SEMA News—July 2013
By Mike Imlay
Insuring Specialty Vehicles
How to Cover the Basics and More
Whether they be OEM “dollar vehicles” or shop display cars, the aftermarket loves to promote itself through project builds and other collectible autos. Many retailers or garages will have one or more in the lot or showroom to wow customers. Manufacturers, of course, use them to showcase products at consumer automotive events and trade shows. At the annual SEMA Show, you’ll scarcely find a booth without one.
Build vehicles are valuable commodities, so whether your business keeps them on display at the shop or takes them on the road to tout your brand, you’ll want to have them properly insured. Yet, adequately covering them can be complicated.
“There can be a lot of crossover and confusion when it comes to coverages,” said Adam Baillie, division manager for HT&R Performance, a section of Hayward Tilton & Rolapp Insurance Associates that focuses primarily on the automotive and motorcycle aftermarkets. “The insurance industry has a lot of terms that we use that are sometimes misunderstood by the general public.”
Covering the Basics
“When it comes to SEMA members, we’ve found the majority [that we cover] are installer shops—the retail guys who deal directly with the public, selling products that are provided by SEMA manufacturers and sometimes also installing them,” Baillie said. “So you have two sides to the business. You have the selling of the product, and then you have the installation. We’re finding that, obviously, due to the Internet, the selling side is probably quite a bit more popular than the installation side. So from an exposure standpoint, the majority of SEMA members are going to have insurance through a business owner’s policy (BOP). That’s designed to be a one-stop, include-all insurance policy usually provided by a big-name insurance company.”
Typically, a BOP can include any or all of the following coverages:
- General liability
- Product liability
- Property insurance
- Commercial automotive insurance
“That probably meets the needs of 90% of the installer members,” Baillie pointed out, adding that BOPs are usually provided by a local regional broker.
Within that BOP, however, the way a vehicle is registered will greatly affect policy particulars.
“When it comes to insuring a vehicle, the majority of the time you’re going to insure it one of two ways,” explained Baillie. “If it’s a non-owned vehicle, you’re going to insure it with garage-keeper’s coverage, which is designed to insure vehicles that are in your care, custody and control. Autos owned by the business are going to be insured under a business or commercial auto policy.”
“The thing with liability insurance is it breaks down into all these specific sections,” added Bob Leggio, principal at Motorsports Insurances Services, which also specializes in coverage for the specialty-equipment industry. Like Baillie, he advises carefully weighing all the factors about how a vehicle is owned and used to fine-tune policies.
“If you’ve got your own cars and they’re used to promote your business, they could be added to your garage-keeper’s liability policy,” Leggio said. “But there are benefits and negatives to that. The obvious negative is that if they’re personal cars owned by you and not necessarily by your business, you may be better off insuring them as individual collector cars that happen to be garaged at your business. The reason for that is the specialty-car policies are more geared toward the correct valuation of the vehicle as well as the adjusting process. More often than not, you’ll have adjustors who are very familiar with your specific car.”
Note that the operative words here are “specialty-car policies.” You normally wouldn’t want to cover a project or collectible vehicle under the typical personal auto policy, said Franco Ganino, vice president of Alliant Insurance Services, another agency catering to the automotive specialty-equipment market.
“I have seen some circumstances where an individual registers a vehicle in their own personal name and they’re calling personal line carriers like State Farm and Allstate and insuring it like it’s their everyday car,” said Ganino. “However, they need to make sure that carrier recognizes the fact that the vehicle has an increased valuation so they don’t just do a replacement cost. Say a $50,000 vehicle has $50,000 put into it and it gets damaged or stolen in the process. The insurance company is going to see it as a stock car, and they’ll be out of pocket for that variance.”
Protecting Dollar Vehicles
All the foregoing is fine if a vehicle is an “ordinary” project car or collectible of a business owner, retailer-installer or manufacturing company. But what if it’s a so-called “dollar car”—a build vehicle purchased through a contracted discount from an OEM to showcase product at trade and consumer events? Here, things can become much more complicated.
“In most cases, what we’re seeing is that these contracts require the business owner or the recipient of the vehicle or even the professional restyler working on the vehicle to carry general liability coverage, and the OEM likes to be named as an additional-named insured,” said Ganino. “Becoming a co-named on the policy allows the OEM to be protected should something happen with the build where they feel they can get pulled into some level of lawsuit as a result of them giving the vehicle to the recipient.”
Some OEMs go even further than that.
“They will be as strict as saying you also have to have worker’s comp and things like that,” said Leggio. “It’s more or less to pass on the liability that may be created by the fabrication of that [project] vehicle so that the OEM doesn’t get tagged with it.”
In the end, however, the OEM will be most interested in two items of coverage. The first, as mentioned above, is general liability. The OEM wants to know that it is protected against possible injuries to people in and out of a vehicle—even if it will only be driven to and from a trailer to a show or to and from a trailer into a place of business.
“The second item is the physical damage side of the equation,” said Ganino. “If the vehicle is not going to be used on the road or registered through DMV records, the business has to secure an inland marine policy to insure the vehicle no matter where it is.”
That includes loaning the vehicle out to subcontractors.
What’s It Worth?
Which brings us to the tricky factor of determining a specialty vehicle’s value. According to Baillie, it’s vitally important that the policyholder understand the three different ways insurance companies pay out.
The primary method is termed “actual cash value” (ACV). Here, an insurance provider will pay what it would cost to replace the vehicle minus depreciation at the time of the claim.
“The problem is that coverage doesn’t take into account extra equipment on the vehicle,” explained Baillie. “You put a $30,000 to $40,000 engine in there, and the insurance company is not going to take that into value because they’re not charging premium for it.”
Alliant Insurance Services
Motorsports Insurance Services
Leggio agreed. “Actual cash value with any kind of specialty car is what you absolutely don’t want, because actual cash value when calculating a loss takes in depreciation,” he said. “I don’t think any of these kinds of cars ever depreciate.”
A second way is “stated value”—an oft-misunderstood term. It’s employed when you want to pay insurance on a vehicle for less than what it’s really worth. In the event of theft or total loss, the insurance company will pay the stated value or actual cash value of the vehicle, whichever is less.
“Say, for instance, that you’ve got a $1 million restored classic collector vehicle that you somehow inherited or acquired at much less cost but can’t afford the insurance on the car’s full value,” explained Baillie. “You may want to insure the vehicle for half its worth, since not only will the premium be cheaper, but also what you’ll recover is still more than what you spent acquiring the car in the first place.”
Stated value is not to be confused with “agreed-upon value,” the third method of determining payout. This is what most specialty-vehicle owners will want. Essentially, the insurance purchaser and the insurance company agree on a value before any money exchanges hands.
“That guarantees you the exact number that you’ve agreed upon in the event of a total loss,” said Baillie.
Not many insurance companies specialize in agreed-upon value policies, and those that do often require an independent, third-party appraisal, which usually costs between $200–$300. The appraisal then technically becomes part of the policy. Note also that premiums will reflect the agreed-upon value of the vehicle, which may be much more than the auto’s standard value, depending upon the aftermarket products and equipment added.
Turning to Experts
Needless to say, there can be other complexities to covering specialty or project vehicles. Many such vehicles are not technically considered roadworthy by insurance companies.
“They’re not issued a VIN, nor are they registered in any way, shape or form through any level of a department of motor vehicles,” observed Ganino.
Regardless of the vehicle’s status, the policy buyer will want to discuss every detail about its build and use with an experienced broker specializing in the area to determine the exact type and extent of coverage required.
“Insurance companies don’t like to be surprised,” said Leggio. “The important thing is that you tell them as much as you possibly can about any exposures in the application process. If there’s ever a claim, most of them, just for due diligence, will research the paperwork that brought the account into the insurance company. They’ll look and see if the exposure that generated the loss was listed or explained in the application.”
Moreover, the time you want to be least surprised is at the time of a loss. Understanding the above insurance basics and working with a good broker who knows the ins and outs of the specialty-equipment business will go miles toward accomplishing just that.