Rental Car Companies Offering “Liability Insurance Supplement” Are Not Statutory Insurers—and Cary De Facto Insurer Liability Is Confined to Claims-Handling Administrators with Primary Responsibility

I. Introduction

Hertz Corporation v. Babayev addresses whether a motor vehicle rental company becomes an “insurer” (and thus exposed to common-law and statutory bad-faith remedies) when it offers customers a “Liability Insurance Supplement” (“supplemental insurance”) that makes the customer and passengers additional insureds on a policy issued by a licensed insurer. The respondents (injured passengers, “plaintiffs”) pursued Hertz—not the policy’s insurer (ACE American Insurance Company, “Chubb”)—for contract and bad-faith relief after UM/UIM benefits were allegedly underpaid. Hertz argued it was neither a statutory insurer under Title 10 nor a common-law “de facto insurer.”

The Colorado Supreme Court framed two “dispositive questions”: (1) legislative intent under Title 10 after the legislature’s response to Passamano v. Travelers Indemnity Co.; and (2) whether Cary v. United of Omaha Life Insurance Co. supports treating Hertz as a de facto insurer based on claim involvement and financial incentives, including a “fronting” risk allocation arrangement.

II. Summary of the Opinion

The Court held that Hertz is neither (a) a statutory insurer under Title 10 nor (b) a common-law de facto insurer under Cary. Even though Hertz had some involvement in claims administration and a significant financial incentive (via a fronting-style deductible reimbursement structure), the nondelegable duty of good faith and fair dealing remained with the insurer named on the policy—Chubb.

The Court reversed the court of appeals, which had treated Hertz as a statutory insurer and found fact issues under Cary, and ordered reinstatement of the district court’s dismissal.

III. Analysis

A. Precedents Cited

1. Statutory interpretation and interpretive method

• Shelter Mut. Ins. Co. v. Mid-Century Ins. Co. (de novo review of statutory interpretation): supplied the standard for reviewing whether Hertz is an “insurer” under Title 10.
• Apodaca v. Allstate Ins. Co., Robbins v. People, and Doubleday v. People: reinforced the Court’s “plain meaning in context” approach.
• Archuleta v. Roane (quoting Dep't of Nat. Res. v. 5 Star Feedlot, Inc.): central to the Court’s criticism of the court of appeals for parsing amendments in isolation rather than reading Title 10 “as a whole.”

2. Procedural posture (Rule 56(h))

• Great N. Props., LLLP v. Extraction Oil & Gas, Inc. and Coffman v. Williamson: defined the de novo standard and the “no genuine issue of material fact” requirement for deciding pure legal questions under C.R.C.P. 56(h).

3. The rise and legislative contraction of rental-car-company “insurer” status

• Passamano v. Travelers Indemnity Co.: the historical pivot. Passamano had treated a rental car company as an insurer “for purposes of section 10-4-609(1)” (UM/UIM offer requirement), but the Court emphasized that the legislature quickly amended Title 10 to negate that application to motor vehicle rental agreements/companies.

4. Common-law bad faith and the “special relationship”

• Cary v. United of Omaha Life Insurance Co.: the controlling precedent for when a non-insurer can owe the tort duty of good faith and fair dealing without privity. The majority reads Cary as “limited to third-party administrators” whose primary business is claims handling, who have primary responsibility for handling claims, and who have a significant financial stake.
• Travelers Ins. Co. v. Savio and Goodson v. Am. Standard Ins. Co. of Wis.: underscored why insurance contracts support tort remedies—because of the “special nature” of the relationship and the insurer’s power over benefits.
• Riccatone v. Colo. Choice Health Plans: used to discuss Cary’s limits; the Court “refine[d]” Riccatone to emphasize that Cary is not a general two-factor test for any third party, but a narrow doctrine for claims-handling administrators with primary responsibility.

5. Supporting authorities and caution against expanding liability

• Bermel v. BlueRadios, Inc. and Martinez v. Lewis: cited for restraint—courts should not use common law to countermand legislative choices.
• Laird v. Nelms: invoked for the “front door/back door” idea—courts should not reintroduce through common law what the legislature excluded by statute.
• De Dios v. Indem. Ins. Co. of N. Am., William Powell Co. v. Nat'l Indem. Co., McLaren v. AIG Domestic Claims, Inc., and Charleston Dry Cleaners & Laundry, Inc. v. Zurich Am. Ins. Co.: used to situate Cary as relatively unusual nationally and to caution against further expansion.
• Md. Cas. Co. v. Buckeye Gas Prods. Co. and Weitz Co. v. Mid-Century Ins. Co.: examples of commonplace additional-insured arrangements, supporting the Court’s point that procuring coverage for others does not collapse the insurer/insured distinction.

6. The dissent’s additional authorities (fronting arrangements)

• Vaccaro v. Am. Fam. Ins. Grp.: cited for the proposition that statutory and common-law insurance claims are distinct.
• Scott Wetzel Servs., Inc. v. Johnson: cited by the dissent (through Cary) to support privity exceptions where policy reasons justify them.
• Reliance Ins. Co. v. Shriver, Inc., Dorsey v. Fed. Ins. Co., and O'Hare v. Pursell: used by the dissent to explain “fronting” and argue that functional control and risk retention can justify a direct duty even absent privity.

B. Legal Reasoning

1. Statutory holding: Title 10 does not treat Hertz as an “insurer”

The Court began with Title 10’s definitions of “insurance” (§ 10-1-102(12)) and “insurer” (§ 10-1-102(13)), but rejected the court of appeals’ conclusion that a rental agreement offering supplemental UM/UIM coverage meant Hertz was “in the business of making contracts of insurance.”

The key move was structural: reading Title 10 holistically, the Court concluded that the legislature—responding to Passamano—drew sharp lines between rental car companies and insurers and between rental agreements and automobile insurance policies. The opinion emphasized multiple coordinated amendments, including:

• § 10-4-609(1)(b): the UM/UIM offer requirement “shall not apply to motor vehicle rental agreements or motor vehicle rental companies.”
• § 10-4-601(10)(a): an automobile insurance “policy” excludes agreements where the vehicle is rented under a motor vehicle rental agreement.
• § 10-3-903(2)(j): the sale of authorized insurance by agents of a motor vehicle rental company is not “transacting insurance business.”
• § 10-2-105(2)(g): officers/employees of a motor vehicle rental company offering coverage are excepted from the “insurance producer” regime.
• § 10-4-608(1)(c): exempts policies arising out of motor vehicle rental agreements from Title 10, article 4, part 6.

In the Court’s view, these provisions collectively undercut the court of appeals’ reliance on Passamano and confirm legislative intent: offering incidental access to coverage through a rental transaction does not convert a rental company into a Title 10 insurer.

2. Common-law holding: Hertz is not a Cary de facto insurer

The Court reaffirmed the general rule that tort liability for bad-faith claims handling typically lies with the insurer because the duty is nondelegable (Cary), and then treated Cary as a narrow exception—crafted for circumstances where a third-party administrator effectively substitutes for the insurer.

The majority identified Cary’s decisive features as: (i) the administrator’s “primary control” and “virtually all” insurer-like functions in claims handling; and (ii) a financial arrangement creating strong incentives to underpay or delay (in Cary, a reinsurance agreement). It then held Hertz did not fit the model because:

• ESIS—not Hertz—was “specifically designated under the Chubb Policy as the authorized entity responsible for claims handling,” and it performed the core adjusting functions.
• Chubb was an “actual insurer” at the center of the arrangement; the policy’s roles were explicit (Chubb insurer; Hertz named insured; renters/passengers additional insureds).
• Hertz’s early involvement and settlement input, even combined with a significant financial stake via a fronting agreement, did not amount to “primary responsibility” for claims handling.

Importantly, the Court “refine[d]” Riccatone, cautioning that Cary is not a general “two-factor” test that can be applied to “any third party.” Instead, the doctrine is confined to administrators “whose primary business is claims handling” and who have primary responsibility plus financial exposure.

3. The dissent’s competing view

Justice Hood (joined by Justices Gabriel and Blanco) agreed Hertz is not a statutory insurer, but argued the majority added a “label-driven” restriction to Cary. The dissent read Cary as a functional test for dispensing with privity in complex insurance arrangements and would allow factual development on whether Hertz’s revenue from the offered policy, involvement in adjustment, and “complete financial risk” under a fronting policy could establish a special relationship and duty.

C. Impact

1. For rental car companies and supplemental coverage programs

The decision provides strong protection against reclassifying rental companies as insurers when they facilitate coverage through a licensed insurer’s policy. It preserves the Title 10 boundary the legislature drew after Passamano and reduces exposure of rental companies to bad-faith tort and §§ 10-3-1115/-1116 claims premised on “insurer” status.

2. For Colorado bad-faith doctrine after Cary

The Court materially narrows (or at least clarifies narrowly) the “de facto insurer” path: financial incentive alone is insufficient without primary claims-handling responsibility, and the doctrine is described as limited to claims-handling administrators whose business is claims handling. Litigants attempting to extend bad-faith tort liability beyond the policy insurer must now confront this tightened framing.

3. For businesses offering incidental insurance products

The Court expressly warned of a broader “chilling effect” if offering incidental access to third-party insurance could turn ordinary commercial entities into “insurers.” The reasoning may resonate in disputes involving travel insurance, product protection plans, and other embedded insurance-like offerings—at least where a licensed insurer and a dedicated claims administrator remain responsible for benefit decisions and payment.

IV. Complex Concepts Simplified

• UM/UIM coverage: coverage for injuries/damages caused by uninsured or underinsured drivers.
• Named insured vs. additional insured: the “named insured” (here, Hertz) is the entity listed on the policy declarations; “additional insureds” (here, renters/occupants who purchase supplemental insurance) are covered persons added by the policy terms.
• Third-party administrator (TPA): a company that handles claim administration (investigation, evaluation, communications, payments processing) on behalf of an insurer or plan.
• Nondelegable duty (insurance context): an insurer cannot avoid bad-faith liability by outsourcing claims handling; the duty of good faith remains the insurer’s.
• De facto insurer (Colorado): under Cary, a limited doctrine allowing bad-faith tort liability against a non-insurer when it effectively performs insurer functions and has financial incentives similar to an insurer—now described by the majority as confined to claims-handling administrators with primary responsibility.
• Fronting agreement / fronting policy: a risk-allocation structure in which an insurer issues the policy and pays claims, but the “insured” reimburses the insurer (often up to the policy limits), leaving the insured with the ultimate economic risk.
• Privity of contract: the direct contractual relationship typically required for contract-based duties; Cary recognized a narrow privity exception in the bad-faith context.
• C.R.C.P. 56(h): a procedural device permitting courts to decide pure questions of law when no genuine dispute of material fact is necessary to resolve the legal issue.

V. Conclusion

Hertz Corporation v. Babayev establishes two consequential propositions for Colorado insurance-adjacent commerce. First, after the legislature’s post-Passamano amendments, a motor vehicle rental company offering supplemental coverage through a licensed insurer’s policy is not a Title 10 “insurer.” Second, Cary de facto insurer liability is not a free-floating “financial incentive plus involvement” test; it is confined (as the majority reads it) to claims-handling administrators whose primary business and primary responsibility is claims administration and who share the insurer’s risk incentives.

While the dissent would have allowed further factual development under a broader, functional reading of Cary—especially in fronting arrangements—the majority’s approach reinforces statutory boundaries and sharply cabins common-law expansion, channeling bad-faith accountability principally to the policy insurer (and, where appropriate, the claims administrator).