Who Pays...?

A victim of wind damage at the December 2009 Russo and Steele classic car auction.

Who pays for damage like this when you antique vehicle is consigned to a classic car auction? As you might guess it makes a difference when the damage occurs, before or after the sale and who technically owns the car, the previous owner or the new buyer, and when transfer of ownership officially takes place. Then there are the outside circumstances like the weather, the freak storm that occurred in December of 2009 at the Russo and Steele classic car auction in Scottsdale Arizona. You might be surprised at who pays...

As a review here is what happened. A massive storm that struck the Russo and Steele auction grounds Thursday caused, according to estimates, $1.5 million in damages. That includes a massive tent protecting the classics falling, scratching and denting 600 cars. This is basically the nightmare of any classic car restorer. You spend months or years rebuilding the car, days detailing it, and have it delivered to the auction grounds before the sale. All this work and the tent it's in collapses before you sell it.

The same gale terrorizing the Russo and Steele auction in Scottsdale also threatened the Barrett-Jackson auction across town . Organizers made all the spectators and car owners move into a main tent then surround it with semi trucks, according to The Arizona Republic Newspaper.

As a car appraiser I closely followed the outcome of this tragic event. The outcome was different than many expected and who ended up responsible for the damage to the cars was also interesting. As you might imagine the lawyers and the insurance companies were heavily involved and here is the outcome.

Who Pays When Your Collector Car is Damaged?

“ If the winds were unforeseeable, they would be considered an act of God, and neither the auction nor tent company would be liable for damages…”

Who would have thought that the wind could blow so hard? That was the multi-million-dollar question at the Russo and Steele collector car auction held in Scottsdale Arizona in December of 2009.

 What was called the worst storm in 40 years—with estimated 80-mph winds—blew through the area on Thursday evening and destroyed two 800-foot tents at the Russo and Steele auction site. The wind lifted the tents like runaway umbrellas. The tent fabric may have caused scratches and broken mirrors, but the major damage came from the aluminum tent poles crashing into, over, and through many of the hundreds of collector cars underneath.

According to Russo and Steele President Drew Alcazar, the company was well aware that weather forecasts called for major rains, but not the gale-force winds. Crews were on-site to manage the water flow throughout the day. But when the wind picked up and the big tents started to flutter and sway, an evacuation was ordered to get people to safety. Fortunately, everyone exited the tents in time and there were no significant injuries. Aftermath photos of the damaged cars clearly show that people could have been killed.

More wind damage from the December 2009 Russo and Steel Auction in Scottsdale Arizona

Police and firemen quickly closed the site to prevent injury, barring car owners from entering to inspect or remove their cars, or take precautions to protect them from further damage. Rain, wind, and hail continued to pelt the cars that were now exposed to the elements, some with their tops down.

The site remained closed until early Saturday morning. Clean up followed at a Herculean pace, and auction staff did everything they could to protect the cars from further damage, including wrapping hundreds of them in plastic. The auction resumed on Sunday and was extended into Monday. Alcazar said that many consignors first pulled their cars from the auction, but as the auction restarted and progressed at such an encouraging pace, many re-entered their cars.

Many of them sold at pre-auction estimated sales prices, including some that were sold in damaged condition—some with, and some without the caveat that they would be returned to pre-damaged condition as a part of the sale.

McKeel Hagerty, President of Hagerty Collector Car Insurance Co., estimates more than 300 cars were damaged, of which at least 110 were insured by Hagerty. By any measure, this was a catastrophe. Hagerty expects that the claims will “test many contractual requirements in many directions.” We will have to wait and see how all that turns out.

Who’s At Fault?
Insurers of the damaged cars took to heart the opportunity to impress their policyholders with their service capabilities. Some owners want to leave their insurance carriers out of the picture, and expect that the auction company’s carrier will handle the situation, but that isn’t how insurance works. Each owner’s carrier will administer the claim (which generally means settle with the owner of the affected car), and later decide whether to pursue claims against third parties who might be at fault.

The obvious liability targets are Russo and Steele and the tent company, and Alcazar reports that there are multiple investigations under way. If it looks like the auction and/or tent company were at fault, the auto insurers will try to recoup their losses from them and their insurers. That process will likely be handled quietly, at least as long as the coverage is sufficient to cover all the losses.

The wild cards are the car owners who didn’t carry insurance. The Russo and Steele consignment agreement, and it is very clear says that the owner is expected to maintain insurance coverage on his or her car. Alcazar said he is amazed that, in spite of that, some of the sellers actually had no insurance coverage.

Another example of more storm damage...

The only way these owners can recoup their losses would be to establish liability on the part of the auction or tent company, and some may file suit. But filing such a lawsuit is a lot easier than winning it. The owner will be on his own with respect to his attorney fees, and will have only his individual loss at stake.

In contrast, the insurers for Russo and Steele and the tent company will be at risk for all the losses, as others could use any adverse determination as proof. They will have ample motivation to defend as forcefully (and expensively) as necessary.

Establishing Liability

The auction and tent companies are not automatically liable; rather, negligence would have to be proven. The auction company’s obligation is only to take reasonable precautions to protect the cars from reasonably foreseeable harm. Adverse weather is certainly foreseeable, but would that include winds this strong? Pre-event weather forecasts will play a role in answering that question.
The auction company is not expected to be an expert in tent design, and can probably leave that to a reputable tent company to handle. The auction company does have to pick a capable tent company, and Alcazar points out that Russo and Steele used the same tent company as all the other Arizona auction companies.

The tent company would be obligated to select appropriate tents for the site, capable of withstanding foreseeable weather conditions. Once again, the question will be if these winds were reasonably foreseeable.

If the winds were unforeseeable, they would be considered an act of God, and neither the auction or tent company would be liable for the damages. If the winds were foreseeable, then either or both might be found to be negligent.

Pity The Poor Buyer

About 100 cars had crossed the block before the winds came. About half were sold to happy owners, and had been moved back under the tents that later collapsed and suffered damage. What is your situation if you were the (temporarily) happy winning bidder?

Under general legal principles, the car is sold, and title and risk of loss pass to the buyer, when the hammer falls. Most buyers’ agreements make that point quite clear.

Obviously, the buyers didn’t have time to call their insurance agents and buy coverage. Will their insurance carrier cover them anyway?

Consumer auto policies generally provide automatic coverage for new cars that you buy. That’s probably easy enough for a $45,000 Porsche 993, but might be tougher for a $25 million Ferrari 250 GTO.

Hagerty explains that their policies provide automatic coverage for new collector car purchases for 30 days. Jim Fiske, U.S. Marketing Manager at Chubb Personal Insurance, confirms that their policies do the same, as will those of most “true” collector car insurance companies. Both caution that various consumer insurance companies have entered the collector car market with less sophisticated policies that must be individually reviewed.

The critical second question is the amount of your coverage. Hagerty says that your purchase price will almost always establish the value of the car, reserving doubt only for highly unusual or suspicious situations. But if you have an actual cash value policy, your insurance adjuster will be well within his rights to suggest that you paid too much for the car, and they won’t make the same mistake when they compensate you for your loss.

No-Sale Equals Tough Deal

Say your car failed to sell because the bidding didn’t reach your reserve, or you offered it at no reserve but bought it back because the bids were too low (yes, that’s illegal), then it suffered extensive damage. With an actual cash value policy, the insurance company is free to debate the value of the car, and you may be surprised to find that your reserve or buy-back can be a ceiling, but not a floor, to the value of the car when it comes time for the insurance company to write a check. After all, the market spoke about the “correct” value and you chose not to listen. Similarly, since you were willing to sell at your reserve, that can be an admission that the car was not worth more.

Agreed Value Nightmares

Many times the agreed value policies are the way to go, but be careful that they accurately reflect the value of the car. “Auto insurance is one of the least scrutinized transactions people enter into. Most people know more about their cell phone contracts than their insurance contracts.”

Many people simply don’t remember what the amount of their agreed value policy is, as they often set it when they bought the car, sometimes many years ago. That can really come back to bite you. Say you have a Series I E-type Jaguar that you insured for $50,000, under an agreed value policy, when you bought the car. You expected it to sell for $75,000 at the auction reflecting the restoration work you had done to the car. But before the car has a chance to cross the block, it suffered $25,000 in damage. Later, you discover that your agreed value is still the $50,000 amount you originally paid for the car.

Still more damage from the storm.

Under an agreed value policy, there is no negotiation about the value of the car—it is conclusively deemed to be the agreed value amount. You get a check for $50,000, and the insurance company now owns the damaged car. They sell it to someone for $25,000, who then spends $25,000 repairing it and making it back into a $75,000 Jaguar.

In effect, you are sharing the loss with your insurance company; you lose the $25,000 of uninsured market value, and the insurance company loses only $25,000 after reselling the salvage. That loss sharing could have been avoided if you had been careful enough to adjust the agreed value as the car’s value changed.

Diminished Value

Several of the damaged cars appeared to be excellent unrestored, original examples. When they are repaired, they won’t be unrestored any longer, and they may suffer from diminished value, which many insurance policies exclude. In those situations, damages from the diminished value can be recovered only from the auction and/or tent company, and only if legal liability can be established.

That is an avenue you would have to pursue on your own at your own expense, unless your insurance company does not exclude diminished damage. In many cases the cost of an attorney and the related legal fees make it cost prohibitive to try and recover any diminished damage compensation. Establishing legal liability on behalf of the tent company and or auction company is difficult time consuming and seldom successful.

No-Sale No-Coverage

Say your car sold but the buyer refuses to pay for the now-damaged car? Your insurance company could take the position that it owes you nothing because you didn’t own the car when it was damaged—after all, ownership and risk transfer to the new owner the instant the gavel falls. If the sale price is greater than your insurance coverage, you might be in a real tough spot. You can either cancel the sale and “reinstate” your lower insurance coverage, or spend the time and money suing the buyer to pay up.

Recommendations

Obviously, the best answer for every one of these situations is insurance. The seller should have an updated agreed value insurance policy in force at all times. The buyer should be sure to have a policy in place before the auction that will cover any purchase. In both cases, it is best to place your coverage with a specialty carrier that knows collector cars and can provide proper assistance in making sure that you are properly covered.

Copyright 2010 Fifth Avenue Antique Auto Parts 415 Court Street Clay Center Kansas 67432.

Fifth Avenue Antique Auto Parts does not sell insurance. This information serves no legal purpose it is provided to act as a reference guide and to provide examples of common situations where collector car losses can occur and what to expect. Hopefully this will help you to ask the right questions BEFORE you suffer a loss. Most important of all know what your insurance does and does not cover before you have a claim.

I include a copy of this explanation along with all of my appraisals. As an antique vehicle owner we do not think of the worst happening but it is good to plan ahead just in case and as an antique vehicle appraiser is was good education for me as well. I hope none of you reading this ever have to deal with something like happened in Scottsdale Arizona in 2009 but at least now you will be better prepared and you know who is responsible for what.