Who Is Liable When a Service Contract Program Fails?
By Michael W. Dunagan Dealer Question: If I sell a third-party service contract and the service contract provider goes broke, do I have any liability to my customer? Answer: Possibly. The recent failure of a commercial service contract provider to pay claims has again raised the issue of the potential liability of a motor vehicle dealer/seller for the obligations created by a service contract the dealer/seller sells in conjunction with the sale of a vehicle. This is an issue that has been raised many times over the years and it doesn’t appear that it will ever go away. Texas has no specific provision of law that addresses seller liability in such situations. In fact, the insurance code doesn’t refer to service contracts except to impose its jurisdiction when insurance is used to back up the contract. If no insurance is involved, the Insurance Code doesn’t appear to affect service contracts. Service contract providers are instead required to register with the Texas Department of Licensing and Regulation, which has jurisdiction over their operation. When the service contract package is sold to the dealer, the dealer is usually told that he will have no liability because (1) the coverage is underwritten by an insurance company so there will be no losses; and (2) the contract is between the service-contract provider and customer, so the dealer is not obligated.
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As the most recent case illustrates, the insurance company can itself be placed in a receivership or possibly even liquidated by government insurance officials, thus resulting in unpaid claims. So the presence of an insurance company to reinsure, or
underwrite, the claims is not an absolute guarantee that all claims will be paid. The second representation made to dealers, that the dealer is not contractually bound to the consumer, while technically correct, does not totally remove the dealer from the line of fire. The wild card for consumers in Texas cases is the Texas Deceptive Trade Practices Act (DTPA). Under the DTPA, a consumer can bring an action against anyone who sells goods or services to the consumer, if the nature, characteristics, qualities, standards, or benefits of the goods or services are misrepresented. What makes this law particularly dangerous to the seller is that knowledge of the misrepresentation or intent to defraud are not required for the imposition of liability. Further, a seller can be liable even if it has no contractual obligation to the consumer under the service contract. Thus, a dealer who sells a service contract would probably be found by a jury to have represented (at least impliedly) that the company issuing the service contract would be around to fulfill its obligations for the duration of the contract. The mere fact that an issuer doesn’t live up to its promises would probably be sufficient to justify the jury in finding that the dealer misrepresented the nature, characteristics, qualities, and standards of the goods or services sold (the service contract). Obviously, if the issuer has closed its doors, filed bankruptcy, or otherwise refused to honor its obligations, the contract is of no value to the purchaser. The seller’s representation that the contract had value would then be false. The consumer’s damages
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in such a case would be either (1) the difference between the price paid and the true value (presumably zero); or (2) the actual loss incurred (e.g. the cost of repair that wasn’t reimbursed). Additionally, the aggrieved consumer is entitled to his attorney’s fees reasonably incurred. Does the fact that the dealer charged a mark-up on the price of the service contract make a difference? Probably not. If the contract was sold in conjunction with the sale of a vehicle, and the price of the contract was added to the sales price, the requirements of the DTPA for potential liability have been met. The fact that the dealer profited more by marking up the charge would only serve to make the jury more intent on passing liability on to the dealer. Because of the high number of service contracts plans, both insured and uninsured, that have failed in the past, we urge our dealer clients to be particularly mindful of the potential for such an occurrence, and to make contingency plans and arrangements. We also suggest that they steer clear of programs that promise the dealer he will have no liability, no matter what happens. We have had occasion to counsel dealers who faced the failure of a service contract plan on how to respond to the demands of injured consumers. In most cases, the dealers have mitigated their liability by absorbing some of the costs of repairs and managing the repairs through reputable repair facilities. The refusal of the selling dealer to at least attempt to satisfy a customer who faces a major repair bill will likely result in a DTPA action being filed. Complaints can also be filed with the Texas Department of Licensing and Regulation at (800) 803-9202.
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Dealer Alert
Platinum Warranty Corporation Files Bankruptcy
Platinum Warranty Corp., which does business under the name Warranty Wizard, has filed for Chapter 11 bankruptcy protection. The company, which is based in Cleveland, Ohio, had been sued by the Attorney General of Ohio for not honoring its service contracts, and has had judgments taken by customers in Georgia for failure to pay claims. The company is licensed by the Texas Department of Licensing and Regulation to market service contracts in Texas. The bankruptcy filing indicated the company had assets of $948,576 and liabilities of $8.8 million. The company’s own filings listed more than 9,000 unsecured creditors, primarily warranty customers and auto repair shops. In a 2003 Texas Dealer article on a dealer’s potential liability when a service contract company fails to pay claims, our counsel, Michael W. Dunagan, gave the following warning: The wild card for consumers in Texas cases is the Texas Deceptive Trade Practices Act (DTPA). Under the DTPA, a consumer can bring an action against anyone who sells goods or services to the consumer, if the nature, characteristics, qualities, standards, or benefits of the goods or services are misrepresented. What makes this law particularly dangerous to the seller is that knowledge of the misrepresentation or intent to defraud are not required for the imposition of liability. Further, a seller can be liable even if it has no contractual obligation to the consumer under the service contract. Thus, a dealer who sells a service contract would probably be found by a jury to have represented (at least impliedly) that the company issuing the service contract would be around to fulfill its obligations for the duration of the contract. The mere fact that an issuer doesn’t live up to its promises would probably be sufficient to justify the jury in finding that the dealer misrepresented the nature, characteristics, qualities, and standards of the goods or services sold (the service contract). Obviously, if the issuer has closed its doors, filed bankruptcy, or otherwise refused to honor its obligations, the contract is of no value to the purchaser. The seller’s representation that the contract had value would then be false. The consumer’s damages in such a case would be either (1) the difference between the price paid and the true value (presumably zero); or (2) the actual loss incurred (e.g. the cost of repair that wasn’t reimbursed). Additionally, the aggrieved consumer is entitled to his attorney’s fees reasonably incurred. Because of the high number of service contracts plans, both insured and uninsured, that have failed in the past, we urge our dealer clients to be particularly mindful of the potential for such an occurrence, and to make contingency plans and arrangements. We also suggest that they steer clear of programs that promise the dealer he will have no liability, no matter what happens. We have had occasion to counsel dealers who faced the failure of a service contract plan on how to respond to the demands of injured consumers. In most cases, the dealers have mitigated their liability by absorbing some of the costs of repairs and managing the repairs through reputable repair facilities. The refusal of the selling dealer to at least attempt to satisfy a customer who faces a major repair bill will likely result in a DTPA action being filed. For a complete copy of Mike Dunagan’s article – Who is Liable When a Service Contract Program Fails, please visit our website, www.txiada.com
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