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We found the information below regarding false pretense coverage and the exclusion that states that coverage does not apply to a loss in which for any reason a bank or other drawee fails to pay. We insure a car dealership. A customer completed an online loan application on the dealer's website and was pre-approved for an auto loan. An appointment was made for the customer to come to the dealership, fill out the paperwork, and purchase the vehicle. Customer provided all requested information including driver's license, copy of his social security card, etc. The customer put a $2,000 down payment on it and was able to leave with the vehicle. A couple weeks later, Chrysler Financial rejected the loan stating the social security number that the customer provided was fraudulent. The dealership attempted to recover the vehicle from the owner and return his $2,000 down payment. After a couple of failed attempts at recovery, a police report was filed and the case was taken to a grand jury. The customer was indicted and a warrant was issued for his arrest, but the dealership still was not able to recover the vehicle. As a result, a claim was made with the thought that false pretense coverage would apply.

There is much discrepancy between the insurer, insured, and agent over whether or not the exclusion on the endorsement applies in this situation.

We would appreciate your unbiased and professional opinion on whether or not the exclusion applies to the scenario described above.

 Ohio Subscriber

 The CA 00 25 exclusion is as follows:

c. False Pretense

We will not pay for "loss" to a covered "auto" caused by or resulting from:

(1) Someone causing you to voluntarily part with it by trick or scheme or under false pretenses; or

(2) Your acquiring an "auto" from a seller who did not have legal title.

The endorsement CA 25 03 that grants coverage is as follows:

1. The False Pretense Exclusion does not apply.

2. The following exclusions are added:

a. The insurance under Paragraph A.2.a. of this endorsement does not apply unless:

i. You had legal title to, or consignment papers for, the covered "auto" prior to "loss"; and

ii. You make every effort to recover the covered "auto" when it is located.

b. False Pretense Coverage does not apply to a loss which for any reason a bank or any other drawee fails to pay.

We agree, after review, that the act would fit under false pretenses, and that your surrounding issue boils down to whether the pre-approved loan results in the failure to pay of a bank or drawee. The customer was pre-approved for the loan, meaning that based on the information provided, the bank was promising to give him the funds to purchase the vehicle, which the customer would pay back over time. This can be seen as a promise to pay. Part of the function of banks is the extension of credit and loans. The customer had provided false information to the bank, so that upon final review the bank withdrew the agreement to fund the loan; any payment the bank would have paid is now not going to be paid because of the false information provided upon application of the loan. The clause "for any reason" is extremely broad, and since the bank had agreed to initially make payment, and the car was released based upon that agreement, once the loan was rejected the bank had, for all intents and purposes, failed to pay. The exclusion should apply.

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