Car Claims Can Drive You Crazy

The infinite variety of auto-related claims keeps adjusters busy researching policy wording and case law. This month, we address two reader queries concerning motor vehicles.

We are handling a claim that involves an error made by a bank when it provided a car loan payoff. The bank gave the insured (an auto dealership) a car loan payoff amount that was much lower than the actual amount still owed by the owner. The dealer relied on this information and entered into an agreement with a customer to accept his car on trade and to apply the balance (based on the incorrect loan payoff amount) as a basis for a new car purchase.

After the deal was completed and a few weeks passed, the dealership called the bank to inquire why it had not yet sent the car title to the dealership. At that time, the bank informed the dealer that the wrong amount had been quoted and that the actual payoff amount was higher.

The dealership has now presented a claim under the false pretense coverage, endorsement, saying that it parted with a covered auto due to “trick, scheme, or under false pretenses.” We are not clear if this claim would be covered as a false pretense loss. The bank did not intend to give out the incorrect information and it had nothing to gain nor any reason to try to create a different outcome. What are your thoughts on this?

Our thoughts are that, although there may have been a bank error against the interest of the insured auto dealership, the dealership will not be able to turn to its insurer to make good.

False pretense coverage under the ISO standard commercial auto policy endorsement CA 25 03 applies when the insured has a loss to a covered auto caused by two different actions: someone's causing the insured to part voluntarily with the covered auto by trick, scheme, or under false pretenses; or the insured's acquiring an auto from a seller who did not have legal title. The insured is claiming to be a victim of the first action, but there are problems with that idea.

No trick or scheme was involved here; there was simply an unintentional mistake made by the bank. There was no intent on the part of the bank to acquire the car by illegal or shady means. This was negligence, not criminal intent.

It may seem to the insured that he voluntarily parted with one of his cars under false pretenses, but false pretense is a statutory crime that consists of a false representation of a material present or past fact that causes the victim to pass title to his property to a wrongdoer who knows that the representation is false and intends, thereby, to defraud the victim. Here, the bank did not get the property, did not knowingly offer a false representation, and did not intend to defraud the insured. Furthermore, the insured did not actually lose the covered auto to false pretense. He sold the car to a legitimate buyer for less than he might have, so he simply lost some profit. He also can get the title to the customer's old car by paying its full payoff amount. So, false pretense coverage is not applicable in this instance. This is an example of a business risk, for which insurance is not the appropriate remedy.

Sudden Air Bag Deployment

While on the topic of auto losses this month, let's look at the coverage in the event of a deployment of air bags in a passenger auto outside of collision situations. An FC&S subscriber in Tennessee had the following claim:

We have a claim in which the air bags in the insured's car suddenly deployed. There was no collision with any other car, so we thought that this would be covered as an other-than-collision loss. The insurer denied coverage, relying on the mechanical breakdown exclusion.

Because air bags are part of the auto's equipment, any loss to that equipment by a covered cause of loss will be covered. Some may question whether a deployment of an air bag is a “direct and accidental loss,” but considering that the auto cannot be driven with the air bags deployed and that auto equipment has suffered a loss, in that it cannot be used until repaired, it is clear that a loss has occurred.

In this case, the other-than-collision coverage would apply to the loss of the air bags, unless the loss was due to a mechanical breakdown. If the insurer can show that the deployment of the air bags was due to a mechanical breakdown, that exclusion would apply. If the insurer cannot do this, there would be coverage for this claim. The insurer simply cannot say that a mechanical breakdown occurred and let it go at that; exclusions have to be proven to apply to claims due to the principle of insurance contract interpretation that coverage grants are applied broadly and exclusions narrowly.

See Us at ACE-SCLA

FC&S staff members are preparing for two sessions at the 2004 ACEoSCLA Conference in Chicago. As this column is devoted to disputed or questioned claim scenarios, it seems appropriate to mention that our sessions at ACEoSCLA will explore that topic.

In a workshop on Oct. 14, just about the entire FC&S staff will be on hand, joined by AON Risk Services of Ohio's Senior Vice President, Jeff Branca, to present “Working the Disputed Claim.” The next day (Friday, Oct. 15), the staff will present a mock FC&S weekly Q&A meeting, which has been popular and lively in past years. This year, we will be joined by Claims' resident iconoclast, Ken Brownlee, in looking at real-life, problematic claim settlement scenarios. Go to www.nucoevents.com and make your plans to join us.

Bruce Hillman is editorial director, Professional Publishing Division, of the National Underwriter Co.

The FC&S Claim Queue is prepared and written by the editorial staff of The Fire, Casualty and Surety (FC&S) Bulletins, the most widely used encyclopedic reference service devoted to insurance policy interpretation and coverage topics. FC&S is published by The National Underwriter Company. The editors welcome comment at fcs@nuco.com. For more on FC&S, visit www.fcsbulletins.com