Car Rental Contract Is Not “Covered Contract”


Smith rented an automobile from Hertz, declined optional loss damage waiver, and contractually agreed to be liable for any damage to the rental car regardless of fault.  When Smith was involved in an automobile accident, he refused to pay the $5,000 property damage to Hertz.  Smith was covered by St. Paul under a Package Accounts for Commercial Enterprises policy issued to his business.  St. Paul paid for damage to the other automobile, but denied coverage for any damages to the Hertz vehicle.  Hertz instituted an action against Smith, and Smith joined St. Paul as an additional defendant.  An arbitration found in favor of Hertz and St. Paul against Smith.  Smith appealed to the Court of Common Pleas, and summary judgment was granted in favor of Hertz and St. Paul.


On appeal, Smith sought payment under St. Paul’s optional coverage that he had purchased for “liability protection for autos you don’t own.”  The coverage applied to non-owned and hired vehicles, but excluded contractual liability for “any claim based on liability assumed under a contract or agreement.”  The exclusion would not apply, however, to liability assumed under a “covered contract,” defined as a contract or agreement in which the insured assumed tort liability of another.


The court found that the rental agreement between Hertz and Smith was not a “covered contract.”  The contractual liability provisions of the St. Paul policy were to provide benefits for tort liability that an insured contractually assumes, and not liability that is based on a breach of contract.  Hertz’s claim against Smith arose out of a breach of contract and was not based on bodily injury or property damage to a third party. Thus, the contractual liability exclusion barred coverage.


The appellate court affirmed judgment in favor of Hertz and St. Paul.


Hertz Corporation v Smith, 657 A2d 1316 (Pa Super 1995).