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Appellate Court Decision on Scope of Insurance Coverage for Rental Expenses of Replacement Vehicles


In a case addressing the issue of whether auto insurance coverage for replacement vehicles during the repair of damaged overseas-brand vehicles must provide for an equivalent overseas-brand vehicle, the appellate court held that the replacement vehicle provided under the policy did not need to be an equivalent overseas-brand vehicle. (Seoul High Court Decision 2023Na2017503, Claim for Rent).
Four insurance companies, represented by Kim & Chang, appealed a lower court decision which held in favor of the plaintiff, a car rental company, that filed a claim for additional compensation for temporary replacement vehicles provided during the period of repair of insured overseas-branded vehicles. While the amounts initially paid by the insurers were set on the basis of rental costs for domestic-brand vehicles, additional compensation was being sought on the basis of additional rental costs incurred in providing overseas-brand vehicles as replacements. On December 22, 2023, the 18th Civil Division of the Seoul High Court overturned the trial court decision that had previously ruled in the plaintiff’s favor and dismissed the plaintiff’s claim.
The key findings of the appellate court were as follows:

  • The purpose of providing a replacement vehicle is to mitigate the vehicle owners’ temporary inconvenience caused by the unavailability of their means of transportation during repair periods. As such, even if the damaged vehicle was an overseas-brand vehicle, mitigating such inconvenience would not require that the replacement vehicle also be a similar overseas-brand vehicle.

  • The Standard Automobile Insurance Terms and Conditions (the “Standard Terms”) issued by the financial regulators set the standard for coverage of replacement vehicle rental costs by insurers as the “ordinary rental cost for the lowest priced vehicle of similar specifications (i.e., in terms of engine displacement and model year).” Such standard was sound and reasonable, as it is intended to prevent excessive damages claims, including with regards to the rental costs of replacement vehicles, which would worsen the loss ratio of insurance companies and ultimately result in increased premiums. Therefore, the defendants’ original reimbursement of the rental costs based on such standard was justified.

  • In seeking additional compensation for rental costs exceeding the amounts owed under the above referenced standard, the plaintiff had the burden to plead and substantiate the special circumstances that required the plaintiff to offer overseas-brand vehicles as replacements, which it had failed to meet in this case.

This decision was the first appellate court decision specifically addressing the issue of the standard for reimbursement of rental costs of replacement vehicles under automobile insurance policies. The decision is significant in that it officially endorsed the validity and applicability of the Standard Terms, which expressly provide that reimbursement of rental costs for replacement vehicles (even with regards to overseas-brand vehicles) may be set at the applicable rental rate for a domestic-brand vehicle of similar specifications (i.e., similar engine displacement and model year).
The decision is expected to curtail the practice of certain car rental agents unilaterally providing high-cost overseas-brand vehicles as replacement vehicles, which can lead to excessive costs to insurers, which would ultimately be passed down to automobile insurance policyholders.
Leveraging our industry expertise, and through in-depth study on the relevant regulatory principles and legal arguments, our firm developed solid legal arguments to persuade the court. Thus, our firm demonstrated that (i) the rental cost reimbursement standards set forth under the Standard Terms were reasonable and reflected social consensus, (ii) the additional costs for providing an overseas-brand replacement vehicle, above and beyond the rental costs of a similar level domestic vehicle, would constitute special compensation items to be separately proved, and (iii) the plaintiff’s claims were also inconsistent with global standards, as confirmed and presented to the court on the basis of a close review of the legal standards and precedents of other jurisdictions. Ultimately, the appellate court agreed with our analysis and arguments in overturning the lower court decision and establishing an important precedent on this issue.