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Model Act for Pre-Insurance Inspections of Motor Vehicles
Source: Coalition Against Insurance Fraud
Rising auto insurance rates are a concern for consumers and
insurers alike. In 1993, the coalition conducted a study
and found that
auto insurance fraud accounts for a large part of the rate
increases. Two types of auto insurance fraud account for
much of the increase.
The first involves the vehicle’s owner failing to reveal
existing physical damage when applying for insurance. The owner
commits a fraudulent act after obtaining coverage by filing
a false claim to cover the pre-existing damage. The second
owners who provide false documentation to insure a vehicle
that has been junked or salvaged or that exists in title form
The owner reports the phantom vehicle stolen and files a claim
after law enforcement fails to recover the non-existent vehicle
The coalition’s study also revealed that in five states
requiring pre-insurance inspections, reports of auto theft rates
declined in 1991 while the national rate rose (six states now
require inspections: California, Florida, Massachusetts, New
Jersey, New York and Rhode Island). New York instituted the first
inspection plan in 1978 and since then, the state’s vehicle
theft rate has fallen from significantly above the national
average to below the average. New Jersey reports a drop in
and in bogus damage claims.
This legislation is an effective and cost-efficient way to
reduce the impact of insurance fraud on auto insurance rates
imposing an undue burden on consumers, insurers or insurance
agents. While the coalition recognizes some insurers require
pre-inspections prior to issuing a vehicle policy, legislation
is needed to level the playing field among insurers. This prevents
customers of insurers who require pre-inspections from subsidizing
the rates charged by insurers who don’t, and will reduce
the costs of fraudulent claims for all consumers.
Section I. Mandatory inspection requirements
damage coverage" to mean either comprehensive
or collision coverage, or both. Insurers would not be allowed to issue a new
policy providing this coverage, or to add the coverage to an existing policy,
without inspecting the vehicle. Further, the insurer could not add an additional
or a replacement vehicle to an existing policy without a pre-insurance inspection.
requirement would apply to all insurers licensed to do business
in the state and creates the level playing field discussed
Section II. Exemptions and waivers from inspection requirements
details conditions under which an inspection wouldn't
be required. Conditions include:
Vehicles already insured for either collision or comprehensive
vehicles purchased from a retail dealership;
who have been continuously covered by the same insurer for
a year or more;
that have been leased or rented for more than six months;
Autos covered under commercial insurance
A vehicle more than seven years old;
the insurer is transferring either a book of business or an insured's coverage,
provided the new insurer receives a copy of the previous
may require pre-inspection of any or all vehicles if it so
chooses as long
as the decision is made on a non-discriminatory
basis, including disregard for an insured's previous coverage
under a residual or non-voluntary market.
This provision requires inspections of
about 10 percent of all cars; that 10 percent is where most
frauds occur. New cars likely will have no pre-existing damage;
older cars have a negligible value and rarely are part of a
fraud scheme; and there is no profit motive for an individual
to commit this type of fraud with a company vehicle. Also,
most fraud perpetrators are new customers to insurance agents
and insurers and are likely to commit the fraudulent act shortly
after the policy is issued; longtime customers are least likely
to commit this type of fraud. Further, to require a new insurer
to re-inspect a vehicle in cases where a policy is simply being
transferred is redundant.
Section III. Deferral of Inspection
The insurer may issue coverage and defer an inspection for
up to seven days if it would create a "serious inconvenience" for
the insured. However, the insured must be told of the requirement
and the consequences of failing to comply.
The coalition recognizes some drivers need immediate coverage
and may not be able to get an inspection first. This provision
provides some flexibility for the insured. The provision doesn’t
define "serious inconvenience;" the coalition expects
insurers to be reasonably accommodating to their customers.
Section IV. Standards and content of inspection reports.
An insurer has a choice who it may designate to conduct inspections:
its employees, agents or independent contractors. Inspections
must be held at a time and place "reasonably convenient" to
applicants; states may define this in terms of mileage from
an applicant’s home, with allowances for the differences
in urban, suburban and rural areas. Inspection forms must be
subject to some sort of control system to prevent forgeries,
backdating or other fraudulent activity. At a minimum, the
report must include:
vehicle identification number (VIN) with an accompanying photograph
of the VIN on the federal certification label;
on the odometer;
of any visible damage with two photographs (defined to
include videotape and digital imaging) taken at angles
viewing of the vehicle’s four sides;
of all optional accessories.
must give a copy of the report to the insured and keep the
report and photographs for at least
two years. If the
inspection isn’t done by the insurer’s employee or
agent at the time of the application, the insurer must provide
a list of inspection sites. Insurers or independent contractors
may not charge applicants directly for the inspection.
This section states the minimum the coalition believes is necessary
to do two things: prove the insured vehicle exists and prevent
false claims for pre-existing damage. By allowing the insurer
to make some choices, the bill doesn’t micro-manage the
process but does ensure inconveniences to all parties are kept
to a minimum. The coalition believes costs will be negligible
and shouldn’t be directly charged to the honest consumer.
This also eliminates complications in payments should an insurer
opt to use agents or independent contractors to conduct the inspection.
Section V. Suspension of Physical Damage Coverage Upon Failure
to Conduct Inspection
This provision requires an insurer, in the event an inspection
hasn’t been done within the allowed seven-day deferral
period, to suspend physical damage coverage until the inspection
is done. If it is not done within 30 days after suspension, coverage
must be canceled and any premium refunded. The provision also
details notification procedures.
The section also provides an enforcement tool to encourage consumers
to have an inspection. Failure to do so would result in cancellation
of coverage and leave the consumer liable for any costs that
otherwise would have been covered. Should an insurer fail to
comply with the act, the company would be open to appropriate
action against it as detailed in each state’s laws and
regulations covering licensed insurers.
Section I. Mandatory inspection
as otherwise provided in this Act, no policy of insurance providing
vehicle physical damage coverage shall be issued or delivered
in this state unless the insurer providing the coverage, or
its authorized representative, inspects the motor vehicle.
B. Except as otherwise provided
in this Act, physical damage coverage shall not be added to
a policy providing motor vehicle liability insurance or personal
protection coverage by endorsement, nor may physical damage
coverage be provided on an additional or replacement vehicle,
unless the insurer providing the physical damage coverage,
or its authorized representative, inspects the motor vehicle.
C. For the purpose of this
Act, the terms "motor vehicle physical damage coverage" or "physical
damage coverage" mean either comprehensive insurance coverage,
or collision insurance coverage, or both.
Section II. Exemptions
and waivers from inspection requirements
requirement of a pre-insurance inspection under this Act shall
the following circumstances:
1) The motor vehicle is
already insured under the policy for either comprehensive
or collision coverage, but not both.
motor vehicle is a new vehicle purchased from a retail dealership,
the insurer is provided with either:
(a) A copy of the bill
of sale containing a full description of the motor vehicle,
including options and accessories and a statement from
the seller that the motor vehicle has no damage; or
(b) A copy of the Manufacturer
Statement of Origin, a statement from the seller that the
motor vehicle has no damage, and a copy of the window sticker
or dealer invoice containing a full description of the
motor vehicle, including options or accessories.
3) An insured named in the
policy has been insured by the same insurer for one (1) or
more policy years under a policy which has continuously provided
physical damage coverage.
4) The motor vehicle is
rented or leased for less than six (6) months, provided that
the insurer is given a copy of the lease or rental agreement,
and provided further that the document contains a complete
description of the rented or leased motor vehicle including
its condition at the time of lease or rental.
motor vehicle is rated or insured under a commercial automobile
a pre-insurance inspection would cause serious hardship to
the insured or
applicant for insurance, and the hardship is documented in
records maintained by the insurer.
insurer may require a pre-insurance inspection of an otherwise
The decision to require a pre-insurance inspection of an exempt
vehicle shall not be based on the age, race, sex, or marital
status of the applicant or insured, or the fact that the motor
vehicle has been insured through a residual or non-voluntary
insurer may waive a pre-insurance inspection under the following
a motor vehicle is over seven (7) model years old.
an insurer or an insurance producer is transferring a book
to another insurer.
3) When an insureds
coverage is being transferred by an insurance producer from
one insurer to another and the producer of record provides
the new insurer with a copy of any previously pre-insurance
inspection reports and photographs, prepared on behalf of
the previous insurer.
Section III. Deferral of
insurer may defer a pre-insurance inspection if a pre-insurance
create a serious inconvenience for the applicant or insured.
The insurer may defer the pre-insurance inspection for a period
of up to seven (7) calendar days following the effective date
of physical damage insurance coverage, or up to the seventh
(7) day following receipt of notice by the insurer that physical
damage insurance coverage is requested by an applicant or insured
on the motor vehicle, whichever is later.
an applicant or insured is granted a deferral of pre-insurance
the applicant or insured must be advised of the requirement
for pre-insurance inspection and the consequences of non-compliance.
Section IV. Standards and
content of inspection reports
A. An insurer
shall use employees, insurance producers, or independent contractors
to conduct pre-insurance inspection services. Any person conducting
such services shall:
pre-insurance inspections at a time and place reasonably
applicants and insureds. A reasonably convenient place
shall be a location within ___ miles of the residence of
the applicant or insured in urban and suburban areas, or
___ miles in rural areas.
2) Use sequentially
numbered reporting forms, and maintain a control system for
As an alternative, an insurer may elect an internal control
system provided that it prevents backdating of reports or
other related fraudulent activity.
B. A pre-insurance inspection
report shall include, but need not be limited to the following:
1. The vehicle identification
number (VIN), recorded by observing a number on the vehicle
2. A record of the mileage
shown on the vehicle odometer.
3. A notation of any observable
damage to the vehicle.
4. A record of
all optional accessories attached to the vehicle not provided
by the original
equipment manufacturer. Optional equipment subject to recording
on the report shall include, but shall not be limited to,
radar detectors, citizens band radios, custom wheels
or other customization.
5. Two (2) color
photographs, which shall be taken at oblique angles, clearly
four (4) sides of the vehicle. In addition, if the report
notes observable prior damage, additional photographs shall
be made of the damage.
6. One (1) close-up
color photograph (using a special camera attachment, if
necessary) clearly showing the VIN located on the Federal
Certification Label: generally affixed to the driver-side
door or lock post. If the Federal Certification Label is
damaged, faded, missing or illegible, the report shall
contain a photograph of the label, or the door or lock
post, where the label is normally located.
C. Upon completion of the
pre-insurance inspection, a copy of the pre-insurance inspection
report (without color photographs) shall be provided to the
applicant or insured. For the purposes of this Section, the
term "color photograph" means any acceptable technology
producing a clear visual image in color, and may include but
shall not be limited to, a photograph, videotape or digital
imaging process. An insurer may electronically store any color
photograph required by this Section. There shall be no direct
charge to an applicant or insured for any inspection required
by this Act.
D. In the event
that an insurer does not normally conduct pre-insurance inspection
by using licensed insurance producers or employees at the time
of application for coverage, the insurer shall maintain an
up-to-date-list of the name, address, business telephone number
and place of inspection of all persons conducting pre-insurance
inspections, reasonably convenient to the residence of the
applicant or insured. The list shall be provided to each applicant
or insured when a pre-insurance inspection is not performed
at the time of application.
E. A copy of the
pre-insurance inspection report and accompanying color photographs
be retained by the insurer for a period of not less than two
(2) years from the date of inspection.
V. Suspension of Physical Damage Coverage Upon Failure to
Conduct a Pre-insurance Inspection
A. If a pre-insurance
inspection is not conducted as required by this Act, any physical
insurance coverage provided under a policy of insurance shall
be suspended on the eighth (8) day after the effective date
of the physical damage insurance coverage, or on the eighth
(8) day following receipt of notice by the insurer that physical
damage insurance coverage is requested by the applicant or
insured on the motor vehicle, whichever is later. The suspension
shall continue until a pre-insurance inspection is completed.
Upon completion of a pre-insurance inspection, coverage shall
be reinstated with no time out-of-force.
B. Whenever physical damage
insurance is suspended because of an insurers inability
to conduct a pre-insurance inspection as required by this Act,
the insurer shall provide written notice of the suspension
to the applicant or insured, the producer of record and any
lienholder. This notice shall be mailed on the effective date
of the suspension.
C. If a pre-insurance
inspection is not completed with thirty (30) days of the effective
of suspension, physical damage coverage shall be canceled.
Premiums paid for the canceled coverages shall be refunded
within forty-five (45) days of the effective date of suspension.
(Adopted March 4, 1994)