The Permissive- Use Paradox

It all sounds straightforward enough, except that Smith then claimed that he was at least a partial owner of the vehicle because of the insurance and loan payments he had made over the past 18 months. Smith asserted his position on the basis that he has an insurable and ownership interest in the car.

We can all agree that Jones as the owner and insured has a right to grant permission to anyone he chooses to use the vehicle. There are, however, many questions remaining:

• Is Smith now an insured because the insurer accepted payments directly from him?

• Does Smith have an insurable interest and/or an ownership interest in the vehicle due to the payments he made, and if so, to what extent?

• Does the insurance contract place a time limit on permissive use of the vehicle?

• Is it significant that the insurer was never notified of the new driver or the changed garage location?

• Does the bank get to repossess the car, or does Smith retain possession?

After researching the answer in my private library, FC&S bulletins and the Internet and not receiving any definitive answers, I wondered what if I did not know the answer and did not know how to get the answer. As a last resort, I put my question out on LinkedIn. The consensus of approximately two dozen responses seems to be that Smith may have insurable interest, at least to the extent of the payments he made. However, he would not be considered a permissive user because of the time he enjoyed the use of the vehicle and did not have to consult with Jones as to how and when he used the automobile. Finally, most respondents believed Jones breached the policy conditions regarding the "regular use exclusion." Despite policy terms and conditions, I believe that the owner and not the user may have insurance protection because in most states, automobile insurance is mandatory, and therefore it is in the public interest to provide coverage for injured parties. If the insurer was required to respond, it may have legal recourse to Jones.

As an expert witness, my opinion would be that Smith did not have any ownership rights to the vehicle because an insurance policy is not any indication of ownership. Having an insurable interest in any particular property is also not proof of ownership. One does not need to be an owner of property to have an insurable interest, i.e., net lessee.

Furthermore, I believe that making insurance payments or loan payments on another person's property does not create an ownership interest. What it might create is an insurable interest. Therefore, in my non-legal opinion, nothing that what Smith did over the 18-month period that he was in possession of Jones's vehicle created ownership and therefore the bank should not be precluded from taking possession of the automobile.

What does this situation have to do with errors and omissions? As it turns out, plenty.

Several important issues must be considered. First, did the bank "perfect its title," and second, what is the relationship between bankruptcy and insurance? The overwhelming opinions expressed by the LinkedIn respondents indicate that if the bank perfected its title, it has superior rights to someone who asserts ownership outside the chain of title.

I consulted with Douglas Koktavy, a bankruptcy attorney in Denver, on the legal issues. His opinion is, "no insurance equals repossession without contest." This is noteworthy because there are certain circumstances in a bankruptcy proceeding which might preclude repossession of the vehicle; therefore, banks need to rely on insurance to protect their interest. Thus, insurance professionals dealing with bankrupt clients should advise them that if they want to have a chance to keep property that has a lien, they must maintain insurance on that property.

Regarding whether the user of the vehicle was still considered a permissive user, the answer by the LinkedIn members was almost universally no–because of the length of time the user had the vehicle in his possession, because it was permanently garaged at the user's home, and because he did not have to consult with the owner as to how and when the vehicle could be used. Another important consideration was the fact that the policy had gone through a renewal and the arrangement with Smith was never revealed to the insurer. Jones's failure to add Smith as a regular driver meant the insurer was unable to conduct due diligence and underwriting for the additional driver and additional garage location.

I believe that application of the "reasonable man rule" dictates that the possession by Smith of Jones's vehicle for more than 30 days means that he is no longer a permissive user. In the event of an accident, the only insurance protection that might be available would accrue to Jones. Based on Koktavy's opinion, absent special circumstances and on the assumption that the bank perfected its lien, the bank will not be barred from repossessing the vehicle.

Insurance professionals are always asked for their opinion on obscure topics; in the event of a wrong answer, the easiest person to blame is the insurance person. Be careful with your opinions. If you're not sure, admit it and without exception make sure that you and your staff document everything to the file and to the client.

The bank might be able to repossess the automobile. As I understand the legal situation, the argument about legal ownership would have delayed the resolution of the bankruptcy. Therefore, to move things along, both Smith and the bank agreed to put the vehicle "outside of the "bankruptcy estate"–which probably means the parties will fight about it later. Anybody out there in Readerland have a different view of the situation?