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USAA Changes Policy After ABC News Investigation into Sandy-Damaged Vehicles Sold on Used Car Lots

STAN HONDA/AFP/Getty Images(NEW YORK) -- In the wake of an ABC News investigation into superstorm Sandy-damaged cars being sold on used car lots, a major American insurance company acknowledged that its salvage vehicle branding process after Sandy was "unsatisfactory," and it is making changes to help keep those damaged cars off the road.

USAA, which focuses on providing financial services and insurance to United States military members and their families, is now facing questions, which were raised by an ABC's The Lookout report in July, over its failure to brand at least one of its flood-damaged vehicles -- a 2006 Ford F-350 -- as a salvage vehicle before selling it at auction.

In a follow-up interview with The Lookout's Bill Weir, Kevin Bergner, the president of USAA's Property and Casualty Insurance Group and a former Army general, said the team's report was "shining the light on something that is troubling all of us."

"We went back and looked at our process, and we said 'unsatisfactory,'" Bergner said. "We are changing it, and we will maintain that highest standard. That even a parts-only sale will involve a [salvage] branded title."

When superstorm Sandy pummeled the Northeast last October, the damage was widespread. Nearly 300 people lost their lives, and thousands more lost their homes. Then there were the cars. According to the National Insurance Crime Bureau, an estimated 250,000 cars were submerged for days in corrosive saltwater.

Thousands of these flood-damaged vehicles were temporarily stored at the Calverton Executive Airpark in Long Island. In the months following Sandy's destruction, these cars began to disappear. Where did these flood cars go?

In a seven-month investigation, ABC's The Lookout found these cars turning up on used car lots across the country.

Christopher Basso, public relations manager at CarFax, explains the potential hazards of flood-damaged vehicles, adding that "flood cars literally rot from the inside out."

Because of how easily the damage can be concealed, Basso warns prospective buyers to bring the vehicle to a mechanic for an inspection. "While this car looks great on the outside and to the untrained eye, things are falling apart inside this car. It may not happen immediately, but days, weeks or months down the road, parts that are on this car are going to fail," he added.

CarFax estimates that more than 100,000 Sandy-damaged vehicles are now back on the road across the United States.

When ABC's The Lookout team went undercover at used car dealership D&D Auto Sales in Old Bridge, N.J., it discovered a Ford F-350 truck totaled by superstorm Sandy selling for $19,999. The truck's Vehicle Identification Number, or VIN, and auction records indicated it had been damaged by a flood.

A D&D's salesman sold the car to an ABC's The Lookout producer for its asking price and referred to a flood alert on the vehicle history report CarFax as only "a glitch."

But Alan Picker, owner and certified mechanic at All-Time AutoBody in Point Pleasant, N.J., knows the CarFax alert was no glitch. The Lookout team brought the truck to him to examine the dangers a cleaned-up flood vehicle can often conceal. Picker discovered the car had serious damage, including a corroded transmission, as well as potentially hazardous airbags that could randomly deploy while driving.

D&D Auto Sales responded to The Lookout team's findings and stated, "D&D auto sales sincerely regrets the unfortunate misrepresentation of the product by the salesperson. We do not condone such business practices and have terminated the salesman as a result of his independent action. This is in no way reflective of typical business practices at D&D."

The Ford F-350's previous owner, Mike Kennedy of Point Pleasant, N.J., is a retired Navy man and his insurance company is USAA, which had declared the truck as a total loss after it flooded during Sandy.

According to New Jersey authorities, once the insurer declares a vehicle a total loss, pays off its insured and takes possession of the vehicle, the insurer becomes the owner of the vehicle. New Jersey authorities say it is then the insurer's responsibility to brand the vehicle's title as flood-damaged, forever marking it as a salvage vehicle, before it goes to auction. But when USAA became the owner of Kennedy's Ford F-350, it failed to do that.

The company claimed Kennedy's title was lost, and instead of asking for a new one, it says it told the auction house to sell the Ford F-350 for parts only. But somehow, the truck ended up on D&D Auto Sales' lot in one piece. As in many states, in this circumstance, failure to obtain a salvage title is illegal in New Jersey.

The New Jersey Motor Vehicle Commission has now suspended D&D Auto Sales' license to sell cars, pending an investigation. The New Jersey Attorney General's office launched its own criminal investigation into the dealership, which includes the cars USAA sold at auction that the dealer bought.

After ABC's The Lookout report aired, Bergner said in a follow-up interview at USAA headquarters in San Antonio that USAA went back through 3,872 vehicle titles -- the total number of USAA member cars he said were declared losses as a result of superstorm Sandy. Of those, Bergner said the company found 174 cases where USAA had sold flood cars without branded titles at auction in New Jersey, just as it did with Kennedy's Ford F-350.

That means it is possible that all of those 174 cars are on the road today -- USAA doesn't know. But it says it now plans to get salvage titles for all those vehicles.

"That's what we're working with the New Jersey Motor Vehicle Commission to do, is go track down every one of those vehicles, 174, and we'll not stop until we are able to say all of them are off the road, [and] are in the right place, which is where that Ford F-350 sits today, in the salvage yard," Berger said.

Before our interview with USAA, ABC News identified four flood vehicles sold by USAA at auction in New Jersey without branded titles. Three, a Honda CRV, a Chrysler Town and Country and a Lexus RX330, were subsequently sold with clean titles and are today being driven by unsuspecting new owners.

USAA would not tell ABC News exactly how it disposed of the remaining 3,698 cars the company insured and declared total losses as a result of superstorm Sandy. The company refused to comment on whether any or all were also sold with unbranded titles.

USAA spokesman Roger Wildermuth said "more than 90 percent of them were in New Jersey and New York," when Sandy hit. He added, "New York has a separate process that does not require a salvage title, and we are confident that we have complied fully with those regulations."

Following our interview with USAA, the auction house involved said in a statement to ABC News that its company "fully supports USAA's practice of branding titles on vehicles they intend to sell for parts only, and we will continue to comply with the accepted practice of the NJ MVC."

Howard Nusbaum, an administrator of the National Salvage Vehicle Reporting Program, a law enforcement support organization, said more work still needs to be done to protect the public.

"There are a number of states that have titling statutes with tremendous loopholes that exempt numbers of significantly damaged vehicles from being branded at all," Nusbaum said. "If Hurricane Sandy had taken place in one of those states, many if not most of those vehicles would never have gotten branded. This is an unacceptable risk for the public."

To protect yourself, experts encourage drivers to do their homework before spending their money and thoroughly check a car's history, as well as get the car inspected by a certified mechanic.

Copyright 2013 ABC News Radio

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