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Katrina has now passed but in her wake she left a good deal of damage. With cities like New Orleans under water, you can bet that we will see a tidal wave of flood cars in the next six months. Unfortunately, most states do not require flood cars to be salvaged, and many states do not have a title brand for a vehicle involved in a flood.

As always, the RiskProf is on top of the insurance issues and notes that auto insurance prices are predicted to increase in the aftermath of Katrina. Just think of all those flooded personal and fleet cars that will affect claims payouts. According to a story from The USA Today, quoting a senior VP of Eqecat, “There will be tens of thousands of cars with flood damage”, and the problem estimating auto claims “is that cars move.” And there, of course, is the rub.

We won’t know for some time what the auto insurance-related costs of this storm will be. However, we are unlikely ever to know what the real cost to consumers is because many of those affected vehicles will be sold without any disclosure or indication on the title that they are flood vehicles. As a result, the problems, expense, and misery will be passed on to others who have no connection with Katrina.

How can this happen? Easily. Initially, understand that vehicles typically only receive a “flood” brand when they are salvaged. That means that the vehicle has to be first declared a total loss and the flood designation will only indicate that it was totaled as a result of water damage as opposed to collision or other cause. Yet, there will be thousands of cars that were flooded but will not be declared a total loss. Most of those vehicles will escape having their titles branded to indicate that, while not declared a total loss, they were immersed in water to some significant degree.

I have spent over a week trying to get in touch with the Lousiana Department of Public Safety because the State’s branding requirements are unclear. Even though located in Baton Rouge, the agency is unavailable due to the storm — I couldn’t even get a telephone connection. Here are some of the things I discovered from my own research, however. A vehicle is “salvaged” when it is declared a total loss by an insurance settlement.
La. R.S. 32:702 (2005) says, in part:

(10) The term “salvage title” shall mean a certificate used to evidence the declaration in an insurance settlement that a motor vehicle is a “total loss” motor vehicle as provided in this Chapter, to be prescribed and distributed by the office of motor vehicles, to an insurance company, its authorized agent, or the owner of a “total loss” motor vehicle.

(11) The term “total loss” means a motor vehicle which has sustained damages equivalent to seventy-five percent or more of the market value as determined by the most current National Automobile Dealers Association Handbook. However, a motor vehicle that sustains cosmetic damages caused by hail equivalent to seventy-five percent or more of its market value as a result of costs for repairs to items such as windshields, windows, and rear glass, exterior paint and paint materials, and body damage such as dents shall not be deemed a “total loss” and salvaged; however, such vehicles shall be issued a branded title indicating the vehicle has sustained hail damage.

The good news is that Louisiana law also requires disclosure of water damage to the buyer when selling a vehicle, but it does not appear to require the vehicle’s title be branded if it has sustained water damage, even if not declared a total loss:

La. R.S. 32:774.2 (2005)

§ 32:774.2. Sale of used water-damaged vehicles

A. No used motor vehicle dealer, nor any person or entity, shall sell, transfer, or convey any used motor vehicle to any person without notifying the buyer or receiver of the vehicle in writing of the extent of any water damage from flooding which occurred to the vehicle prior to the transaction.

B. If a sale, transfer, or conveyance of a used motor vehicle occurs in violation of Subsection A, the person receiving ownership and title to the vehicle who is not otherwise aware of the damage at the time of the transaction may bring an action to set aside the transaction within one year from the date of the transaction and receive all monies or other property given as consideration for the vehicle less a reasonable assessment for miles driven.

Problematically, there is no interpretation of this law to tell us whether it applies a strict liability or a knowledge standard. In other words, if you are a seller who has no idea the vehicle had water damage, are you liable for the transaction even though you acted honestly and in good faith? The law also doesn’t define “water damage”, so what amount of water and which part of the vehicle exposed constitutes “water damage”?

Mississippi, on the other hand, does not have a separate statutory requirement that water damage must be disclosed to buyers. The State does require insurance total losses to be retitled as a salvage vehicle. Miss. Code Ann. §63-21-33 (2005)

Mississippi law adds an interesting twist to these flood issues. MS is one of the states that titles mobile or manufacturered homes with a personal property certificate of title, not as real estate. Miss. Code Ann. §63-21-40 (2005). As a result, the State requires mobile home titles to be reissued as salvage certificates of title when a total loss claim is paid.

This is one of those times when having a Uniform Certificate of Title Act with uniform title branding laws would be extremely beneficial. Oh, and don’t forget. Whether the insurance company totals your vehicle or not, the auto maker will void your manufacturer’s warranty anyway. Good luck, too, getting your car fixed under any “extended warranty”. They typically have exclusions for changes in the vehicle as well.