How vehicle depreciation can create E&O risk

Personal auto insurance brokers who don’t offer an endorsement that would limit an insurer’s right to restrict its coverage to actual cash value could be increasing their errors and omissions risk, a senior broker has cautioned.

Alberta and Ontario have optional endorsements to auto policies that insure vehicles up to the actual purchase price instead of just actual cash value. In Alberta, the Limited Waiver of Depreciation is called the SEF 43R.

“When somebody phones us and says, ‘Hey I bought a new vehicle, and I need to add it to my policy,’ it would be routine to add the SEF 43 to that policy,” said Robyn Young, principal and owner of Lundgren and Young Insurance Ltd. in Calgary.

“We would be creating for ourselves an E&O scenario if we did not provide that option with a brand-new vehicle,” said Young, who is also president-elect of the Insurance Brokers Association of Canada. “Every market offers it.”

Young was commenting specifically about Alberta auto. She was asked what advice personal lines brokers should give clients about the financial risk of owing more on an auto lease than the vehicle’s replacement value. Some motorists may be at risk of driving a vehicle whose actual cash value is less than what they owe on a loan.

Unless the motorist makes a large down payment, there is a good chance that the vehicle will be worth less than what’s owed on the loan for several years, the Associated Press reported earlier.

In both Ontario and Alberta, the statutory conditions stipulate that auto insurers are not liable for more than the actual cash value of the vehicle at the time of loss and damage. This means the insurer can deduct depreciation from the value of the vehicle.

Alberta has SEF 43 while Ontario’s optional auto insurance endorsements include the OPCF 43 Removing Depreciation Deduction and OPCF 43A Removing Depreciation Deduction for Specified Lessee(s).

If your clients buy OPCF 43 in Ontario, it means the insurer no longer has the right to deduct depreciation. The most the insurer is liable for is the lowest of the following three amounts:

• The actual purchase price of the automobile and its equipment;
• The manufacturer’s suggested list price of the automobile and its equipment on the original date of purchase; or
• The cost of replacing the automobile with a new automobile of the same make and model, similarly equipped.

In Alberta, the cost of adding SEF 43 is nominal, said Young.

When Lundgren & Young is quoting a new vehicle on a policy, they would normally include the SEF 43 endorsement.

“It’s a coverage that we offer automatically on any new vehicle,” she said. “If [the client] wanted to opt out, they certainly could, but we would include it in our initial quote.”

How quickly a new vehicle loses its value depends on several factors, AP reports. Among them are luxury vehicles with lots of options that lose value quickly, as well as high-mileage vehicles, AP reported in a story originally posted to Edmunds by consumer advice editor Matt Jones.

In Ontario, the statutory condition on the insurer’s liability for the vehicle reads as follows:

The insurer shall not be liable for more than the actual cash value of the automobile at the time any loss or damage occurs, and the loss or damage shall be ascertained or estimated according to that actual cash value with proper deduction for depreciation, however caused, and shall not exceed the amount that it would cost to repair or replace the automobile, or any part thereof, with material of like kind and quality, but, if any part of the automobile is obsolete and out of stock, the liability of the insurer in respect thereof shall be limited to the value of that part at the time of loss or damage, not exceeding the maker’s latest list price.’

Alberta’s statutory condition on actual cash value of vehicles reads as follows:

The insurer is not liable for more than the actual cash value of the automobile at the time any loss or damage occurs, and the loss or damage must be ascertained or estimated according to that actual cash value with proper deductions for depreciation, however caused, and must not exceed the amount that it would cost to repair or replace the automobile, or any part of the automobile, with material of similar kind and quality, but if any part of the automobile is obsolete and unavailable, the liability of the insurer in respect of the automobile is limited to the value of that part at the time of loss or damage, not exceeding the maker’s latest list price.

Feature image via iStock.com/luplupme