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Bad History Report, Clean Title...Now What?

Sometimes, a history report shows a vehicle was deemed a total loss by an insurance company, yet it will still have a clear title. At first glance, the title seems contradictory to the vehicle history report; however, that is not the case as insurance companies have different definitions than Texas. This blog will first explain why this can occur and what steps a dealer should take to avoid liability related to the insurance's determination that the vehicle was a total loss.

Salvage Titles vs. Total Loss

To understand when a vehicle needs to be branded as “salvage” or “rebuilt salvage,” we must look at the definition of a salvage vehicle because a rebuilt salvage title indicates a vehicle that was branded salvage was built to roadworthiness. So, what makes a motor vehicle a salvage vehicle? Well, that can change based on the state the vehicle is titled in. If another state has branded a vehicle salvage, Texas will recognize it as salvage. Texas Transportation Code, Section 501.091(15)(B) states a salvage motor vehicle is any vehicle that “comes into this state under an out-of-state salvage motor vehicle title or similar out-of-state ownership document.” Therefore, any vehicles that have been branded by another state will receive a branded title in Texas.

For vehicles titled in Texas, Texas Transportation Code, Section 501.091(15)(A) controls the rules for the title. It states that a salvage motor vehicle is defined as a vehicle that “has damage to or is missing a major component part to the extent that the cost of repairs, including parts and labor other than the cost of materials and labor for repainting the motor vehicle and excluding sales tax on the total cost of repairs, exceeds the actual cash value of the motor vehicle immediately before the damage.”

Likewise, the definition of a total loss can change based on state and sometimes vary from insurance company to insurance company, depending on the state. The Texas Department of Insurance provides the following guidance on what a total loss is to consumers:

“The insurance company will look at the value of your car vs. the cost to repair it. If the cost to repair the car is about the same or more than the value of your car, the insurance company will likely consider it totaled. Some companies might total your car even if the cost to fix it is lower.”

Since discretion is left up to insurance companies in many cases, it is important to look at how insurance companies define total losses. One large company states, “a vehicle is a total loss (or totaled) if any of the following apply:

  • The vehicle cannot be safely repaired

  • Repairs would cost more than the vehicle's estimated value

  • The damage meets your state's total loss guidelines

What is Damage?

Another variation that often occurs is how the insurance company defines damage compared to TxDMV. TxDMV is concerned with the vehicle's roadworthiness and making sure consumers know about any repairs that may affect the roadworthiness of a vehicle. Insurance companies are concerned with limiting the costs of claims. This causes a difference in definition as to what is considered damage. Specifically, TxDMV does not include sudden damage caused by hail, any damage caused only to the exterior paint of the motor vehicle, and theft, unless the motor vehicle was damaged during the theft and before recovery, as these items do not impact roadworthiness. Yet, most insurance companies consider these items damage as they affect the cost to repair a vehicle.
 

Duty To Disclose Known Vehicle Defects

If you are selling a vehicle that has a clear title but also was a total loss, you should disclose that information to the customer. A dealer has a duty to disclose any known issue or defect that might affect the merchantability of a vehicle. This includes, but is not limited to, damage sustained in a prior collision (even if repaired), flood damage, and whether the vehicle is subject to an open safety recall. The keyword is “known.” It is impossible to know, for example, whether an airbag is defective without deploying the airbag.  A dealer can only disclose that information of which he or she has knowledge. You cannot disclose something that you do not know is wrong.

As a best practice, you may want to have a customer sign any reports the dealer received about the vehicle from an auction, and any vehicle history report(s) that you obtained. Finally, consider including an Airbag Disclosure and/or a Known Defects Disclosure form as a regular part of your sale documents. Click the links below for examples of each:

Airbag Disclosure Form
 
Known Defects Disclosure Form

Keep copies of any signed vehicle reports in the deal jacket. Following these recommendations can go a long way toward demonstrating that a dealer made a good faith effort to disclose the most accurate vehicle history and recall information available at the time of sale.

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