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 and he 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 and 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 03 06, attached to a standard ISO garage form. We called the insurer on the risk at the time our insured 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

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.