Indirect Loss Claims: Part One

Don't get me wrong—I like to rent a car when I'm on a long trip and have lots of driving to do, but I often question the wisdom of claim departments that have a direct line to the auto rental companies for an assignment every time a claimant's or insured's damaged car has to go to the body shop for repairs. As an urban dweller, the fuss and bother of finding the rental agency, signing contracts, and pledging one's first-born if the car is returned with damage, is a bigger nuisance than just walking up to the corner and catching the next bus to wherever one is headed.

Consider London's transportation system. The city has practically outlawed automobiles from the center of town, so a rental would more than likely be left parked somewhere. New York City is another driver's nightmare. It is much easier to take a train into town and transfer to the subway than it is to drive in that traffic. Hence, a rented car would again be parked at some rail station and left for the day.

The practice of assigning rental cars for virtually every auto damaged in a wreck has financial consequences galore for the insured, who ends up paying twice for the very same thing: they pay an auto insurance premium that includes “loss of use” for property damage and “transportation expenses” under physical damage coverage, plus they pay taxes to operate a municipal transit system that probably also gets a subsidy from the federal government (which is more tax money that we all must pay).

A careful look at PP 00 01 01 05, otherwise known as the I.S.O. Personal Auto Policy, reveals that it does not mention the term “auto rental” anywhere within the form. Third-party liability for “loss of use” does not legally mean “rental car” any more than “nuisance” or “inconvenience” means a bodily injury. Under first party coverages, the transportation expenses agreement provides up to $600, but not more than $20 a day, for “temporary transportation expenses … incurred by you in the event of a loss to 'your covered auto.'” I suppose one can rent a car that includes all of the bells and whistles for somewhere around $20 a day, but by the time taxes and extras are added, most cost more than that. Also, if the limit is $600, that gives insureds 30 days of coverage at $20 a day. Except in the case of theft, if the car is going to take 30 days to fix, perhaps it should have been totaled. Damage appraisers need to take costs of loss of use into consideration in those “repair or replace” decisions.

Other Transportation Options
Perhaps someone who lives too far away from alternate transportation options might need a rental vehicle, but even then, it's possible that they could borrow a neighbor's extra pick-up truck for a few days instead of renting a car. The neighbor might be glad to get the 20 bucks a day.

This type of alternate transportation is like alternative medicine. Far too many adjusters would pay for radical surgery before they would consider paying for the services of alternative medicine, other than chiropractic perhaps. Most adjusters would not even agree to pay the price of one herbal tea bag, regardless of the psychosomatic value of the tea. The same is probably true of alternate transportation. “What do you mean, you 'paid your brother-in-law' to borrow his car? We can't reimburse that!” Why not? Like the policy says, the coverage is for “temporary transportation expenses,” and it doesn't have to always mean a rental car.

One crafty claims manager I knew tried to collect the “loss of use” of his injured adjuster when the man was hurt in an auto accident that wasn't his fault.  But that is not allowed under the I.S.O. policy either. “Property damage” is defined as “physical injury to, destruction of, or loss of use of tangible property.” Undoubtedly the injured adjuster was “tangible,” but he wasn't the claims manager's “property.” Although the Old Testament talks about payment for injury to one's chattels, slavery has been abolished and an employer cannot collect damages for “loss of use” of an employee (nor can he collect on a policy for a “useless” employee.).

What is 'Tangible'?
Certainly an automobile would qualify as “tangible property,” which is why auto adjusters must consider loss of use as a factor. There may be damage to other property besides the automobile in an accident though, and the loss of use of that property must also be considered in a liability claim. Suppose a claimant had a tractor in the bed of his truck when a negligent insured caused damage to both the truck and the tractor. The policy would have to cover the loss of use of both. Nothing but the insured auto would be considered in a first party claim, but when damage occurs to a claimant's property, then one must get out the calculator and consider the value of the loss of use of that property, and that amount is not limited to just $20 a day or $600 total.

As insurers, the public, and the courts began to approach the 21st century, the question of what “tangible” meant became significant. I.S.O. forms such as CG 00 01 12 04 Commercial General Liability began adding a caveat: “For the purposes of this insurance, electronic data is not tangible property. As used in this definition, electronic data means information, facts, or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.” A more specific definition of tangibility is becoming the norm today, especially in the realm of technology.

Intangible Property Theft
Courts have also addressed other issues of tangibility. Intellectual property, for example, is not “tangible.” This issue has often arisen in advertising liability claims, in which a plaintiff alleges that a defendant “stole” an idea, or improperly used a trademark or copyright. That is perhaps what all those “license agreements” are about when new software is purchased. Plagiarism is a growing threat to those who earn their living using their ideas.

As a writer, I'm not thrilled about the invention of the Kindle and other e-reading devices. I know that these columns are available on the Internet, as is one of my books; I get paid when people use those, but who knows who is copying my other books without paying my publishers to buy a copy?

Students “copy” entire reports into their computers and pass them on to the teacher or professor as their own work, without paying any credit to the real author. I can recall one situation 30 years ago when a member of a large local agency published an article in a magazine. A reader recognized the bulk of the article, and thinking it sounded familiar, found the original work in one of these Iconoclast columns. As the author, I was flattered that someone would think enough of what I had written to copy it, but as he had been paid for what he did not write, it was theft and he was fired. After all, these columns in Claims are copyrighted, and even I have to acknowledge the source when I quote myself elsewhere!

I can remember another “intellectual property” lawsuit that cost hundreds of thousands of dollars. It involved a commercial bakery that wanted to learn how to make a certain baked good that was being popularized by a competitor. They had one of their bakers hire on with the competitor in order to learn the formula. When he learned the secret he quit, returned to the defendant bakery, and devised a similar product. It was industrial espionage and trade infringement. When the defendant bakery was caught, they found that their general liability insurance did not cover such a “tort,” even if it involved an actual “torte.”     

The claim was, basically, “loss of use,” even though there had been no actual physical damage to any tangible property. To the extent that the competing bakery could claim market share, the originating bakery lost the use of that market share.

Paying for indirect loss, such as loss of use, loss of market, and similar loss is tricky, as many victims of the Deep Horizon BP oil spill in the spring of 2010 discovered. When fishermen can't fish, motel owners can't rent rooms, or restaurants can't sell dinners, the loss is real, even if it is not direct loss, and even if there is no actual damage to property. The proof must be documented, but when it is an element of damages, the adjuster is going to have to investigate and evaluate those documents, then negotiate the value of the loss. That is the art of claim adjusting. It is far more detailed than simply saying, “Oh, go rent a car while yours is in the shop.”