The Answer's in the Details

I get lots of calls from dealers who want me to review and comment on the latest and greatest new product they plan to offer their customers—damage waivers, GAP products, service contracts, warranties, “etch.” You name it; I’ve probably spoken to a dealer about it.

When I get these calls, I spend a lot of time explaining to the dealer that, before I can advise on any restrictions that apply on the financing or sale of the product, I need to spend some time reviewing the specific features of the product so I can get a feel for how the product will be characterized under state law.

Why? Because so much of the advice I give will be driven by the very important threshold question: Will this product be regulated as insurance in the state or not? After all, the answer to that not-so-simple question could affect how the product is disclosed, whether a license is needed to sell the product, and so many other issues.

After being bombarded by my seemingly endless questions about “triggering events,” costs, and other issues, it’s not unusual for dealer clients to get frustrated or annoyed and ask, “But, another dealer in my 20 group had this program run by his insurance regulator, and they said it was ok. So, why can’t I just do it in my state?”

Tricky question. Very tricky.

A recent case is a good example of exactly how tricky this question can be. And, while this case is about the sale of an “etch” product, it goes to show just how topsy-turvy the legal analysis of ancillary products can be.

As part of the purchase of her new car from the dealership, a customer bought an Auto Theft Security Discount (ATSD) Guarantee Program for $295. The ATSD program involved a form of “window etching” where the vehicle’s identification number was permanently engraved into the window. Under the program, which was advertised as a theft deterrent, if the customer’s car was declared a total loss due to theft, the dealer would provide the customer with a 10 percent discount towards the purchase of a replacement vehicle. Universal Automotive Services, which issued the policy, would indemnify the dealer if it had to issue a credit under the ATSD policy.

The customer brought a class action suit against the dealer and Universal, alleging violation of the New York Insurance Law, the federal Truth in Lending Act and common law. The crux of the customer’s claim was that the product was insurance, not a warranty, and that the dealer failed to comply with the slew of requirements that would apply to the sale of insurance in the state.

The dealer moved to dismiss the case, arguing that the product was a warranty, and not regulated by the insurance law. Specifically, the dealer argued that ATSD was a “theft deterrent and recovery” product, and that the warranty provided a monetary benefit if the product did not work and the vehicle was stolen. The dealer begged the court to consider cases in other states, which held that similar products were not insurance. In those cases, incidents of non-recovery were considered design defects with the VIN etching, and the policy was viewed as a warranty, in that it warranted non-performance of the etch product. On the flip side, the customer asked the court to look at state insurance laws and argued that the product was an insurance product in that it promised to “confer benefit” upon the occurrence of a “fortuitous event.”

The court declined the dealer’s motion to dismiss, explaining that the customer had adequately alleged facts supporting his claim that the ATSD program should be considered insurance. As a result, the dealer and customer will have to litigate the pivotal issue—namely, whether the product is insurance or not.

Considering what this dealer went through, it kind of makes all my questions about those ancillary products a little less annoying, doesn’t it?