Insurance Implications of the Volkswagen Scandal

On September 18, the Environmental Protection Agency issued a Notice of Violation of the Clean Air Act to Volkswagen for its deception with software designed to trick emissions tests on vehicles equipped with its TDI engine. Affected models include VW’s Passat Jetta, Golf, Beetle, and the Audi A3. There are about 500,000 of these vehicles in the US and up to 11 million worldwide.

Volkswagen will begin recalling cars in January 2016, provided agencies in the US, Germany, and other countries approve of its repair plans. Repairs may be as easy as installing updated software which controls the emissions systems, while in some cases, it may also involve replacing the fuel injection equipment and catalytic converters. Cost estimates for the recall of affected models are $7.3 billion. Fines from the EPA could run as high as $37,500 per vehicle or $18 billion in the US.

There are some interesting insurance related implications as details continue to come out. Let’s look at the personal, or car insurance related items, as well as the commercial insurance items.

Personal Insurance: The good news is no one has died from the polluting vehicles, unlike the GM ignition debacle. In addition, no accidents or claims, such as a car fire, have been reported which were a result of the emissions bypass. If something like a fire or accident was reported and attributed to the emissions systems, it would be covered by car insurance provided the owner maintained comprehensive (fire), and collision (accident) coverage.

Car insurance, however, does not cover an item that is malfunctioning whether purposely or accidentally bypassed. That is considered a warranty and / or maintenance item. Since VW will pay for repairs when the vehicles are recalled, no owner will be financially affected.

One concern many owners have voiced is that their vehicles have experienced a loss in value due to the modified emissions software. There is a slight possibility owners of affected older model year vehicles that suffer a total loss could receive a lower claim amount paid, however I don’t expect this to be much of a factor in adjusters’, or insurance companies, determinations.

Commercial Insurance: VW’s insurers will likely take a huge hit from the scandal in two potential areas. If litigation is brought against Volkswagen’s board of directors, whether by shareholders, dealers, emissions agencies, or individuals, then their directors and officers (D&O insurance) policy will be tapped to pay these claims. If these lawsuits exceed the amount of insurance coverage, then VW will either tap umbrella coverage, also referred to as excess liability, or pay them out of pocket.

What will be interesting to see is whether or not Volkswagen’s products and completed operations coverage will pay for some portion of the recall. The question here is did the deliberate actions to game the emissions testing void VW’s coverage under their completed products policy or excluded. If it did, then Volkswagen will be on the hook for the entire amount of the recall. If it didn’t, then VW may get some financial assistance with the recall costs. Regardless of how it reads, I’m very sure both VW and their insurance companies will hammer it out in court before it’s fully decided.

What do you think? Share your comments, questions, and experiences with me on my Google +, Facebook, and LinkedIn pages. I’d love to hear from you!

Evie Wise
Evie Wise


Evie Wise
Evie Wise

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