Section IV of the Coverage Form
Summary: In a sense, the automobile physical damage insurance needs of an insured under an auto dealers coverage form are the same as those of any other automobile owner. The insured's coverage requirements are only more complicated because there are more automobiles at risk, more possible variation in the interests being covered, perhaps a wider variety in application of coverage to different classes of automobiles and certainly a far greater fluctuation in the number and types of automobiles to be insured.
Physical damage insurance as presently written is detailed within section F. of the auto dealers coverage form. This article offers an analysis of the coverage.
Topics covered:
The designation of covered autos is a function of the use of the appropriate symbol on the declarations page. For most auto dealers, symbol "22″ can be used to indicate coverage on all owned autos. Symbol "23″ limits coverage to owned private passenger autos and symbol "24″ reverses the arrangement so that coverage applies only on autos other than private passenger vehicles. Symbol "27″ can be used to indicate coverage on scheduled or specifically described autos.
The symbols are shown opposite the appropriate coverages on the declarations page. For example, if an auto dealer insured desires $250 deductible collision insurance on all owned autos and on two scheduled autos, the entry opposite collision coverage should be symbols "22″ and "27." Note that symbol "22″ is used even if the dealer intends that the collision insurance apply only to a specific subgroup within the all-owned-autos category. Perhaps only used cars, demonstrators, and service vehicles are to be insured against collision damage; however, all owned autos must first be made subject to being covered autos before a subgroup can be singled out as the owned autos intended for coverage.
Whatever the symbol and whatever the interest covered, only autos are insured. Dealers will sometimes accept other property in trade for an automobile — a boat, for example — and may even report the value of the property as another unit in their inventory sitting on the lot for sale. Though the policy's definition of "auto" is quite broad, only a land motor vehicle, trailer, or semitrailer qualifies for coverage.
1.We will pay for "loss" to a covered "auto" or its equipment under:
a.Comprehensive Coverage. From any cause except:
(1)The covered "auto's" collision with another object; or
(2)The covered "auto's" overturn.
b.Specified Causes of Loss Coverage. Caused by:
(1)Fire, lightning or explosion;
(2)Theft;
(3)Windstorm, hail or earthquake;
(4)Flood;
(5)Mischief or vandalism; or
(6)The sinking, burning, collision or derailment of any conveyance transporting the covered "auto".
c.Collision Coverage. Caused by:
(1)The covered "auto's" collision with another object; or
(2)The covered "auto's" overturn.
2.Glass Breakage – Hitting a Bird or Animal – Falling Objects or Missiles.
If you carry Comprehensive Coverage for the damaged covered "auto", we will pay for the following under Comprehensive Coverage:
a.Glass breakage;
b."Loss" caused by hitting a bird or animal; and
c."Loss" caused by falling objects or missiles.
However, you have the option of having glass breakage caused by a covered "auto's" collision or overturn considered a "loss" under Collision Coverage.
3.Coverage Extension—Loss of Use Expenses
For Hired Auto Physical Damage, we will pay expenses for which an "insured" becomes legally responsible to pay for loss of use of a vehicle rented or hired without a driver, under a written rental contract or agreement. We will pay for loss of use expenses if caused by:
a.Other than collision only if the Declarations indicate that Comprehensive Coverage is provided for any covered "auto";
b.Specified Causes of Loss only if the Declarations indicate that Specified Causes of Loss Coverage is provided for any covered "auto"; or
c.Collision only if the Declarations indicate that Collision Coverage is provided for any covered "auto".
However, the most we will pay for any expenses for loss of use is $20 per day, to a maximum of $600.
Analysis
Physical damage coverage can be comprehensive coverage ("comp"), specified causes of loss coverage, or collision coverage. The comprehensive agreement promises to pay for direct and accidental loss to covered automobiles from any cause except collision (or) overturn. If comprehensive insurance is selected, glass breakage, loss by missiles or falling objects, and colliding with a bird or animal will be treated as comp claims instead of collision. If comprehensive is not applicable, the impact between covered auto and falling object or between covered auto and bird or animal reverts to what it actually is, collision, and whatever coverage is applicable to collision damage applies to the incident.
If it is to the insured's advantage to recover for glass breakage as collision, the insured may do so. Comp and collision may each be subject to a deductible. This option under the garage coverage form for the insured allows glass breakage that occurs in a collision to be treated as part of the collision insurance claim, all subject to only the collision deductible.
The specified causes of loss are listed in the form: fire, lightning, or explosion, theft, windstorm, hail, earthquake, flood, vandalism or mischief, and the transportation peril of "sinking, burning, collision, or derailment" of any conveyance (including boats and aircraft) transporting an insured auto.
Note that smoke damage or smudge from a malfunctioning heater on the premises is not covered by specified perils. Also, except for flood, water damage is not included in specified causes of loss coverage. Nor is loss caused by falling aircraft. Though the incidence of damage to automobiles by any of these perils is undoubtedly rare, they represent valid points of consideration in the insured's decision between specified causes of loss and comprehensive perils coverage.
Collision is, of course, the other major peril the insured can choose to include in physical damage protection. The coverage agreement specifies that the term refers to overturn of the covered auto as well as its collision with another object. For more information on collision, see What is Collision.
1.We will not pay for "loss" caused by or resulting from any of the following. Such "loss" is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the "loss".
a.Nuclear Hazard.
(1)The explosion of any weapon employing atomic fission or fusion; or
(2)Nuclear reaction or radiation, or radioactive contamination, however caused.
b.War or Military Action.
(1)War, including undeclared or civil war;
(2)Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign or other authority using military personnel or other agents; or
(3)Insurrection, rebellion, revolution, usurped power or action taken by governmental authority in hindering or defending against any of these.
2.We will not pay for "loss" to any of the following:
a.Any covered "auto" leased or rented to others unless rented to one of your customers while their "auto" is left with you for service or repair.
b.Any covered "auto" while used in any professional or organized racing or demolition contest or stunting activity, or while practicing for such contest or activity. We will also not pay for "loss" to any covered "auto" while that covered "auto" is being prepared for such contest or activity.
c.Tapes, records, discs or other similar audio, visual or data electronic devices designed for use with audio, visual or data electronic equipment.
d.Any device designed or used to detect speed measuring equipment such as radar or laser detectors and any jamming apparatus intended to elude or disrupt speed measuring equipment.
e.Any electronic equipment, without regard to whether this equipment is permanently installed, that reproduces, receives or transmits audio, visual or data signals.
f.Any accessories used with the electronic equipment described in paragraph e. above.
3.Exclusions 2.e. and 2.f. do not apply to equipment designed to be operated solely by use of the power from the "auto's" electrical system that, at the time of "loss", is:
a.Permanently installed in or upon the covered "auto";
b.Removable from a housing unit which is permanently installed in or upon the covered "auto"
c.An integral part of the same unit housing any electronic equipment described in Paragraphs a. and b. above; or
d.Necessary for the normal operation of the covered "auto" or the monitoring of the covered "auto's" operating system.
4.False Pretense.
We will not pay for "loss" to a covered "auto" caused by or resulting from:
a.Someone causing you to voluntarily part with it by trick or scheme or under false pretenses; or
b.Your acquiring an "auto" from a seller who did not have legal title.
5.We will not pay for:
a.Your expected profit, including loss of market value or resale value.
b."Loss" to any covered "auto" displayed or stored at any location not shown in ITEM THREE of the Declarations if the "loss" occurs more than forty-five days after your use of the location begins.
c.Under the Collision Coverage, "loss" to any covered "auto" while being driven or transported from the point of purchase or distribution to its destination if such points are more than 50 road miles apart.
d.Under the Specified Causes of Loss Coverage, "loss" to any covered "auto" caused by or resulting from the collision or upset of any vehicle transporting it.
6.We will not pay for "loss" to a covered "auto" due to "diminution in value".
7.Other Exclusions.
We will not pay for "loss" due and confined to:
a.Wear and tear, freezing, mechanical or electrical breakdown;
b.Blowouts, punctures or other road damage to tires.
This exclusion does not apply to such "loss" resulting from the total theft of a covered "auto".
Analysis
The nuclear and war exclusions speak for themselves—and they are absolute, eliminating coverage regardless of any contributing cause or event.
The second part of the exclusion section addresses such common issues as leased or rented autos (not covered except if the rental is to a shop customer, covering for the period while the customer's auto is in the insured's charge for service or repair) and using insured autos in organized races, stunts, demolition derbies, and so on. An impromptu race thought up by dealership employees can be considered as not "organized" and it is therefore an example of an event that this exclusion does not reach.
Media for use with audio, visual, or data electronic equipment are not covered and neither are radar detectors or other types of fuzz busters. These exclusions are a part of the second set along with one directed at "electronic equipment…that receives or transmits audio, visual, or data signals." Permanently installed sound equipment and accessories are excused from the exclusion so long as it is designed to be operated only ("solely") by use of the power from the auto's electrical system. The exclusion also does not apply to electronic equipment that is necessary for the normal operation of the covered auto or the monitoring of the covered auto's operating system.
Exclusion 4 is unique to auto dealers. Nondealers might seek to have it removed from their policies on the grounds that such an exclusion is not a feature of the business auto policy. Exclusion 4 is the so-called "trick and device" exclusion. A covered auto is not insured for the loss resulting from the named insured's being tricked into parting with it. An employee, acting under the authority of the named insured, may similarly part with a covered vehicle, to the same uninsured effect. Insurance covering this exposure is available by means of an endorsement to the garage policy. The insurance is called false pretense coverage and it is reviewed separately. See False Pretense Insurance.
There are other exclusions listed on this coverage form.
There is a flat exclusion of the prospective profit of the insured. This includes loss of market value or resale value.
An insured has forty-five days in which to report acquisition of a new location for business. After that, coverage ceases if not reported.
Damage caused by or resulting from the collision or upset of a transporting conveyance is excluded under the specified causes of loss coverage. Any insured whose exposure in this area is such as to cause concern should consider purchasing collision coverage. Blanket collision insurance will respond to most such losses — but see the next exclusion.
Any collision coverage does not apply to a "drive away" exposure when the distance from point to point in the acquisition-distribution chain is more than 50 road miles. "Drive away" refers to movement of dealer's stock of autos, not general over the road operation of vehicles by insured and employees. The term can apply equally to autos the dealer delivers to a purchaser and to those picked up in trade. Drive away collision insurance can be used to buy back the coverage taken away by the exclusion; see endorsement CA 25 02.
Diminution in value is excluded. This is done in order to shore up the fact that physical damage coverage is for "loss" to a covered auto, that is, direct and accidental loss or damage to the auto. Diminution in value is simply not looked upon by the insurer as direct physical damage to the covered auto and that is what is meant to be covered under this part of the garage form. This particular exclusion avoids a creative application of the word "loss" to a bad business deal. Also, dealers need business income insurance to cover loss of income flowing from damage to the business's stock in trade.
The last set of exclusions duplicates some physical damage exclusions in the business auto coverage form. These eliminate coverage for the following:
1. Loss by wear and tear, freezing, and mechanical or electrical breakdown. All property will wear out. In the absence of proper maintenance, it will freeze or break down. Such occurrences hardly represent risk at all so they are not insurable by traditional standards. However, when losses in the nature of wear and tear, breakdown, etc., are caused by a peril that is insured under the policy, there is coverage. For example, if a thief causes mechanical damage while racing away with an auto, this exclusion will not detract from the insured's recovery under the theft peril for all related damage.
2. Loss to tires by blowout or puncture or ordinary road damage. There is coverage, however, for tire damage that is caused by other insured loss. If there is insurance for collision damage and a collision causes tires to rupture, the tire damage is insured as a collision loss.
1.The most we will pay for "loss" to any one covered "auto" is the lesser of:
a.The actual cash value of the damaged or stolen property as of the time of "loss"; or
b.The cost of repairing or replacing the damaged or stolen property with other property of like kind and quality.
2.All electronic equipment that reproduces, receives, or transmits audio, visual, or data signals in any one loss is $1,000, if, at the time of loss, such electronic equipment is:
a.Permanently installed in or upon the covered "auto" in a housing, opening or other location that is not normally used by the "auto" manufacturer for the installation of such equipment;
b.Removable from a permanently installed housing unit as described in Paragraph 2.a. above; or
c.An integral part of such equipment.
3.An adjustment for depreciation and physical condition will be made in determining actual cash value in the event of a total "loss".
4.If a repair or replacement results in better than like kind or quality, we will not pay for the amount of betterment.
5.The following provisions also apply:
a.Regardless of the number of covered "autos" involved in the "loss", the most we will pay for all "loss" at any one location is the amount shown in the Declarations for that location. Regardless of the number of covered "autos" involved in the "loss", the most we will pay for all "loss" in transit is the amount shown in the Declarations for "loss" in transit.
b.Quarterly or Monthly Reporting Premium Basis. If, on the date of your last report, the actual value of the covered "autos" at the "loss" location exceeds what you last reported, when a "loss" occurs we will pay only a percentage of what we would otherwise be obligated to pay. We will determine this percentage by dividing your total reported value for the involved location by the value you actually had on the date of your last report.
If the first report due is delinquent on the date of "loss", the most we will pay will not exceed 75 percent of the Limit of Insurance shown in the Declarations for the applicable location.
c.Non-Reporting Premium Basis. If, when "loss" occurs, the total value of your covered "autos" exceeds the Limit of Insurance shown in the Declarations, we will pay only a percentage of what we would otherwise be obligated to pay. We will determine this percentage by dividing the limit by the total values you actually had when "loss" occurred.
Analysis
Paragraph 1 in this section describes what the insurer will pay for a loss to any one covered auto. It is the lesser of the actual cash value or the cost or repair. This is standard policy language.
Paragraph 2 states that the insurer will pay for loss in any one accident to all electrical equipment that reproduces, receives, or transmits audio, visual, or data signals. Recall that the policy does provide coverage (through an exception to an exclusion) for loss to electronic equipment that reproduces, receives, or transmits audio, visual, or data signals under certain circumstances. Paragraph 2 further defines this coverage by limiting the amount the insurer will pay for a loss to such equipment to no more than $1,000; but this limited coverage applies only when the insured has the electronic equipment permanently installed in a place that is not normally used by the auto manufacturer for the installation of such equipment. For example, if the insured has stereo speakers installed in the sides of the vehicle doors or in the trailer, and a loss occurs to the equipment, the most the insurer will pay is $1,000. If the insured has this equipment in the place where the manufacturer normally puts it while building the vehicle, this $1,000 limit does not apply.
Paragraphs 3 and 4 deal with depreciation and betterment. The insurer will take into account depreciation and the physical condition of the vehicle in determining what the actual cash value of the auto is before the insurer will pay after a total loss. And, if the repair of the auto results in a betterment (that is, an increase in value) of the vehicle, the insurer will not pay for that betterment.
Paragraph 5 declares that the insurer will pay no more than the amount shown in the declarations for all loss at one location regardless of the number of covered autos involved in the loss. The same goes for all loss to covered autos damaged or lost in transit. A limit of liability must be indicated in the declarations schedule to govern in case of loss at any location that is not named. The setting of a limit for unnamed locations—permanent or temporary—allows the underwriter some gauge of the possible additional exposure beyond the major exposure at named locations. This limit does not affect premiums. Consequently, the only consideration is that it be adequate—and as accurate as possible within reasonable expectations.
If limits are established for automobiles at named locations and at additional unnamed locations, only one other situation remains where the insured is apt to have an exposure—automobiles in the course of transportation. This exposure is covered by entry of another limit in the declarations respecting cars in transit. This limit, too, has no bearing on premium. It simply puts the underwriter on notice as respects the maximum possible transit loss. The limit must be adequate to avoid disappointment for the insured in case loss occurs.
The final paragraph describes what the insurer will pay for loss to covered autos depending on whether the insured has chosen either a reporting or non-reporting premium basis. More information on the reporting and non-reporting choices for the insured are discussed further on in this article.
For each covered "auto", our obligation to pay for, repair, return or replace damaged or stolen property will be reduced by the applicable deductible shown in the Declarations prior to the application of the Limit of Insurance shown in the Declarations, provided that:
1.The Comprehensive or Specified Causes of Loss Coverage deductible applies only to "loss" caused by:
a.Theft or mischief or vandalism; or
b.All perils.
2.Regardless of the number of covered "autos" damaged or stolen, the per "loss" deductible for Comprehensive or Specified Causes of Loss Coverage shown in the Declarations is the maximum deductible applicable for all "loss" in any one event caused by:
a.Theft or mischief or vandalism; or
b.All perils.
Analysis
For insureds, the comprehensive or specified causes of loss coverage deductible applies to loss caused by theft or mischief or vandalism, or all perils. A single deductible applies per occurrence for damage to all autos. The applicable deductibles are listed in the declarations.
Reports of values for insureds that are shown in the declarations as auto dealerships may be made monthly or quarterly. The option must be taken in advance and the appropriate box in the insured's declarations form is checked to indicate which method is to be used. The quarterly reporting basis requires the named insured to give the insurer the first report by the 15th of the fourth month after the policy begins. Subsequent reports must be given to the insurer by the 15th of every third month. These reports must contain the value for the last business day of every third month coming within the policy period. As for the monthly reporting basis, the named insured must give the insurer the reports by the 15th of every month. The reports will contain the total values the named insured had on the last business day of the preceding month.
There is the equivalent of a full reporting or honesty clause, limiting recovery to that proportion of loss that the last reported actual cash value bears to the true actual cash value as of the date of the report. This is on a per location basis. If the first required report is delinquent, the insurer's liability is held to 75 percent of the limit shown for the location. (Note that these provisions are close in language and intent to reporting provisions in property insurance forms.)
Per-location reporting requires special attention. Most auto dealers will have at least two locations at their main premises—the values stored inside a building being subject to a different rate and premium from those on an open lot. However, the insured's records may reflect total values in a lump sum at each premises and the temptation might be to report values that way as well. Unless special arrangements have been made and coverage applies on a blanket basis at each premises or at all premises, the insured must be certain that the value reports reflect the policy locations accurately. An insured with a $50,000 limit at location 1 (inside) and a $200,000 limit at location 2 (open lot) who reported, for example, $100,000 inside and $100,000 outside as an arbitrary division to simplify the reporting of total values at the site should expect major difficulties in a loss adjustment. If, for example, the real values on the open lot were $150,000 when the insured reported $100,000, the insured will recover for open lot loss in the same proportion, i.e., ten-fifteenths. This would be true even if the insured could show that the report was accurate as to total values (200,000) or even if it developed that the insured paid more premium than accurate reports would have justified. Simply, the insured recovers in the same proportion that the reported values at each location bear to the actual values at each location.
It is important for the insured to understand that the periodic reports of values do affect physical damage premiums. The principle is well established in terms of reporting forms generally that a report showing values greater than the limit established in the policy does not effect an increase in that limit; however, the insured is obliged to pay premium on the basis of the higher (reported) values. Thus, any time an insured finds values at a particular location exceeding—or even approaching—the policy's limit for that location, the insurance company should be instructed to increase the limit. Though receipt of the inflated report puts the insurance company on notice that values are exceeding the limit, or they may soon do so, the insurance company has no obligation (or authority) to increase the limit unilaterally.
Another point in connection with reporting forms generally; it is quite possible for an insured to have a loss that is completely covered even though the amount is greater than any value ever reported. Reports reflect values on hand as of the last day of the reporting period. They reveal little about the values that may be at that location at any other time. Suppose, for example, an insured has a limit of $200,000 at one location and values that range between $125,000 and $175,000. If the insured has such control over inventory that it is always at low ebb on or near the reporting date, reports may never show values in excess of $125,000-$135,000. Yet, if a loss occurs when inventory is at its peak, the insured could have a recoverable loss of $170,000-$175,000. As long as the insured reports values accurately and honestly on the appointed date, and the limit of insurance is adequate, any amount of loss up to the limit is recoverable.
What value to report for sales demonstrators and executives' autos is sometimes a question. Should values be adjusted downwards with each report to reflect depreciation from usage? Probably so, but only after a thorough discussion with the underwriter. A dealer may have two autos of equal value in terms of dealer cost, but one is kept in storage awaiting sale while the other is used as a demonstrator. The insured anticipates that the demonstrator will be sold at a marked down price but the book value of both autos in terms of their cost to the dealer may stay the same. (Profits, recall, are not insured.) If the insured reports equal values on both autos in each report and consequently pays the same premium on both autos, a loss adjustment with depreciation as a consideration on the demonstrator may leave the insured complaining of inequitable treatment. In short, if the loss adjuster is prepared to apply a usage depreciation to dealers cost in computing a loss to a demonstrator then the insured should be encouraged to apply the same depreciation factor to the value of the unit with each report.
The value of cars used by officers, salespersons, and others (though privately stored at the homes of the users or elsewhere) must be included in the total of values reported at the main sales location. Values at unnamed locations are included in the total for the main sales location also.
If coverage is written on a nonreporting basis and if, when loss occurs, the total value of the covered autos exceeds the limit of insurance shown in the declarations, there is, in effect, a 100 percent coinsurance clause. It is set forth in the limits of insurance paragraph.
The clause refers to two distinct figures—(1) the limit of insurance set out in the declarations and (2) the total value of all covered autos. The latter obviously includes automobiles at unnamed locations, in transit, etc., as well as those at named locations. If, (1) is less than (2) the insured will be penalized in case of any loss, total or partial.
It is thus most important to make the limits of liability for named locations high enough to include the value of whatever automobiles the insured may expect to have in transit or at newly acquired locations.
By way of example, suppose a $5,000 loss occurs while limits of liability at named locations are $75,000, but the total value of covered autos at the time of the loss is $150,000. In this case, the loss would be settled for 50 percent of 5,000. Perhaps the insured acquired the added values on the same day as the loss; there is no device in the policy for an automatic increase of limits during a grace period. The percentage is determined by dividing the limit by the actual total values when the loss occurred.
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