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2008: following recent articles (case studies) appearing in the Ombudsman News (issue 66 - click here to read the articles) we contacted the FOS in an attempt to obtain more definitive guidance in respect of values in the hope of assisting both insured's and insurers. After all, this is often a point of contention and can cause some policyholders to be left with a poor impression of the insurance industry. Haggling over value causes delays, wastes claims handlers time and should, in the main, be unnecessary in these days of guides and on-line sale facilities. The results of the exchanges with the FOS can be read by clicking here. 1. Which Market Value? An overseas car policy provides for payment of ' market value' in the event of total loss but does not define this. The policy makes no provision for deduction of tax from any settlement. The insurer argued that unless a deduction were made in respect of tax on settlement of a claim the policyholder having bought tax-free is effectively making a profit. They described it as ' a nice little earner' ! A proposed settlement of a claim for a vehicle bought free of tax, kept and accidentally destroyed in Germany was on the basis of a UK value with a deduction of approximately 20% for tax. The Ombudsman found the ' profit' argument unsustainable. Any advantage to the policyholder comes from his being able to purchase the car at a concessionary price in the first place. It has, however, no effect on subsequent market value and in the absence of a specific policy provision there can be no deduction for tax. As the policy fails to define which ' market' should apply for valuation it was the Ombudsman' s view that it should be valued in both and the valuation most beneficial to the policyholder should apply. AR 93 para 7.18 p. 45 2. Reconstructed Cars We receive numerous complaints concerning insurers' valuations of written-off cars. During this year we considered a number of case where insurers' valuations had been lower than otherwise because of the fact that the car had been entered on the available registers as previously treated as a total loss. This has caused me to review my treatment of such cases. One register, maintained by Hire Purchase Information, has just recently been opened to general use, on payment of a fee; the other, the Motor Industry Anti-Theft and Fraud Register, is only available to insurers. The proposition that the market value of an object which has been damaged and restored, however skilfully, would be less than its value if that had not happened was dealt with in the Annual Report for 1990 [See: ACCIDENT DEPRECIATION para 2] and our approach has not changed. The decisions on which that approach is based postulated that the facts of damage and repair were known to the hypothetical buyer in the market. What, however, if the buyer is, not unreasonably, ignorant of that fact? By way of guidance we took notice of the case of State Insurance Office v Bettany [1992] 2 NZLR 275, in which the New Zealand Court of Appeal dealt with the issue in respect of a car which had substantial but undetectable rust, revealed only by the collision damage. The proposition that the vehicle would be dealt with in the market as sound was accepted by the court as a basis for a judgment based on the value in its apparent condition. The court accepted that there could be an expert market, where these defects might well be known and allowed for in dealings, and a non-expert market in which that would not happen; it is a question of fact which market provides the proper measure of value in each case. A monolithic market is not inevitable and the existence of two such markets is more likely when the difference stems from the accessibility of registers rather than the ability to inspect the vehicle itself. The parallel of that 1992 decision to the written-off but restored vehicle is compelling. Until the opening of the HPI register to public inspection becomes far more widely known and its use is common or routine, ordinary consumers are unlikely to use it. Not only would such a consumer buy the vehicle at a price not depressed by knowledge of the entry (and of the earlier severe damage which led to the entry) but he might also sell it to a second consumer similarly unaware of the true facts. If that situation appears to exist, a fair and reasonable result does not require me to accept a discount on account of the unknown history, any more than did the hidden rust in the Bettany decision. If the circumstances of the purchase (e.g. a low price or buying from a salvage firm), the physical state of the vehicle is discoverable on reasonable inspection or indeed anything else shows that the purchaser must be taken to have known of the defect the new approach will not apply. That will be so even if the knowing purchaser might have sold on the vehicle without disclosing the defects. The market value for the knowing purchaser as owner will be that for blemished goods. Some insurers have reacted strongly to the adoption of this approach. However, the remedy is in their own hands. Search of the two registers before accepting proposals would enable them to inform consumers as to the true state of affairs at that stage. Use of the voluntary facility to make entries on the licensing system documents would give a warning to all. Insistence on the restoration of seriously damaged vehicles to an independently verified and acceptable standard would remove or reduce the risks associated with the current pressure for disposal of wrecked vehicles at a price reflecting the rebuilding potential and not just the scrap metal value. If any of those steps are thought economically unattractive, it should be borne in mind that part of the cost of not taking them may well be the inability of insurers to rely on the hidden depreciation factor when settling claims. AR (93) para 6.76-6.80 p. 36 3. Previously written-off vehicle - market value The applicant paid £2,500 for a car which was stolen the following day; he made a claim under his policy. The insurer discovered that the vehicle had been previously written-off and had done in excess of 100,000 miles, and valued it at £1,000. It was considered that, as a matter of principle, it was wrong for the value of the vehicle to be affected by matters about which the purchaser neither knew, nor could reasonably have been expected to know. Computer records showing that a vehicle had been a previous total loss were not generally available to members of the public, and whilst there was now a scheme available whereby purchasers could check computer records it was not sufficiently widely advertised, nor currently used, to put the onus on a purchaser to use it as part of the standard precautions when buying a car. When a vehicle was purchased by a reasonably prudent purchaser who was not an expert in motor vehicles, it should be valued on the basis of what it appeared to be and not on a history of which the purchaser was ignorant. The applicant had paid a price for the vehicle which was in line with what might have been expected; had it been a particularly low price that might have put him on notice that there was something wrong with it. Moreover, it had passed its MOT a matter of days prior to the purchase which suggested that there was nothing about its condition to put the MOT examiner on notice. The inspector had recorded mileage of 36,177 which also suggested that the condition of the vehicle did not appear to be such as would have been expected with a car that had covered in excess of 100,000 miles. If an inspector would take the mileage at face value it would not seem unreasonable for a purchaser to have done likewise. If a reasonably prudent non-expert purchaser could not detect anything amiss with a vehicle, it was reasonable to assume that he, in turn, could have sold it in good faith, without difficulty, to a similar purchaser. Accordingly, the price paid shortly before the theft would appear to be a proper measure of its market value, which was the amount of the award made with interest. BN (94) 1 p. 8 4. Reconstructed vehicle - ' market value' - Policyholder' s state of knowledge The applicant paid £12,000 in 1990 for a BMW, which was stolen with all service records in 1993. In the course of enquiries, the insurer discovered that severe damage had been caused to the car in a collision about a year before its purchase when the mileage was 12,208. The news came as a surprise to the applicant who had no reason to think that the car had ever sustained any serious damage or undergone structural repairs. The mileage recorded at the time of the collision was inconsistent with the figure of 11,615 shown on the MOT certificate three months prior to the theft. The insurer asserted that the market value at the time of the theft should take into account what was now known about the car' s history - it had been declared a total write-off - and the absence of any service records, or repair work. Its engineer put the market value at £7,100. ' Market value' was not defined in the policy; it was generally taken to mean the price which the applicant would have to pay at the time of the loss to acquire a car of the same age and type, and in similar condition. Assessing market value could be particularly difficult when the car was no longer available for inspection and the records of routine maintenance and servicing were missing. A further difficulty arose in cases involving a car which was treated for the purposes of an earlier insurance claim as being beyond economical repair, but which was then repaired or reconstructed and put back on the road. The Ombudsman' s approach to such cases depended on whether or not the policyholder had, at the time of the loss, any knowledge of the earlier damage and repair work. On the basis of the available evidence in this case, he was satisfied that the applicant did not know, nor have any reason to suspect, that the car was anything other than a standard model in good condition for its age and not having undergone extensive repairs. The price of £12,000 paid was not significantly lower than might have been expected, and she had used the car for 2 years without, apparently, any problems. The insurer had also identified certain discrepancies concerning the description of the car and suggested that the car which had been purchased in 1990 might not have been identical to the vehicle to which the registration number was originally allocated. It also urged the Ombudsman to take into account the discrepancy concerning the mileage, in addition to making representations about the engine. However, those were not matters of which the applicant was aware at the time of the loss and the Ombudsman did not regard it as appropriate for the market value of the car in April 1993 to be assessed by reference to the ' expert market' in which factors likely to depress the vehicle' s price would be known to, or suspected by, motor traders and expert engineers. It would not be equitable to make any deduction to take account of the history of the car. According to Glass' s Guide, at the time of the loss the applicant would have had to pay approximately £9,800 to replace the car with one of the same age, in good condition and with a recorded mileage of 12,500, mileage estimated by the applicant at the time of the loss. Accordingly, the insurer was required to pay the difference between £9,800 and its offer figure, plus interest. BN (94) 2 p. 6 5. Motor vehicle valuations (again!) Disputes over the value of motor vehicles that have been stolen or written off continue to be referred to the Bureau with almost monotonous regularity. The analysis of cases in para 1.2 indicates there were 274 of these during 1994. It surprises me that most insurers in the UK continue to be resistant to a practice which I understand is widely adopted by their counterparts in South Africa: policies specify that the value of a vehicle in a total loss claim will be determined by reference to a standard trade guide. The publishers of the guide selected need to satisfy all concerned that it is free from bias in favour of insurer, motorist or motor dealer, and insurers need to make sure that policyholders are aware that this objective yardstick is included in their policies. Subject to that, such a practice ought to reduce considerably the scope for disputes of this kind, and it was pleasing to hear from one member of the Bureau recently that it is planning to give it a try here. Meanwhile, in those cases referred to us, we do the best we can. Usually the policy provides for payment of the ' market value' of the vehicle (or words to that effect). How do we establish that? So far as the Bureau is concerned, two points are now clear. First, that market value is not the second-hand value of the car (unless the policyholder was in fact intending to sell it before it was stolen or written off) but what a replacement of similar age, condition and so on would cost. Second, [See: VALUATION OF MOTOR VEHICLES para 2] there are different markets. The appropriate one is not, as insurers often assume, the market for private sale and purchase of vehicles, through newspaper ads and the like, unless there is evidence to suggest that that is the market in which the policyholder intends to buy a replacement. As a general rule, the appropriate market will be the public one, so the policyholder gets what it would cost to replace the vehicle through a motor dealer. How do we find out what that would be? All relevant evidence has to be considered, but in particular we have to rely on standard trade guides! Profiteering policyholders and reticent insurers In most vehicle valuation disputes, a decision on the market value of the vehicle is the end of the problem. In one case, it was only the beginning. The unfortunate policyholder' s car was stolen. When recovered, it was in such a terrible state that the insurer agreed it should be considered a total loss. The car had been a considerable bargain. It had been bought at auction only three months prior to the loss, for £2,800. The insurer' s engineer had valued the vehicle at £4,250. The insurer did not disclose this to the policyholder, but said that as the vehicle had been purchased in an auction, it would offer £2,700, subject to the policy excess of £350. It subsequently increased this offer to £3,500, but the policyholder was still not satisfied that that would enable him to obtain a comparable vehicle, whether at auction or elsewhere, so the matter came to me. The insurer' s main argument was that to pay the policyholder anything substantially more than he had paid for the vehicle would enable him to profit from his loss. This was a logic which I could not accept. The policyholder had made a good buy. It was not something he could necessarily repeat, even at auction, and in any case he was not obliged to replace the vehicle in that way. He was entitled to be indemnified on the basis of the actual value of the car, not what he had paid. We concluded (with the help of a standard trade guide) that the value of the car was in the region of £4,575. This was not so different from the engineer' s valuation. We had to point out to the insurer our considerable concern over its failure to tell the policyholder that the actual value of the vehicle, as assessed by its engineer, was so much greater than the amount it was offering. For it to tell the policyholder that its offer took into account the fact that the vehicle had been purchased at auction was not enough. They must accept that the obligation is mutual. If the insurer has had the benefit of a professional valuation for the vehicle in one of these valuation disputes, it should normally tell the policyholder what that is. If the insurer does not accept the valuation, the policyholder should be told why. Then everyone is on a more or less level playing field when it comes to agreeing on a figure that is fair. AR 94 para 2.8 p. 33 6. Valuation - car previously written-off - no obvious signs of damage - whether a reduction from market value appropriate The policyholder' s car was covered by comprehensive insurance. In December 1995, it was involved in an accident. It was inspected by the insurer' s engineer, who valued it at £1,350 (net of the £75 excess). He adjudged it as beyond economical repair. The insurer made an offer of £1,375 to the policyholder' s broker, but it was rejected. In the meantime, the insurer had checked with MIAFTR and discovered that the car had previously been written-off. Its engineer accordingly recommended a deduction of approximately 20%. The insurer issued a revised offer of £1,125. Complaint upheld If a policyholder (who had no access to the confidential register) bought a car in good faith, paid the market value for it and the vehicle had no obvious signs of damage, then the policyholder should not be prejudiced because the vehicle had been previously written-off. We noted that the engineer had not spotted the previous repairs and we concluded that it was not reasonable to make a deduction in these circumstances. If an insurer intended to impose a deduction on a car which had previously been written-off, even when the purchaser had no knowledge of this damage and the car had no obvious signs of such damage, then the proposer had to be warned of this approach before the policy was issued. Insurers which intended to offer reduced settlements should check MIAFTR before accepting any proposal. Furthermore, the insurer' s original offer appeared low. We asked its engineer to reconsider his assessment. He advised that the maximum retail valuation, reflecting the late-registration prefix and below average mileage, was £1,750. The insurer was required to pay this amount and to waive the excess to take account of the delayed payment and the policyholder' s expenses. BN (96) 10.30 p. 11 1. Valuation - market value - whether car in ' Guide' condition The claimant bought her car for £700 in a private transaction. She fitted new tyres and a radio-cassette player and replaced part of the exhaust and the battery. When the car was stolen two months later, the insurer valued her loss at £700, less the £100 excess. The claimant was aggrieved and argued that her car had been worth £1,400. The insurer agreed to pay a further £182.50 for the tyres and radio/cassette player. Complaint rejected The claimant was entitled, under the terms of her policy, to receive the market value. ' Market value' should be assessed by reference to the cost of replacement, that is, what the claimant would have to pay to obtain a car equivalent to the one lost. The evidence indicated that the car' s value should not be assessed by reference to the trade guides. It was not in ' Guide' condition: it had been hand-painted and this would have had a significant impact on its worth. The price paid for the car was not irrelevant and there was no evidence that the claimant had obtained a genuine bargain. On the contrary, the vendor had only sold the car after reducing its asking price. Finally, the money spent on replacing the exhaust and battery did not enhance the car' s value, but were merely matters of maintenance. Taking all these factors into consideration, the insurer' s offer was fair and should not be increased. BN (96) 10.31 p. 12 8. Valuation - market value - previous damage - measure of reduction appropriate The policyholder disputed the insurer' s valuation of his car. The insurer had made a deduction of £300, to reflect the cost of repairing damage which predated the loss and had not been repaired. Complaint upheld The insurer was justified in reducing its valuation from the Guide recommendation, to reflect damage which existed at the time of the loss. However, the appropriate deduction was the amount by which the market value had been diminished, not the full cost of repairs. In this case, the proper assessment was £200. The insurer had neglected to compensate the policyholder for the loss of his personal effects, which were limited under the policy to a maximum of £100. In addition, it agreed to make an ex gratia payment of £50 to reflect delays in handling the claim. BN (96) 10.32 p. 12 9. References (a) State Insurance Office v Bettany [1992] 2 NZLR 275 |
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