Imagine this: A law-abiding bicyclist is struck by a driver who was texting behind the wheel. The bicyclist suffers multiple broken bones, resulting in an extended hospital stay followed by years of physical therapy and other treatments. The injured cyclist contacts a lawyer to figure out if he has any recourse. While it may seem like a straightforward liability case, there is one complication. The driver was in a rental car. This raises a new question: Who, if anyone, is liable? Could the rental company be on the hook for damages?

Prior to 2005, the issue was more straightforward. If the accident occurred in North Carolina, the cyclist would have had a cause of action in negligence against the individual driver, and because the vehicle was owned by a rental company, the injured party would have also had a valid cause of action against the rental company under a legal theory called "vicarious liability." This means that regardless of whether the rental company was directly involved, it could still be deemed liable as the owner of the vehicle via agency principles. However, in 2005, a federal law called the Graves Amendment (49 U.S.C. § 30106) changed the liability landscape by effectively eliminating vicarious liability claims against a rental company. Accordingly, in the scenario above, the injured cyclist would be left with only one path to recovery: a direct lawsuit against the driver of the vehicle. By enacting the Graves Amendment, Congress rejected the premise that renters of vehicles  became agents of the rental entity.

Part of a federal highway bill signed into effect in 2005, the Graves Amendment bars vicarious liability claims against rental car companies for injuries caused by their customers unless  the injured party can prove that the rental company was otherwise negligent. More specifically, the law states that the owner of a motor vehicle, or any affiliate of the owner, who rents or leases that vehicle will not  be held liable simply because it owns the vehicle. This protection extends to harm to people or property that results or arises out of the use, operation, or possession of the vehicle during the rental period, so long as:

  1. The owner is in the business of renting or leasing motor vehicles; and
  2. There is no negligence or criminal wrongdoing by the owner.

Per the first prong of the statute, the Amendment does not apply to an individual renting a vehicle to a friend and then being absolved of any liability. The statute is specifically designed to protect owners of rental fleets and their affiliates. Most ambiguity will live in the second prong, which involves analyzing whether the rental company adequately maintained its fleet of vehicles. This will involve considering, among other factors, whether the rental company kept its vehicles in good working condition and whether it addressed any known issues with any material parts of its vehicles.

Because it is a federal law, the Graves Amendment generally preempts state laws that may conflict with it. This is because most rental cars cross state lines and, as such, engage in interstate commerce by traveling on highways throughout the country.

Practical Application of the Graves Amendment

The Graves Amendment was a response to the rapidly increasing number of states passing vicarious liability laws that lacked an exception for rental car companies. Many of those same states have no statutory limit on vicarious liability claims. The two combined, without added protection, had the potential to make it economically impossible to rent motor vehicles due to the possibility of unlimited liability risks. Such risks had the potential to outweigh the reward for the rental car companies.

Notably, in New York, a driver who rented a vehicle from a rental company in 2000 ran a red light in Manhattan, hitting a van, which then struck a 25-year-old pedestrian: Wall Street Trader Ethan Ruby. Ruby was paralyzed from the chest down. In a lawsuit against the rental company, the ultimate judgment in favor of Ruby included $2 million for past pain and suffering and an additional $8 million for future pain and suffering, thought to be one of the State's largest such awards in a personal injury lawsuit. As this case illustrates, a single claim has the potential to completely liquidate a company. For some companies, the answer was to significantly increase the cost of renting vehicles to ensure there was some "cushion" in the event of an incident. This, of course, has a substantial economic impact.

The Amendment's protections for rental companies extend beyond traditional rental cars, also protecting those leasing or renting trucks, tractor-trailers, and semi-tractor trailers. The protection for these vehicles is under the same premise: These are operated by "mechanical power" and made to be used on public roadways. This means that the protections may, in some circumstances, extend to motorcycles, ATVs, snowmobiles, boats, and golf carts. Generally, if state law imposes vicarious liability on its owner, then it is likely protected under the Graves Amendment.

However, it is crucial to note that in any case, "not vicariously liable" does not mean "not liable at all." For example, if a rental company is protected by the Graves Amendment and not held vicariously liable for harm caused by a negligent driver, it may still be found to be directly liable for harm caused by its own negligence (i.e., negligent maintenance or repair of the vehicle in turn causing or contributing to the accident).

Additionally, the Amendment does not apply to supersede any state minimum financial responsibility or insurance standards laws. If state law (or a contractual relationship) imposes minimum financial responsibility automobile insurance standards on the owner of a vehicle, the Graves Amendment will not supersede. As such, in states that require minimum automobile insurance limits, even if Graves insulates a rental company from vicarious liability, the company's insurance policy may still be required to cover the losses for permissive users of the vehicles up to the minimum financial responsibility limits of the jurisdiction if the renter is not adequately covered by his or her own personal automobile insurance.

In sum, Graves eliminated the premise that renters of vehicles are agents of the rental entity. When considering vicarious liability and the Graves Amendment, litigants need to bear in mind that regardless of what state law states, if the owner of the rental car is i) in the business of renting or leasing vehicles, and ii) was not directly negligent, then Graves will provide a cloak of protection from vicarious liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.