Know the difference: False pretense vs. theft coverage

There is much discrepancy between the insurer, insured, and agent over whether or not the exclusion on the endorsement applies in this situation.

We would appreciate your unbiased professional opinion on whether or not the exclusion applies to the scenario described above.

— Pennsylvania Subscriber

Answer: We agree, after review, that the act would fit under false pretenses, and that your surrounding issue boils down to whether the pre-approved loan results in the failure to pay a bank or drawee.

The customer was pre-approved for the loan, meaning that based on the information provided, the bank promised to give him the funds to purchase the vehicle, which the customer would pay back over time. This can be seen as a promise to pay.

Part of the function of banks is the extension of credit and loans. This customer provided false information to the bank. So upon final review, the bank withdrew the agreement to fund the loan; any payment the bank would have made is now not going to be paid because of the false information provided upon application of the loan.

The policy clause that states "for any reason" is extremely broad. The bank initially agreed to make payment, and the car was released based on that agreement. Once the loan was rejected, the bank, for all intents and purposes, failed to pay. The exclusion should apply.

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False pretense exclusion and theft coverage

Question: We would really like your opinion regarding our garage insurance and the exclusionary policy language for false pretense claims. Our insurance specialist makes a good point that theft coverage applies in the two scenarios we will describe below. 

Here are the scenarios; the thief acts as a potential customer in both examples:

1. 1. 1. 1. 1. The thief takes a car on a test drive with the insured's salesman going along for the ride. The thief then forces the salesman out of the car and drives off.
            2. In an alternate scenario, the thief asks to hear what the car sounds like and is given the keys to start the car. He then drives the car from the lot and disappears.

These scenarios do not seem to fit under the false pretense exclusion, which requires the insured to voluntarily part with the car by trick or scheme. Do you think losses of these sorts are actually covered as thefts, because an insured does not 'voluntarily part with a car'?

— Arizona Subscriber

Answer: These scenarios are theft losses. The key point is the voluntary parting. Forcing a salesman out of the car and driving off is certainly not a voluntary parting. And, giving the keys to someone so he can start the car up is not voluntary parting, either. It may be a voluntary parting of the keys, but it is not a voluntary parting of the car, since the insured had no intention of letting this happen and no actual belief that the thief would drive off the lot in the car. So these are both theft claims.

Related: We see you: Catching garaging fraud

False pretense coverage question

Question: I have a question with regard to False Pretense Coverage in a situation wherein the exposures of a parking garage or similar service risk for voluntary parting by trick to an unauthorized person are not covered by a garage policy. In this situation, the insurance coverages are provided by a general liability policy and a business auto policy with the garagekeepers endorsement. There is no exclusion for voluntary parting or false pretense under the comprehensive coverage provided by the GKLL endorsement as there is in the garage form.

Is the intent to cover this exposure for these types of risks?

— Connecticut Subscriber

Answer: Both the CGL form and the auto policy have the care, custody or control exclusion, so if the insured has someone make off with a car that the insured has in its care, custody, or control, that exclusion will prevent coverage for the claim. The GKLL endorsement is meant to provide coverage under certain conditions for property damage to a customer's car while the insured has the car in his custody, but the lack of a false pretense exclusion in the GKLL endorsement will not prevent the care, custody, or control exclusion in other forms from being applicable to a claim such as this.

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Dealer unknowingly sold stolen vehicle

Question: Our insured is an automobile dealer who unknowingly bought a stolen auto and sold it to a customer. About two years later, the buyer was driving the car when he was stopped by police, and the car was confiscated. The buyer called the dealer, who gave the buyer another car. The dealer had no way of knowing that the car was stolen.

The two criminals involved in selling him the car would buy a "totaled" vehicle from an insurance company, then steal a similar vehicle and run it through their "chop shop," where they would exchange the serial numbers. After this work was finished, they were able to obtain what looked like a valid title and sell it to an auto dealer as a used vehicle.

Our insured has always been covered under the false pretense coverage endorsement, CA 25 03, attached to a standard ISO garage form. We called the insurer on the risk at the time our insurer sold the car and were told that the present carrier should respond to the claim under the insured's "product related damage" form (which we believe covers "lemon car" claims and has nothing to do with this loss). We think that the false pretense endorsement is designed to protect the dealer for this type of loss and would like your opinion.

— Arizona Subscriber

Answer: The false pretense endorsement is broad enough to reach the loss situation you described.

The "covered autos" section of the garage coverage form is modified by the endorsement to include, for false pretense coverage purposes, "any auto [the named insured] has acquired." Acquired is a broad term, meaning to get for one's own or to come into possession of, which certainly is the case here. And, the physical damage coverage section of the garage form pays for direct and accidental loss or damage to a covered auto. The false pretense endorsement modifies the physical damage coverage to include loss to a covered auto caused by "[the named insured] acquiring an auto from a seller who did not have legal title." That also fits the situation as you describe it.

The only impediment to coverage might arise from a dispute over the meaning of the word "loss". Some might say that a loss as defined on the garage form means actual physical damage to the covered auto, and does not include loss of use through an action like confiscation. However, the intent to cover a loss of use claim can be inferred due to the fact that the physical damage coverage section of the garage form, under the false pretense exclusion, specifically excludes a loss to a covered auto caused by the named insured acquiring an auto from a seller who did not have legal title, the loss, in effect, being a loss of use since the auto will be taken away from the insured. And, the false pretense coverage endorsement specifically gives this type of coverage back to the insured. So, if there was no intent to cover a loss of use type claim under CA 25 03, why would such language be used in the endorsement?

As to which insurer should respond, since the loss to your insured did not occur until the car was confiscated, the current insurer is the one responsible. When the car was confiscated the insured lost the value of the car originally sold to the buyer by having to replace it with a different car, just as he would have lost the value of the car if it had been confiscated from his lot. This can be seen to correspond with the prevailing rule that property damage occurs at the time the damage is discovered or when it manifests itself.

See also:

Care, custody or control exclusions: disputed and misunderstood

The risk of rideshare deception

2 retired N.C. insurance agents convicted of fraud