WONDERING IF YOUR SERVICE CONTRACT PROGRAM CREATES LEGAL EXPOSURE FOR
YOUR DEALERSHIP?
By: Keith E. Whann, Esq.
While there are numerous sources of information for consumers on what
to look for when purchasing a service contract and various laws to protect
them, motor vehicle dealers looking for a service contract program are
not as fortunate. As I walked the Exhibit hall at NADA and met with dealers,
service contracts and the types of issues a motor vehicle dealer should
consider when analyzing a service contract program and its provider were
a major topic of discussion. Their concern is certainly understandable.
When National Warranty Insurance Corporation (NWIC) announced that it
would no longer pay any claims and then filed for protection under bankruptcy
laws, thousands of dealers found themselves exposed to potential liability
they never thought existed.
Forty-two individuals who purchased extended service contracts covered
by NWIC have filed a class-action lawsuit alleging that vendors and other
affiliates were involved in a “Ponzi” scheme whereby money from new investors
is used to pay artificially high returns to earlier investors. The potential
class is estimated to include as many as 1 million consumers throughout
the United States whose contracts are still in force. The lawsuit names
numerous defendants, including thirty-five of the estimated 5,000 dealerships
that sold service contracts insured by NWIC. Dealer reserve accounts
established to pay for claims in the event NWIC failed to do so have
been frozen, preventing dealers from getting access to the money as NWIC
goes through liquidation proceedings. As a result, some dealers are finding
themselves paying tens of thousands of dollars out of their own pockets
to settle consumer claims.
As with any other third party product or service, a dealer should do
some due diligence with respect to both the service contract provider
and the product it is offering prior to selling it in the dealership.
Remember, to be realistic when looking at a particular service contract
program. As with dealership paperwork, the cheapest is not always the
best. Most service contract providers offer a wide range of options within
each of their programs. Since the dealership is the one selling the product
to the consumer it can, in certain circumstances, be exposed to liability
regardless of what the actual service contract or service contract provider’s
dealer agreement might say.
The first and foremost issue for a dealer to consider is whether the
provider is offering a “dealer obligor” or “third party/administrator
obligor” service contract program. While the actual mechanics of the
program will be somewhat similar, the dealership bears the responsibility
for all of the obligations to the consumer under a dealer obligor program,
including financial responsibility for the payment of claims. A careful
review of the service provider’s dealer agreement and the service contract
should enable you to ascertain the structure of the program. In conducting
your review, focus on each party’s contractual obligations and how those
obligations are fulfilled rather than document headings that may contain
labels such as “administrator” or “provider”.
Even when dealing with third party or administrator obligor service
contract programs, if everyone else involved with the program becomes
insolvent, the consumer’s last resort is the dealership where the service
contract was sold. A number of dealers are discovering this fact in dealing
with NWIC’s exit from the market place. When selecting a program, a dealer
should consider the service provider’s current ability and past history
with respect to the payment of claims. Ask for references and check the
provider out with the appropriate State Regulator, the Attorney General’s
Office, and the Better Business Bureau. Dealers should also inquire about
the type of insurance coverage the provider has obtained for the program
and obtain copies of the current insurance policy. An important factor
to consider when analyzing the insurance coverage is whether the policy
provides “first dollar,” “stop loss,” or some other coverage.
Apart from the dealer’s belief or any statements made by the service
provider during its sales presentation indicating that the dealership
will have no liability under a given program, the dealer agreement and/or
service contract itself often contain other areas of potential liability
for a dealership. For example, some service contract programs provide
for a delay in coverage between the date of sale of a motor vehicle and
the effective date of a service contract, thereby limiting coverage during
one of the most crucial time periods when the consumer owns the vehicle.
Other service providers require that an application for a service contract
be received and accepted by the provider before the service contract
becomes effective, once again limiting coverage and potentially exempting
the service contract provider from responsibility for paying claims that
arise during those first few days of ownership of a vehicle.
Many service contract provider’s dealer agreements also make it the
selling dealership’s obligation to repair, or assume liability for the
cost of repairing, any damage to vehicle components covered by the service
contract that existed at the time of the sale of the vehicle to the retail
customer. This can present a number of problems when a service contract
is sold in conjunction with a used motor vehicle. Furthermore, many of
the dealer agreements provide that the service provider can deny a prospective
consumer’s claim if the vehicle has been modified from the original manufacturer’s
specifications. Since it is virtually impossible for anyone dealing in
used vehicles to be familiar with the original manufacturer’s specifications
and equipment for the motor vehicles with which they deal, this creates
another potential area of exposure for the dealership.
Claims administration is also an important consideration. Effectively
handling claims and getting them paid helps to keep your customers satisfied,
and thus loyal customers of the dealership. Additionally, if your dealership
will be performing any of the repair work pursuant to the service contract,
you should inquire as to what the standard is for the payment of labor
rates (i.e. are they determined by national averages, flat rate manuals
or actual time spent?), whether the provider will pay the entire cost
of the repair or only what the “reasonable” cost of repair should have
been according to the provider, and whether you are obligated to provide
any additional warranty to the customer in connection with the repair.
A motor vehicle service contract program can, when structured properly,
be an important profit center for a dealership. The exercise of a little
due diligence by the dealership prior to executing a dealer agreement
with a service contract provider and engaging in the sale of its products
will not only protect the dealership from unforeseen liability, but will
help ensure the overall success of the program.
The information contained
herein has been provided by Keith E. Whann and Deanna L. Stockamp of
the Law Firm Whann & Associates, LLC and
is for general information purposes only. You should contact professional
counsel regarding specific application of the information.
|
