acknowledged the restrictions on using the loaner and his liability for any claims.
Despite agreeing to the 100-mile use limitation, Mr. Oke drove the courtesy vehicle over 200 miles to Boston with his then-wife Ms. Shanitqua Steele. Ms. Steele did not have a driver’s license and joined her husband on the trip to Boston solely as a passenger.
In Boston, Mr. Oke illegally parked the loaner near the intersection of School and Washington. He left Ms. Steele in the passenger seat of the vehicle with the vehicle’s blinkers on, the keys in the ignition, and the engine running while he met with his lawyer in a nearby office.
When a parking officer approached the loaner and informed Ms. Steele that the vehicle could not be parked there and had to be moved, Ms. Steele moved to the driver’s seat of the vehicle to “take the key out of the car” and “turn off the blinkers” Instead of turning off the blinkers, she activated the drive button, causing the vehicle to begin moving forward. The vehicle, with Ms. Steele in the driver’s seat, went through the red light at the corner of Washington and School Streets and plowed into a tourist from Spain, Maria Blanca Elena Garcia, who was walking in the crosswalk with her husband, José Fafián Seijo on a Freedom Trail walking tour. As a result of the collision, Ms. Garcia suffered a fractured spine, a fractured pelvis, and a hematoma.
Before the accident, Mr. Oke had been aware his then-wife lacked a driving license. He also had never seen her operate a motor vehicle. For her part, Ms. Steele also admitted after the accident that she knew she lacked permission and a license to drive the loaner vehicle. She also acknowledged that MBF Auto only authorized Mr. Oke as the vehicle’s driver through its loaner car program agreements.
The Lawsuit: After the accident, Ms. Garcia and her husband sued MBF Auto, Mr. Oke, and Ms. Steele.
Just under two years after the accident, the Garcias filed sued MBF Auto and Oke for negligence and negligent entrustment in the Superior Court. For liability against Mr. Oke, Garcias alleged he had entrusted the courtesy car in his custody to an unlicensed driver, Ms. Steele. For MBF Auto, the Garcias’ lawsuit claimed it had vicarious liability for Mr. Oke’s actions under Massachusetts G.L. c. 231, § 85A. This statute, by its terms, provided that the loaner vehicle’s registration was “prima facie evidence that [the vehicle] was then being operated by and under the control of a person for whose conduct the [the registered owner, MBF Auto] was legally responsible at the time of the accident.”
MBF Auto moved for summary judgment, arguing the federal Graves Amendment preempted state law. Mr. Oke moved for summary judgment on the Garcias’ negligent entrustment claim based on his assertion that he never gave Ms. Steele permission to move the loaner.
After the Superior Court granted summary judgment in favor of MBF Auto and Mr. Oke, the Garcias’ appealed the decision to the Massachusetts Appeals Court, the state’s intermediate appellate court.
The SJC intervenes, taking the appeal directly and soliciting amicus briefs on the Graves Amendment applying to dealership loaner vehicles.
The Appeals Court never heard the Garcias’ appeal. Based on the issue of undecided law in Massachusetts concerning loaner vehicles and the Graves Amendment, the Supreme Judicial Court elected to hear the Garcias’ appeal directly, bypassing the Appeals Court.
The day after entering the appeal on its docket, the SJC issued an official announcement stating: “ANNOUNCEMENT: The Justices are soliciting amicus briefs.”
The legal question for which the SJC’s announcement solicited amicus briefs stated:
Whether 49 U.S.C. § 30106, the Graves Amendment, which provides that, in certain circumstances, the owner of a motor vehicle that rents or leases the vehicle to a person shall not be liable on the basis of ownership “for harm to persons or property that results or arises out of the . . . operation . . . of the vehicle,” applies to a motor vehicle dealership that loans a courtesy vehicles to a customers while the dealership services the customer’s own vehicle; whether loaning a customer a “courtesy vehicle” amounts to engagement “in the trade or business of renting or leasing motor vehicles” for purposes of the Graves Amendment.
The 2005 Graves Amendment overrules state vicarious liability laws applicable to car rental or leasing companies.
In 2002, a $28 million judgment was entered in a Rhode Island bodily injury suit against Chase Auto Finance for an accident caused by the lessee of a leased vehicle it owned. Chase’s liability arose from a Rhode Island statute similar to Massachusetts’s General Law c. 231, 85A. Each of these statutes allowed accident victims to sue a vehicle’s registered owner for damages caused by a third person renting or leasing a vehicle. Concerned by verdicts like Chase’s, auto rental companies and auto lessors lobbied Congress for relief from state vicarious liability laws that they claimed unfairly targeted deep-pocketed leasing companies for accidents they did not cause. This advocacy led Congress to take action in 2005 with the Graves Amendment, sponsored by Representative Sam Graves.
The Graves Amendment states in its relevant part: “An owner engaged in the trade or business of renting or leasing motor vehicles shall not be liable for harm caused by the vehicle due to being the owner, if there was no negligence or criminal wrongdoing on the part of the owner.”
The Amendment protects owners who rent or lease their vehicles as part of their trade or business from all state vicarious liability laws if:
The owner rents or leases the vehicle.
The owner is regularly engaged in renting or leasing vehicles.
The owner was not independently negligent or engaged in criminal wrongdoing.
As a federal law, the Graves Amendment preempts all state laws allowing vicarious liability claims against rental and leasing companies that meet its requirements. By restricting such claims, the Amendment aimed to treat rental companies equally with other businesses not subject to vicarious liability. This resolved ambiguity over whether state laws like § 85A could impose liability on dealerships providing courtesy vehicles.
The SJC ruling on loaner liability and negligent entrustment
On appeal, the Supreme Judicial Court upheld the dismissal of claims against MBF Auto, affirming it was shielded from liability under the Graves Amendment. However, the SJC reversed the lower court’s dismissal of the negligent entrustment claim against Mr. Oke. It found disputed facts regarding whether Mr. Oke negligently entrusted the vehicle to Ms. Steele and remanded that claim for trial.
The appeal centered on whether the federal Graves Amendment, which protects rental car companies from vicarious liability claims, also applies to dealership courtesy vehicle programs.
As they had on the lower court, the Garcias argued on appeal that the Graves Amendment did not protect MBF Auto because the dealership was not engaging in renting its vehicles. They claimed that MBF Auto did not receive consideration for the use of its loaner vehicle since it did not “rent” its vehicles as required by the Amendment. Specifically, the Garcias urged the Court to rule that because MBF Auto provided the courtesy vehicle free of charge to Mr. Oke, separate from the repair bill, there was no financial consideration exchanged to create a “rental.”
The SJC rejected this argument. It ruled the courtesy vehicle still constituted consideration, as it was part of the overall service transaction, and induced Mr. Oke to choose MBF Auto for repairs.
The SJC’s decision explained consideration does not have to be a monetary payment and can take many forms, including a benefit like a loaner car. Even though it was not a separate line item on any bill, MBF Auto provided the courtesy vehicle in exchange for Oke’s repair business. This contractual exchange met the legal definition of consideration.
Therefore, despite charging no separate fee, the SJC found MBF Auto did receive consideration for the loaner car. The vehicle was an inducement tied to the broader service contract. This contractual relationship satisfied the Graves Amendment’s rental requirements, leading the SJC to conclude MBF Auto was entitled to protection from vicarious liability.
However, it reversed the summary judgment for Oke, finding a factual dispute over negligent entrustment. The Court ruled a jury could conclude leaving Ms.Steele alone in the running car impliedly permitted her to drive it if needed. So this claim was remanded for trial.
In affirming, the Superior Court appeals court established an important precedent that the Graves Amendment protects dealership courtesy vehicle programs. Such loaner cars meet the definition of “rents or leases” as long as they are provided as part of the overall service transaction. Further, routinely lending vehicles means a dealership is considered in the business of renting or leasing cars. This entitles dealerships to the same protections given to traditional rental companies under the Graves Amendment.
Yet, while the dealership was insulated from liability, the court reaffirmed dealership customers must act responsibly and remain liable for their own negligence under claims like negligent entrustment.
Key Takeaways:
The Graves Amendment protects dealerships, and by extension, similar auto-related businesses, from vicarious liability for accidents involving their free courtesy vehicles operated by customers as long as:
The vehicle is provided as part of a service transaction.
The dealership or similar business entity regularly lends such vehicles.
The dealership or similar business entity is not independently negligent.
However, the Amendment does not shield negligent customers who cause accidents with dealership courtesy vehicles.
In summary, this decision provided an expansive interpretation of the Graves Amendment to protect dealership courtesy vehicle programs while still holding irresponsible customers accountable. It gives dealerships assurance they will not face vicarious liability suits for a customer’s negligence. Presumably, this immunity from such vicarious liability suits will reinforce the continued viability of the courtesy vehicle business model in Massachusetts.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
Connect with me directly, by calling me at 617-598-3801.
