Breach of Lease by Lessee Expensive to Lessor

Zalma on Insurance in Top 50

When a person is uninsured and injures someone the injured parties who are also uninsured must be creative to obtain damages for their injuries. Without primary insurance or uninsured motorist coverage the injured parties are usually limited to a suit to gain the assets of the person responsible for their injuries. Usually, an uninsured person has insufficient assets to indemnify the injured parties. The following case got injured parties some money because their lawyer was creative and persistent.


Michael Kuester leased a car from Nissan in 2007. The lease agreement required him to obtain motor vehicle liability insurance. Kuester failed to maintain a liability policy and was thereafter in an accident which injured Deanna Brown and her passenger Cynthia Eulenbach. As Kuester was uninsured, Brown and Eulenbach sued Nissan and its insurer, Tokio Marine & Nichido Fire Insurance Co., Ltd. In Deanna Brown v. Tokio Marine & Nichido Fire Insurance Co., Ltd. and, No. 2011AP454 (Wis.App. 03/21/2012) the Wisconsin Court of Appeal was asked to determine whether the lessor’s insurance was required to respond to the injured persons.

On January 30, 2007, Kuester entered into a thirty-nine-month lease for a Nissan Altima. On November 23, 2007, Kuester swerved across the center line of traffic and hit Brown’s vehicle head on, seriously injuring Brown and her passenger Eulenbach. At the time of the accident, Kuester, despite a contractual obligation in the lease, did not have a personal auto insurance policy in force.

Brown and Eulenbach filed suit against Kuester and a direct action against Tokio Marine (which had previously issued a $5 million business auto coverage policy to Nissan). Kuester did not answer. Tokio Marine answered that its policy did not provide coverage to Kuester.

The Policy

The Tokio Marine policy provides that an “insured” is anyone using a “covered auto” with Nissan’s permission. Two distinct endorsements to the policy are at issue in this case. The first is the “Contingent Coverage for ‘Leased Autos'” endorsement, which excludes coverage for “any person operating a ‘leased auto.'” Both parties agree that Kuester, as a lessee, falls within this exclusion.

The second endorsement is a two-page endorsement called “Wisconsin Changes,” which provides that “[t]he following is added to Who Is An Insured: Anyone else is an ‘insured’ while using a covered ‘auto’ [Nissan] own[s] with [Nissan’s] or any adult ‘family member’s’ permission.” Brown and Eulenbach argue that this endorsement brings Kuester back into coverage under the Tokio Marine policy because, as a lessee, Kuester had Nissan’s permission to use its leased automobiles. The Wisconsin Changes endorsement also makes the Tokio Marine policy compatible with Wisconsin law.

Tokio Marine argued that:

  1. as a lessee, Kuester was excluded as an insured and therefore the policy does not provide coverage;
  2. Brown and Eulenbach could not bring a direct action against Tokio Marine because the policy was not issued or delivered in Wisconsin; and
  3. even if coverage existed, Tokio Marine’s exposure was limited to the statutory minimum amounts of $25,000 per person and $50,000 per accident as set forth in Wis. Stat. § 344.01(2)(d) (2007-08).

Brown and Eulenbach responded that the plain language of the policy’s Wisconsin Changes endorsement added Kuester back in as an additional insured. They also argued that even if the Wisconsin Changes endorsement did not add Kuester back in, Wis. Stat. § 632.32(3), Wisconsin’s “omnibus coverage statute,” provided coverage to Kuester.

Trial Court Decision

The circuit court ruled that:

  1. the Wisconsin Changes endorsement did not override the coverage exclusion for lessees;
  2. the policy was subject to Wisconsin law; and
  3. liability was limited to the statutory minimum amounts of $25,000 per person and $50,000 per accident.

Brown and Eulenbach appealed.


The appellate court applied a three-part test to determine if an insurance policy provides coverage. First it looked to see if the insurance policy makes an initial grant of coverage based on the facts.  If it does not no more analysis is required. If the claim does trigger an initial grant of coverage, secondly the court must then determine if there are any exclusions that preclude coverage. Third the court looks to see if any of the exclusions have exceptions that would reinstate coverage. An exception only applies to the exclusion clause within which it appears; in other words, an exception to an exclusion cannot trump the insurance policy or a separate exclusion.

The Tokio Marine policy provides that an “insured” is anyone using a “covered auto” with Nissan’s permission. As a “leased auto” is covered under the policy, and as Kuester was a lessee, the court assumed, without deciding, that the initial terms of the policy provide coverage. A three-page endorsement at the end of the policy entitled “Contingent Coverage for ‘Leased Autos,'” states that coverage does not extend to lessees.

An exception pertains only to the exclusion clause within which it appears. The Wisconsin Changes endorsement is separate from the lessee exclusion endorsement. The Wisconsin Changes endorsement says nothing about lessees and thus is unrelated to the lessee exclusion endorsement. The Court of Appeal concluded, therefore, that the Tokio Marine policy does not provide coverage for Kuester.

Brown and Eulenbach argue that, regardless of whether the Tokio Marine policy covers Kuester, coverage is mandated by Wisconsin’s omnibus coverage statute which provides that every automobile and motor vehicle insurance policy issued or delivered in Wisconsin must include coverage for anyone operating the vehicle.

When a policy is issued and delivered outside of Wisconsin, the omnibus coverage statute applies if it was incorporated into the insurance contract. Given that the Wisconsin Changes endorsement expressly conforms the policy to Wisconsin law, the court was compelled to hold that Tokio Marine incorporated the omnibus coverage statute into the policy.

Although the omnibus coverage statute applies, it does not mandate coverage for Kuester. Tokio Marine’s lessee exclusion conforms to the omnibus coverage statute and the statute does not mandate coverage for Kuester. Wisconsin Statatutes require a lessor, before leasing a vehicle, to file a certificate with the Department of Transportation verifying that the vehicle has liability insurance. The statute, in relevant part, reads: “No lessor … may for compensation … lease any motor vehicle unless there is filed with the [D]department [of Transportation] … a certificate for a good and sufficient bond or policy of insurance issued by an insurer …. The certificate shall provide that the insurer which issued it will be liable for damages caused by the negligent operation of the motor vehicle in the amounts set forth in Wis. Stat. § 344.01(2)(d).”

Nissan violated this statute when it leased a vehicle to Kuester without filing a certificate of insurance with the Department of Transportation. The statute mandates coverage by the lessor of  $25,000 per person and $50,000 per accident. The purpose of the statute is to protect people harmed by the negligence of a lessee.  Violation of this statute by a lessor does not, however, create unlimited liability. Lessors are not the alter egos of their negligent lessees. When Nissan leased the vehicle to Kuester Tokio Marine is liable to Brown and Eulenbach in the amounts of $25,000 per person and $50,000 per accident.


The Tokio Marine policy does not provide coverage to Kuester, as it contains an express exclusion for lessees but it does provide limited coverage to Nissan.


Automobile lessors always require the lessee to provide liability insurance equal to that required by state law. Nissan’s lease did the same. However Nissan failed to ascertain that the lessee maintained insurance protection. Because Nissan failed to fulfill the statutory requirement of advising the state it had insurance it failed to fulfill the state statute and was obligated to provide the minimum insurance requirements of the state.

Automobile lessors need to closely watch each lessee to make sure that each fulfill the insurance requirement. Insurers of the lessors, like Tokio Marine, need to carefully write their policies to avoid a liability they did not intend to take. The appellate court showed how they could do so and we expect that the next generation of the policy will be rewritten to avoid the exposure.

The two injured parties now have available an insurer with up to $25,000 in coverage each to pay for their injuries if they can prove liability.

Barry Zalma, Inc.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at


About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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