By LeRoy H. Utschig, CPCU, ARM

This article will address some of the unique coverages and exclusions of garage insurance. Garage insurance can be used for a wide range of exposures. A small garage with one gasoline pump can be insured on a garage form. The franchise auto dealer with a thousand cars also can be covered by the garage form. Self-service gasoline stations, car washes, auto body shops, and auto tow truck operations can be insured by the form, too.

Some commercial accounts can be insured by either a garage form or a commercial general liability contract. Some businesses that do not touch a customer's automobile can be insured with either form. A self-service gasoline station is one example.

Insuring agreement exclusion

In the insuring agreement of a garage policy, non-garage operations are excluded. For example, a business we'll call Small Gas Station, Inc. (SGS), sold about $300,000 in gasoline, car wash and auto repairs. SGS also sold about $350,000 worth of groceries, including some ready-made coleslaw.

When coleslaw sits in the sun for an hour at a picnic, the combination of ingredients can become quite deadly. One of SGS's customers purchased coleslaw and did let it sit in the sun. Several people became quite ill and had to be taken to the emergency room at a nearby hospital. An insurance claim was presented. At first, there appeared to be coverage for the injury, but then the insurer denied coverage for the claim. The denial was based on the wording in the insuring agreement that coverage was for garage operations. The insurer took the position that SGS's sale of $350,000 of groceries should not be considered as part of the business's garage operations.

There is no definite rule regarding when a firm is solely a garage operation and when it is not entirely a garage operation. Certainly the service station selling cigarettes and candy from a vending machine is a garage operation. Small Gas Station's operation was not considered to be entirely a garage operation as meant by the garage insurance form.

I recommend the in-tandem use of a commercial general liability contract and a garage form for those operations that have an exposure(s) that is not clearly only a garage account. Depending upon the underwriter and the exposure that exists, you might experience any of several pricing approaches. If the underwriter thinks that the non-garage exposure is minor, the general liability contract will be attached for no premium charge. A different underwriter might charge a flat fee of $100 to attach the general liability policy. For still other types of exposures, the underwriter might charge garage premiums for the garage exposure and full general liability premiums for the non-garage exposure(s).

Customer coverage

Garage insurance does not protect a garage customer while the client is operating a garage-owned vehicle. Auto dealers have the option of providing insurance for the customer while the consumer is driving a garage unit.

An actual loss in Philadelphia demonstrates some of the problems resulting from insuring an auto dealer's customers. A business we'll call Philadelphia Dealer, LLC (PDL), provided coverage for its customers while prospective car buyers were test driving any of PDL's autos. A woman came into the show room and asked to test drive a vehicle. One of the salespeople accompanied her. During that test drive, the prospective buyer caused a very serious accident. Since PDL's garage policy was set up to protect the prospective customer, the dealership's entire $500,000 liability limit was used on behalf of the prospective customer. There was no coverage left to protect the dealer!

This loss provides a good illustration of why an auto dealership would not want to provide any coverage to the garage's customers. Another reason for not covering the customers is that there is a 25% increase in the dealer's liability premium if its garage contract protects the customers.

However, there are potential problems if the dealer's coverage does not protect the customer. A loss that occurred in central Illinois during the late 1980s illustrates some of the problems. A business we'll call Central Illinois Dealer, Inc. (CID), did not provide coverage for its customers while they were driving CID's autos if the consumer had auto liability limits equal to or higher than the financial responsibility limits.

A woman customer had an accident while driving one of CID's vehicles. She was at fault and had her personal insurance with a large direct writer insurance company.

CID's garage policy protected the dealership. However, CID's policy was not going to pay anything to the injured person since there was no liability on the part of the dealership. The customer was told to have her own insurance pay for the claim. The lady's insurer stated that it had never heard of the Insurance Services Office (ISO) and was not about to recognize any ISO policy provision. The insurer refused to pay for the claim and insisted that the garage was to pay. The dealer's insurance agent got involved and a complaint was made to the Illinois Department of Insurance. The department of insurance backed up the large direct writer and said that it did not have to pay.

Meanwhile, the dealer was concerned about its reputation as the claim was not being paid. So, the dealer paid the claim (about $1,500) out of its own pocket and then expected reimbursement from CID's insurer.

Central Illinois Dealer's loss gives an indication of the possible problems associated with not providing liability coverage to a dealer's customers. My recommendation is that these two loss scenarios be discussed with a dealer to aid them in making their decision. Certainly, the decision to protect or not to protect garage customers is the dealer's decision. Never should an insurance agent make this decision for a dealer account.

The customer coverage is activated by checking item number five of the dealers' declaration page.

New lot limit

Physical damage coverage for vehicles owned by a dealership is covered by the garage form. Two of the generic names for this coverage are "open lot coverage" or "dealer's form." The coverage may be written on either a fixed limit basis or reporting form basis. Every franchise dealer I have ever worked with has used the reporting form basis. Smaller used car lots tend to use the fixed limit basis.

Dealer's coverage has a provision to provide automatic coverage in the event that a dealer starts to use a new lot during the course of a month. There is a limit that applies to this coverage for new lots. Any amount can be used to apply to the new lot.

To illustrate a potential problem, consider a dealer we'll call Big Dealer, Ltd., which has several storage lots on which the limits per lot were about $2 million plus.

During the course of a month, Big Dealer starts to use a new lot. A hailstorm causes about $1,250,000 damage at the new lot. After the adjusters make a preliminary estimate of the total damage, they tell Big Dealer that the limit applying at the new lot is $250,000. In other words, $1,000,000 of the loss is not insured!

There is absolutely no reason why the limit for new lots would ever be too low. Any amount can be used since there is no restriction in the amount that can be shown. An insurance company will get its premium for the exposure because the insured must report that new lot and its values within 45 days after it begins to use it. No premium charge is made for showing any limit for new lot coverage. It is unfathomable to me why a free coverage would not have an adequate limit. My recommendation is that the new lot limit be similar to the limit(s) a dealer is using at its currently used locations.

The need for accurate reports

Dealerships face another potential problem when they file inaccurate reports of their inventory. Let's assume a hailstorm damages much of the inventory at a dealership called Northeast Iowa Autos (NIA). Upon arriving at the loss scene, the first thing that the adjusters do is to check the insured's records. The dealer had been submitting reports of values to the insurance company each month. It is easy to determine what values a dealership has on a given day because computers calculate this value daily. Both the cars that are sold and those that are received are entered into the computer. Actually, many dealer's computers compute this total value number after each sale and purchase.

Northwest Iowa Autos has a
$5 million policy limit. At the end of the prior month, the business had reported values on hand of $2,600,000. Actual values on hand at the end of the prior month, per the dealer's own records, were $4,200,000. As the values reported were incorrect, the insured will have an amount deducted from each damaged car in the same percentage as the values reported were wrong. The insured will get 62% ($2,600,000 / $4,200,000 = 62%) of the loss on each car. Average damage per car was $2,600 and the insured receives an average loss settlement of $1,612 ($2,600 X .62 = $1,612).

Coinsurance

One loss situation involving a Midwest car dealership during the 1980s illustrates the effect of coinsurance on a garage policy. The dealership was covered by a non-reporting dealers' form written with a $30,000 limit applying to physical damage on the stock held for sale. This limit was not changed for several renewals, which was okay because the dealership had no losses. However, a coinsurance problem became apparent when the insured called to report a loss. While traveling in Colorado with his girlfriend, he had an accident which nearly totaled his $25,000 motor home. The motor home was part of the dealership's inventory.

The first thing that the adjuster asked for was the value of the used vehicles on the date of loss. Including the value of the motor home, the dealership had an inventory value of $90,000. Since the policy limit was $30,000 and the actual value was $90,000, the insurer would pay one-third ($30,000 /$90,000) of the loss. Naturally the insurance agent was unhappy and said that there was no 100% coinsurance clause to be found in the contract. This 100% coinsurance provision is not called coinsurance in the dealer form. It is found in the "limits of insurance" section under the "non-reporting premium basis" clause.

Advertising injury

Another loss involving a car dealership occurred near Cedar Rapids, Iowa, during the 1980s. A small, local advertising agency kept pestering a car dealership to do some advertising. Finally, the dealership agreed to let the advertising agency put up some billboards. The billboard advertising appeared to be very good. Everything was fine until the owner of an East Coast auto dealership drove through Iowa and saw the billboards. The local advertising agency had copied the East Coast dealer's billboard ads exactly. The Iowa dealership was sued by the East Coast dealership, and when the Iowa dealer notified its insurance carrier, it was told it had no advertising coverage.

Unlike a commercial general liability policy, garage insurance does not automatically provide the following coverages: personal injury, advertising injury, host liquor liability, fire legal liability, medical malpractice, non-owned watercraft, additional persons insured, automatic coverage for 90 days for newly acquired businesses, and limited worldwide coverages. All of these loss exposures can be insured by adding ISO's Form CA 25140797, Broadened Coverage--Garages.

False pretense

Another potential uninsured loss that auto dealers can suffer involves fraud. For example, a customer trades in a late model Chevrolet and purchases a new car through Auto Dealer, Inc. Shortly after this, Auto Dealer sells the late model Chevrolet. About three weeks later, the state police arrive at the home of the person who'd purchased the late model Chevrolet. The car is confiscated by the state police because they identify it as a stolen car.

Here is how the scam is carried out. The perpetrator buys a late model Chevrolet from a junkyard. Then he steals an identical late model Chevrolet. After he switches the vehicle identification numbers from the junker to the stolen vehicle, he trades in the stolen car using the title and ID numbers from the junker.

This type of loss is referred to as a false pretense loss. Due to the use of a fraudulent scheme, the dealer voluntarily parts with the title to a vehicle. In another common scheme, the dealer signs over the title of a vehicle to someone who gives the dealer a phony check.

Upon reporting the loss to its insurer, the auto dealer learns that it does not have coverage for false pretense losses. False pretense coverage can be endorsed to a dealer's policy.

Summary

* The garage form may not cover operations that are not clearly garage activities.

* A conscious decision needs to be made whether a given auto dealer's liability coverage should extend to customers while they are driving garage-owned vehicles.

* Use an appropriate limit for the feature that automatically covers storage at new lots.

* Accurate reports need to be made.

* Non-reporting dealer coverage needs to recognize that there is in effect a 100% coinsurance clause applying to this coverage.

* Broadened coverages can be endorsed to provide several coverages that are automatically covered by a commercial general liability contract.

* False pretense losses are not automatically covered by the garage form but can be added by endorsement. *