YOU AUTO KNOW® - Risk of Loss

in Automotive/Transportation, News

Scenario:  Mr. Jones takes delivery of his new vehicle. During the period of time when the title is being transferred to Mr. Jones, he is in a serious accident, and the vehicle is determined to be a total loss. Mr. Jones contacts you and states that the dealership is responsible for payment of the vehicle since title had not yet transferred to him. What is the dealership’s legal position? 

The facts in the scenario pose an interesting question regarding title or possession to determine ownership of an automobile. Ohio has, through litigation, resolved the issue. The two competing areas of law which effect the sale of automobiles are the Certificate of Title Act and the Ohio Uniform Commercial Code. Although each effect the sale of automobiles, their purposes are mutually exclusive. The Ohio Uniform Commercial Code (UCC) at ORC §1302.42(B) provides “unless otherwise explicitly agreed, title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place . . .” Whereas, Ohio title law, ORC §4505.04 specifically states that “no person acquiring a motor vehicle from the owner thereof . . . shall acquire any right, title, claim or interest in or to said motor vehicle unless such person has been issued to him a certificate of title to said motor vehicle . . .” Looking at the black and white letter of the law would seem to indicate that Mr. Jones would have a good claim for indemnification against the dealership. However, the duty to obtain a title to the vehicle is the responsibility of both buyer and seller. 

The risk of loss scenario has been litigated in Ohio on several occasions. The leading case, Smith v. Nationwide Mutual Insurance Co. (1988) 37 Ohio St.3d 150, addressed the application of Ohio title law and the Uniform Commercial Code to automobile sales. The court at page 152, specifically stated that “RC §4505.04 is irrelevant to the issue of risk of loss and thus does not conflict with UCC risk of loss analysis.” Ohio title law is important regarding the issue of ownership and evidence of ownership relative to a secured party or an individual claiming an interest in the subject vehicle. Further, it was implemented for the purposes of deterring the sale of stolen vehicles and perpetration of fraud upon a seller and/or buyer. The court in Smith specifically stated at page 158 “indeed, it is apparent that RC §4505.04 is irrelevant to all issues of ownership except those regarding the importation of vehicles, rights as between lien holders, rights of bona fide purchasers, and instruments evidencing title and ownership. Otherwise, motor vehicle ownership rights will be determined by the Uniform Commercial Code.” Ohio courts have come to the position that the Ohio commercial law controls situations as in the scenario. Specifically, ORC §1302.42(B) and ORC §1302.53 and not the Ohio title law. The Ohio Supreme Court stated in Smith its intent was to determine whether Ohio title law or the Ohio UCC was the controlling entity to decide whether a seller’s insurance policy applies to a loss after the sale of the automobile but prior to transferring title. The Court clearly stated that unless there is an explicit agreement to the contrary, title passes at the time the seller delivers the goods to the buyer despite the fact that a document of title will be delivered at a different time and place. In other words, physical possession of the vehicle determines the party responsible for loss due to accident and/or theft. See also Searcey v. Yahle, 2d Dist. Montgomery No. 21016, 2006-Ohio-4520, ¶20 (following Smith and holding that car lot owner’s insurer had no UM coverage obligation to dealer who was rear ended while driving a vehicle purchased with dealer’s money but titled in the name of the lot owner); Gregory-Hill v. Willey, 4th Dist. Highland Case No. 98CA28, 1999 Ohio App. LEXIS 2238, at *11 (May 10, 1999) (following Smith). 

The question remains if your title clerk forgets to issue title, or for various reasons, title is deliberately not being transferred to the purchaser for an extended period of time, does the fact of possession still dictate who is responsible for the loss? This point was determined in Grange Mutual Casualty Co. v. Smith (1992) 80 Ohio App. 3d 426, when an individual sold his vehicle to his stepdaughter. The stepdaughter was in possession of the vehicle prior to the time of sale and after sale. The vehicle was in a severe accident with an underinsured motorist and the insurance company filed an action to determine whether the stepfather was still the owner of the vehicle or the stepdaughter who had possession of the vehicle. The court indicated, Ibid at 427, that it was “proper to apply the UCC provision dealing with delivery of goods when made without moving them to determine ownership of an automobile at time of accident where the automobile had been in possession of buyer prior to the time of sale.” The court stated that the person claiming the title did not pass pursuant to the UCC has the burden of proving the existence of a provision in the contract contradicting the UCC. “The transfer of title is one factor, but if the whole transaction is reduced to writing or if the facts are so abundantly clear as to justify one conclusion, then it is a matter for the court to determine ownership and, following UCC, the ownership and insurable interest transfers at the time of possession.

Another issue faced by automobile dealers has to do with the issue of an uninsured motorist taking a vehicle for a demonstration drive. This was addressed in the case of Fontine, Executor, State of Joyce A. Fontine, deceased vs. Hairston, et al., 2002, Court of Appeals, 10th District, No. 01AP-1004. In this case, the consumer took the subject vehicle to have her expert/technician inspect it. She was gone for several hours and subsequently was in an accident where she crossed the center line and killed the driver of the oncoming vehicle. The estate sued the customer and the dealership who allowed the individual to take the vehicle for a demonstration drive. The dealership was sued under claims of negligence, negligent entrustment and negligent bailment. Further, the plaintiff claimed the dealership was negligent, per se, based on the dealership’s violation of the Ohio Financial Responsibility Statute. O.R.C. §4509.101 (A)(1) states “no person shall operate or permit the operation of a motor vehicle in this state, unless proof of financial responsibility is maintained continuously throughout the registration period with respect to that vehicle, or, in the case of a driver who is not the owner, with respect to that driver’s operation of the vehicle.” In this case, the dealership had the individual sign a demonstration agreement which specifically stated that the dealership had no insurance on the subject vehicle. However, there was a dispute as to whether or not the dealership knew the customer did not have insurance of her own. The Court specifically stated that if the dealership was actually aware the customer did not have liability insurance and still entrusted the vehicle’s operation to her, this would be a violation of the statute which would constitute negligence, per se. However, the Court took an extra step to determine whether or not the proximate cause of the accident was the operation of the vehicle or the fact that the customer did not have insurance.

In this particular case, the dealership argued that the plaintiff had incurred no harm due to the fact that an insurance carrier had already paid for her damages. Therefore, the Court found for the dealership. However, it should be specifically noted that the Court did not address the issue that if the plaintiff did have damages, whether or not the dealership would have been found guilty of negligence, per se.

What does this mean? If you permit a customer to take a vehicle on their own, without a dealership representative in the vehicle with him/her, then it is strongly recommended that the dealership have the customer sign some type of demonstrator agreement/rental agreement and/or verify that the customer does have insurance that complies with Ohio law. Obviously, if you obtain a copy of the individual’s driver license and a copy of their insurance card, this may be sufficient to protect the dealership. However, the dealership would be in a much stronger position if it had a type of demonstration agreement whereby the consumer is placed on notice that the dealership is not insuring the vehicle and the customer verifies that he/she does have the appropriate insurance in place.

As always, these are highlights of the law and are not to be construed as containing the entire law. 

This You Auto Know was originally published in 2002, but recent inquiries dictate that it be republished with updates from Weston Hurd attorneys Robert A. Poklar and Joshua M. Miklowski.

Contact Information

Robert A. Poklar, Esq. rpoklar@westonhurd.com – 216.687.3243

Joshua M. Miklowski, Esq.jmiklowski@westonhurd.com – 216.687.3367