Trick and Device Exclusion Buy-Back
April 2000
One important element of commercial auto coverage (specifically, physical damage coverage) to be aware of when prospecting potential garage clients is the false pretense endorsement to standard garage insurance. Automobile dealers or garages are not automatically insured against loss to covered vehicles by means of trick, scheme, or false pretenses; in fact, the standard garage form's false pretense (“trick and device”) exclusion specifically precludes such coverage. The exclusion on the current garage coverage form states that the insurer will not pay for loss to a covered auto caused by or resulting from someone causing the named insured to voluntarily part with covered autos by trick or scheme or under false pretenses, or by the named insured's acquiring an auto from a seller who did not have legal title.
The garage form's false pretense exclusion eliminates coverage under the physical damage section of the form for losses such as the insured selling an automobile and taking a worthless check, selling an automobile on credit because of impersonation or other fraudulent misrepresentation, delivering an automobile to the wrong party due to deceit, allowing a supposed customer to try a car and abscond with it, etc., etc. The exclusion has been broadly upheld in court a number of times, the following cases typifying such instances.
A Minnesota dealer's employee charged with preparing new and used automobiles for sale had the insured's permission to take vehicles from the premises for cleaning. On twelve occasions the employee absconded with the cars, sold them illegally, and pocketed the money. Believing this the sort of incident his operation was insured against, the dealer presented his claim to the insurance carrier, who denied liability under provisions of the trick and device exclusion. The insurance company's denial was upheld all the way to the Minnesota supreme court. The high court decided the “conversion of vehicles by an employee was not afforded coverage under comprehensive provisions of the policy, which excluded . . . loss resulting from someone causing the named insured to voluntarily part with the covered automobiles by trick, scheme, or false pretenses.” The case is Bjorklund v. Aetna Casualty & Surety Company, 306 N.W.2d 838 (1981).
In Liggans R.V. Center v. John Deere Insurance Company, 575 So. 2d 567 (1991), the Alabama supreme court upheld the application of the exclusion. Here, the insured allowed a couple to drive a motor home off the sales lot because the couple wanted a mechanic to inspect it prior to purchase. The couple never returned and the insured sought coverage under his policy for the missing motor home, claiming a theft. The insurer denied coverage, saying that the loss was not covered since it was caused by a voluntary parting with the motor home by the insured due to false pretenses. The trial court agreed with the insurer and, when the case finally made its way to the Alabama supreme court, that court upheld the lower court's decision. The court noted that the unambiguous policy language made a clear distinction between a theft and a false pretense loss, and this loss was clearly a false pretense loss.
And note, in Chapman v. Auto Owners Mutual Insurance Company, 684 S.W.2d 335 (1984), a Missouri court of appeals even applied the exclusion to a loss that involved a collision. In that case, a person who was secretly planning to jump parole and drive to Canada was allowed to take a dealer's car for a test drive; during a subsequent police chase, the driver crashed the car. The exclusion in the insurance policy denied coverage for loss “suffered by the insured in case he voluntarily parts with a covered auto if induced to do so by any fraudulent scheme or trick”, so the insurer denied the claim. The court decided that a loss of any nature was excluded by that provision whenever the insured is tricked into parting with a covered auto, so the resultant collision damage was not covered.
In these cases, the insureds recovered nothing on the loss of their autos. It did not have to be that way—the insureds could have bought back coverage excluded by the false pretense provision through the use of the false pretense coverage endorsement, CA 25 03.
False Pretense Coverage
Universal Underwriters is generally credited with being a leader in marketing false pretense coverage to auto dealers in the early 1950's. Because there is a natural conflict between the urge to sell a car and the need to be wary of being “taken”, the insurance industry never intended to become an automatic partner to any “gamble” every insured might take on the integrity of his customers. Instead, insurers developed a means for qualified dealers (i.e. those who recognize the risk and who have a reputation for careful dealing) to “buy back” coverage through the false pretense endorsement. And, because the industry did not want to cover as “trick and device” all the many bad credit traps that dealers are exposed to, they made it part of the coverage that the insured was required to have legal title to the automobile prior to a loss.
The false pretense endorsement, CA 25 03, negates the false pretense exclusion. Generally, it states that coverage applies to loss of covered automobiles that results from the insured's being tricked out of a covered automobile. It also says there is coverage for loss to covered autos caused by the insured's acquiring an automobile from someone who did not have legal title. However, the endorsement does not provide coverage for a loss in which for any reason, a bank or any other drawee fails to pay. This particular lack of coverage is simply an attempt by the insurer to force the insured to accept a business risk that the insured should have some control over; the insured should have the business experience and some kind of controls in place so that “rubber checks” are not accepted.
Note that if the insured got anything at all in the transaction—an amount of cash, or a trade-in car—this is to be taken into account in figuring the loss that is paid by the insurer.
There are some requirements that must be met for coverage to apply under the first part (loss by trick or scheme) of the false pretense endorsement. The insured must have had legal title to the covered auto prior to the loss and the insured must make every effort to recover the covered auto when it is located. Just what constitutes making “every effort” is not stated, so that point is certainly open to a vigorous discussion between the insured and the insurer if a disagreement arises.
CA 25 03 also adds a paragraph to the duties of the insured in the event of a loss, claim, or suit. The named insured must obtain a warrant, as soon as practicable, for the arrest of anyone causing a loss as defined within the false pretense coverage.
The endorsement also states that $25,000 is the most that the insurer will pay for all loss caused by any one person within any one year of the policy period unless another limit is shown in the schedule. The limit of insurance is for all “loss”, a term defined on the garage form as direct and accidental loss or damage. This would seem to include the cost of recovery of stolen automobiles plus the cost of reconditioning or repairing. As for the $25,000 limit, as the sticker price of new automobiles reaches $25,000 or more, it becomes extremely important for the insured to consider raising this limit.
As noted above, when paying for a loss, the insurer will deduct from the amount paid to the insured, the actual value of any property delivered to the named insured in full or partial payment for the title to or possession of a covered auto; this “deductible” would include, for example, the value of a trade-in car left with the insured when someone drives off the insured's lot for a test drive and never returns.
The premium for the false pretense coverage is based on the dealer's reports of total inventory values (including wholesale floor plan values) for each named location. The state rate pages have the appropriate rate which is then applied per $100 of value as reported by the insured.
All of the insured's automobiles must be included in the coverage, including autos that the dealer chooses to except from the coverage of other perils. This prevents the insured from buying coverages on only the most severely exposed values, but it also has the advantage of avoiding a gap in coverage in case a culprit happens to abscond with the “wrong” (i.e., an otherwise uninsured) auto.
Conclusion
A thorough understanding and explanation of the false pretense exclusion and the attendant endorsement can be the door leading to better commercial auto insurance sales. Because it is not included in standard garage policies, the suggesting of such coverage shows the prospective client that the agent is on top of his (the insured's) coverage needs and is able to be a competent ally in planning for financial loss protection.
For more information on the subject of false pretense insurance, see False Pretense Insurance.