May 11, 2008

MOTORING

When Modifying Vehicles, Upgrade the Insurance

By ROY FURCHGOTT

NO matter what improvements you’ve made to your car — fancy wheels, neon glow, or a more powerful engine — one component is almost certain to lag in performance: your insurance policy.

Few drivers realize that aftermarket parts are generally not insured, so if you have an accident in your modified car, your insurer is not likely to reimburse you for the damaged add-ons. Even worse, in some cases insurers may deny the whole claim or cancel the policy.

Still, if you’re willing to pay more than you would for a standard policy, there are ways to get coverage for those add-ons from specialty insurers and even from mainstream ones.

It’s not that insurers are against modified cars, they are just not set up to handle them. Generally, the industry tends to shy away from covering modified cars because it gauges risk based on statistics. The bigger the pool of examples, the better the risk assessment.

“For O.E.M. vehicles, it’s easy,” said Robert Horst, a lawyer in Blue Bell, Pa., referring to vehicles in stock condition. That’s because thousands of cars contribute to the database.

But one-of-a-kind modified cars don’t fit into a neat statistical category.

“When faced with a situation the underwriter has only faced twice in the past, rather than 2,000 times in the past, they don’t want to take the risk,” Mr. Horst, who represents insurance companies, said.

Modified cars were once uncommon, but sales of aftermarket parts for appearance and performance — spurred by television car shows from “American Hot Rod” to “Pimp My Ride” — have been increasing about 7 percent a year, reaching $37 billion in 2006, the most recent numbers available, according to the Specialty Equipment Market Association, an industry trade group.

Sometimes drivers will modify a car without telling the insurance company. Then after an accident, the company finds that the $20,000 car it insured is now a $40,000 car, and the owner expects coverage on losses that weren’t priced in the policy.

Insurance companies have sought to protect themselves from unexpected costs of added equipment by putting “exclusions” in policies, or capping losses, like AAA Insurance in Michigan. “Here at AAA Michigan, we will cover a car beyond whatever the factory has installed up to $1,000,” said Nancy Cain, a company spokeswoman. The policy heads off losses on thief-magnet additions like gold wire wheels that can cost $5,000 a set, she said.

Rather than risk being turned down or having their premiums increased, some owners are prepared to accept the car’s stock value in an accident and pay for the damaged modified parts themselves. “Some modified-car owners kind of suck it up and self-insure,” said Jack Nerad, executive market analyst of kbb.com, the Web site of Kelley Blue Book, an auto pricing guide.

If you do decide to insure the car, here are some options.

There are basically three kinds of car insurance. Actual value, which is the common policy that insures the car for its value at the time of the claim. There is agreed value, which lets the driver insure the car for more than its book value. Then there is stated value, which lets the driver insure the car for more than book value, less depreciation.

Stated and agreed value policies (which go by other names in various states) are available from some insurers and may offer better coverage for modified cars, but can cost more. Rebecca Woan, principal at Chartwell Insurance Services in Chicago, said stated and agreed value policies tend to add $10 per year for each thousand of coverage over the market value of the car.

You also need to check your existing policy to see what is and what is not covered.

The critical passages to read? “There are conditions, then there are exclusions, then there are exceptions to exclusions,” said Jonathan G. Stein, a lawyer in Elk Grove, Calif., who represents drivers in insurance cases.

Beware of broad exemptions. Many contracts exclude “racing parts” without noting what they are. A tachometer? Grippy tires? A supercharger? Ask your agent for a definition in writing.

Sometimes the contracts are too complex for even an agent or lawyer to sort out. “It’s probably designed that way,” said Tom Cady, a law professor and coauthor of “West Virginia’s Automobile Insurance Policy Laws: A Practitioner’s Guide.” The insurance company can say, ‘We wrote it, we know what it means, and we’re not going to pay it.’ And they usually get away with it.”

The policies can be so intricate, sometimes even the agents don’t understand what they are selling, which isn’t necessarily a problem for the consumer. Whatever an agent promises, even if the agent misunderstood the policy, the company must honor what the agent promised. “If an agent says it’s covered, you can rely on that,” said David Snyder, assistant general counsel of the American Insurance Association. The problem is proving what was said. Get assurances in writing.

You can avoid misunderstandings by checking with your agent before making modifications to see if they are covered.

Aesthetic improvements can also cause a problem. Juliet Brooks’s 2000 Dodge Durango was damaged when a car ran a light and crunched the fender, and with it, the custom chameleon paint job. The paint seems to change colors as the light on it shifts.

The vehicle, which was a rolling billboard for her husband, Mike’s, body shop, had to be completely repainted to match the damaged fender to the body. A body shop estimated the job at more than $12,000.

“It takes all day to do a nice chameleon,” Mr. Brooks said. “Not three or four hours like a normal paint job.” He said that when the insurance company made a final offer of $2,000, he countered with a lawsuit. More than a year later the case was resolved and, after legal fees, he took home about $3,700.

Specialty insurers, who primarily handle collector cars and hot rods, are another option.

“We can say it’s not the typical collector car,” said Tommy Sneed, president of Sneed Insurance in Memphis. “It’s a ’96 Miata, and you’ve put some rims on it that bump it up $5,000, and these can fit into our collector-car framework most of the time. I’m not saying we would write every car that’s jacked up. It depends on each individual case.”

There are caveats with the specialty insurers. Some limit the miles the car can be driven in a year. Some may require that the car be parked in a locked garage. Just like the big insurers, they don’t like racing.

“No one will write a car that is going to be on a racetrack,” said Mr. Sneed. In fact, a car that is raced off the track can be denied payment, said McKeel Hagerty, chief executive of the Hagerty Insurance Agency. “If it were obviously in a street race, we would make a very hard case for exclusion,” he said.

Mr. Hagerty predicted that eventually the insurance industry would adjust to accommodate the growing modified car market.

“This is not a trend that is going to go away,” he said. “As the market matures, I think you will see better options.”