Exclusion's effect

False pretense coverage

"Acquired" autos

Other provisions of CA 25 03

Rating

General Information

 A 1924 case before the Kansas supreme court is generally credited with bringing about the introduction of the trick and device exclusion in automobile physical damage insurance. In Overland-Reno Co. v. International Indemnity Co., 222 P. 122, an automobile dealer with insurance for "theft, robbery or pilferage" exchanged a car for a worthless check. The insurance company denied coverage, but the court held that any scheme involving a fraudulent trick or device whereby an owner of property is swindled out of it, is larceny. Moreover, though the policy did not claim to cover "larceny" the court held that the undefined term "theft" would include larceny. Insurers reacted to this court decision with a corresponding exclusion.

 By 1929 every policy for automobile physical damage insurance carried a mandatory exclusion denying liability for loss caused by the insured or someone acting under the insured's authority voluntarily parting with title or possession of an insured automobile "whether or not induced to do so by any fraudulent scheme, trick, device, or false pretense." It was not until 1940 that the exclusion was withdrawn from forms covering risks other than automobile dealers. Now, those insureds that are covered under a garage coverage form—the target risks—have their automobile physical damage coverage limited by the exclusion. The current expression in the garage form refers to excluded loss "…resulting from someone causing (the named insured) to voluntarily part with (covered autos) by trick or scheme or under false pretenses"; or resulting from the named insured "acquiring an auto from a seller who did not have legal title."

 Exclusion's Effect

 The garage form's trick and device exclusion, known now as the false pretense exclusion, eliminates coverage under either comprehensive or specified causes of loss agreements for losses such as:

 1.     the insured selling an automobile and taking a worthless check;

2.     delivering an automobile to the wrong party because of impersonation or other fraudulent misrepresentation;

3.     allowing a supposed customer to try an automobile and abscond with it, etc., etc.

  The exclusion has been upheld by courts a number of times.

 As an example, the Alabama supreme court in a 1991 case upheld the application of the exclusion and declared that "the loss…due to trick, scheme, or false pretenses…is excluded by the terms of the policy." In this case, Liggans R.V. Center v. John Deere Insurance Company, 575 So.2d 567 (1991), 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 theft. The insurer denied coverage, saying 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. When the case finally made its way to the Alabama supreme court, that court upheld the trial court's decision, noting that the unambiguous policy language makes a clear distinction between "theft" and "false pretenses", that the loss clearly was a false pretense loss, and the exclusion did apply.

 Note that the person who pulls off the scheme that triggers the exclusion can include an employee, as well as an outsider. For example, Minnesota courts including the supreme court had no difficulty in applying the exclusion to the actions of an employee in the 1981 case of Bjorklund v. Aetna Casualty & Surety Co., 306 N.W. 2d 838 (1981). An employee who was responsible for taking dealership cars and getting them cleaned managed to dispose of 12 of them before the insured became aware of the losses. Two supreme court justices dissented from the high court's upholding of the trial court's decision. The dissent, however, was because the employee's actions might be seen as outright theft rather than loss by any sort of trickery.

 And, in a similar case from Illinois, an appellate court upheld the false pretense exclusion where a car dealership's manager removed trade-in cars from the lot for his own benefit. The manager admitted that he transferred possession and titles of approximately 75 vehicles over time with the proceeds being deposited into accounts he controlled. The court, taking note of the Bjorklund decision and other jurisdictional rulings (since there was no Illinois case directly addressing the interpretation of the false pretense exclusion in the context of employee conversion), said that here, the manager removed the autos and titles from the lot with the authority to do both, and the language of the false pretense exclusion applied whenever the insured, or anyone acting for the insured with express or implied authority to do so, voluntarily parts with possession of a vehicle. This case is Ford v. Illinois Emcasco Insurance Company, 906 N.E.2d 1279 (2009).

 The exclusion deals only with loss caused by or resulting from the insured being tricked. If the culprit subsequently wrecks the car and abandons it, the exclusion imposes no restriction on coverage for loss resulting from collision (assuming collision insurance has been purchased, of course). It should be noted, however, that a Missouri court of appeals did apply the exclusion to a collision loss. In Chapman v. Auto Owners (Mutual) Insurance Company, 684 S.W.2d 335 (1984), 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" and subsequently wrecked the car during a police chase. 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". The court of appeals decided that a loss of any nature is excluded by that provision whenever the insured is tricked into parting with a covered auto and, therefore, the insured had no coverage.

 Regardless of this decision, the coverage form applies to a "loss" to a covered auto. A "loss" is defined as direct and accidental loss or damage. If a covered auto is damaged through a collision, it can be said that a loss occurred through a collision and the fact that the auto was in the hands of someone who had no right to possess that auto should make no difference. If a collision loss subsequent to a false pretense loss is to be excluded from coverage, the form should clearly and unambiguously state that point. However, to preclude any argument over coverage between the insured and the insurer, it would be sensible to have the insured consider buying false pretense coverage.

 False Pretense Coverage

 False pretense coverage—available as an endorsement (CA 25 03) to the garage coverage form—negates the trick and device exclusion. Specifically, CA 25 03 states, in part, that the false pretense exclusion does not apply and that coverage does apply to loss to covered autos caused by someone causing the named insured to voluntarily part with the covered auto by trick, scheme, or under false pretenses. It should be pointed out that this part of the insuring agreement is limited somewhat by an exclusion on the endorsement. That exclusion declares that the insurance does not apply unless the named insured had legal title to, or consignment papers for the covered auto prior to the loss and unless the named insured makes every effort to recover the covered auto when it is located.

 The importance of the title requirements is underscored by judicial statements found in the case of Heshion Motors, Inc. v. Trinity Universal Insurance Co., 618 P.2d 327 (1980). In upholding the insurer's denial of coverage under the false pretense endorsement, a Kansas court of appeals reasoned that the title requirement has a purpose beyond establishing an insurable interest in the vehicle. The court decided that where there is an obviously high risk in a dealer's automobile policy (namely, theft by deception), the title requirement "lend(s) stability and certainty in the insurance industry as to the coverage of a particular insurer and furnish(es) means for a ready ascertainment of ownership of a vehicle." Note that the Supreme Court of Kansas affirmed this decision (although with modifications); the Supreme Court case is Heshion Motors, Inc. v. Trinity Universal Insurance Company, 625 P.2d 437 (1981).

The "consignment papers" phrase is on the endorsement to point out that coverage is available under CA 25 03 if the named insured has the auto of another for sale on consignment. Symbol 31 on the garage form makes an auto held for sale by non-dealers a covered auto for physical damage coverage. As such, that auto would normally be subject to the false pretense exclusion; endorsement CA 25 03 changes that.

 The second part of the insuring agreement on endorsement CA 25 03 states that there is coverage for loss to covered autos caused by the named insured's acquiring an auto from a seller who did not have legal title. For example, if the insured accepts a stolen vehicle in trade and is then unable to recover his auto when the facts come to light, false pretense coverage applies to the loss of the insured's vehicle. Also, if the insured buys an auto from someone who did not have a legal title and then, subsequently, the true owner of the auto demands its return, CA 25 03 will apply to the insured's loss.

 Note that false pretense coverage under CA 25 03 does not apply to a loss in which for any reason a bank or any other drawee fails to pay. This exclusion is on the endorsement to clarify the scope of the coverage. It is true that CA 25 03 does cover loss to a covered auto due to someone causing the named insured to voluntarily part with the auto under false pretenses. However, if the "buyer" of a covered auto pays for the car with a check that bounces due to, for example, the account being closed or not having sufficient funds to cover the check, the insurer is telling the insured that there is no coverage for that type of loss. As explained by the court in Great American Indemnity Co. v. Yoder, 131 A.2d 401 (1957), the term "theft" comprehends trespatory takings, rather than takings which are the product of an actual and voluntary intent to transfer possession and title to one's property. The insurer is, in effect, forcing the insured to accept a business risk that the insured should have control over; the insured should have the business experience and some kind of controls in place so that "rubber checks" are not accepted.

 "Acquired" Autos

 Some confusion and questions have arisen due to the use of the term "acquired" on CA 25 03. The endorsement states that any auto that the named insured has "acquired" is a covered auto under false pretense coverage. Also, the second part of the endorsement's insuring agreement states that there is coverage for loss to covered autos caused by the named insured's "acquiring" an automobile from a seller who did not have legal title. So, just how does the term "acquired" affect coverage under endorsement CA 25 03?

 Since the term is not defined on the endorsement, it has to be given a common dictionary meaning. "Acquire" means to get as one's own or to come into possession or control of, a very broad definition indeed. So, if the insured accepts a stolen vehicle in trade, the insured has acquired or come into possession of that vehicle; it is an "acquired" auto. Whether a loss then occurs because the real owner demands the return of the auto or because the police confiscate the auto as evidence, the insured has suffered a false pretense loss and endorsement CA 25 03 will respond.

 Other Provisions of CA 25 03

 There is a condition on CA 25 03 requiring the named insured, or someone on his or her behalf, to "take all reasonable steps to cause a warrant to be issued, as soon as practicable, for the arrest of anyone causing a loss defined within the false pretense coverage." This provision is tempered by the insurer stating that "failure to cause such warrant to be issued as required … shall not invalidate any claim made by you, if it is shown that reasonable efforts were made." Therefore, the insurer is accepting the fact that circumstances beyond the control of the insured may prevent a warrant from being issued; if the local authorities, for some reason, can not or will not issue a warrant for the person who took off with the car, the insured should not be punished for something over which he or she has no control. However, if the insured is not willing to obtain a warrant (or make any effort to obtain one) in order to preserve good customer relations or to cover up his or her foolish business practices, that is another issue. Should that happen, the insurer could rightfully disclaim coverage based on the failure of the insured to live up to his expressed duty after a loss under the terms of the endorsement.

 There are other provisions and conditions affecting the false pretense coverage. If the insured got anything at all in the transaction—a small amount of cash, perhaps, or a trade-in—this is to be taken into account in figuring the recovery amount. The actual value of any property delivered to the insured in full or partial payment for title to or possession of a covered auto is deducted from the amount payable by the insurer. Another provision of false pretense coverage is, as noted previously, the requirement that if the covered automobile should be located, the insured must "make every effort" to recover it. If the relocated car is recovered, the settlement includes the cost of recovery—including legal expenses—plus the cost of reconditioning or repairing. There is no provision that the insured must reimburse the insurance company if the car is located and recovered after a loss has been paid. However, this situation is viewed the same as a theft loss, that is, having paid the insured for the automobile, the insurer has rights to any salvage from the recovery.

 CA 25 03 changes the limits of insurance clause in that, under false pretense coverage, the limit shown in the schedule of the endorsement is the most the insurer will pay for all loss caused by any one person within any one year of the policy period. $25,000 is a standard limit, but this is in lieu of any other amount being listed in the endorsement's schedule.

 Rating

 The rate for false pretense coverage is based on the total inventory value for each named location per $100 of values, as prescribed in the pages of the ISO commercial lines manual, division one, automobile. All of the insured's autos must be included in the coverage; even autos that the dealer chooses to except from the coverage of other perils are not exempt from this requirement. 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., with what otherwise would have been an uninsured, auto.