Type of Insurance Requested
The value of a physical damage loss on a business or personal auto is determined by the Limit of Insurance section of the Business Auto Policy or the Limit of Liability section of the Personal Auto Policy. Though the words are slightly different in each policy, the effect is the same, the company is liable for the smallest of the following amounts:
This provision in the policy raises a number of questions that are addressed in this report, including:
Texas court decisions have established actual cash value to be synonymous with fair market value, the price a willing purchaser who is under no obligation to buy would pay to a willing owner who is under no obligation to sell. This price can be quantified in one of three ways: (1) comparable sales; (2) the income capitalization approach; or (3) the cost to repair or replace less depreciation.
The comparable sales approach is typically used to determine the value of an auto that has been stolen or totally destroyed. Such valuations on “stock” autos are easy to determine, because there is an identifiable market for used autos. In other cases, such as classic or unusual autos, a professional appraisal may be needed.
With regard to partial losses, Texas court decisions and Texas Department of Insurance rulings make it clear that actual cash value is not a consideration when adjusting a claim on specific parts of an auto. See the next article.
Texas court decisions and TDI rulings do not permit an insurer to depreciate partial losses. (See Commissioner’s Bulletin #B-0014-0.) In effect, the actual cash value provision in Texas auto policies only applies to total losses. For partial losses, the insurer must pay the amount necessary to repair or replace the property with other property of like kind and quality.
Nothing in the policy or otherwise prevents an insurer from making loss adjustments based on used or after-market parts to make repairs, as long as they are deemed to be “of like kind and quality” as the damaged property at the time of the loss. The insurer can’t force the insured to accept such parts, but likewise is under no obligation to pay the increased cost of new parts or parts sold by a particular manufacturer.
Texas law prohibits an insurer from requiring an insured to use a specific repair shop. However, the insurer is under no obligation to pay more than a reasonable amount to repair the auto. The insurer is required to pay an amount that is sufficient to repair the damaged auto with like kind and quality, but not an increased amount just because the insured wants to use a higher-priced shop. The insured can have the auto repaired at the shop of his or her choice, but will have to pay the difference.
When an auto is repaired to its pre-damaged condition, a policyholder may assert that the auto’s market value after repair is less than its market value before the damage. The 2003 Texas Supreme Court decision in American Manufacturers Mutual Insurance Co. vs. Schaefer makes it clear that Texas auto policies do not cover diminished value. In its decision, the Supreme Court ruled that Texas policies do not obligate an insurer to pay for this diminished value, because the coverage is clearly limited to the lesser of the three amounts shown in the policy.
Physical damage coverage on autos can be provided on a stated amount basis by entering a specific amount for each auto in the declarations. (This should not be confused with the cost of the vehicle shown in the description section and used to determine the premium.) Covering autos on a stated amount is seldom a good idea, because the company’s liability is still limited to the actual cash value of the auto if that is less than the stated amount. A stated amount does not create a “valued policy.” There are only two reasons one should ever cover an auto on a stated amount basis: (1) when the insured only wants to pay for a specific amount of insurance that’s less than actual cash value (the loan amount, for example), or (2) when that’s the only way the company will provide coverage. In either case, the agent should make sure the insured understands how much he or she will recover in the event of a total loss and put it in writing.
There are situations where the insurer will have to pay more than the value (or stated amount) of the auto following a total loss. In Condition A.4.b of the BAP and Part E of the PAP, the insurer agrees to return stolen property at its expense. Towing charges fall into the category of returning stolen property, whether the auto was towed to the insured’s place or to a repair shop or storage lot. In Condition A.2.c.(2) of the BAP and in Part D of the PAP, the insured must take reasonable steps to protect the property from further damage. Taking the damaged or destroyed auto to a secure lot for storage pending adjustment of the claim and repairs would be an additional expense for which the company is liable in addition to the limit of insurance. In addition, the Vehicle Storage Facility Act (Section 2303.156 of the Texas Occupations Code) requires insurance companies that pay a claim of total loss on a vehicle in a storage facility to also pay any money owed to the operator of the facility for delivery of the vehicle to or storage of the vehicle in the facility, regardless of whether an amount accrued before the insurance company paid the claim.
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