The Texas Department of Insurance has received several complaints from policyholders that their insurers are not paying for loss due to confiscation of an automobile which the policyholder purchased as a bona fide purchaser.
The Texas Department of Insurance believes that coverage is provided. The Texas Insurance Code, art. 5.06 prescribes the policy forms (which also contain the exclusions) and endorsements that are to be used by insurers in writing motor vehicle insurance delivered, issued for delivery, or renewed in Texas. As a good faith purchaser for value, the insured has an insurable interest in the property for coverage to take effect even though the insured was never the legal owner. That the insured did not have legal title does not affect the insurable interest in the absence of facts showing that the insured knew or should have known that the automobile he purchased was stolen. Under the standard provisions of the Texas Personal Auto Policy, coverage is provided for "direct and accidental loss" to a covered auto. Confiscation of a stolen car from a bona fide purchaser is not a natural and probable result of the good faith purchase of the automobile and therefore is an accidental loss. The loss occurs when the injury or damage to the property is manifested, in this case, upon confiscation. Part D of the Policy states the exclusions to coverage. One of the eleven exclusions is loss due to seizure of a covered vehicle by law officers in which the insured is convicted under the Controlled Substances Act (either federal or Texas statute), thus showing that confiscations were contemplated in the drafting of the exclusions. None of the exclusions specifies loss due to seizure by law officers of a stolen vehicle of which the insured was a bona fide purchaser for value.
The Courts have addressed this issue in a May, 1997 decision by the 3 rd Court of Appeals styled, State Farm Mutual Automobile Insurance Company vs. Joel Kelly, 945 S.W.2d 905 (Tex. App.-Austin 1997, writ denied). In a case involving a police confiscation of a stolen car which had been earlier bought by the insured as a good faith purchaser for value and upon purchase, was placed on the insured´s personal automobile policy, the insurer denied the insured´s claim for accidental loss. The insurer´s positions were that this was not a "covered auto" since the insured never received a legal certificate of title; confiscation of a stolen car cannot be considered an accidental loss; and requiring coverage would force the insurer to insure against a loss that has already occurred. The Court of Appeals rejected these positions and mandated coverage by the insurer on the grounds that this was a "covered auto" since an insured need only have an insurable interest in property for coverage to take effect and actual ownership is not required; confiscation of a stolen car is not the natural and probable result of a good faith purchase for value and therefore under certain facts may be an accidental loss; and the loss occurs when the injury or damage to the property is manifested, in this case, upon confiscation. The Court noted that the policy did not specifically exclude a loss resulting from confiscation on behalf of an unknown rightful owner. Since the policy did not list this item among its other excluded categories of risk, the Court held that the insured was entitled to insurance coverage for the confiscation as an accidental loss under the comprehensive provision of the policy.
Accordingly, coverage is mandated for loss due to confiscation of an automobile which the policyholder bought as a bona fide purchaser for value. The Texas Department of Insurance expects companies to abide by the policy and to provide coverage as noted. The Department will monitor insurers for compliance. The Department recognizes that there may be legitimate disputes about the facts underlying the cause of a loss, and this bulletin is not intended to address these disputes or render such disputes invalid.
An insurer´s refusal to pay claims under the standard provisions of the Texas Personal Auto Policy for loss due to confiscation of an automobile which the policyholder bought as a bona fide purchaser for value may subject the insurer to disciplinary action for violations of the Texas Insurance Code, including unfair claim settlement practices pursuant to Article 21.21 §4(10)(a) and Article 21.21-2. Under both statutory and common law, insurers have a duty to deal fairly and in good faith with their insureds. The Texas Supreme Court has unified the common law and statutory standard for bad faith. Adopting the statutory bad-faith standard in Article 21.21 §4(10)(a)(ii) of the Texas Insurance Code, the Court held that an insurer breaches its duty of good faith and fair dealing when the insurer fails to settle a claim if the insurer knew or should have known that it was reasonably clear that the claim was covered. 1Elton Bomer
Commissioner Of Insurance