In a case addressing the auto insurance coverage for replacement vehicles during the repair of damaged foreign-brand vehicles, the appellate court held that the replacement vehicle provided under the policy need not be an equivalent foreign-brand vehicle (Seoul High Court Decision 2023Na2017503, December 22, 2023).

Kim & Chang, representing four insurance companies that were the defendants in this case, appealed a lower court’s decision that the defendants were obliged to reimburse the rental costs of the replacement vehicles for damaged foreign-brand vehicles and received the appellate court’s decision that overturned the district court decision 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 a foreign-brand vehicle, mitigating such inconvenience would not require the replacement vehicle to be a similar foreign-brand vehicle.

• The Standard Automobile Insurance Terms and Conditions (the “Standard Terms”) set the standard for the coverage of a replacement vehicle’s rental costs as the “ordinary rental cost for the lowest priced vehicle of similar specifications (i.e., in terms of engine displacement and year of production).” Such a standard was sound and reasonable in light of the principle of general damages under the Civil Code, as it is intended to prevent premium increases resulting from a worsening of the loss ratio of auto insurance companies. 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 Standard Terms, the plaintiff had the burden to plead and substantiate the special circumstances that required the plaintiff to offer equivalent foreign-brand vehicles as replacements to the owners of the damaged foreign-brand vehicles, which it had failed to meet in this case.
   

This decision was the first appellate court decision specifically addressing 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 foreign-brand vehicles) may be set at the applicable rental rate for a domestic-brand vehicle of similar specifications (i.e., similar engine displacement and year of production).

Through an in-depth study of the regulatory principles and legal arguments regarding claims for rental expenses, we successfully proved the following points and eventually won the case in its entirety: (i) the rental cost reimbursement standards set forth under the Standard Terms were reasonable and reflected social consensus, (ii) given that the additional rental costs of foreign-brand replacement vehicles claimed by the plaintiff would constitute special compensation items, the plaintiff must meet the burden to plead and prove the relevant circumstances, 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.

As the plaintiff appealed the appellate court’s decision, the case is currently pending in the Supreme Court. If the Supreme Court dismisses the plaintiff’s claim and upholds the appellate court’s decision, it would change the practice of providing foreign-brand vehicles of similar specifications as replacement vehicles during the reparation of damaged ones.

If the general principle of damages applies mechanically, it may be seen as reasonable to compensate for the rental cost of a foreign-brand replacement vehicle during the repair period of a damaged foreign-brand vehicle. However, this appellate court decision setting the reasonable scope of an insurer’s liability would serve as a meaningful reference in determining the scope of liability insurance coverage.