September 9, 2013

Summary: The policy provisions of the personal auto policy (PAP) give automatic coverage under certain conditions to automobiles acquired during the policy period. In some instances, however, an auto is not acquired, but is made operable, during the policy term. In such cases, court opinion is divided as to whether coverage is automatic; ownership by the named insured is generally, though not always, a requirement for coverage. Furthermore, the distinction between a “replacement” and an “additional” auto can be important; how courts determine whether a car is a replacement or an additional vehicle varies.

These topics are examined in this discussion. The current personal auto policy is the basis for this article.

Topics covered: Coverage for newly acquired autos Inoperable autos—when acquired? Trailers Named insured's ownership Ownership of stolen auto Ownership by a corporation Replacement vs. additional automobile

Coverage for Newly Acquired Autos

Part of the definition of a covered auto under the personal auto policy (PAP) is a ″newly acquired auto.” But what is that? The PAP continues that a newly acquired auto means: “any of the following types of vehicles you become the owner of during the policy period: a private passenger auto; or, a pickup or van, for which no other insurance policy provides coverage, that: (1) has a gross vehicle weight rating of 10,000 lbs. or less (gross vehicle weight rating is a rating calculated by the manufacturer to be the amount of weight the vehicle would be weighed when filled with gas and loaded according to the manufacturer's specifications); and (2) is not used for the delivery or transportation of goods and materials unless such use is: (a) incidental to your ″business″ or installing, maintaining or repairing furnishings or equipment; or (b) for farming or ranching.” Thus, the PAP contains a provision automatically giving covered auto status to an automobile that the named insured acquires during the policy period.

(The automatic coverage in the PAP should not be confused with the fleet automatic coverage to be found under commercial auto forms. Fleet automatic coverage can be arranged so that the insured need only report replacement or additional autos at the insurer's request, usually at policy expiration. Automatic coverage under the PAP, on the other hand, is subject to several conditions.)

Before continuing this discussion, note that a ″newly acquired auto″ can take one of two forms. First, the auto might simply be a replacement auto—that is, one chosen to replace an auto already insured on a PAP. For example, the insured might decide to replace her 2002 auto with a newer, more fuel efficient 2012 vehicle. Second, the newly acquired auto might be an additional auto. Here, the insured decides to purchase a small SUV to use for camping trips. This vehicle is in addition to the family's existing two vehicles.

Automatic coverage depends both on the status of the acquired vehicle (a replacement or an addition), and on a time limit for reporting the newly acquired vehicles to the insurer. Consider first the coverage available for a replacement vehicle. If the newly acquired vehicle replaces a vehicle already existing on the PAP, then the policy states that the vehicle will have the broadest coverage other than coverage for physical damage (generally liability, med pay, and UM) provided for any vehicle shown on the declarations. Coverage is provided without the insured having to notify the insurer; coverage begins on the day the insured becomes the owner.

As stated, this does not apply to physical damage coverage. If the insured wants other than collision coverage on the newly acquired vehicle, coverage begins on the date of acquisition; but, in order for the coverage to apply, the insured must carry other than collision coverage on at least one vehicle. The replacement vehicle will have the broadest coverage (i.e., the lowest deductible) of any vehicle shown in the declarations. The insured must then notify the insurer of the replacement within 14 days. Of course, at that time the insured can request a different deductible. If no vehicle on the insured's PAP carries other than collision coverage, the insured has only 4 days to notify the insurer after the acquisition date. Similarly, if the insured wishes collision coverage, he or she has 14 days to report the vehicle, provided at least one auto on the policy carries collision coverage. The broadest coverage (i.e., the lowest deductible) applies. If no vehicle carries collision, the insured has only 4 days to notify the insurer.

Say a loss has occurred prior to the insured's notifying the insurer, but still within the 4 day period. In that case, an other than collision or a collision deductible of $500 will apply. Certainly, the insured, when notifying the insurer, can request a different other than collision deductible or collision deductible, but the $500 deductible will nonetheless apply to a loss occurring within the 4 days' period.

As for the coverage available for an additional vehicle, the insured will have the broadest coverage (other than physical damage coverage) of any vehicle shown on the declarations. Unlike a replacement auto, in this situation the insured has 14 days to notify the insurer of the vehicle's acquisition. The physical damage coverage for the additional vehicle will be the same as for a replacement vehicle—notification within 14 days, if the insured has carried physical damage coverage, both other than collision and collision, for the other vehicle(s) shown in the declarations. If no vehicles already shown in the declarations have collision or other than collision coverage, the insured's time for reporting the acquisition is only 4 days, if he or she wishes these coverages. Coverage for an additional vehicle is the same as was the case with a replacement vehicle. If the insured has not carried physical damage, then a $500 deductible applies to any loss—collision or other than collision—occurring within the 4 days.

The wording of this reporting requirement brings up the question about whether there is coverage within the time periods noted, that is, within the fourteen days (or four days) from the time the named insured becomes the owner of the acquired vehicle and the time that the insurance company is notified of the acquisition. In two cases, Badger State Mut. Cas. Co. v. Swenson, 404 N.W.2d 877 (Minn. App. 1987) and Shelter Mut. Ins. Co. v. Baker, 753 S.W.2d 646 (Mo. App. 1988), newly acquired vehicles were involved in accidents within the reporting period, but notices of the acquisitions (and the losses) were not given to the company until after the stated period—in this case, thirty days. The courts found the coverage to be truly automatic, with notices required only to extend coverage beyond thirty days. Likewise, in American Freedom Ins. Co. v. Smith, 347 Ill. App. 3d 1(2004), when the insured had an accident the day after purchasing a new vehicle, the court said that the insured had thirty days in which to notify the insurer, and so had abided by the policy. This has become the majority rule in the United States.

There is, of course, a minority opinion. In Farm & City Ins. v. Anderson, 509 N.W.2d 487 (Iowa 1993), the Iowa Supreme Court refused to follow the majority of jurisdictions. In that case, the insured had acquired a vehicle during the policy period, did not notify the insurer, and had an accident within thirty days of the acquisition. The insured sought coverage and claimed that he had automatic coverage for the thirty days after he became the owner of the vehicle regardless of whether he notified the insurer due to the provisions of the policy; the insurer disagreed. The Iowa Supreme Court found for the insurer and said the insured did not comply with the thirty days notice requirement, so the vehicle involved in the accident was not a covered auto. The court said that many courts holding otherwise simply relied on a general rule and that these courts have undertaken no independent analysis of the rationale for such a rule. Likewise, in Auto-Owners Ins. Co. v. Winter, 469 N.W.2d 314 (Mich. App. 1991), the court ruled there was no liability coverage for the insured's newly acquired auto during the thirty day period since the insured did not notify the insurer of the purchase.

The insurance policy is not clear on this point. It does say what happens if an insured reports a newly acquired auto after the reporting time has elapsed—coverage is effective at the time the named insured requests the coverage. So, logically, if the insurer wanted to say that there was no coverage during the specified reporting period before the deadline for notification had been reached, the policy could reflect this position. Therefore, as usual, when there is a legitimate question as to the interpretation of an insurance policy, the insured gets the benefit of the doubt. However, because of the differing opinions and possible disputes, insureds should always be advised to report newly acquired autos to the company as soon as possible after the acquisition, and even before the actual acquisition if possible.

Inoperable Autos—When Acquired?

Does the named insured have coverage for a newly acquired auto after he becomes the owner of the auto, or at the time the newly acquired auto becomes operable? For example, if the insured owns an inoperable vehicle at policy inception, can that vehicle qualify for automatic coverage if it becomes operable later in the policy period? Does the time prescribed automatic coverage begin when an inoperable auto is actually acquired, or when it becomes operable? These questions have been brought before the courts.

Generally, the courts have held that acquisition, rather than operability, is the starting point for the automatic coverage. In Stockberger v. Meridian Mut.Ins. Co., 395 N.E.2d 1272 (Ind. App. 1979), an Indiana appeals court held that the additional auto was not a covered auto at the time of the accident. Although the insured gave notice roughly two weeks after the vehicle became operable, he had purchased it many months earlier. A Georgia court of appeals, in Lumbermens Mut. Cas. Co. v. Commercial Union Assurance Co., 273 S.E.2d 649 (Ga. App. 1981), upheld the insurance company's denial of coverage. The insured was involved in an accident while using a car that had been acquired prior to the personal auto policy's inception, but had been inoperable until shortly before the accident. The court stated that “the key to coverage under this provision is the date of the acquisition of ownership of the automobile and not the date when it first comes into service as a means of transportation. To give the provision a contrary interpretation would permit an insured with a number of vehicles, some in operable condition and some in need of repair, to put them in and out of service, contending that all are covered by the policy, where in fact no premiums are being paid for some of them.”

A California court reached a different conclusion in Farmers Ins. Exchange v. Schepler, 171 Cal. Rptr. 230 (1981). The insured began to assemble a home-built dune buggy two to three months prior to the accident. The court found that the dune buggy was merely a “collection of parts suitable for assembly into the basic elements of a vehicle.” Since the dune buggy became operable as a vehicle about two weeks before the accident, the insured was in compliance with the policy provision requiring reporting within thirty days of the date of acquisition.

Another case holding that operability, rather than acquisition, is the starting point for the time required notice, is State Security Ins. Co. v. Ottinger, 487 N.E.2d 446 (Ind. App. 1985). The insured owned a 1966 van which became inoperable in November, 1978. He bought an inoperable 1971 Travelall on November 30, 1978, and completed repairs on December 11, 1978. On that date he transferred the title to his name and switched license plates from another car. The insured called his agent on December 20, 1978, to transfer liability coverage from the 1966 van to the Travelall, but the agent neglected to notify the insurer. On January 9, 1979, the insured had an accident while driving the Travelall, and notified his agent, who, in turn notified the company. When the insured was sued for injuries as a result of the accident, the company denied coverage on the grounds that it had not received notice until February 15, 1979, of the Travelall's acquisition.

The policy had a condition requiring the insured to inform the company within “30 days of such change” when replacing an auto. The court noted the use of the word “change” distinguished the case from the Stockberger case discussed above, because the Stockberger policy referred to “acquisition.” The court found the policy “could have pinpointed the event of change in any number of ways such as the date ownership of the replacement vehicle was acquired or the date delivery of the replacement vehicle occurred. However, the policy was silent. Therefore, the critical issue is when the change occurred. The court stated that when the replacement involves 'junking' the replaced vehicle or holding the replaced vehicle for later sale, the issue of change involves a determination of the insured's intent to replace. In the instant case, the evidence reasonably supports the determination that the change occurred on December 11, 1978. Since the accident occurred within thirty days of that date, coverage for the accident under the automatic coverage provision applied.

Now, since the current PAP describes a newly acquired auto as a vehicle that the named insured becomes the owner of during the policy period, ownership should clearly be the guidepost to coverage as opposed to operability. Whether that choice of words by the insurer will end the legal disputes over this issue is not yet settled.

Trailers

The personal auto policy's definition of your covered auto includes any trailer owned by the named insured, and any nonowned trailer while used as a temporary substitute for a trailer that is out of normal use due to breakdown, repair, servicing, or loss or destruction. A newly acquired trailer should automatically be covered for the entire policy period from the date of acquisition since the notice requirements listed in the policy do not mention trailers, only newly acquired autos (a defined term that also does not mention trailers).

However, although the paragraphs describing coverage (liability and physical damage) for a newly acquired auto do not mention coverage for trailers, the exclusions found in Part D—Damage to Your Auto certainly do. Exclusion 7.a. states that the insurer will not pay for loss to ″a trailer, camper body, or motor home, which is not shown in the Declarations.” The policy continues ″This exclusion (7.) does not apply to a: a. Trailer, and its facilities or equipment, which you do not own; or b. Trailer, camper body, or the facilities or equipment in or attached to the trailer or camper body, which you: (1) Acquire during the policy period; and (2) Ask us to insure within 14 days after you become the owner.”

Note that there is no language describing deductibles applied should there be a loss to the newly acquired trailer prior to the insured's notifying the insurer of the acquisition. Although it would appear that the $500 collision and other than collision deductibles would be applied, the policy is silent.

Named Insured's Ownership

For purposes of automatic coverage the personal auto policy refers to vehicles that “you,” the named insured, becomes the owner of during the policy period. A clear requirement would therefore appear to be that the vehicle be owned by the named insured, or the named insured's spouse—if a resident of the same household. Some courts, however, have not interpreted these words that strictly, as the following cases will demonstrate.

In Caldwell v. Allstate Ins. Co., 417 So. 2d 1040 (Fla. App. 1982), a Florida court of appeals held that there was coverage for a replacement automobile when the originally described vehicle was jointly titled to the named insured and his son, but the replacement vehicle was titled in the son's name only. Even though insureds under the policy were described as the named insured and a resident spouse, the court ruled that the named insured had been sufficiently involved in purchasing the replacement vehicle to meet the policy requirements covering replacement vehicles.

The Colorado Supreme Court reached a different conclusion in a case involving an emancipated son in Mid-Century Ins. Co. v. Liljestrand, 620 P.2d 1064 (Col. 1980). Here, the court ruled that the newly acquired automobile clause did not apply to the son's auto that replaced another auto, also titled in the son's name, which had been insured under the father's automobile policy. The court said that although the auto might be considered a replacement, it could not be considered as owned by the named insured, i.e., the father. Therefore, the policy requirement that the named insured be owner of the acquired vehicle had not been met. And in the case of Birmingham Fire Ins. Co.. Rosado, 42 So. 3d 896 (Fla. App. 2010), the court ruled that the newly acquired auto clause did not apply to a vehicle purchased by the insured's son, although a vehicle on the insured's policy was jointly owned by him and his son. The vehicle purchased by the son was solely titled to him, and he never asked the insurer to provide coverage within the thirty day period.

There are different interpretations regarding the named insured's joint ownership of a vehicle. For example, in Farmers Ins. Co., Inc. v. State Farm Ins. Co., 613 S.W.2d 158 (Mo. App. 1981), a Missouri court of appeals held that a newly acquired automobile titled jointly in the names of the named insured and her daughter did not qualify for automatic coverage under the mother's policy because of the mother's lack of an undivided interest in the car. Likewise, in the case of Selective Ins. Co. of America v. Arrowood Indemnity Co., 2010 WL 580984 (Oh. App. 2010) there was no coverage for the insured's daughter's accident under the mother's insurance. The mother co-signed a car loan, but evidence showed the daughter was to make all payments for the car, pay for maintenance, and be the sole driver.

The opposite conclusion was reached in Glacier General Assurance Co. v. State Farm Mutual Auto. Ins. Co., 436 P.2d 533 (Montana 1968). Here, the Montana Supreme Court held that an automobile owned jointly by the named insured and her son was a newly acquired automobile, ownership of which was acquired by the named insured. The court cited a Georgia case, American Indemnity Co. v. Davis, 260 F.2d 440 (5th Cir. Ga. 1958) that reached the same conclusion.

The Supreme Court of Alabama cited the Davis case favorably in Hartford Ins. Group v. State Farm Mut.Ins. Co., 372 So. 2d 1303 (Ala. 1979). The court found that the named insured's joint acquisition of a vehicle with her daughter was unimportant if the evidence supported a finding that the named insured purchased the vehicle as a replacement for a previously insured vehicle.

Ownership of a Stolen Auto

Coverage for the innocent purchaser of a stolen automobile raises the question of ownership. Jurisdictions are split on the question of whether an innocent buyer of a stolen auto has an insurable interest.

For example, in Granite State Ins. Co. v. Lowe, 362 So. 2d 240 (Ala. Ct. App. 1978), an Alabama appeals court ruled that an innocent buyer of a stolen automobile was entitled to recover under fire and theft insurance when the car was stolen from him and later found destroyed by fire. The court in Riley v. Mid-Century Ins.Exchange, 173 Cal. Rptr. 257 (1981) reached a similar conclusion.

However, in Napavale, Inc. v. United National Indemnity Co., 336 P.2d 984 (Cal. App. 1st Dist. 1959), the court decided differently. The named insured innocently purchased a stolen auto a few days before it was in turn stolen from her. The court held that the insured could not acquire ownership of an automobile that had been stolen from its rightful owner, and therefore there was no coverage.

In the case of United Financial Cas. Co. v. Youth Alive, 2012 WL 468627 (W.D. Ky.) a stolen auto involved in an auto accident in which four children were killed was not held to be an ″insured auto,″ an ″additional auto,″ a ″replacement auto,″ or a ″temporary substitute auto.” The four children attended a ″Youth Alive″ event. They had been brought to the event in one of the organizations three vans, but there was no room in the vans to take them home. One of the workers saw a sixteen-year-old boy in a Honda, and asked him to take the children home. Unbeknownst to her, the boy had car-jacked the Honda. The police gave chase, and the boy crashed the vehicle into a tree, killing the four children. Youth Alive tried to find coverage for the inevitable lawsuits under its commercial auto policy with United Financial under the wording above. The court said the stolen auto was not an insured auto—it had never been listed on the declarations page. It was neither an additional auto nor a replacement auto, since the vans were all operational and the stolen auto could not replace one. The stolen auto could not be a temporary substitute since none of the vans was out of service, and permission had not been given to drive the Honda. Then, the plaintiffs argued that the children would not have been at the event but for the use of the insured vehicles, and therefore the children's deaths were related to their use. The court found that to be a stretch, bottom line, and found for the insurer.

Ownership by a Corporation

Courts have held that a replacement automobile is not owned by the named insured under his personal auto policy when the replacement is titled in the name of a corporation, even though the named insured is the principal shareholder. This was the ruling in Allstate Ins. Co. v. Estate of Johnson, 539 F. Supp. 421 (W.D. Ark. 1982), applying Arkansas law. Further, non-owned automobile coverage did not apply because the car was furnished and available to the insured for his regular use.

Even though it would appear obvious that a personal auto policy would not respond to a loss caused by a vehicle insured on a commercial policy, the attempt was still made in the case of North Carolina Farm Bureau Mut. Ins. Co. v. Welch, 455 S.E. 2d 906 (N.C. App. 1995). An employee was driving the company's pickup when he collided with a motorcyclist. The motorcyclist filed a personal injury suit against the company, the owner of the company, and the driver. The business auto policy paid its limit. The cyclist looked to the owner's personal policy, citing the definition of ″your covered auto,″ particularly 2.b. ″a pickup truck or van….” The court didn't buy this argument, noting that the business owner had never asked the insurer of his personal vehicle to insure the pickup. The court also noted that the truck was not a household vehicle, and so the exception to the exclusion for maintenance or occupation of a vehicle furnished or available for the regular use of a family member (B.3.b.) did not apply.

This last statement about a car being furnished and available for the regular use of the insured is worth comment. The named insured is an insured for the use of any auto under the terms of the personal auto policy. But, there is an exclusion for liability coverage for the use of any vehicle that is furnished or available for the regular use of the named insured, unless that vehicle is a covered auto. Covered autos include newly acquired autos but only in accordance with the term as defined on the PAP. And, one of the requirements in the definition of a covered auto is that the named insured become the owner of the vehicle during the policy period. So, if an insured wants personal auto policy coverage for the use of a car in business, the ownership of the car should be clear in order to clarify insurance coverage.

Replacement versus Additional Automobile

As noted earlier, the newly acquired vehicle is treated somewhat differently under the PAP depending upon whether it is considered a replacement vehicle or an additional vehicle. This issue is discussed in the following cases.

In Continental Cas. Co. v. Employers Mut. Cas. Co., 422 P.2d 560 (Kan. 1967), action was brought by two insurers to determine which of the policies was primary and which was excess. The insured had two vehicles, a 1958 Cadillac and a 1957 Oldsmobile, insured by Employers Mutual. He became employed by a company which provided automobile liability coverage through Continental to its employees. On September 16, 1962, the insured bought a third vehicle, a 1962 Chevrolet. He transferred the license plate from the Cadillac to the Chevrolet, but did not trade in the Cadillac. When asked by his agent whether the Chevrolet should be insured under the Employers Mutual policy, the insured said that coverage would be provided through his employer.

In October, 1962, while driving the Chevrolet during the course of his employment, the insured was fatally injured, and the driver of the other car was injured. Each insurer paid one-half of the other driver's claim, and brought action against each other to determine liability. The trial court found, and the appeals court affirmed, that the Chevrolet was not a replacement for the Cadillac and the Continental policy was primary.

The court rejected Continental's argument that the policy contemplated the replacement of one vehicle by another without requiring the disposal of the original vehicle. The court said, “A proposition generally supported is that a vehicle is a replacement if procured after issuance of the policy, and there has been a disposition of the vehicle described in the policy or the vehicle described in the policy has become inoperable.” In this case the  Kansas Supreme Court held that there were three operable vehicles, one intended for use as an additional vehicle.

How courts determine whether a car is a replacement or an additional vehicle varies. Some courts ask whether a number of criteria for replacement status have been met: (1) the policyholder must acquire the second vehicle after he entered into the insurance contract; (2) he must acquire the second vehicle before the policy expires; (3) he must acquire the vehicle to replace the vehicle described in the policy; and (4) the described vehicle must be disposed of by the policyholder or otherwise be inoperable at the time of replacement. Two cases using this approach are United Farm Bur. Mu. Ins. Co.v. Elder, 427 N.E.2d 127 (Ill. 1981), and Young v. State Farm Mut.Auto. Ins. Co., 198 S.E.2d 54 (N.C. App. 1973). Courts use this approach as a way of avoiding fraud by the insured by eliminating reliance on the insured's statements concerning his intent.

Although it is usual to trade in or sell a vehicle and immediately replace it, that is not always the case. In West American Ins.Co. v. Mid-American Fire & Cas. Co., 611 N.E.2d 646 (Ind. App. 1993), the insured purchased an auto two days prior to a fatal accident, and its status was called into question. The insured had three autos insured with West American, and sold one in December. In May of the next year the insured and his wife moved out of state, and he was given a company car. He then sold a second car. In early June, he purchased a new car and insured it with Mid-American. Following the accident, Mid-American paid its limit, and looked to West American for half the settlement. West American said because the car was not listed in the policy, it was an additional auto, and the insured had not notified them. The court ruled, however, that the vehicle had replaced the one sold, and so there had been no need to notify the insurer. Therefore, both Mid-American and West American were to share in the settlement.

Other courts, however, reject this approach, relying instead on an analysis of the policyholder's “intent and conduct in the totality of the circumstances.” In Government Employees Ins. Co. v. Berry, 724 F. Supp. 872 (M.D. Ala. 1989), a federal court preferred to determine whether the “insured intended the second vehicle to act as a replacement and acted in accordance with that stated intent.”

In this case, Berry, the insured, purchased comprehensive coverage for three cars in June, 1985. The three cars were a 1983 Chevrolet van, a 1979 GMC pickup, and a 1982 Toyota. In December, 1987, Berry filed a theft claim on a 1981 Mercedes. At trial, Berry testified that the Mercedes was a replacement for the Toyota. The Toyota was sold in 1986, and was replaced by a succession of different cars that were subsequently sold. At the time the 1981 Mercedes was stolen, the insured owned a 1979 Mercedes, also allegedly bought to replace the Toyota, and sold that car several months after buying the 1981 Mercedes. The insured had been trying to sell the Mercedes when it was stolen. The insured convinced the jury that the stolen car was covered under the policy as a replacement vehicle.

The federal court granted GEICO's request for a new trial, finding the jury decision contrary to the great weight of the evidence presented. There was evidence showing the insured had a license to sell used vehicles, and kept a steady stream of cars for use during the years of coverage. The court found it likely that the 1981 Mercedes was replaced before the theft by another vehicle, both by intent and actual use.

However, the court refused to find that a vehicle is not covered by the replacement clause if it is not the first replacement vehicle, or that a vehicle cannot replace a covered vehicle if the policyholder keeps the covered vehicle after buying a second, and the covered vehicle is not inoperable. Other cases applying this less rigid approach include Continental Ins. Co. v. Entrikin, 680 P.2d 913 (Kan. App 1984), and Rowland v. State Farm Mut.Auto. Ins. Co., 512 P.2d 1129 (Wash. App. 1973).