By Andrew Janquitto, Partner, Mudd, Harrison & Burch, L.L.P
Chapter 62 examines physical damage coverage for motor vehicles, which is a first-party insurance coverage designed to protect the insured vehicle from direct and accidental loss caused by a variety of transportation and non-transportation risks.
Section 62.01 provides an introduction to the three types of physical damage coverages: collision, comprehensive, and named-perils. Collision and comprehensive are the most common forms and are available in both personal and commercial lines. An insured can buy either or both. They are designed to be complementary. The third form, named-perils coverage, is more commonly found today in commercial lines. An insured might buy collision and named-perils or one and not the other. An insured would not buy comprehensive and named-perils coverage because the former encompasses all losses covered by the latter. Section 62.01 also outlines two important areas in any coverage dispute: state regulation and contract drafting and interpretation. Section 62.01[2][a] provides an overview of the state regulation of physical damage coverage. No state mandates physical damage coverage, but a few require that it be offered. Many states, however, regulate ancillary aspects of physical damage coverage or losses under the coverage. Section 62.01[2][b] provides insight into a sampling of the type of subjects addressed by state statutes or regulations. Issues related to the language used in insurance policies providing physical damage is the subject of Section 62.01[3]. As explained by Section 62.01[3][a], the language varies from insurer to insurer, and from personal lines to commercial lines. Section 62.01[3][b] covers policy forms developed by the Insurance Services Office, Inc., more commonly known as ISO. A brief discussion of two ISO forms, the Personal Auto Policy and the Business Auto Policy, is contained therein. These forms are used throughout this chapter to illustrate the type of language found in insurance policies; however, the exact language of the policy involved in the dispute must be analyzed because the language varies and many insurers modify ISO forms. A few major insurers do not use ISO forms, preferring instead to draft their own forms. The rules of contract construction employed by states have a significant bearing on any insurance coverage dispute. Section 62.01[3][c] discusses the importance of consulting the specific rules employed, which vary from jurisdiction to jurisdiction and may, ultimately, be outcome determinative. A similar topic-the burdens of proof placed on insureds and insurers in coverage disputes-is addressed by Section 62.01[3][d]. These burdens, like the rules of construction, control the outcomes of many cases. Finally, Section 62.01[3][e] points out the important distinction between statutory requirements and policy provisions. In no instance can a policy provide less coverage than mandated by statute, but nothing prevents an insurer from providing more coverage.
Section 62.02 addresses collision coverage, which provides coverage for damage to or loss of the insured motor vehicle caused by three specific perils. Section 62.01 provides a brief outline of the history of collision coverage. Section 62.01[2][a] focuses on the risk known as "upset." In most upset cases, the vehicle flips over on its side or rolls repeatedly. But upset as a risk is broader and involves any loss of equilibrium by the insured vehicle. Section 62.02[2][b] tackles the archetypal risk covered by collision coverage-the collision of the insured vehicle with another vehicle. Section 62.02[2][b][i] highlights the definition of collision, which is broadly construed as the striking together of two bodies. A collision between two vehicles can involve a moving vehicle and a stationary vehicle or two moving vehicles. Section 62.02[2][b][ii] considers the language used by many insurers, which defines collision as the impact with another vehicle (rather than another motor vehicle). Section 62.02[2][c] examines the last risk falling within collision coverage-the impact of the insured vehicle with another object. Section 62.02[2][c][i] shows that "object" has been repeatedly interpreted by courts in a broad manner to include anything tangible. Section 62.02[2][c][ii] discusses the controversial topic of impacts between the insured vehicle and the roadway. Section 62.02[2][c][ii] discusses another controversial topic: impacts with flying or falling objects. Many of the appellate cases involving impacts with the roadway or impacts with flying or falling objects were decided under different policy language. Additionally, many of those decisions were rendered in the early days of comprehensive coverage. In general, the judicial treatment of collision and comprehensive coverage, and particularly how the two relate to each other, has evolved, thus bringing into question the precedential value of some of the earlier decisions.
Section 62.03 is concerned with the second type of physical damage coverage, "comprehensive coverage." Section 62.03[1] discusses the origin of comprehensive coverage, which is an all-risks coverage designed to cover damage to or loss of the insured motor vehicle from any cause except those falling within collision coverage. Section 62.03[2] sets forth several classic forms of insuring agreements for true comprehensive coverage. Section 62.03[3] discusses "other than collision" coverage, which is what many insurers, including those using the ISO's personal auto policy form, prefer to call coverage for losses not covered by collision coverage. Discussed in this section is whether "other than collision" coverage is comprehensive coverage or named-perils coverage. Although there is at least one appellate decision that indicates "other than collision" is not an all-risks coverage, this decision is at odds with the history and language of "other than collision" coverage. Section 62.03[4] details the perils traditionally enumerated under comprehensive coverage. Section 62.03[5] provides a comparison of collision and comprehensive coverage, which are designed to be mutually exclusive.
The third type of physical damage coverage-named-perils coverage-is the subject of Section 62.04. Like comprehensive coverage, named-perils coverage is designed to cover certain risks not falling within collision coverage. It is less expensive and therefore not as encompassing as comprehensive coverage. As its name suggests, it covers losses caused only by named or enumerated perils. Section 62.04[1] discusses the origin of named-perils coverage. Section 62.04[2] compares comprehensive coverage and named-perils coverage: the former is an all-risks, or open-perils, coverage, while the latter is restricted to the named-perils. The perils traditionally enumerated under named perils coverage are set forth and discussed in 62.04[3]. They are similar but not identical to many of the perils that traditionally are listed in policies as falling within comprehensive coverage.
Section 62.05 discusses the concept of direct and accidental loss. Section 62.05[1] discusses the history of the phrase "direct and accidental loss." Section 62.05[2] treats the meaning of "direct loss," which is interpreted by courts to require a causal link, usually expressed as the proximate or efficient cause. The meaning of "accidental loss" is the subject of section 62.05[3]. An "accidental loss" is any loss that is not intentionally caused by the insured seeking coverage: it includes losses caused by forces of nature, losses caused negligently by the insured, and losses caused intentionally by someone other than the insured.
Section 62.06 is directed at the vehicles typically covered by physical damage coverage. Section 62.06[1] deals with the three most commonly covered vehicles: vehicles designated on the declarations page, vehicles that temporarily substitute for the designated vehicles, and newly acquired vehicles, which come in two types: replacement vehicles and additional vehicles. A replacement vehicle replaces a designated vehicle; an additional vehicle is one that is added to the vehicles designated. Section 62.06[2] concerns another category of vehicles that are often covered by physical damage coverage: rental vehicles and borrowed vehicles. In several states, coverage for rental vehicles is mandatory.
The exclusions and limitations traditionally applicable to physical damage coverage are set forth and discussed in Section 62.07. Section 62.07[1] discusses nine such exclusions. Section 62.07[2] examines two limitations: territorial restrictions and time limitations. Most policies are applicable to the United States, its territories and Canada, but some insurers expand the coverage territory for a variety of reasons. Nearly all policies restrict the coverages provided, including physical damage coverage, to accident and losses that occur within a designated policy period, which is set forth on the declarations page.
Issues revolving around the insurer's payment obligation are addressed in Section 62.08. The insurer's payment obligation, as detailed in Section 62.08[1], varies depending upon whether there is a total or partial loss. Section 62.08[1][b] addresses issues related to total losses. In general, the insurer's obligation when there is a total loss is to pay the actual cash value of the vehicle. As explained in Section 62.08[1][b][i], the actual cash value is generally interpreted to mean the market value, which can be determined in variety of different ways. Typically, the insurer consults industry publications or databases of comparable vehicles in the geographic area. This topic is addressed in Section 62.08[1][b][ii]. Insurers are also, as noted in Section 62.08[1][b][iii], are allowed by contract to account for depreciation when determining the actual cash value. Often, a vehicle is declared a constructive total loss: Section 62.08[1][b][iv] explains that this occurs when the cost of repair exceeds a certain percentage of the vehicle's actual cash value. State statutes and regulations may establish a percentage at which the vehicle must be declared a constructive total loss. Section 62.08[1][b][v] addresses certain policies that require the insurer to pay more than the vehicle's actual cash value. These include replacement policies, which obligate the insurer to pay for the replacement value of the vehicle, and total loss or GAP policies, which obligate the insurer to pay more than the actual cash value of a vehicle if there is an outstanding loan in an amount greater than the vehicle's value. Stated-value policies, which require the insurer to pay a pre-determined amount in the case of a total loss, are the subject of Section 62.08[1][b][vi]. These policies are often used when the insured vehicle has unique characteristics, such as an antique or classic vehicle. When an insurer pays a total loss, policies often require the insurer to pay for incidental expenses. Section 62.08[1][b][vii] deals with this topic. Section 62.08[1][b][viii] addresses salvage. When a vehicle is a total loss, the wreckage, known as salvage, has a value. The insurer usually retains the right to the salvage, but, in some circumstances, such as when the insured keeps the wreckage, the insurer deducts the amount of the salvage from its payment.
Partial losses are the subject of Section 62.08[1][c]. The insurer is typically required to pay the amount necessary to repair or replace with property of like kind and quality. This obligation is explained by Section 62.08[1][c][i]: it is generally considered to require the insurer to place the insured in possession of a vehicle that is the same or nearly the same as the insured vehicle in its pre-loss condition. By contract, an insurer often reserves the right to deduct from its payment the amount of any betterment, which occurs when a vehicle's value is enhanced beyond its pre-loss value by the repair or replacement. Section 62.08[1][c][ii] treats this topic. Section 62.08[1][c][iii] is concerned with diminished value claims, which are claims by insureds that a repaired vehicle has lost some of its value because of improper repairs, improper claims adjustment, or simply because of a perceived stigma attached to vehicles that have been involved in a loss and then repaired. States divide on whether the insurer must pay for diminished value claims, particularly those involving inherent diminished value. The majority rule is that policies that obligate the insurer to repair or replace with property of like kind and quality do not obligate the insurer to pay for inherent diminished value. Additionally, many policies now contain exclusions for diminished value claims. The use of designated repair facilities by insurers is addressed in Section 62.08[1][c][iv]. State statutes or regulations may restrict the use of such repair facilities.
Section 62.08 also addresses three other topics dealing with the insurer's payment obligation. Section 62.08[2] concerns the insured's deductible, which is a form of self-insurance. The insurer's payment obligation attaches above the amount of the deductible. Some statutes regulate the amount of the deductible. It is common for an insured to be given the choice of several deductibles. A higher deductible will reduce the premium. The same or different deductibles can apply to collision, comprehensive, and named-perils coverages. Policies usually list the deductible for each coverage on the declarations page. Many insuring agreements refer to the insurer's obligation to pay for the loss minus the applicable deductible, although some other policies have separate provisions that address the insurer's right to apply the deductible to a loss. Other insurance clauses are the subject of Section 62.08[3]. In concurrent coverage situations, they are designed to preclude the insured from recovery more than once for a loss. Additionally, they attempt to coordinate the allocation method among the insurers concurrently on the risk. There are three general types of other insurance clauses: pro-rata, excess, and escape. Pro-rata and excess clauses are quite common in physical damage coverage. The various rules for interpreting "other insurance" clauses are set forth and explained. Loss payee provisions are explained in Section 62.08[4]. There two general types. A simple loss payee clause makes the loss payee (i.e., the lienholder or secured party) an appointee to receive monies when the insured vehicle is damaged or destroyed. A standard loss payee clause makes the loss payee an appointee and provides certain protection against misconduct by the insured. Standard loss payee clauses are more common than simple loss payee clauses. The language varies considerably from insurer to insurer.
Many policies contain appraisal provisions. These are the subject of Section 62.09. An appraisal provision is not an arbitration provision, though they are often treated as such by courts. In the common appraisal provision, either the insured or the insurer can demand appraisal. The decision by the appraisers as to the amount of the loss is then binding under the typical policy provision.
If an insurer makes a payment under physical damage coverage, it becomes subrogated to the insured's rights against third-parties that caused the damage. This subrogation right is addressed in Section 62.10. Section 62.11 discusses "No Benefit to Bailee" provisions, which are found in many policies. These provisions are designed to preclude the application of physical damage coverage to bailees who have custody of the insured vehicle. Such provisions vary from insurer to insurer. Many apply only to bailees for hire.
The final section, Section 62.12, touches upon the application of bad faith liability to physical damage claims. In general, because physical damage coverage is a first-party coverage, the rules and principles applicable to bad faith liability in first-party claims are applicable to physical damage claims.
Andrew Janquitto is a partner in the Towson, Maryland, firm of Mudd, Harrison & Burch, L.L.P. He has a litigation and appellate practice with an emphasis on insurance coverage. He is the author of Maryland Motor Vehicle Insurance and several law review articles on insurance issues.
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