Minnesota Car Rental: Handling BI/PD, UM/UIM & Rental Vehicle Damage Claims


This article provides a brief overview of Minnesota rental car coverage law, from priority of payment for bodily injury and property damage liability claims to uninsured and underinsured motorist claims to no-fault claims to rental vehicle damage claims. A considerable portion of the article is devoted to Minnesota Statute § 65B.49, subd. 5a(1), a statute unique to only a handful of jurisdictions, which requires that all auto policies issued in the state of Minnesota provide coverage for damage to, and loss of, a rented vehicle under the policy’s property damage liability coverage.

Statutorily Mandatory Auto Coverages

Like other compulsory automobile insurance systems, the Minnesota No-Fault Automobile Insurance Act, Minn. Stat. § 65B.41 et seq., (Minnesota “No-Fault Act”), distinguishes between mandatory coverages and optional coverages. The title of the Act is a misnomer inasmuch as the Act addresses bodily injury (BI) liability coverage, property damage (PD) liability coverage, uninsured motorist (UM) coverage and underinsured motorist (UIM) coverage in addition to basic economic loss (a/k/a no-fault) coverages. The Minnesota No-Fault Act requires that every policy issued in the state provide certain levels of BI, PD, UM, UIM and basic economic loss coverages. A personal auto policy must afford a minimum of $30,000 per person/$60,000 per accident in   BI coverage, $10,000 in PD coverage, $25,000 per person/$50,000 per accident in UM and UIM coverages and $20,000/$20,000 in medical expense and income loss no-fault coverage. Minn. Stat. §65B.44; 65B.49, subd. 2, 3, 3a.

Generally, the mandatory coverages afforded under a Minnesota-issued personal auto policy will also apply when the insured is operating a “rented” vehicle. First, Minn. Stat. § 65B.49, subd. 3(2) requires that an auto insurance policy extend coverage to the insured for all sums the insured may be legally obligated to pay as damages arising out of the use of “any motor vehicle, including a motor vehicle permissively operated by an insured,” which would include a rented vehicle. Second, Minnesota Statute § 65B.49, subd. 5a(a), states that a personal auto policy must extend “basic economic loss benefits, residual liability insurance (i.e., BI/PD liability coverage), and uninsured and underinsured motorist coverages to the operation or use of the rented motor vehicle.”

Under the No-Fault Act, a vehicle is “rented” if: “(1) if the rate for the use of the vehicle is determined on a monthly, weekly, or daily basis; or (2) during the time that a vehicle is loaned as a replacement for a vehicle being serviced or repaired regardless of whether the customer is charged a fee for the use of the vehicle.” Minn. Stat. § 65B.49, subd. 5a(b). Conversely, a “vehicle is not rented if the rate for the vehicle’s use is determined on a period longer than one month or if the term of the rental agreement is longer than one month.” Id.

Since 2007, the BI/PD liability coverage of a personal auto policy must afford primary coverage to the insured while operating a rented vehicle. Minn. Stat. § 65B.49, subd. 5a(j) (“The plan of reparation security covering the owner of a rented motor vehicle is excess of any residual liability coverage insuring an operator of a rented motor vehicle”). The 2007 amendment reversed the priority of payment of BI/PD coverage which had previously existed for rental (as opposed to loaner) vehicles. See, Agency Rent-A-Car, Inc. v. Am. Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994) (like other vehicle owners, rental car company had obligation to afford primary BI/PD coverage to renter for injuries caused by renter while operating rented vehicle, but rental car company could limit primary omnibus coverage to statutory minimum while retaining greater protection for itself).  (I’ve previously posted several articles addressing the Agency Rent-A-Car case and the impact of the federal Graves Amendment on a rental car company’s vicarious liability.  A couple articles can be found here and here).

Under Minn. Stat. § 65B.49, subd. 3a(5), the No-Fault Act’s UM/UIM priority statute, the UM/UIM coverage available on the rented vehicle will afford primary coverage, but the renter’s personal UM/UIM coverage will be available on an excess basis if the UM/UIM limits of the renter’s policy exceed the UM/UIM limits of the policy insuring the occupied rented vehicle. The “excess insurance protection is limited to the extent of covered damages sustained, and further is available only to the extent by which the limit of liability for like coverage applicable to any one motor vehicle listed on the automobile insurance policy of which the injured person is an insured exceeds the limit of liability of the coverage available to the injured person from the occupied motor vehicle.” Id. See, Johnson G., The Minnesota Automobile Insurance Manual, UM/UIM Chapters (1991, 1994, 2001, 2004).

Under Minnesota law, no-fault coverage generally follows the insured person. Pursuant to the No-Fault Act’s priority statute for no-fault benefits, Minn. Stat. § 65B.47, the renter’s personal auto insurer is obligated to provide primary, and generally exclusive, no-fault coverage.

Optional Physical Damage Coverage

In contrast to these mandatory coverages, the Minnesota No-Fault Act does not mandate that the owner of a motor vehicle purchase physical damage (collision and comprehensive) coverage insuring the owner against damage to, or theft of, the insured vehicle. Collision coverage, as its name suggests, is primarily designed to pay the insured for the cost to repair a vehicle when damaged in a vehicle collision (or the cash value or replacement value of the vehicle if it is not repairable or totaled). Comprehensive coverage is intended to pay the insured for the cost to repair a vehicle when damaged by non-vehicle collisions such as vandalism, fire, weather, or impacts with animals (or the cash value or replacement value of the vehicle if it is stolen). While a lending institution may require the vehicle owner to maintain such coverage if the vehicle owner financed the purchase or lease of the vehicle, the No-Fault Act does not require that physical damage coverage be purchased or that a personal auto policy afford it.

If a renter has purchased physical damage insurance under his or her personal auto policy, the coverage (like the mandatory coverages described above) will usually also apply to a rented vehicle. When a rented vehicle is damaged while in the renter’s possession under the rental car agreement, the renter is obligated to pay the costs necessary to repair the vehicle (or, if totaled, the difference between the car’s fair market value before it was damaged and the sale or salvage proceeds). If the rented vehicle is totaled, the renter is generally liable for the difference between the vehicle’s fair market value before it was damaged and the sale (or salvage). And, if the rented vehicle is stolen and not recovered, the renter is usually obligated to pay the rental car company for the rental car’s fair market value. In addition, the renter may also be legally liable to the rental car company for a variety of other damages, such as damages for “diminution in value,” “loss of use” and incidental losses such as towing, storage and administrative fees.

Diminution in value damages arise when a rented vehicle cannot be restored to its pre-accident condition by repairs. Many states (including Minnesota) recognize that the owner of a commercial vehicle (which would include the owner of a rental vehicle) is entitled to recover the monetary difference between the value of the rented vehicle at the time of rental and its value after it was damaged and repaired. Loss of use damages represent the income the rental car company loses when it cannot rent a damaged, totaled or stolen car. Many states (including Minnesota) recognize that the owner of a commercial vehicle is entitled to recover damages based on the loss of use of the vehicle while it is undergoing repairs or until it can be replaced. (I will be discussing diminution in value and loss of use damages in detail in subsequent articles on this blog).

Most rental car companies will offer loss damage waiver (LDW) (a/k/a Physical Damage Waiver (PDW) or Collision Damage Waiver (CDW)) to renters. For a fee, the car rental company will enter into a contract with the renter to waive all or part of its damage claim against the renter if the rented vehicle is damaged or stolen (provided the car was not driven by an unauthorized driver or in violation of a geographic or use limitation specified in the rental contract). Purchase of LDW may not be necessary if the renter has purchased physical damage coverage in connection with his or her personal auto policy. Accordingly, many states have enacted statutes which require rental car companies provide notice to automobile renters advising that purchase of a LDW may not be necessary if they have purchased physical damage coverage under their personal auto policy. See, Colo. Rev. Stat. Ann. § 6–1–203(1)(e); Kan. Stat. Ann. § 50–657(e); La. Rev. Stat. Ann. § 2091.5 B(5); Mass. G.L. c. 90, § 32E 1/2; Or. Rev. Stat. § 646.859(2); Va. Code Ann. § 59.1–207.31 B.

The Massachusetts statute obligates rental car companies to provide the following notice to rental customers:

NOTICE: This contract offers, for an additional charge, a Collision Damage Waiver to cover your financial responsibility for damage to the rental vehicle. Your personal automobile insurance may already cover you for damage to a rental car. The purchase of a Collision Damage Waiver is optional and may be declined. For Massachusetts residents: If you have an automobile policy on your personal vehicle with coverage for collision, your policy will cover collision damage to the rental vehicle, less the deductible on your policy. If you have comprehensive coverage on your vehicle, your policy will cover loss on the rental vehicle caused by fire, theft or vandalism, less the deductible on your policy. Drivers who hold policies in other states should check with their insurance agents to determine whether their policies extend to rental vehicles.

Statutorily Imposed Physical Damage Coverage for Rented Vehicles

Minnesota is one of a few states which have gone one step further. In recognition of the fact that may people do not purchase physical damage coverage in connection with their personal auto policies, Minnesota enacted a statute in 1987 which imposes physical damage coverage on personal auto policies when the insured is operating a rented vehicle.

Under Minnesota law, personal auto policies insuring private passenger vehicles and pickup trucks and vans, wherever issued, must provide coverage for rented private passenger vehicles, pickup trucks, vans and trucks with a registered gross vehicle weight of 26,000 pounds or less. Minn. Stat. § 65B.49, subd. 5a(a)(1). The personal auto policy must insure the rented vehicle against “damage and loss of use” under the compulsory “property damage liability” coverage of the policy. Minn. Stat. § 65B.49, subd. 5a(a)(1).

Under the statute, a personal auto policy must extend this coverage to its insured regardless of fault or negligence on the part of the insured in causing the damages. Although Minnesota law only requires that personal auto policies afford $10,000 of property damage liability coverage (see, Minn. Stat. § 65B.49, subd. 3a), the statute mandates that $35,000 of coverage be provided for damage and loss of use of rented vehicles. Id.

Minnesota Statute § 65B.49, subd. 5a(f), provides that when a motor vehicle is rented in Minnesota, the rental car company must attach to the rental contract a separate notice stating:

Under Minnesota law, a personal automobile insurance policy must: (1) cover the rental of this motor vehicle against damage to the vehicle and against loss of use of the vehicle; and (2) extend the policy’s basic economic loss benefits, residual liability insurance, and uninsured and underinsured motorist coverages to the operation or use of a rented motor vehicle. Therefore, purchase of any collision damage waiver or similar insurance affected in this rental contract is not necessary. In addition, purchase of any additional liability insurance is not necessary if your policy was issued in Minnesota unless you wish to have coverage for liability that exceeds the amount specified in your personal automobile insurance policy.

Further, “[n]o collision damage waiver or other insurance offered as part of or in conjunction with a rental of a motor vehicle may be sold unless the person renting the vehicle provides a written acknowledgment that the above consumer protection notice has been read and understood.” Id.

The statute’s reference to “damage and loss of use,” could lead one to conclude that Minn. Stat. § 65B.49, subd. 5a only imposes coverage for purposes of losses typically covered by collision coverage and not losses typically covered under comprehensive coverage, such as theft. However, Minn. Stat. § 72A.125, subd. 3 defines “collision damage waiver” to mean “a discharge of the responsibility of the renter or lessee to return the motor vehicle in the same condition as when it was first rented. The waiver is a full and complete discharge of the responsibility to return the vehicle in the same condition as when it was first rented.” Presumably, the legislature intended Minn. Stat. § 65B.49, subd. 5a to embrace all losses which relate to damage to, or theft of, a rented vehicle. Otherwise, the statement that “purchase of any collision damage waiver or similar insurance affected in this rental contract is not necessary,” would not be entirely true.

The statute has always addressed loss of use damages. As originally enacted, Minn. Stat. § 65B.49, subd. 5a(h) provided that in order “[t]o be compensated for the loss of use of a damaged rented motor vehicle, the car rental company must prove: (1) that had the vehicle been available, it would have been rented; and (2) that no other vehicle was available for rental in place of the damaged vehicle.” Further, “[a] car rental company may be compensated for loss of use of a damaged rental motor vehicle only for the period when the damaged car actually would have been rented.” Id. However, Minn. Stat. § 65B.49, subd. 5a(h) was subsequently amended to eliminate the “proof” requirements in favor of a provision which simply states that “[c]ompensation for the loss of use of a damaged rented motor vehicle is limited to a period no longer than 14 days.”

Some additional takeaways from the Minnesota rental vehicle statute include the following:

  • Some Personal Auto Policies Excluded

The imposed coverage required by Minnesota Statute § 65B.49, subd. 5a does not apply to all types of personal auto policies. By its express terms, the statute does not apply to policies which only insure collector vehicles as described in Minnesota Statute 168.10, subds. 1a, 1b, 1c and 1d or recreational vehicles as defined by section 168.002.

  • Imposed Coverage not Limited to Named Insured

The imposed coverage required by Minnesota Statute § 65B.49, subd. 5a is not limited to the “named insured” under a personal auto policy. The statute uses the term “insured,” which is, in turn, defined in Minn. Stat. § 65B.43, subd. 5 to include the named insured and the spouse and relatives of the named insured who reside with the named insured and are not identified as a named insured under their own personal auto policy. “A person resides in the same household with the named insured if that person’s home is usually in the same family unit, even though temporarily living elsewhere.” Id.

  • Imposed Coverage not Limited to Policies Issued in Minnesota

The imposed coverage required by Minnesota Statute § 65B.49, subd. 5a is not limited to personal auto policies issued in Minnesota. By its express terms, the statute applies to “every plan of reparation security, wherever issued ….” In addition, Minnesota Statute § 65B.48, subd. 1 provides that the personal auto policy of a nonresident owner of a motor vehicle “shall include coverage for property damage to a motor vehicle rented or leased within this state by a nonresident.” Thus, if a vehicle is rented in Minnesota by an individual who is insured under a personal auto policy issued outside of Minnesota, that policy will likewise be reformed to provide the rented vehicle coverage required by Minn. Stat. § 65B.49, subd. 5a.

  • Imposed Coverage under Two or More Personal Auto Policies

If the renter is insured under two or more personal automobile insurance policies providing the rented motor vehicle coverage required under the statute, the renter can select the personal auto policy that will apply to the rental car company’s damages (the selected insurer is entitled to a pro rata contribution from the other insurer(s) based upon the property damage limits of liability of the policies). Minn. Stat. § 65B.49, subd. 5a(d).

  • Imposed Coverage under Commercial Auto Policies

Minnesota law requires commercial insurance policies contain coverage for rented vehicles. Minn. Stat. § 60A.08, subd. 12, provides that “[a]ll commercial automobile liability policies must provide coverage for rented vehicles as required in chapter 65B.” Because a commercial policy must cover rented vehicles to the same extent as a personal auto policy, the commercial policy will likewise be reformed to provide the rented vehicle coverage required by Minn. Stat. § 65B.49, subd. 5a.

  • Priority for Imposed Coverage: Commercial and Personal Auto Policies

Minnesota Statute § 65B.49, subd. 5a(d) provides that if the renter is covered by a commercial policy issued to his or her employer, the employer’s policy bears primary responsibility to pay claims arising from use of the rented vehicle. In such cases, the renter’s personal auto policy, if any, would provide excess coverage if necessary.

  • Purchased Physical Damage Insurance

The statute does not limit the contractual responsibility a personal auto insurer may have to its insured under the terms of any physical damage coverage the insured may have purchased. Presumably, any physical damage coverage the insured purchased would, subject to its terms and limitations, apply on an excess basis if necessary.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

Rental Car Coverage: Diminution in Value, Loss of Use & Loss Damage Waiver (LDW) — the Basics


This is the first in a series of articles addressing claims for damage to, and loss of, rented vehicles. It provides an overview of the types of damages a rental car company may sustain (and, thus, may be imposed on the renter) in the event the rented vehicle is damaged, totaled or stolen. In addition to the typical repair costs and loss for a totaled or stolen vehicle, these damages may include damages that may not be appreciated by renters such as diminution in value, loss of use and other incidental losses.

This article also identifies the types of coverage available to a renter to protect himself/herself against liability for such damages, such as Loss Damage Waiver (LDW) (a/k/a Physical Damage Waiver (PDW) or Collision Damage Waiver (CDW)), physical damage (collision/comprehensive) coverage under a personal auto policy, physical damage coverage imposed by statute on personal auto policies for rented vehicles and physical damage coverage provided by credit card companies for rented vehicles.

In future articles, I will address diminution in value and loss of use damages in detail and highlight court decisions addressing whether loss of use claims can or must be based on reasonable rental values or loss of income and require use of fleet utilization rates.

Rental Car Agreement Creates Bailment Relationship

While the laws of each state differ and need to be consulted, renting a vehicle from a rental car company generally creates a bailment contract for the mutual benefit of the parties. Generally, a bailee (renter) is liable to the bailor (rental company) for any damage to, or loss of, the bailed property (rented vehicle) caused by the bailee’s negligence or fault. In addition, the parties to a bailment contract are generally free to alter their obligations by contract, provided the agreement does not contravene a statute or public policy. While a state may limit a renter’s obligation to damages or losses caused by the renter, most rental car agreements require the renter to bear responsibility for all damages regardless of whether the renter was negligent or at-fault.

Damage to, or Loss of, Rented Vehicle

Typically, if the rented vehicle is damaged while in the renter’s possession under the rental car agreement, the renter is obligated to pay the costs necessary to repair the vehicle. If the rented vehicle is totaled, the renter is generally liable for the difference between the vehicle’s fair market value before it was damaged and the sale (or salvage) proceeds. And, if the rented vehicle is stolen and not recovered, the renter is usually obligated to pay the rental car company for the rental car’s fair market value.

In addition to these typical damages, the renter may also be legally liable to pay the rental car company for a variety of other damages that are less understood, such as damages for “diminution in value,” “loss of use” and incidental losses such as towing, storage and administrative fees. I will be discussing these types of damages, and court decisions addressing them, in subsequent posts. For purposes of this article, it is sufficient to note that diminution in value damages arise when a rented vehicle cannot be repaired to its pre-accident condition. Many states (including Minnesota) recognize that the owner of a commercial vehicle (which would include the owner of a rental vehicle) is entitled to recover the monetary difference between the value of the rented vehicle at the time of rental and its value after it was damaged and repaired.

Loss of use damages represent the income the rental car company loses when it cannot rent a damaged, totaled or stolen car. Many states (including Minnesota) recognize that the owner of a commercial vehicle is entitled to recover damages based on the loss of use of the vehicle while it is undergoing repairs or until it can be replaced.

Sources of Renter Protection against Damage/Loss of Rented Vehicle

A renter can protect himself against the risk of having to pay for damage to, or loss of, a rented vehicle in several ways.  Four methods include the following:

          a. Loss Damage Waiver

First, the renter can purchase loss damage waiver (LDW) (a/k/a Physical Damage Waiver (PDW) or Collision Damage Waiver (CDW)). For a fee, the car rental company will enter into a contract with the renter to waive all or part of its damage claim against the renter if the rented vehicle is damaged or stolen (provided the car was not driven by an unauthorized driver or in violation of a geographic or use limitation specified in the rental contract).

Most rental car agreements provide that if the renter declines to purchase LDW at the time of rental and the car is damaged or stolen during the rental period, the renter is liable for all damages, including damages which were not due to the fault or negligence of the renter. A car rental agreement may, for example, provide the following:

Damage/Loss to the Car. If you do not accept LDW, or if the car is lost or damaged as a direct or indirect result of a violation of paragraph 14 [“Prohibited Use of the Car”], you are responsible; and you will pay us for all loss of or damage to the car regardless of cause, or who, or what caused it. If the car is damaged, you will pay our estimated repair cost, or if, in our sole discretion, we determine to sell the car in its damaged condition, you will pay the difference between the car’s retail fair market value before it was damaged and the sale proceeds. If the car is stolen and not recovered you will pay us for the car’s fair market value before it was stolen. As part of our loss, you’ll also pay for loss of use of the car, without regard to fleet utilization, plus an administrative fee, plus towing and storage charges, if any (“Incidental Loss”).

Loss Damage Waiver. Loss Damage Waiver (LDW) is not insurance and not mandatory. If you accept LDW by your initials on the rental agreement at the daily rate, for each full or partial day that the car is rented to you, and the car is used and operated in accordance with this agreement, we assume responsibility for the loss of or damage to the car except for your amount of “responsibility”, if any, specified on the rental document. You acknowledge that you have been advised that your insurance may cover loss or damage to the car. You also acknowledge reading the notice on loss damage shown on the rental document, or at the end of these terms, or in separate notice form.

Although LDW meets the basic definition of insurance — it transfers some risk from the renter to the rental company — it is not regulated as insurance because it is simply a waiver of the rental company’s right to charge the renter for damages to, or loss of, the rented vehicle.

Nonetheless, some states regulate the content of LDW provisions by statute. Minnesota, for example, defines “collision damage waiver” to mean “a discharge of the responsibility of the renter or lessee to return the motor vehicle in the same condition as when it was first rented. The waiver is a full and complete discharge of the responsibility to return the vehicle in the same condition as when it was first rented.” Minnesota Statute. § 72A.125, subd. 3. The statute goes on to state that, “[t]he waiver may not contain any exclusions except those approved by the [department of commerce] commissioner.” This type of statute will override any contrary LDW terms in the rental car agreement. Thus, if a person purchases LDW in connection with a vehicle rental in Minnesota, the renter cannot thereafter be held responsible for any damages unless one of the statutorily authorized exclusions is applicable.

         b. Personal Auto Policy with Physical Damage Insurance

Second, the renter may have a personal auto policy and may have purchased physical damage (collision and comprehensive) coverage. Physical damage coverage will usually extend coverage to the rented vehicle. If the renter has this coverage, purchase of LDW may be unnecessary.

It is important to recognize that, in contrast to coverages which are typically mandated by state law (bodily injury and property damage coverage, uninsured and underinsured motorist protection and personal injury protection (a/k/a basic economic loss or no-fault) coverage), physical damage coverage is entirely optional. While a lending institution may require the vehicle owner to maintain physical damage coverage if the vehicle owner financed the purchase or lease of the vehicle, a vehicle owner need not purchase physical damage coverage in order to legally operate a vehicle. Collision coverage, as its name suggests, is primarily designed to pay the insured for the cost to repair a vehicle when damaged in a vehicle collision (or the cash value or replacement value of the vehicle if it is not repairable or totaled). Comprehensive coverage is intended to pay the insured for the cost to repair a vehicle when damaged by non-vehicle collisions such as vandalism, fire, weather, or impacts with animals (or the cash value or replacement value of the vehicle if it is stolen).

As noted above, physical damage insurance generally transfers to a rented vehicle. Numerous states have enacted statutes which require rental car companies provide notice to renters advising that purchase of a LDW may not be necessary if the renter has purchased physical damage coverage under their personal auto policy. See, Colo. Rev. Stat. Ann. § 6–1–203(1)(e); Kan. Stat. Ann. § 50–657(e); La. Rev. Stat. Ann. § 2091.5 B(5); Mass. G.L. c. 90, § 32E 1/2; Or. Rev. Stat. § 646.859(2); Va. Code Ann. § 59.1–207.31 B. These types of statutory provisions are designed to benefit consumers who rent private passenger automobiles by notifying them that purchase of LDW might duplicate coverage already provided by their auto insurance. The Massachusetts statute is an example and obligates rental car companies to provide the following notice to their customers:

NOTICE: This contract offers, for an additional charge, a Collision Damage Waiver to cover your financial responsibility for damage to the rental vehicle. Your personal automobile insurance may already cover you for damage to a rental car. The purchase of a Collision Damage Waiver is optional and may be declined. For Massachusetts residents: If you have an automobile policy on your personal vehicle with coverage for collision, your policy will cover collision damage to the rental vehicle, less the deductible on your policy. If you have comprehensive coverage on your vehicle, your policy will cover loss on the rental vehicle caused by fire, theft or vandalism, less the deductible on your policy. Drivers who hold policies in other states should check with their insurance agents to determine whether their policies extend to rental vehicles.

It is also important to note that even if the renter purchased physical damage coverage on his or her personal auto policy, the coverage is subject to a deductible and stated limits and that deductible and those limits will usually apply to the rented vehicle as well. In addition, most personal auto policies will not cover cars rented outside the United States and many will not apply to exotic or luxury cars, SUVs and certain types of vans. In addition, many personal auto policies will not cover all damages the rental car company may assess the renter such as diminution of value, loss of use or administrative fees, such that the renter can be liable for such charges even if the renter’s personal auto policy contained physical damage coverage at the time of rental.

The renter should thoroughly review his or her personal auto policy before renting a vehicle

        c. Statutorily Imposed Physical Damage Coverage for Rented Vehicles

Third, the renter may have purchased a personal auto policy in state which requires that the mandatory property damage liability coverage of the policy be automatically rewritten to afford physical damage coverage to rented vehicles. Minnesota is one such state. In 1987, Minnesota enacted legislation requiring that personal auto policies insuring private passenger vehicles and pickup trucks and vans, wherever issued, provide coverage for rented private passenger vehicles, including pickup trucks, vans and trucks with a registered gross vehicle weight of 26,000 pounds or less. Minn. Stat. § 65B.49, subd. 5a(a)(1). Under the statute, a personal auto policy must cover a “rented vehicle” against “damage and loss of use” under the compulsory “property damage liability” coverage of the policy. Id. Although Minnesota only requires $10,000 of property damage liability coverage, the policy is automatically rewritten to afford $35,000 of coverage for damage and loss of use of rented vehicles. Id.

Minnesota Statute § 65B.49, subd. 5a(f), also provides that when a motor vehicle is rented in Minnesota, the rental car company must attach to the rental contract a separate written notice stating in part:

Under Minnesota law, a personal automobile insurance policy must: (1) cover the rental of this motor vehicle against damage to the vehicle and against loss of use of the vehicle … Therefore, purchase of any collision damage waiver or similar insurance affected in this rental contract is not necessary. … No collision damage waiver or other insurance offered as part of or in conjunction with a rental of a motor vehicle may be sold unless the person renting the vehicle provides a written acknowledgment that the above consumer protection notice has been read and understood.

Thus, in Minnesota, it does not matter whether the renter purchased physical damage coverage when s/he purchased the personal auto policy. Physical damage insurance is imposed on the policy for purposes of responding to damages to a rented vehicle. If the renter’s policy was issued in a state imposing physical damage insurance on personal auto policies for rented vehicles, such as Minnesota, purchase of LDW may be unnecessary.

This statutorily-imposed coverage is written into personal auto insurance policies issued in Minnesota. A renter should review his or her policy before renting a vehicle.

I will be addressing the Minnesota statute in detail in a subsequent article on this blog.

        d. Credit Card Physical Damage Coverage for Rented Vehicles

Fourth, the renter may have a credit card which will extend physical damage coverage to the rented vehicle if the renter charged the rental vehicle on the card and declined to purchase LDW. If the renter has this coverage, purchase of LDW may be unnecessary.

It is important to note that while all four major credit card companies cover damage to the rented vehicle, some credit card policies may not cover vandalism or theft or weather-related damages and may only extend coverage to the credit cardholder (as opposed to a collision caused by other drivers of the rental vehicle), short term rentals (15 days or less) or accidents occurring on public roads. In addition, virtually all credit card policies exclude coverage for luxury and exotic vehicles and some do not cover SUVs, vans and trucks. Further, while some claim to cover “loss of use” damages, the credit card company may only be obligated to pay if the rental company proves loss of use by providing a fleet utilization log showing that it did not have other cars available to rent.

Usually, the physical damage insurance available through a credit card is written to apply on a “secondary” basis, meaning that if the renter/credit cardholder has a personal auto policy that applies to the rental car company’s damages, the personal auto policy will be “primary” and pay first. The credit card company will then be obligated to reimburse the renter for the deductible under the primary personal auto policy and address large claims above the limits of the primary personal auto policy. However, if the renter has no personal auto insurance that applies to the damages, the credit card company will generally drop-down and pay all damages, up to its limits of insurance.

The renter should thoroughly review his or her credit card policy before renting a vehicle.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

 

 

Auto Dealer-Arranged Financing: When must TIL Disclosures be Provided?


I recently posted an article, “Auto Dealer-Arranged Financing and the Truth in Lending Act: Understanding the Basics.”  This is one of several posts that get more specific.

Under the federal Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq., and its implementing provision (“Regulation Z”), an auto dealer in a dealer-arranged financing transaction must provide Truth in Lending (“TIL”) disclosures to the consumer before “consummation” of a credit transaction. Consummation occurs when a consumer “becomes contractually obligated on a credit transaction.” Among other things, the TILA and Regulation Z require the auto dealer to disclose the following information:

Identity of the creditor;

The amount financed;

An itemization of the amount financed;

The finance charge;

The annual percentage rate;

The total of payments;

The total sale price; and

The payment schedule.

Although the TILA allows a creditor (which includes an auto dealer) to furnish a separate TIL disclosure statement, virtually all retail installment sales contract (“RISC”) forms — which are written by lending institutions or third-party companies – contain TIL disclosures. Typically, “consummation” occurs at the moment a consumer executes a retail installment sales contract for it is at that moment the consumer becomes legally obligated to credit terms. Generally, then, a dealership complies with TILA by presenting the RISC to the consumer for review and signature and giving her a copy of the signed contract. See, Peter v. Village Imports Co., 2001 WL 1640130, at *3 (D. Minn. Oct. 9, 2001) (“[t]he court finds that Village Imports satisfied TILA when it gave Peter the unsigned contract containing the TILA disclosures and Peter had the opportunity to defer signing it if he found the terms unacceptable”).

Distinction between Sale and Credit

In determining whether “consummation” has occurred for purposes of triggering the disclosure requirements of the TILA and Regulation Z, it is important to distinguish between an obligation to purchase a vehicle and an obligation to purchase a vehicle on credit. While a consumer’s obligation to purchase a vehicle may coincide exactly with the customer’s to a particular credit arrangement, the two obligations are analytically separate.

This point is often confused. For example, in Raceway Ford Cases, 229 Cal. App. 4th 1119, 177 Cal. Rptr. 3d 616 (2014), the defendant dealership argued that “consummation” for purposes of the TILA and the Automobile Sales Finance Act, also known as the Rees–Levering Motor Vehicle Sales and Finance Act (“ASFA”), California Civil Code, § 2981 et seq., occurred when the consumer executed a purchase contract and took physical possession of the vehicle. Under California law, a vehicle sale is “deemed completed and consummated when the purchaser of the vehicle has paid the purchase price, or, in lieu thereof, has signed a purchase contract or security agreement, and has taken physical possession or delivery of the vehicle.” California Vehicle Code, § 5901, subd. (d). The appellate court rejected the argument. Raceway, 177 Cal. Rptr. 3d at 629. (“[t]his reasoning inappropriately muddles together consummation of the sale with consummation of the credit transaction”). (Fortunately, the court in Raceway Ford Cases ruled in favor of the dealership on other grounds).

The Liabo v. Wayzata Nissan Case

The case that most concretely illustrates the distinction between these two obligations is Liabo v. Wayzata Nissan, LLC, 707 N.W.2d 715 (Minn. Ct. App. 2006), review denied (Minn. March 26, 2006), a case I handled for the defendant dealership.

There, Liabo agreed to purchase a 1998 Nissan Altima GXE for $19,158, contingent upon being approved for special 2.9% APR financing. The terms of Liabo’s purchase offer were recorded in a “Delivery Sheet.” Because Liabo wanted to ensure that her $1,200 down payment would be refunded if she did not qualify for the special 2.9% APR financing, she insisted that the financing condition be recorded on the Delivery Sheet. At her insistence, handwritten on the Delivery Sheet were the words “Special 2.9% O.A.C.” Liabo then signed the Delivery Sheet immediately above a statement providing: “I UNDERSTAND THAT THIS IS A BINDING CONTRACT AND I WILL LOSE ANY DEPOSIT IF I DO NOT PERFORM ACCORDING TO TERMS.”

Both Liabo and the dealership understood that if Liabo did not qualify for the 2.9% APR, her down payment would be refunded and she would not obligated to purchase the 1998 Altima GXE. Both understood that if she was approved for the 2.9% APR, she would be obligated to purchase the 1998 Altima GXE. After considerable effort, Wayzata Nissan secured the 2.9% APR financing for Liabo. However, Liabo changed her mind and decided she wanted to purchase a different model, an Altima GLE, instead of the GXE, which retailed for a higher price and did not qualify for the special 2.9% APR financing. Liabo decided not to purchase the 1998 Altima GXE. Wayzata Nissan then refused to refund her $1,200 deposit under the terms of the Delivery Sheet.

Later, Liabo commenced a class action styled lawsuit against Wayzata Nisan alleging violations of the federal TILA, the Minnesota Motor Vehicle Retail Installment Sales Act (“MMVRISA”), Minn. Stat. § 168.66 et seq. (now Minn. Stat. § 53C.08 et seq) and deceptive trade practices in violation of Minn. Stat. §§ 325D.44 and 325F.69.

Liabo contended the Delivery Sheet obligated her to purchase the 1998 Altima GXE vehicle on credit and, therefore, the dealership violated the TILA and MMVRISA by not providing her with the credit disclosures required by the TILA and MMVRISA.

The trial court granted Wayzata Nissan’s motion for summary judgment and dismissed the class allegations. The Minnesota Court of Appeals affirmed the trial court.

The Minnesota Court of Appeals first held that Liabo was contractually obligated to purchase the 1998 Altima GXE from Wayzata Nissan or forfeit her $1,200 down payment. As noted above, the Delivery Sheet contained a condition precedent which required Wayzata Nissan to secure financing at 2.9% APR before the Delivery Sheet became binding on Liabo. Because Wayzata Nissan secured the financing, the condition precedent was satisfied and the Delivery Sheet was binding on Liabo. Thus, Wayzata Nissan was entitled to judgment against Liabo for the $1,200 downpayment.

The appellate court next addressed Liabo’s argument that Wayzata Nissan was required to provide TIL disclosures. On behalf of Wayzata Nissan, I argued that while the Delivery Sheet was a binding contract, it did not obligate Liabo to purchase the vehicle on credit thereby triggering TILA (and MMVRISA’s) disclosure requirements. TILA disclosures are only required to be made “when a consumer becomes contractually obligated on a credit transaction.” 12 C.F.R. § 226.2(a)(13). Although Liabo conditioned her purchase on qualifying for the 2.9% APR financing, the Delivery Sheet did not require that she accept the 2.9% APR financing if Wayzata Nissan was, in fact, able to arrange it. Rather, Liabo remained free to forego the 2.9% APR financing and purchase the vehicle for cash (or obtain her own financing).

The appellate court agreed with Wayzata Nissan’s position and held that no TIL disclosures were required. The court first noted that the Delivery Sheet was not a contract setting out the particulars of a credit arrangement. Rather, it functioned as purchase contract stating the price of the automobile, the fees associated with the purchase, Liabo’s trade-in value and down payment, and the amount to be financed. The court noted that had Liabo proceeded with the transaction after Wayzata Nissan satisfied the financing contingency, she would have been presented with a retail installment sales contract containing TIL disclosures. However, she chose to back out of the transaction.

Most importantly, the Delivery Sheet did not contractually obligate Liabo to any credit terms. The fact that she would lose her $1,200 downpayment if Wayzata Nissan satisfied the financing contingency and she did not proceed with the purchase the vehicle did not obligate her to any credit terms – at all times, she remained free to pay cash to purchase the vehicle or obtain financing elsewhere through a lender that did not involve Wayzata Nissan. In support of its holding, the court of appeals cited the Official Staff Commentary to Regulation Z:

The Official Staff Commentary to Regulation Z states that consummation “does not occur merely because the consumer has made some financial investment in the transaction (for example, by paying a nonrefundable fee) unless … applicable law holds otherwise.” 12 C.F.R. Pt. 226, Supp. I, § 2(a)(13). Additionally, the commentary explains that consummation “does not occur when a consumer becomes contractually committed to a sale transaction, unless the consumer also becomes legally obligated to accept a particular credit arrangement.” Id. The commentary uses an example with facts similar to here to demonstrate its language. “When a consumer pays a nonrefundable deposit to purchase an automobile, a purchase contract may be created, but consummation for purposes of the regulation does not occur unless the consumer also contracts for financing at that time.” Id.

The Minnesota Court of Appeals also rejected Liabo’s argument that Wayzata Nissan had violated the MMVRISA by failing to provide her with the disclosures required by Minn. Stat. § 168.71(b). The trial court held that MMVRISA disclosures were not necessary because the Delivery Sheet was not a retail installment sales contract under the MMVRISA. In affirming the trial court’s ruling, the appellate court stated:

The Delivery Sheet executed by appellant was not a retail installment contract. Under Minn. Stat. § 168.66, subd. 4, a retail installment contract is defined as “any agreement … evidencing a retail installment sale of a motor vehicle.” A retail installment sale is defined as a “sale evidenced by a retail installment contract wherein [the] retail buyer agrees to buy and [the] retail seller agrees to sell a motor vehicle at a … price payable in one or more installments.” Id. at subd. 3. Here, the Delivery Sheet did not list any finance charges, nor the total amount of installment payments, the amount of each installment payment, or the date the payments were due. There was no “retail installment” contract at the point that appellant backed out of the transaction.

Finally, the Minnesota Court of Appeals affirmed the trial court by rejecting Liabo’s argument that Wayzata Nissan had engaged in deceptive trade practices in violation of Minn. Stat. §§ 325D.44 and 325F.69. Liabo could not establish that Wayzata Nissan engaged in any misrepresentation or that she had suffered any damages. The court stated:

[Wayzata Nissan] did not engage in deceptive trade practices or misrepresent the facts. [Wayzata Nissan] took extra care to note on the Delivery Sheet that [Liabo] was obligated to purchase the vehicle only if she was approved for the special financing. This is exactly what happened. [Liabo] was initially denied financing but through the efforts of [Wayzata Nissan] and her own, she was eventually approved for the financing. She understood exactly what she was getting into. [Liabo] suffered no damages. She executed a contract that stated her $1,200.00 down payment would be refunded if she did not qualify for the special 2.9% APR financing. She was approved for that financing, but then rejected it for the car she had intended to buy, wanting to switch the preferential financing to a more expensive vehicle. When that request was denied, [Liabo] tried to back out of the contract, not buy any car, and get back her down payment. We conclude [Wayzata Nissan] was entitled to [Liabo] down payment. That was a term of the agreement.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

 

Auto Dealer-Arranged Financing: Compliance with TILA May Satisfy State Motor Vehicle Retail Installment Sales Acts — TILA Preemption and TILA Safe Harbors.


I recently posted an article, “Auto Dealer-Arranged Financing and the Truth in Lending Act: Understanding the Basics.”  This is one of several posts that get more specific.

Prior to the passage of the federal Truth in Lending Act (“TILA”), 15 U.S.C. §1601 et seq. in 1968, many states adopted retail installment sales legislation to regulate the retail sale and financing of motor vehicles and require dealerships to disclose credit cost information.

For example:

The Minnesota Motor Vehicle Retail Installment Sales Automobile Act (“MVRISA”), Minn. Stat. § 53C.08 et seq., (formerly Minn. Stat. § 168.71), became effective in 1957.

The Rees-Levering Automobile Sales Finance Act (“ASFA”), California Civil Code § 2981 et seq., replaced the 1945 Automobile Sales Act and became effective on January 1, 1962.

The Illinois Motor Vehicle Retail Installment Sales Act (“MVRISA”), 815 Ill. Comp. Stat. Ann. 375/1 et seq., was enacted in 1967.

While the disclosure requirements of state retail installment sales acts differ in some respects, they generally have similar purposes and require that similar information be disclosed to consumers before the consumer gets locked into credit terms.  The disclosure requirements of most state acts are similar, if not identical, to those required by the federal Truth in Lending Act (“TILA”) 15 U.S.C. § 1601 et seq., and Regulation Z, its implementing provision, requiring that a retail installment sales contract disclose important credit terms such as the cash sales price, finance charge, amount financed, annual percentage rate, total payment, total sales price and payment schedule.

TILA Preemption

However, on occasion, a state act may require a disclosure which is more demanding or exacting than that required by TILA and Regulation Z.  In such cases, an issue of federal preemption may arise. Generally, federal preemption occurs when: (1) Congress enacts a statute that explicitly preempts state law; (2) federal law occupies a legislative field to such an extent that it is reasonable to conclude that Congress left no room for state regulation in that field; or (3) state law actually conflicts with federal law. With regard to the TILA, Congress has preempted all state laws that are “inconsistent with the provisions of [TILA] and then only to the extent of the inconsistency.” 15 U.S.C. § 1610(a)(1). See also Regulation Z, 12 C.F.R. § 226.28(a)(1) (2005).

Thus, not all state laws are preempted by the TILA. TILA preempts only those state laws that are inconsistent with the TILA. State and federal laws are inconsistent when “compliance with both federal and state regulation is a physical impossibility” or when state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Psensky v. Am. Honda Fin. Corp., 378 N.J. Super. 221, 225-26, 875 A.2d 290, 293 (App. Div. 2005) (quoting Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 153, 102 S. Ct. 3014, 3022, 73 L.Ed.2d 664, 675 (1982)).

Generally, a state law will not conflict with the TILA merely because it provides a greater level of protection (disclosure) to consumers than proscribed under the TILA and Regulation Z. See, e.g., Beaver v. Tarsadia Hotels, 2014 WL 3002297 (S.D. Cal. July 2, 2014).

TILA Safe Harbors

However, to avoid inconsistency between federal and state law and ease the burden on creditors where the disclosure requirements of state and federal law are largely duplicative, some state motor vehicle retail installment sales acts were amended afer passage of the federal TILA to provide that compliance with TILA satisfies the state act.

For example, the California Automobile Sales Finance Act, California Civil Code § 2982(m) provides in part:

Notwithstanding any other provision of this chapter to the contrary, any information required to be disclosed in a conditional sale contract under this chapter may be disclosed in any manner, method, or terminology required or permitted under Regulation Z, as in effect at the time that disclosure is made … if all of the requirements and limitations set forth in subdivision (a) are satisfied.

The Illinois Motor Vehicle Retail Installment Sales Act, 815 ILCS 375/5, provides:

A retail installment contract which complies with the federal Truth in Lending Act, amendments thereto, and any regulations issued or which may be issued thereunder, shall be deemed to be in compliance with the provisions of this Section.

The Minnesota Motor Vehicle Retail Installment Sales Act, § 53C.08, subd. 2(7) (formerly Minn. Stat. § 168.71(b), provides:

In lieu of the above [disclosures], the retail seller may give the retail buyer disclosures which satisfy the requirements of the federal Truth-In-Lending Act in effect as of the time of the contract, notwithstanding whether or not that act applies to the transaction.

The TILA safe harbor incorporated in the Minnesota MVRISA was addressed in Kinzel v. Southview Chevrolet Co., 892 F. Supp. 1211 (D. Minn. 1995), a class action styled lawsuit I handled for the defendant dealership.  The court held the dealer’s compliance with the federal TILA constituted compliance with the MMVRISA resulting in dismissal of the lawsuit In that case, Kinzel financed the purchase of an automobile pursuant to a retail installment sales contract.  In order to pay the downpayment identified on the RISC, the dealership sent her to Security Pacific, a third-party lender providing personal loans, to obtain a downpayment “side-loan.” Kinzel sued the dealership in a class action styled complaint alleging the dealership violated the MMVRISA by not providing her with a compound disclosure which incorporated the Southview Chevrolet and Security Pacific transactions. At the time of the transaction, the Official Staff Commentary to Regulation Z provided that “[t]he separate financing of a downpayment in a credit sale transaction may, but need not, be disclosed as 2 transactions (a credit sale and a separate transaction for the financing of the downpayment.” 12 C.F.R. § 226.17, Supp. I, Commentary 17(c)(1)–16, p. 363 (1994), Because the disclosures Southview Chevrolet provided in the retail installment sales contract satisfied TILA, and compliance with TILA satisfied MMVRISA pursuant to Minn. Stat. § 168.71(b) (now Minn. Stat. § 53C.08, subd. 2(7)), the federal district court granted the dealership’s motion for summary judgment terminating the litigation.

In Franks v. Rockenbach Chevrolet Sales, Inc., 1998 WL 919714 (N.D. Ill. Dec. 30, 1998), Franks purchased a used 1993 Chevrolet Astro van from Rockenbach Chevrolet, a car dealership.  In connection with this purchase, he signed a retail installment sales contract which was subsequently assigned to a bank. Franks sued, claiming Rockenbach violated the Truth in Lending Act, 15 U.S.C. § 1601 et. seq. (“TILA”) with regard to its disclosure relative to a service contract he purchased. Franks conceded that a recent Seventh Circuit Court of Appeals decision mandated dismissal of his TILA claim, but sought to impose liability under the Illinois Motor Vehicle Retail Installment Sales Act, 815 ILCS § 375/5 (“MVRISA”).  The court rejected the claim:

Section 5 of the MVRISA provides that “[a] retail installment contract which complies with the federal Truth in Lending Act, amendments thereto, and any regulations issued or which may be issued thereunder, shall be deemed to be in compliance with the provisions of this Section.” 815 ILCS § 375/5. *** To the extent that Franks is attempting to seek relief under the MVRISA itself, his claim is frivolous as the MVRISA expressly provides that compliance with the TILA is a complete defense to an action brought under the MVRISA. 815 ILCS § 375/5.

In order to successfully handle auto dealer litigation – and particularly lawsuits arising out of auto dealer arranged financing transactions – you have to know both federal and state laws.  Conduct which may violate a state motor vehicle retail installment sales act may be legal if authorized by TILA (or Regulation Z) and the state act contains a safe harbor provision.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

Auto Dealer-Arranged Financing and the Truth in Lending Act: Understanding the Basics


With all the discussion about the Consumer Financial Protection Bureau advocating the end of the so-called dealer reserve, I decided to post a series of articles outlining the auto dealer-arranged financing process supplemented by significant cases I handled on behalf of auto dealerships. Congress created the Consumer Financial Protection Bureau (“CFPB”) as part of the Dodd-Frank financial reform act. An original proposal called for the CFPB to directly regulate automobile dealers. The National Association of Auto Dealers (“NADA”) fought that on the grounds that automobile dealers are not lenders. The NADA won an exemption. However, the victory proved hollow. The CFPB’s regulation of auto lenders strongly affects auto dealers and the Bureau wants to eliminate the dealer reserve, where auto retailers typically add a percentage point or two to an auto lender’s wholesale interest rate as compensation for facilitating the indirect financing. The CFPB contends the present dealer reserve system has led to unintended lending discrimination and wants a flat fee system.

To understand auto dealer-arranged financing, one should review the following cases I handled for the involved auto dealers and are summarized in the text of this article:

Scott v. Forest Lake Chrysler-Plymouth-Dodge, 611 N.W.2d 346 (Minn. 2000).

Liabo v. Wayzata Nissan, LLC, 707 N.W.2d 715 (Minn. Ct. App. 2006), review denied (Minn. March 26, 2006).

Madrigal v. Kline Oldsmobile, Inc., 423 F.3d 819 (8th Cir. 2005).

Sharlow v. Wally McCarthy Pontiac-GMC Trucks-Hyundai, Inc., 221 F.3d 1343 (8th Cir. 2000)

Kinzel v. Southview Chevrolet Co., 892 F. Supp. 1211 (D. Minn. 1995).

Evans v. Rudy-Luther Toyota, Inc., 39 F. Supp. 2d 1177 (D. Minn. 1999)

Vang v. Morrie’s Minnetonka Ford, 2001 WL 1589614 (D. Minn. Dec. 11, 2001).

Peter v. Village Imports Co., 2001 WL 1640130 (D. Minn. Oct. 9, 2001).

Stevens v. Brookdale Dodge, Inc., 2002 WL 31941158 (D. Minn. Dec. 27, 2002).

The Process

Auto dealers often arrange financing for a consumer’s purchase of an automobile. The Minnesota Supreme Court’s decision in Scott v. Forest Lake Chrysler-Plymouth-Dodge, 611 N.W.2d 346 (Minn. 2000), described the dealer-arranged financing process in detail and also identified the three key documents involved in the process:  a vehicle purchase contract, a retail installment sales contract (“RISC”) and a condition delivery agreement.

The vehicle purchase contract identifies the agreed upon terms for the purchase of the vehicle including the price of the automobile, fees associated with the purchase, trade-in value and down payment, and the balance due (or to be financed). Scott, 611 N.W.2d 346, 352 (Minn. 2000) (a “vehicle purchase contract sets forth the terms of the actual purchase, including trade-in allowances and identifies the amount to be financed, if any”).

If the consumer wants the dealership to arrange financing for the vehicle purchase (as opposed to paying cash or obtaining financing through his or her own lending institution), the dealership will prepare a RISC (sometimes referred to as a “credit sale contract”) or which outlines the credit terms. See, Scott, 611 N.W.2d at 352 (Minn. 2000) (a “retail installment contract sets forth the details of how the financing is to work — the interest rate, the finance charge, amount financed, total payment and total sales price”).

The vast majority of auto dealers do not extend credit directly to consumers in the sense of holding the RISC and charging and accepting the payments outlined in the RISC. See, Madrigal v. Kline Oldsmobile, Inc., 423 F.3d 819 (8th Cir. 2005) (detailing process). Rather, the dealership will attempt to locate a sales finance company, bank or other lender who is willing to extend credit to the consumer and assign the RISC to the lender. See, Scott, 611 N.W.2d at 352 (Minn. 2000) (a “retail installment contract … becomes effective only if financing is arranged”). This is where the “dealer reserve” comes into play. Lenders that agree to extend credit to a consumer will offer to purchase the RISC from the dealership at a wholesale interest rate called the “buy rate.” The dealership will then add an additional percentage of interest — dealer reserve — onto the buy rate as compensation for arranging the deal. The dealer reserve is then factored into the consumer’s annual percentage rate. Although the dealer reserve is authorized by state law and a consumer cannot obtain financing on his own for the lender’s wholesale buy-rate, the CFPB contends the present add-on system has led to unintended lending discrimination and wants a flat fee system.

In some jurisdictions, including Minnesota, the consumer may also execute a conditional delivery agreement (sometimes referred to as a “spot delivery” agreement) – an agreement which allows the consumer to take immediate (“on the spot”) delivery of the vehicle pending financing approval by a lending institution. See, Scott, 611 N.W.2d at 352 (Minn. 2000) (a “conditional delivery agreement permits the buyer to take immediate possession of the vehicle, but the buyer is obligated to return it if financing is not approved”); Madrigal v. Kline Oldsmobile, Inc., 423 F.3d 819 (8th Cir. 2005) (detailing process) (“Conditional Delivery Agreement Addendum to Installment Contract” expressly conditioned the dealership’s sale of the vehicle upon Bank One or another lender accepting the assignment).

TIL Disclosures

The federal Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq., has been in effect since the late 1960’s. In contrast to state motor vehicle retail installment sales acts which also regulate consumer credit, the TILA and Regulation Z, its implementing regulation, do not contain provisions proscribing maximum finance charges, late payment charge limits, etc.).  Rather, the TILA is primarily a disclosure law. It “compels … disclosure of certain information in a ‘consumer credit transaction.’” Kinzel v. Southview Chevrolet Co., 892 F. Supp. 1211, 1215 (D. Minn. 1995). It “was enacted to ‘assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available … and avoid the uninformed use of credit.’” Kinzel, 892 F. Supp. at 1215.

Although the vast majority of automobile dealers do not extend credit directly to their customers to finance the purchase of a vehicle, the TILA and Regulation Z define a dealership as the “creditor” in a dealer-arranged financing transaction. Kinzel, 892 F. Supp. at 1215. As the “creditor”, the auto dealership must provide disclosure of “a financing transaction’s annual percentage rate, finance charge, amount financed, total payments, total sales price, and the number and amount of payments.” Id.

When TIL Disclosures are Due

Under TILA and Regulation Z, the dealership in a dealer-arranged financing transaction must provide TIL disclosures to the consumer before the consumer has become legally obligated to purchase the vehicle on credit – that is, before “consummation” of a credit transaction. See, Liabo v. Wayzata Nissan, LLC, 707 N.W.2d 715 (Minn. Ct. App. 2006), review denied (Minn. March 26, 2006) (citing 12 C.F.R. § 226.2(a)(13), consummation occurs at “the time that a consumer becomes contractually obligated on a credit transaction” and Official staff interpretations, 12 C.F.R. § 226, supp. I, subpt. A(2)(a)(13)(2), consummation occurs when the consumer “becomes legally obligated to accept a particular credit arrangement”). Among other things, the TILA and Regulation Z require the auto dealer to disclose the following information:

Identity of the creditor;

The amount financed;

An itemization of the amount financed;

The finance charge;

The annual percentage rate;

The total of payments;

The total sale price; and

The payment schedule.

The distinction between a consumer’s legal obligation to purchase a vehicle and a legal obligation to purchase a vehicle on credit is often confused. If the consumer has obligated himself to purchase a vehicle, but has not obligated himself to purchase it on credit, TIL disclosures are not required (and the dealership may not be sued for not providing them). See, Liabo, 707 N.W.2d 715 (consummation for purposes of TILA did not occur by reason of consumer’s payment of non-refundable deposit to purchase an automobile because agreement did not obligate consumer to purchase the automobile on credit); Raceway Ford Cases, 229 Cal. App. 4th 1119, 177 Cal. Rptr. 3d 616 (2014) (rejecting dealership’s argument that consummation occurred simply because the consumer executed a vehicle purchase contract and took delivery of the vehicle – this argument, according to the court, “inappropriately muddles together consummation of the sale with consummation of the credit transaction”).

The determination of when a consumer “becomes contractually obligated on a credit transaction” – and, thus, is entitled to TIL disclosures — is determined by state law.  The TILA and Regulation Z do not make this determination. Typically, “consummation” occurs at the moment a consumer executes a RISC for it is at that moment the consumer becomes legally obligated to credit terms. See, Liabo, 707 N.W.2d at 723 (“TILA disclosures would only have been necessary if appellant had continued with the transaction and executed the Retail Installment Contract. She chose not to do so, therefore, the disclosures were not necessary”).

The auto dealership must provide TIL disclosures before the consumer has executed a RISC. Although the TILA allows a creditor (which includes an auto dealership) to furnish a separate TIL disclosure statement, virtually all RISC forms — which are written by lending institutions or third-party companies — contain the TIL disclosures. Thus, a dealership will comply with the TILA by presenting the RISC to the consumer for review and giving her a copy of the signed contract. See, Vang v. Morrie’s Minnetonka Ford, 2001 WL 1589614, at *3 (D. Minn. Dec. 11, 2001) (“Mr. Vang was given the opportunity to review the contract, and he then made the voluntary decision to execute it immediately before taking his copy with him”); Peter v. Village Imports Co., 2001 WL 1640130, at *3 (D. Minn. Oct. 9, 2001) (“[t]he court finds that Village Imports satisfied TILA when it gave Peter the unsigned contract containing the TILA disclosures and Peter had the opportunity to defer signing it if he found the terms unacceptable”).

Civil Cause of Action

The TILA provides a cause of action by borrowers against creditors who fail to provide the TIL disclosures required by its provisions. 15 U.S.C. § 1640). Subsection (e) confers Federal and State Court jurisdiction over such claims and, in the same provision, imposes a one-year time limitation for bringing actions. See, Evans v. Rudy-Luther Toyota, Inc., 39 F. Supp. 2d 1177, 1181 (D. Minn. 1999) (dismissing TILA lawsuit which was not commenced within one year of date of alleged violation).

As a “creditor,” auto dealers must generally meet a standard of strict compliance with the TILA’s disclosure requirements. While some courts have held that borrowers should not be permitted to use the TILA as an instrument of harassment or oppression against the lending industry, and that strict compliance does not necessarily mean “punctilious” compliance if substantial and clear disclosure of the fact or information demanded by the applicable statute or regulation occurs, (see Hawaii Community Federal Credit Union v. Keka, 11 P.3d 1, 13 (Ha, 2000); Smith v. Chapman, 614 F.2d 968, 972 (5th Cir. 1980)), most courts adhere to the rule that technical violations do not excuse liability and the consumer need not have been deceived for TILA liability to attach. Under this majority view, once a court finds a violation, it has no discretion with respect to imposition of liability. Subject to certain stated exceptions, where the TILA or Regulation Z have been violated, the creditor (auto dealer) must pay a statutory penalty, plus costs and reasonable attorney’s fees. See, Stevens v. Brookdale Dodge, Inc., 2002 WL 31941158, at *1 (D. Minn. Dec. 27, 2002) (dismissing TILA claim alleging dealership violated timing requirements of the TILA and Regulation Z because statutory damages were not available for alleged violation and plaintiff could not establish any actual damages); Peter v. Village Imports Co., 2001 WL 1640130, at *3 (D. Minn. Oct. 9, 2001) (same).

State Motor Vehicle Retail Installment Sales Acts

The TILA and Regulation Z are complex and the law is constantly changing. Contimortgage Corp. v. Delawder, 2001 WL 884085 (Ohio Ct. App. July 30, 2001) (“the administrative requirements of TILA have grown more complex and burdensome for the financial industry and … technical mistakes have become increasingly likely regardless of how conscientiously institutions may attempt to comply with the act”).

To further complicate matters, prior to the passage of the federal TILA in 1968, many states adopted retail installment sales legislation which also require dealerships to disclose credit cost information to consumers (and serve to regulate interest charges). For example, the Minnesota Motor Vehicle Retail Installment Sales Automobile Act (“MMVRISA”), Minnesota Statutes § 53C.08 et seq., (formerly Minn. Stat. § 168.71), became effective in 1957. The MVRISA sets forth a statutory scheme to regulate the retail sale and financing of motor vehicles. It was adopted, in part, to address “the fact that several states had enacted some form of regulation aimed particularly at automobile installment sales because the bona fide cost of installment credit had actually exceeded the rates generally allowed under usury statutes.” Scott v. Forest Lake Chrysler-Plymouth-Dodge, 611 N.W.2d 346, 348 (Minn. 2000) (citing Van Asperen v. Darling Olds, Inc., 254 Minn. 62, 70–71, 93 N.W.2d 690, 696–97 (1958).

State retail installment sales acts may impose disclosure requirements that are more exacting than those proscribed by the federal TILA or obligations in addition to those required by TILA. See, Sharlow v. Wally McCarthy Pontiac-GMC Trucks-Hyundai, Inc., 221 F.3d 1343 (8th Cir. 2000) (addressing, and rejecting, claim that dealership violated “agreements of the parties” provision of state act). On the other, many state acts have been amended to provide that compliance with the federal TILA will satisfy the disclosure requirements of the state act. See, Kinzel v. Southview Chevrolet Co., 892 F. Supp. 1211 (D. Minn. 1995) (court recognized that compliance with the federal TILA constitutes compliance with state act), For example, the MMVRISA was amended in 1987 to provide that “[i]n lieu of the above [disclosures], the retail seller may give the retail buyer disclosures which satisfy the requirements of the federal Truth-In-Lending Act in effect as of the time of the contract, notwithstanding whether or not that act applies to the transaction.” Minn. Stat. § 53C.08, subd. 2(7).

The foregoing is a summary overview of the auto dealer-arranged financing process.  Future articles will address the issues more specifically.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

The Auto Dealer’s Coverage Form (ADCF) Policy: No Acts, Errors or Omissions Coverage for Violations of Auto Damage Disclosure Statutes.


In 2013, Insurance Services Office (ISO) rolled out its new Auto Dealers Coverage Form (ADCF) Policy. The ADCF Policy replaces the Garage Liability (GL) Policy which had been available for decades. One of the most major differences between the GL Policy and the new ADCF Policy is the addition of “Acts, Errors or Omissions” coverage in Section III of the ADCF Policy. This optional liability coverage is primarily designed to protect the auto dealer against claims resulting from the dealer’s violation of certain specifically described consumer protection laws.

Prior to the ADCF, most auto dealer insurers provided a similar type of “statutory errors and omissions” coverage which provided protection against suits for, among other things, violations of an “auto damage disclosure statute”.  However, the “Acts, Errors or Omissions” coverage of the ADCF Policy omits coverage for this potential liability.  Auto dealer insurers who wish to offer this coverage in connection with the ADCF Policy would need to write their own manuscript endorsements to insure the risk.

Historically, policies have not specifically defined what constitutes an “auto damage disclosure statute”.  However, in the automobile dealership industry it will include a statute which affirmatively requires a dealership to disclose vehicle damage to the buyer (typically in writing) prior to the sale of the vehicle to the buyer. The purpose of an auto damage disclosure statute is to ensure that vehicle condition information is provided to consumers so the consumer can make an informed purchasing decision.

Many states require disclosure of vehicle damage if the damage exceeds a certain percentage of the vehicle’s value. Generally, the damage percentage is quite low in the case of new vehicles and considerably higher in the case of used cars. See e.g., Minn. Stat. § 325F.664 subd. 2(a) (seller required to disclose damage exceeding four percent of the retail price of a new vehicle) and Minn. Stat. § 325F.6641 subd. 1(a) (seller required to disclose damage exceeding 70 percent of vehicle’s actual cash value immediately prior to sustaining damage). Georgia Code Ann. § 40-1-5(b) provides another example, by requiring that “prior to the sale of a new motor vehicle, a dealer must disclose to the buyer any damage which has occurred to the vehicle of which the dealer has actual knowledge and which costs more than 5 percent of the manufacturer’s suggested retail price to repair.” Other states have enacted statutes which require disclosure of prior damage, but do not specify any percentage above which prior damage must be disclosed to the purchaser. In Colorado, for example, the statutes and regulations require disclosure when the prior damage was “material.” Because “material” is a vague term, the Colorado Auto Dealers Association advises dealerships to disclose all prior damage of which the dealership has knowledge.

It is possible for prior auto damage disclosure claims to trigger coverage under the basic insuring provisions of the ADCF Policy if the claim alleges “bodily injury” or “property damage” resulting from the failure to disclose.  The ADCF Policy, like the former GL Policy, contains insuring provisions obligating the insurer to “pay all sums an ‘insured’ legally must pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies caused by an ‘accident’, and resulting from your ‘auto dealer operations’ other than the ownership, maintenance or use of ‘autos’”. The ADCF Policy, in turn, defines the term “property damage” to require “damage to or loss of use of tangible property.”

Prior auto damage claims are generally not covered under such policy provisions because the claim does not satisfy the “bodily injury” or “property damage” requirements. In addition, the ADCF Policy requires an “accident” and usually contains several potentially applicable exclusions which may bar coverage, in whole or in part, for the claim. The damages caused by a dealership’s failure to disclose prior damage or misrepresentation regarding the condition of the vehicle usually only give rise to damages which are “economic” in nature — i.e., the buyer pays more than the vehicle was worth – as opposed to constituting covered “property damage.”

There have been a few notable cases addressing these issues:

In U.S. Fid. & Guar. Co. v. Dealers Leasing, Inc., 137 F. Supp. 2d 1257, 1260-63 (D. Kan. 2001), the court addressed these issues in the context of a commercial general liability policy which provided coverage for “bodily injury” or “property damage” caused by an “occurrence.” An occurrence was defined as “an accident including continuous or repeated exposure to substantially the same general harmful conditions.” The plaintiff in the underlying litigation alleged that Dealers Leasing was negligent by failing to discover safety defects in the minivan plaintiff purchased, failing to disclose the history of the minivan and failing to conduct a safety inspection. The plaintiff also alleged that Dealers Leasing’s conduct “constituted negligent misrepresentation” because it failed “to exercise reasonable care or competence in obtaining or communicating the information, including but not limited to misrepresentations about the identity and mileage of the minivan.” The court agreed with USF&G’s position that the policy did not afford coverage. First, the court held that the dealership’s alleged negligence and negligent misrepresentation did not cause the damages at issue – the complaint asserted that the minivan was in poor condition because it was involved in an accident and was negligently reconstructed. Second, the court held that any damage caused by the dealership’s alleged negligence or misrepresentations was not to “property damage” or “personal injury” as required by the policy. Rather, the damages were economic – the dealerships allegedly wrongful conduct caused the plaintiff to pay more for the minivan than it was worth and were not covered by the Dealer Leasing policy.

However, in AutoMax Hyundai South LLC v. Zurich American Ins. Co., 720 F.3rd 798 (10th Cir. 2013), the court held that the dealership’s failure to detect prior damage in a vehicle could constitute an “accident” (and thus an “occurrence”) at least where the where the dealership believed the vehicle was in perfect condition and the dealership neither expected nor intended to cause injury to its customers when it sold the vehicle. In addition, the customers in AutoMax Hyundai alleged that the sale resulted in emotional distress, a covered “injury” under the Zurich policy. Thus, the facts of the case suggested the possibility that the customers had suffered an injury resulting from a covered accident and Zurich was obligated to defend.

Note that in Dealers Leasing, Inc., 137 F. Supp. 2d 1257 (D. Kan. 2001), the plaintiff also alleged loss of use and emotional distress. These allegations were insufficient to establish coverage: “[w]hile the plaintiff would not have suffered the alleged loss of use and emotional injuries had she not purchased the minivan, these damages were caused by the condition of the minivan.” Further, the dealership’s counsel acknowledged that the “mental pain, anguish, emotional distress, embarrassment, humiliation, and inconvenience” were caused by the poor condition of the minivan, not by plaintiff’s purchase of the vehicle. Likewise, the alleged loss of use of the minivan was caused by its poor condition and need for constant repair.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

Sonic Dealerships Lose Class Action Insurance Coverage Dispute with Chrysler Insurance: Court Finds Statutory Errors or Omissions Coverage did not apply to Dealers’ Failure to Disclose Price of Etch in Retail Installment Sales Contracts.


I recently posted an article providing a general overview of the insuring clause to the “Acts, Errors or Omissions” of the new Auto Dealers Coverage Form (“ADCF”) Policy.  (See the article here).  This optional coverage is primarily designed to protect the auto dealer against claims resulting from the dealer’s violation of certain specified consumer protection laws that regulate the dealer’s finance and insurance operations such as the federal Truth in Lending Act (“TILA”) and federal Consumer Leasing Act (“CLA”) and similar state laws.

While there have not been any reported decisions interpreting the acts, errors or omissions coverage of the ADCF policy, case law interpreting pre-ADCF statutory errors and omissions coverage will provide guidance when addressing the new policy. One of the more interesting recent cases to address the insuring clause requirements in a pre-ADCF policy is Sonic Auto., Inc. v. Chrysler Ins. Co., 2014 WL 1382070 (S.D. Ohio Apr. 8, 2014), a decision of the federal district court for the Southern District of Ohio.

Sonic, which owns automobile dealerships in various locations across the country, was named as a defendant in two similar lawsuits.  Like other dealers, Sonic arranges financing for the vehicles it sells and leases. Customers are provided with retail installment sales contracts or leasing agreements that are supposed to disclose the information required to be disclosed by the federal Truth in Lending Act (TILA) and Consumer Leasing Act (CLA), as applicable. One lawsuit was filed in Florida and alleged a cause of action under the Florida Deceptive and Unfair Trade Practices Act (FDUPTA). The named plaintiff sought to represent Sonic customers whose retail installment sales contracts failed to disclose the charge of an anti-theft insurance product sold by Sonic, called Etch. As part of its FDUPTA claim, the named plaintiff alleged that Sonic’s practices were unfair or deceptive because they violated the federal TILA and the Florida Retail Installment Sales Act (FRISA). The named plaintiff also alleged that Sonic sold Etch products knowing the product to be “largely valueless, ineffective against vehicle theft and unconscionably overpriced.”

The district court certified a class of Florida consumers and Sonic subsequently settled the lawsuit.

Another action was filed in North Carolina, but subject to arbitration. The claimants alleged that Sonic marketed and sold the Etch product as a mandatory add-on. They alleged that Sonic “in a uniform class-wide practice provided consumers with forms with blank prices thus allowing them to ‘pack’ and ‘stuff’ in the [Etch] product at exorbitant prices” and that “[t]he price charged to [claimants] for Etch was not disclosed in any of the transaction documentation provided to the consumer.” The arbitration demand included claims for (1) violation of the South Carolina Regulation of Manufacturers, Distributors, and Dealers Act (S.C. Dealers Act), (2) rescission to void Etch contracts and unlicensed insurance products; (3) breach of contract; (4) unjust enrichment; and (5) violation of the North Carolina Unfair and Deceptive Trade Practices Act (NCUDTPA). The arbitration demand did not include a separate claim for violation of the federal TILA or any state truth-in-lending statute. However, the claimants specifically argued at a summary judgment hearing that Sonic violated TILA and that the TILA violation could serve as the predicate unfair or deceptive act constituting a violation of the NCUDTPA. A settlement was approved by the North Carolina trial court which included all customers who purchased or leased a vehicle from a Sonic dealership which included the Etch product as part of the transaction but excluding customers from Sonic dealerships in Florida.

Thus, in both lawsuits the consumers alleged that Sonic’s practices involving the Etch product violated truth-in-lending statutes, but did not assert claims for damages under those statutes. Rather, the claimed truth-in-lending violations were asserted to serve as a predicate unfair or deceptive act for purposes of the causes of action under the UPTA and NCUDTPA.

Sonic claimed that Chrysler Insurance, which had issued three insurance policies to Sonic, breached its obligation to defend and indemnify Sonic. The Chrysler policies included endorsements which provided coverage for certain violations of truth-in-lending statutes. The endorsements obligated Chrysler to pay:

all sums an “insured” legally must pay as “damages” arising from an “occurrence” because of an alleged or actual negligent act or “error or omission” by an “insured” occurring during the policy period of this policy and resulting from … a civil violation of any federal, state or local statute that regulates specific disclosures required to complete . . . [c]onsumer financing agreements . . . [or] . . . [c]onsumer leasing agreements.

Chrysler asserted the suits were not covered because the damages sought in each action were pursuant to deceptive trade practices statutes not under truth-in-lending statutes and, additionally, the damages did not arise from negligent acts errors or omissions.

The federal district court for the Southern District Court of Ohio held that Chrysler was not obligated to defend or indemnify Sonic in the underlying lawsuits.

In support of its holding, the court cited the decisions in TIG Insurance v. Joe Rizza Lincoln–Mercury, Inc., 2002 WL 406982 (N.D. Ill. Mar.14, 2002) and Heritage Mut. Ins. Co. v. Ricart Ford, Inc., 105 Ohio App.3d 261, 663 N.E.2d 1009 (Ohio Ct. App.1995). However, the TIG and Ricart Ford cases were not exactly on point. The policies at issue in TIG and Ricart Ford only required the insurer to “pay all sums the insured legally must pay as damages solely by operation of” TILA (in TIG) and “damages solely due to” TILA (in Ricart Ford). Based on this restrictive policy language, the courts in TIG and Ricart Ford held the insurer had no obligation to defend or indemnify the dealership because the underlying complaints, although alleging violations of the TILA, did not seek damages under the TILA.

By contrast, the similar provisions of the policy issued to Sonic obligated Chrysler to pay “all sums an insured legally must pay as damages … resulting from … a civil violation of” TILA.  This “resulting from” language was much broader in scope than the policy language interpreted in TIG or Ricart Ford.  Nonetheless, the court noted that “[a]pplying the TIG Insurance analysis to this case, Sonic would not have coverage under the TILA Provisions in the Chrysler Insurance Policies because the [Florida] plaintiffs sought damages under the FDUTPA and the [North Carolina] plaintiffs sought damages under the NCUDTPA and the S.C. Dealers Act.”

In denying coverage, the court in Sonic further noted that “the focus of the Underlying Suits was on deceptive and unlawful practices, not on purported violations of federal or state statutes that regulate disclosures required to complete consumer financing or leasing agreements.” In support, the court pointed out that the “plaintiffs sought to certify classes of all customers who purchased or leased a vehicle with the Etch product, regardless of whether the customers executed financing or leasing agreements with Sonic to do so.” This distinction was certainly relevant to the issue of whether Chrysler Insurance would be obligated to indemnify Sonic for the amounts Sonic paid in settlement (the court’s opinion does not indicate whether the settlement agreements segregated the portion of the damages paid which were attributable to the dealerships’ alleged failure to disclose the price of the Etch product as opposed to the portion attributable to Etch being allegedly overpriced or essentially valueless).  However, the distinction would not seem to be particularly relevant to the determination of whether Chrysler was obligated to defend the dealerships in the lawsuits.  Most, if not all, jurisdictions subscribe to the view that a liability insurer has an obligation to defend a cause of action whenever there is any possibility the insurer would be obligated to indemnify. Inasmuch as the damages sought under the UPTA and NCUDTPA in the underlying lawsuits allegedly “resulted from” a violation of the TILA, the court could have easily decided that Chrysler was obligated to defend (but perhaps not indemnify) Sonic in the underlying lawsuits.

The Sonic court also denied coverage on the alternate basis that the underlying lawsuits did not allege any “negligent act or error or omission” as required by the insuring clause:

The TILA Provisions provided coverage for only “an alleged or actual negligent act or ‘error or omission.’”  The Policies defined “errors and omissions” as “a mistake, oversight, miscalculation or clerical error, which occurs as an unintentional exception to the standard practice or procedure of the insured.” The Court agrees with Chrysler Insurance and Great American that the [underling complaints] alleged intentional misconduct by Sonic. * * * Sonic does not identify allegations of negligent misconduct or errors or omissions made against it in the . . . pleadings. * * * Sonic argues that Chrysler Insurance also had a duty to defend pursuant to the TILA Provisions in the Chrysler Insurance Policies because the [complaints] alleged that Sonic violated TILA and such allegations could be established by negligent conduct. The Court does not agree. * * * Neither [complaint] included express allegations against Sonic based on negligent conduct or errors or omissions. Sonic cannot obtain coverage based on a theory that the plaintiffs in the Underlying Suits could have alleged claims based on negligent conduct when, in fact, plaintiffs alleged only intentional misconduct by Sonic.

As noted in a previous article on this blog, a consumer’s allegations regarding a dealer’s level of culpability should not control the insurer’s obligations to defend and indemnify TILA or CLA claims because the TILA and CLA impose strict liability.  (See,Should an Auto Dealer Insurer Defend an Auto Dealer Against ‘Intentional’ Violations of Federal and State Credit Sale and Leasing Disclosure Laws?). It seems incongruous to limit coverage to negligent acts when the risks insured under the policy are not based on negligence and allegations of negligence are not likely to appear in pleadings. The auto dealer purchases statutory errors and omissions coverage for TILA and CLA to protect itself against liability under the TILA and CLA and cannot control whether the consumer attaches superfluous assertions of wrongful intent to those claims. While insurers should be required to defend or indemnify an auto dealer who has engaged in conduct with the intent to cause consumer harm or evade the law, the determination should not be based on the consumer’s pleadings. Rather, the determination of whether Sonic was entitled to a defense probably should have turned on the applicability of the wrongful conduct exclusion in the Chrysler policies. The exclusion barred coverage for “Dishonest, malicious, fraudulent, criminal, deceptive, malicious or intentional act or omission.” The duty-to-defend analysis in Sonic should have considered whether, for example, the dealerships acted with the specific intent to cause consumer harm (or evade truth-in-lending requirements) or acted with knowledge that either of such harmful consequences was substantially certain to result from their conduct.

Although the plaintiffs’ pleadings in Sonic contained numerous assertions of intentional wrongdoing, it is not entirely clear, from the opinion, whether the dealerships acted with the intent to cause consumer harm or acted with knowledge that consumer harm was “substantially certain” to occur (assuming that is the correct standard to use when addressing the wrongful acts exclusion). On the one hand, the consumers’ retail installment contracts did not separately disclose the charge of the Etch product. However, the opinion does not indicate whether the charge was disclosed to consumers in their purchase agreements or other pre-delivery documents that were presented to, and executed by, consumers. If the charge was disclosed to consumers prior to consummation of their transactions, the insurer would have had some difficulty in proving Sonic intended consumer harm. Whether Sonic acted with the intent to evade the law also cannot be gathered from the plaintiffs’ pleadings. The requirements of the TILA and state retail installment sales act with respect to the Etch product were not addressed in the opinion. Sonic may have, for example, been operating under the belief that the charge for Etch product could be included in the “cash sales price” of the vehicle – an amount which was disclosed to consumers in the itemization of amount financed section of their retail installment contracts.  In any event, the determination of whether Sonic was entitled to a defense probably should have been based on an analysis of the actual facts compared to the wrongful conduct exclusion in the Chrysler policies, not on the consumer’s superfluous assertions of wrongful intent.

This blog is for informational purposes only. By reading it, no attorney-client relationship is formed. The law is constantly changing and if you want legal advice, please consult an attorney. Gregory J. Johnson ©All rights reserved. 2014.

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