The relative ease with which automobiles can be stolen and then resold to unsuspecting buyers has produced a controversy over the right of the buyer to recover for subsequent loss to the vehicle under standard automobile insurance. This issue with respect to individual cases may be complicated by specific policy language or statutory provisions in a particular jurisdiction. However, at the center of the controversy remains the question of an innocent buyer's insurable interest in property that is stolen.

A basic principle of insurance practice is the requirement that a person have an insurable interest in a piece of property in order to recover under a policy insuring it (see Interest Feature of Property Policies for a discussion of the interest feature in property policies). The requirement of an insurable interest was created to avoid the use of insurance as a tool for gambling. Where the insured has no interest in a piece of property, an insurance contract on that property becomes a wagering agreement rather than protection of one's own interests.

Many courts have found that any innocent person who would benefit from the continued use of an automobile, or who would suffer a loss from its destruction, has an insurable interest. These cases find that the principle of prohibiting gambling through insurance is not damaged where the insured is unaware of the defect in title. Other courts have been less lenient toward the insured and have found that only a person with good legal title has an insurable interest in a motor vehicle.

There are two major positions on what is sufficient for insurable interest purposes where a person innocently (unknowingly) purchases a stolen automobile, insures it, subsequently is involved in an accident, and turns in an insurance claim. The rule less favored today, but at one time the majority rule, is that the insured has no insurable interest in an innocently-purchased stolen automobile unless he also has good legal title. The reasoning behind this position is that strict adherence to legal title requirements furthers the public good by making the traffic in stolen cars more difficult. Obviously, where this rule is still used, the insured cannot recover for any loss to the vehicle.

The second view on insurable interest allows recovery for innocent buyers of stolen automobiles because of their substantial economic interest in the vehicle, seen as a deterrent against any temptation to profit by collecting insurance for losses to the property. Generally, courts will not allow recovery based strictly on economic interest where there is evidence that the insured was not an innocent purchaser, although one state supreme court has taken the position that the insured need not be unsuspecting of the vehicle's nature at the time of purchase. However, decisions based entirely on the insured's economic interest have not become popular in other jurisdictions.

Some judges have reasoned that insurance coverage is not available to the innocent purchaser because any payment for stolen property is in fact forfeited immediately and that subsequent theft or destruction of the vehicle only makes manifest an uninsured loss that has already taken place. This line of reasoning is presented explicitly in a written dissent to the majority opinion in Scarola v. Insurance Co. of North America, 292 N.E.2d 776 (1972). The dissenting judge, applying a statutory definition equating insurable interest with “substantial economic interest,” stated: “…the insured innocent purchaser had no 'substantial economic interest' in the stolen car. His monetary investment was lost at the time of purchase; and having purchased the vehicle from one without any interest therein, he acquired only a qualified possessory interest…which was so tenuous that it might have been terminated at any moment by the true owner” (italics added).

In Napavale, Inc. v. United National Indemnity Co., 336 P.2d 984 (1959), a California court of appeals held that the innocent purchaser of a car had no insurable interest. The court said, “While it is true that [the insured] in good faith paid the price of the automobile…the interest which she achieved thereby was such interest only as [the seller] had, and he had none.” The insured paid the seller the full asking price of $4,750 for a Cadillac and took possession of the car. The insured did not receive any title or bill of sale from the seller. Several days after purchase, the insured let the seller take the car for the purpose of having a dealer fix a rattling window. The seller did not return with the car. The court found that the buyer was not the “owner of the described vehicle” for purposes of insurance coverage and that an insurable interest was also lacking. This decision was based squarely on the concept that insuring nonowned property would not be allowed since it would be tantamount to “a wager.” The court noted the existence of only one case of which it was aware that held that there was an insurable interest when the insured had bought an automobile that was stolen.

Another case following similar reasoning was Ernie Miller Pontiac, Inc. v. Home Insurance Co., 534 P.2d 1 (1975), decided by the supreme court of Oklahoma. In this case, the thief sold a car to the insured car dealer, and gave a title with the ID number of the vehicle. The thief then stole the car from the insured's lot and was arrested while trying to sell it to another dealer in the same city. The insured argued at appeal that it had a “substantial economic interest” in the car of which it was deprived by the theft from its lot. The court, in rejecting the insured's argument for coverage, nonetheless noted several cases holding that a buyer could have an insurable interest in stolen property. At the time of this decision, an increasing number of courts were finding decisions based solely on possession of good title to be too restrictive an analysis. Eventually, the Oklahoma supreme court also adopted the more liberal view on insurable interest in the case of Snethen v. Oklahoma State Union of the Farmers Educational and Cooperative Union, discussed below.

A Missouri court of appeals finding no insurable interest did so with some reluctance in Horton v. State Farm Fire & Casualty Co., 550 S.W.2d 806 (1977). The insured's vehicle was stolen after purchase, and subsequently found to be a stolen vehicle. His title did not comply with state regulations for transfer of a valid title because the application did not have the true identification number. The court noted that Missouri courts have held that absolute compliance with the state law is required, otherwise the sale is void. Since insurable interest in a motor vehicle was tied to ownership, which did not exist in this case, insurance coverage for the theft did not apply. However, the court voiced doubts that the public policy behind the title registration law could be served by “invalidating property damage and theft insurance policies purchased in good faith for valuable consideration.”  Nonetheless, the court declared itself compelled to enforce the statute “despite any doubts we may have.”

Despite the trend toward finding an insurable interest when the purchase of a stolen vehicle is made by an innocent person, Missouri courts are not following this approach. Eight years after the Horton case, another Missouri court of appeals found no insurable interest when the insured could not comply with the state's title transfer law in Faygal v. Shelter Insurance Co., 689 S.W.2d 724 (1985).

This later case did not involve the purchase of a previously stolen vehicle. Instead, the new truck involved was bought by the insured's father-in-law for the insured's use, with the understanding that the insured would cover the costs of taxes, maintenance, and insurance. The title was in the father-in-law's name, but the insurance named the son-in-law. As stated also in Horton, the court asserted that the general principles or cases relating to other forms of property do not apply to loss coverage of automobiles. The court said that under general principles of insurance law, any title or interest in property, “legal or equitable,” supports an insurable interest, but not in cases involving cars. According to this view, automobile cases turn on compliance with the strict requirements of the state title certificate law. The Faygal court reasoned that requiring strict compliance with the law is necessary to avoid illegal trafficking in stolen automobiles.

The more recent trend in court decisions supports a finding of insurable interest in a stolen automobile when loss is suffered by an innocent buyer. The reasoning behind these decisions is that no public policy is supported by denying an innocent purchaser insurance coverage, and the insurer is not harmed because the fact that the vehicle was stolen did not change the risks involved or insured against.

Such was the explicit reasoning behind the finding of an insurable interest in Shockley v. Harleysville Mutual Insurance, 553 A.2d 973 (1988). The insured bought a used car from a dealer which was subsequently destroyed in a fire. The dealer had also obtained the vehicle in good faith from another dealer. The insured sued the dealer for breach of warranty of title, obtained a judgment, and was paid for the amount she owed on the car. Then the insured sued her insurer for coverage of the same loss, and the dealer intervened, asking for subrogation of any insurance proceeds. The Superior Court of Pennsylvania agreed with the trial court that the insured had an insurable interest in the automobile, stating the “generally accepted rule” that “anyone who will derive pecuniary benefit or gain from the preservation or continued existence of the property or who will suffer pecuniary loss from its destruction has an insurable interest.” The court added, “It is also sufficient if the individual has a reasonable expectation of benefit from the preservation of the property. Having a perfect legal title is not necessary.”

Having determined that the insured had an insurable interest, the court considered whether the insurer should have been relieved of its obligation under the contract since the insured had already been compensated by the dealer. The court majority found that the insured was not receiving double compensation for the same loss, because her recovery from the dealer was based on defective title and the basis for her recovery from the insurer was a fire loss. The dissenting justice agreed with the majority on the issue of insurable interest, but stated that the insured had been improperly granted a double recovery since, “[a] policy of fire insurance is a contract of indemnity which does not pertain to the property as such, but rather covers the interest of the insured in the property…The object of the property insurance contract is not to provide a gain for the insured, but only to compensate him for an economic loss…Thus, where there is no economic loss by virtue of recoupment against a third party, there is no right to an additional recovery against the insurance company. The fact that an insurance carrier may be in an apparently strong financial position and able to absorb a loss, does not justify creating liabilities…It is well settled that the ultimate measure of compensatory recovery is not affected by the form of action in which a plaintiff seeks his remedy…Although plaintiff may sue in two separate causes of action, he may only obtain one recovery for a single loss and this is so even though the recovery sought is against two different persons.”

Although the court majority ruled in favor of recovery by the insured, it also raised the issue of what rights, if any, the rightful owner would have to the insurance proceeds. It was the view of the majority that the rightful owner could have rights of recovery against the buyer. This issue is discussed in a few of the cases reported below.

Several state supreme courts, as illustrated by the cases that follow, have established the rule that an innocent buyer of a stolen automobile has an insurable interest in the vehicle. This was the decision reached by the Tennessee supreme court in Duncan v. State Farm Fire & Casualty Co., 587 S.W.2d 375 (1979). The insured ran a coal hauling business and bought a tractor-trailer rig from a seller in Alabama. The insured arranged to pay for the truck by getting a bank loan; he pledged the truck as security for the loan. The collision policy he purchased had a loss payable clause in favor of the bank. Six months after purchase, the truck was destroyed in a single-car accident. The insurer refused to pay on the grounds that because the truck had been stolen before it was bought by the insured, he had no insurable interest. The bank brought suit against the insured, who admitted his obligation but also brought a third-party claim against the insurer for collision coverage.

The supreme court ruled that it had erred in an earlier decision finding no insurable interest under similar circumstances, and stated: “Clearly, such a purchaser stands to benefit from the continued existence of such a vehicle because of the continued availability of its use to him unless and until the true owner reclaims it; and, he runs the risk of pecuniary loss by its destruction not only because of the loss of its use, but also because, as a constructive bailee of the property, he may incur liability to the true owner for the value of the vehicle, in the event the true owner makes a claim for its return and he is unable to make delivery because it is destroyed. Although there are some decisions to the contrary, we conclude that the better, more just rule is to recognize an insurable interest in such cases. The modern trend of authority is in this direction.” Referring to the ruling in Duncan, the Ohio supreme court adopted the liberal view in the case of Phillips v. Cincinnati Insurance Co., 398 N.E.2d 564 (1979).

The supreme court of Oklahoma also reversed its previous position and dropped the requirement of strict compliance with title certificate laws in the case of Snethen v. Oklahoma State Union of the Farmers Educational and Cooperative Union, 664 P.2d 377 (1983). The insurer issued a policy to the insured to cover his used car for collision damage. The car was involved in a two-car accident shortly after the insured bought it. During the claim investigation it was discovered that the car had been stolen. The Oklahoma State Bureau of Investigation seized the car in order to return it to its rightful owner. The insured brought a claim for collision damage, denied by the insurer due to lack of insurable interest. The supreme court found for the insured after specifically rejecting its earlier position on what constitutes an insurable interest.

The court's opinion gives the historical background for the development of the strict “legal interest” approach, derived from an English court case written in 1806. The case, Lucena v. Craufurd, 127 Eng. Rep. 630, was also the origin of the opposing position on what constitutes “insurable interest,” since the dissenting opinion first mentioned the “factual expectation” theory. The dissenting justice agreed that the requirement of insurable interest has, as one its goals, the removal of temptation to destroy property in order to gain by its destruction. He found that insurable interest could exist, even when the insured is not holding good legal title, where the insured had a relationship to the insured property that made him interested in its preservation.

In its analysis, the court had to consider whether the insured's interest was “lawful.” Oklahoma had a statutory definition of “insurable interest” that provided: “`Insurable interest' as used in this section means any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment.” The court said that it was necessary to distinguish between “lawful” and “legal,” since these terms are not synonymous; a legal interest is one that is enforceable against the whole world, but a lawful interest is enforceable against all the world but the legal owner. Because the insured's interest was not acquired by him in violation of law, it was “lawful.”

The case of Butler v. Farmers Insurance Co. of Arizona, 616 P.2d 46 (1980), addressed the question of whether repossession of the stolen car by the true owner was a loss by “accidental means” for purposes of insurance coverage. The Arizona supreme court ruled that it was, and that the insured had an insurable interest in the vehicle. The insured bought a car and received an Arizona certificate of title without knowledge that the car had been stolen. Two years after he bought the car, it was seized by the Tucson police and returned to its original owner. The insurer denied the insured's claim for coverage based on lack of insurable interest. Arizona's statutory definition of “insurable interest” was virtually identical to the Oklahoma definition discussed above, and this court also found the insured's interest to be “lawful.” The second issue requiring resolution was whether the loss was by “accidental means.” The insured's policy agreed to pay for loss to the covered automobile caused by “any accidental means except collision.” Since the court found that “either unanticipated or unintentional occurrences are sufficient, and since repossession by an unknown owner is neither foreseeable nor deliberate, the loss…must fall within the coverage of the contract.” The court rejected the insurer's position that the loss was not covered since it was not due to one of the specific of losses set forth in the policy that would be covered as “other than collision.” The court believed that the examples of covered losses were not exclusive.

One state supreme court case has taken the position that an insurable interest should be defined solely in terms of the insured's economic interest in the vehicle, and should not also depend on whether the insured is an “innocent purchaser.” The court said that it is the insured's economic interest that “prevents the insurance contract from becoming a wager or an arrangement which encourages fraud.” This position was taken by the supreme court of Oregon in Treit v. Oregon Automobile Insurance Co., 499 P.2d 335 (1972). The insured property in this case was a stolen trailer. The trial court found for the insurer because it was not satisfied that the insured was an innocent purchaser. The insured's testimony was that he first saw the trailer parked on a service station lot and occupied by a man he had never seen before. He made an arrangement to buy the trailer for $1,500, with a $500 cash downpayment. He made the second payment without ever receiving a certificate of title. The seller disappeared. The insured testified that he spent much time and money fixing up the trailer, but he produced no evidence of his expenses. The trailer was stolen from the insured's possession. The trial judge found a “slight stench” about these alleged facts. The supreme court agreed that the facts did not necessarily point to the insured as being an “innocent purchaser,” but did not agree that the insured's innocence was an essential element in order for him to have an insurable interest.

The true owner filed an action in February, 1969, against the insured to recover the trailer. The insurance policy involved was purchased in April, 1969. The trailer was stolen in May. The owner's action against the insured was successful (albeit after the date of theft from the insured) and he received a judgment for $2,100. It is hard to see how the court could support an argument for coverage, since the application for insurance was so obviously made with the idea of covering any claim made by the true owner. Nonetheless, the court found that “at the time of the loss there was no temptation on the [insured's] part to destroy the trailer…His possession of the vehicle had already been discovered by the true owner and the action of conversion had been brought against him. At that time plaintiff could not possibly have benefited by the destruction or disappearance of the trailer.”

Although the Treit case has not been overruled, most courts still require that the purchaser be unaware of the stolen nature of the vehicle in order to recover insurance proceeds. This requirement is supported by statute in those states where an insurable interest must be “lawful” in order for the insured to prevail.