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I.I.I. President Hartwig Says Toyota's Recall Unlikely to Be a Big Problem for Insurers

Source: Reactions

Posted on 15 Feb 2010

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Japan car maker Toyota's embarrassing recall of many of its cars because of braking problems will cause headaches for people who have bought its cars, but is unlikely to cause a big problem for insurers.

In the past, automobile recalls have not had big insurance implications, says Bob Hartwig, president of the Insurance Information Institute in New York. "For insurers, there are two liability issues that might come out of the Toyota problem: people who are injured and the liability paid to the families of people who have been killed,” he told Reactions. “However, so far the number of people who are killed or injured is relatively small, as far as we know.”

“Also there is discussion about the diminished value issue if the resale value of the car gets marked down as a result of the recall,” he added. “All the other costs will be borne by Toyota.”

However, insurers have played a role in identifying the problems at Toyota. US insurer State Farm warned a US government regulator of a worrying trend in Toyota car accidents as early as 2007, according to Reuters.

After noticing numerous claims involving the car company, State Farm reported the frequency of claims to the National Highway Traffic Safety Administration (NHTSA), a spokesperson told Reuters.

NHTSA announced last week it is opening a formal investigation of the 2010 Toyota Prius petrol-electric hybrid to look into allegations of momentary loss of braking capability while travelling over an uneven road surface, pothole or bump.

Toyota issued a formal recall of its latest-model Prius earlier this week. According to The Financial Times, the car manufacturer has already recalled more than 8m other Toyota vehicles since November 2009 to fix faulty accelerators and floor mats.

The FT reported that Henry Waxman, chairman of the House energy and commerce committee is requesting information from the five biggest US auto insurers, including State Farm, on what warnings the insurance companies may have provided NHTSA since 2000.

The insurance companies, which also include Geico, Allstate, Farmers Insurance, and Progressive Group, have until February 17 to give Waxman’s committee any reports, briefings or presentations they gave to the NHTSA about Toyota.

It is possible the results of the investigation could put a spotlight on US regulators for not acting on the information they were given.

Car insurers will not change coverage for the affected cars. For example, the Association of British Insurers (ABI) confirmed car insurance policies would continue to be covered for Toyota owners, in a statement. “The ABI confirms that motor insurance policies will continue to cover Toyota owners affected by the recall of certain models. Any claims will be dealt with in the normal way, in accordance with the terms and conditions of the policy. If they have not already done so, anyone who thinks they may be affected should contact their local Toyota dealer and follow their advice.”

Hartwig affirmed that insurers in the US would also provide the same coverage.

Toyota now faces growing legal issues as attorneys start assembling consumer liability cases against the car manufacturer. In the US a consortium of law firms has been created for those filing lawsuits against Toyota.

The Attorneys Toyota Action Consortium (ATAC) consists of 22 law firms in 16 states, with more set to join. ATAC has announced that a court hearing on consolidation of the national litigation is expected to be heard before a multidistrict panel in US District Court in San Diego on March 25 2010.

In addition to Toyota vehicles with problems related to sudden acceleration, the ATAC Team is now also preparing cases involving braking issues with the Toyota Prius.

Toyota owners have seen the value of their vehicles fall, investors have seen securities investments fall, and customers have lost the use of their vehicles for substantial periods of time during periods of recall. Dr Tim Howard, a professor of law and policy at Northeastern University, who also practices consumer law at Howard & Associates, is heading the consortium "This is the strongest and largest case for economic damages to American consumers we've ever had.”

"Major used-car valuation services like Edmonds, NADA, and Kelley Blue Book have already downgraded resale value by as much as 3.5%, and consumers can expect an additional decrease up to 6%. As a result, Toyota owners have been robbed of their investment, along with their ability to trade in these vehicles rather than submit to hasty and questionable repairs. In the meantime, they have also lost the use of their car. That's economic damage, plain and simple."