Two recent cases that attracted a lot of attention seem to involve different issues, but they actually have a lot in common. In one, SCM and ACC contributor John Stein brought to our attention a recent fire in a Sacramento repair shop that destroyed a number of Porsches. In the other, SCMer Joel Gardner shared a very lengthy Internet chat-board thread about a Ferrari FF that was damaged while being driven by a dealer’s employee.
The Sacramento shop was completely destroyed during a three-alarm fire that also destroyed a number of Porsches — 356s, Speedsters, early 911s, 914s, and the owner’s 1973 911 Carrera RSR, which was reputed to be the world’s most original RSR. The cause of the fire has not been officially determined, but at least one report attributed it to arson.
The owner of the Ferrari FF had purchased it three months earlier and had driven it about 1,700 miles. He returned it to the dealer to fix a wheel-vibration issue. While test driving it, the mechanic crashed it to the tune of a $50,000 repair. The FF has been repaired, but the owner says he is hesitant to pick it up and wants a new FF.
In each of these Legal Files, there are two separate insurance coverages that apply. One is the owner’s auto policy. The other is the shop’s liability policy. The coverage probably overlaps.
Always file a claim on your policy
In each case, it is critical for the car owner to make a claim on his auto policy. That is clearly contrary to the overwhelming sentiment of the posters in the 11-page Internet chat about the FF, but that is how these things work. The owner should not hesitate to bring his insurance carrier into the mix for several reasons:
First, it is hard to know that the shop’s policy will cover the loss, and failure to promptly report the claim to your auto-policy carrier could leave you without any coverage.
Second, the shop’s policy may carry lower coverage amounts than your auto policy.
Finally, your auto-policy carrier might do all the work for you, perhaps avoiding unrecoverable legal fees on your part.
If the shop is liable for the loss, your insurance carrier will undoubtedly pursue the claim against the shop’s carrier. That liability arises under a legal principle called “subrogation.” By paying your claim, your insurance carrier acquires your legal rights against the shop, and can pursue that claim against the shop and its insurance carrier.
You should not be penalized by your carrier for the claim.
In the case of the RSR, which was the property of the shop owner, reporting the loss to his insurance company would be his only recourse, as there is no third party involved.
In the case of the Porsche fire, whether the shop is liable for the loss of customers’ cars depends entirely upon whether it was negligent.
Legally, the shop is required to exercise reasonable care in storing and securing customers’ cars. In the case of a fire, that turns on the cause of the fire and whether the shop should have taken steps to prevent it. For example, if the cause was leaving oily rags next to a 50-gallon gas drum, negligence would seem to be likely. If it was faulty electrical wiring, the shop might not be liable unless it had reason to know about the condition. If the cause was arson, then liability would require some pretty unusual facts, such as leaving the shop unlocked at night and so on.
In the case of the crashed FF, we can easily imagine scenarios in which the mechanic just screwed up and crashed the car. If that happened, then the dealer would be liable, as the employer is liable for the employee’s negligence.
But if the crash was attributable to another driver’s negligence, then the dealer would not be liable, and recourse would have to be aimed at the other driver.
The point to take away is that the shop or dealer is not automatically liable just because they had possession of your car. They are not insurers. Their liability is based entirely upon their negligence, and if they weren’t negligent, then your policy is the only source of recovery.
Another angle is that the shop’s insurance coverage may be insufficient to cover all of the damage to all of the cars. The Porsche shop fire would likely be considered a single event, and insurance liability is undoubtedly limited to some policy amount.
If the limit is small, then all owners would be required to share the available coverage and seek recovery from the shop for the uninsured losses. That could bankrupt a repair shop, leaving the owners with no good source of recovery other than their own policies.
For these reasons, it is clear that the owners should not hesitate to make claims on their own policies as a protective measure.
Replacing the FF
The overwhelming majority of the chat-board posters are adamant that the dealer should “do the right thing” and give the owner a new FF. As eminently fair as that may sound, that isn’t necessarily how the world works.
First off, it’s not up to the dealership to decide anything. The dealer has undoubtedly filed a claim with its insurance carrier, and that makes the resolution of the claim entirely up to the insurance carrier. Under the terms of its policy, the dealer is required to keep quiet and let its carrier do its job as it deems appropriate. If the dealer tries to “fix” the problem, there is a risk of losing the insurance coverage.
Second, the owner did not have a new Ferrari — he had a 1,700-mile Ferrari. In the Ferrari resale world, that’s actually a lot of miles. Giving him a new FF would put him in a better economic position than he was in before the damage occurred.
Still, the owner is not necessarily required to take the repaired FF and call it good. The repaired FF will unquestionably be subject to “diminished value” no matter how expertly the repair is carried out. As a general rule, the diminished value is typically about 25% of the pre-loss value of the car. The owner is entitled to recover that loss in addition to getting the car repaired.
Let’s run the numbers on the FF. The owner posted that he paid $350,000 for the FF. Let’s say that, with 1,700 miles on the odometer, the resale value was $300,000. If the diminution in value is 25%, that is a $75,000 value loss. The owner would be entitled to have the FF repaired plus get a check for $75,000. He could then sell the repaired car for $225,000, add the $75,000 cash, add another $50,000 to cover the depreciation caused by his 1,700 miles of use, and he has $350,000 with which to buy a new FF.
That all sounds simple enough, but making the deal is not likely to be simple. The owner should get competent legal help right away, and the attorney will want to bring in a qualified automotive appraiser to establish the magnitude of the diminished value. That is all going to cost the owner some money, which he is not likely to recover, but there is little likelihood that the same settlement would be reached without attorney involvement. Sorry about that, but that is reality.
Restoring the RSR
The Internet photos show that the RSR was a total loss. Once the shop owner’s insurance carrier pays the claim, the insurance carrier becomes the owner of the burned-out Porsche.
Insurance carriers know how the hobby works — the wreck has value because it is what is left of a real RSR, and most anything can be restored. It won’t be original any longer, and it won’t be numbers-matching any more, but it should end up with greater value than the cost of the restoration in today’s market.
That means that the “salvage” has value, which can be tapped to recoup some of the carrier’s loss on the claim. The carrier will certainly hire a consultant for advice on what can be done.
The shop owner may consider buying the salvage back from the insurance carrier. It won’t be free, but he might be able to negotiate a decent buy because the insurance carrier saves a lot of effort and expense in reselling the salvage. The owner can then restore the car himself — and even make a profit, assuming he gets into it all at the right price and the market stays hot.
Check your coverage
Both cases suggest that we should all be careful about our agreed-value insurance policies. Under an agreed-value policy, the owner and the insurance carrier agree on the value of the car when the policy is purchased or renewed. If it is totaled, the insurance company pays the agreed value without hesitation, and that avoids all legal wrangling about the value of the car. For this reason, “Legal Files” has always recommended agreed-value policies.
In today’s hot collector car market, the major advantage of an agreed-value policy can also be its major defect — it sets the value of the car and neither party can dispute it. When the market moves up as quickly as it has in recent years, the agreed value can easily be under market. That means that your insurance payoff will not be enough to replace the car.
The obvious solution is to keep a good eye on the market and adjust the agreed value accordingly. Most advisors will suggest you do that at each annual renewal, but in today’s market, with some collector cars, that may not be often enough. Just look at the recent skyrocketing values of Porsche RSRs, McLaren F1s, Ferrari GTOs, and other blue-chip collectibles. ♦
John Draneas is an attorney in Oregon. His comments are general in nature and are not intended to substitute for consultation with an attorney. He can be reached through www.draneaslaw.com.