Minnesota First-Party Coverages: Recovering Consequential Damages in Addition to the Policy Benefits when the Insurer Declines or Unreasonably Delays Payment.

bad faithBy Greg Johnson, Esq. Sometimes an unpublished appellate decision has some important rulings. In Swanny of Hugo, Inc. v. Integrity Mutual Ins. Co., 2015 WL 9437571 (Minn. Ct. App. 2015), the Minnesota Court of Appeals addressed the issue of whether an insured can recover consequential damages in addition to first-party insurance benefits when an insurer unreasonably delays payment of policy benefits. The Minnesota appellate court, in a decision released on December 28, 2015 held that an insured can recover consequential damages if the policy benefits are not “effectively or genuinely in dispute,” the damages are caused by the insurer’s conduct and were either a natural result of the breach or reasonably foreseeable when the policy was purchased. Most significantly, the court held that an insured need not prove the insurer engaged in willful, wanton, or malicious conduct to recover consequential damages from a first-party insurer.

The General Prohibition on Consequential Damages & the Olson Exception

At common law, Minnesota prohibited an insured from recovering damages in addition to insurance policy benefits in first-party insurance claims regardless of the insurer’s conduct. See Independent Grocery Co. v. Sun Ins. Co., 146 Minn. 214, 178 N.W. 582, 583 (1920) (insured’s damages limited to policy limits plus interest regardless of insurer’s malicious or wrongful breach of contract). Stated another way, the terms of the insurance policy ordinarily delineate the extent of an insurer’s liability to its insured. See Mattson Ridge, LLC v. Clear Rock Title, LLP, 824 N.W.2d 622, 630 (Minn. 2012); Reinsurance Ass’n of Minn. v. Hanks, 539 N.W.2d 793, 797 (Minn.1995); Emp’rs Mut. Cas. Co. v. Kangas, 310 Minn. 171, 174, 245 N.W.2d 873, 875 (1976).

However, the Minnesota Supreme Court recognized an exception to the general rule in Olson v. Rugloski, 277 N.W.2d 385, 387 (Minn. 1979). In Olson, the insured sought to recover lost profits after its insurer failed to pay actual damages the insured’s trucks sustained in a fire. Id. at 387. The parties disagreed about the maximum recovery per truck under the policy, but both parties agreed that the insured was entitled to a minimum payment of $5,000 per truck. Id. at 388. The insurer nevertheless refused to pay any benefits, which caused the insured to sustain lost profits while the trucks were not in service. Id. In awarding consequential damages to the insured, the court stated the following rule: “[w]hen the insurer refuses to pay or unreasonably delays payment of an undisputed amount, it breaches the contract and is liable for the loss that naturally and proximately flows from the breach.” Id. at 387–88.

Some insurance industry commentators have suggested that Olson limits consequential damages based on the breach of an insurance contract to a “bad-faith” breach and that bad faith requires a “willful, wanton, and malicious” refusal to make payment. However, in Swanny, the court found this interpretation of Olson too restrictive. 2015 WL 9437571 at * 2. While the unreasonable refusal to pay the undisputed minimum amounts in Olson constituted willful, wanton, and malicious conduct, nothing in the Olson opinion suggests that an insured must prove the insurer engaged in willful, wanton, and malicious misconduct to recover consequential damages. Id. Rather, for an insured to recover damages in excess of the policy limit, as in Olson, “it must prove the insurer unreasonably delayed payment of an undisputed amount of benefits and that its [consequential damages] were a natural and proximate consequence of [the insurer’s] breach of the … policy.” Mattson Ridge, LLC v. Clear Rock Title, LLP, 824 N.W.2d 622, 630 (Minn. 2012).

The Swanny Case

In Swanny, Carpenter’s Steak House in Hugo, Minnesota, was destroyed by fire in early January 2010. Integrity Mutual insured the restaurant. The policy covered various losses including the structure, business personal property and computers. It also provided limitless coverage for loss of business income (BI) over a 12–month restoration period.

Integrity immediately noted that the building was a total loss and advised the insured it would be covered by the policy’s BI-loss provisions. The insured submitted a proof-of-loss statement on January 28, 2010 for the restaurant structure and a $164,772 BI claim prepared by a public adjustor. Integrity’s investigation into possible arson and fraud lasted more than 100 days. During this period, the insured attempted unsuccessfully to open another restaurant. Although the insured successfully negotiated a lease, it lacked the funds to complete the deal. Integrity eventually paid policy-limit payments for damages to the restaurant structure, business personal property and computers, but paid nothing for BI loss after its accountant finished a report in December 2010 concluding the insured had no BI loss.

The insured sued Integrity, claiming that Integrity breached the policy by denying BI loss coverage and by failing to timely pay other covered losses, resulting in consequential damages. A jury found that Integrity breached the policy by refusing BI coverage at all and by failing to timely pay benefits. It awarded $275,000 in BI loss damages and $859,500 in consequential damages. (Although not clear from the appellate court’s opinion, the consequential damages must have been related to the non-BI coverages). On appeal, Integrity asserted, among other arguments, that the $859,500 of consequential damages were not permissible as a matter of law.

Integrity first claimed that Olson limited consequential damages to a bad-faith refusal to pay and bad faith in the context of an insurance contract required a “willful, wanton, and malicious” refusal to make payment. As noted above, the Court of Appeals rejected this argument.

Integrity next claimed that Olson required proof that the insurer conditioned payment on an unreasonable demand before becoming eligible for consequential damages. While Olson involved an unreasonable demand – i.e., insisting on a release in exchange for payment of the undisputed minimum amounts due under the policy. — the Swanny court held that Olson did not require proof of the same. Further, Integrity cited no case interpreting Olson in this narrow fashion, and the court was aware of none.

Integrity next argued that Olson does not allow consequential damages where the claims under the policy were disputed. Integrity argued that consequential damages may be recovered only “[w]hen the insurer refuses to pay or unreasonably delays payment of an undisputed amount.” Id. at * 3 (quoting Olson, 277 N.W.2d at 387-88)). While noting this argument presented a “close issue,” the Court of Appeals upheld the jury’s award because the evidence suggested the benefit amounts were not “effectively or genuinely” in dispute for a significant length of time. The court stated:

Immediately after the fire, Integrity claims adjustor Bodenheimer informed [the insured] that the building was a total loss and that [the insured] would be covered under the BI provision of the policy. After [the insured] submitted a proof-of-loss statement to Integrity in January 2010, it took six weeks for Integrity even to acknowledge it received the statement. Although Integrity announced that it would withhold payments until after it completed its investigation, the jury heard from [the insured’s] expert that no fraud indicators were ever present and that it was “very clear” as early as mid-January 2010 that the coverage would reach the policy limits. There was sufficient evidence from which the jury could find that the coverage amounts were not effectively or genuinely in dispute for a significant majority of the payment-delay period.

The courts in Olson and Swanny did not specifically address the legal standard by which to measure a first-party insurer’s conduct – i.e., when are first-party benefits “not in dispute” (Olson) or not “effectively or genuinely” in dispute (Swanny)? The legal standard under Olson and Swanny may be similar, if not identical, to the “fairly debatable” standard applied to claims under Minn. Stat. § 604.18, the first-party bad faith statute. See Friedberg v. Chubb & Son, Inc., 800 F.Supp.2d 1020, 1025 n. 1 (D.Minn.2011) (citing Wynia v. Metropolitan Life Ins. Co., Inc., 2010 WL 2816264 *9 (E.D. Wash. 2010) (noting the majority of jurisdictions apply the “fairly debatable” standard)). Whether there is a knowledge requirement similar to the bad faith statute — i.e., the insurer knew there was no dispute that benefits were payable or recklessly disregarded the same and whether such knowledge, if required, would be based on an objective or subjective standard, appear to be open issues. While the Swanny court held that an insured need not prove the insurer acted with a willful, wanton or malicious intent, courts may require an insured to prove some level of knowledge or culpability to recover consequential damages.

Under Olson, the insured must also show the consequential damages were caused by the insurer’s conduct and were either a natural result of the insurer’s conduct or reasonably foreseeable when the policy was purchased. See Mattson Ridge, LLC v. Clear Rock Title, LLP, 824 N.W.2d 622, 630 (Minn. 2012) (“[f]or an insured to recover in excess of the policy limit, as in Olson, it must prove the insurer unreasonably delayed payment of an undisputed amount of benefits and that its [consequential damages] were a natural and proximate consequence of [the insurer’s] breach of the … policy”); Elder v. Allstate Ins. Co., 341 F. Supp. 2d 1095, 1106 (D. Minn. 2004) (consequential damages were not recoverable because there were “no facts upon which a reasonable jury could conclude either that such damages arose naturally from the breach, or that such damages were contemplated by Swanson or Allstate when the Policy was issued”). Whether damages were reasonably foreseeable at the time the insurance policy was purchased is generally a question of fact for the jury. Lassen v. First Bank Eden Prairie, 514 N.W.2d 831, 838 (Minn.Ct.App.1994).

The Minnesota Court of Appeals also addressed the foreseeability requirement in Swanny. There, Integrity argued that consequential damages could not be awarded because the damages were not foreseeable when the insurance policy was purchased. After noting that Minnesota had adopted the foreseeability rule of Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854) in Paine v. Sherwood, 21 Minn. 225, 232 (1875), the appellate court held the jury was properly instructed and there was enough evidence of foreseeability to sustain the jury’s verdict for the insured. The court stated:

Michael Anderson testified that when the policy began he believed that the BI coverage would protect the flow of the business following a catastrophic event. Insurance expert Elliott Flood opined that an insurance company would have known that failure to make timely payments could prevent a business from reopening. Integrity’s assertion that it lacked prior knowledge of [the insureds] specific financial vulnerability is also unavailing because the jury can hold a defendant liable for damages that a reasonable person ought to have foreseen as likely to result from a breach. Franklin Mfg. Co. v. Union Pac. R.R. Co., 311 Minn. 296, 298, 248 N.W.2d 324, 325 (1976). We are satisfied that the damages awarded here arise naturally from the breach or can “reasonably be supposed to have been contemplated by the parties when making the contract.” Lassen, 514 N.W.2d at 838.

The insured in Swanny also asserted a statutory bad-faith claim under Minn. Stat. § 604.18 relative to Integrity’s denial of the BI claim. To prevail on a statutory bad-faith claim, an insured must prove two elements: (1) the insurer lacked a reasonable basis to deny benefits; and (2) either the insurer knew about the lack of a reasonable basis or recklessly disregarded the lack of reasonable basis in denying benefits. Id. While a claim under the bad faith statute and a claim under Olson and Swanny both allow an insured to recover amounts in excess of the policy limits, the primary difference is that the statute focuses on the amount of policy “proceeds” (i.e., policy benefits) awarded to the insured. The statute allows the court to later add to the judgment the lesser of “one-half of the proceeds awarded that are in excess of an amount offered by the insurer at least ten days before the trial begins or $250,000” (as well as reasonable attorney’s fees) if the insurer violates the statute. By contrast, under Olson and Swanny, the insured is entitled to recover different, consequential damages that result from the insurer’s failure to pay insurance policy benefits.

In Swanny, after noting that a majority of states with similar bad-faith statutes had adopted the “fairly debatable” standard for evaluating an insurer’s denial of benefits. (see Friedberg v. Chubb & Son, Inc., 800 F.Supp.2d 1020, 1025 n. 1 (D.Minn.2011)), the district court determined the BI claim was “fairly debatable” based on the different opinions reached by the parties’ experts as to how the BI provision functioned, the different opinions as to what sales data should be used to calculate BI loss, and the conflicting results in the calculation of the BI loss. The district court also found that Integrity had a reasonable basis to deny the BI loss claim because its understanding of the policy language differed from the insured’s and because its expert indicated the insured was not entitled to BI payments. Thus, the insured could not recover under the statute. On appeal, the Court of Appeals affirmed, concluding there was sufficient evidence in the record supporting the district court’s findings and the district court did not clearly err by denying the bad-faith claim.

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 2016.

Posted in Bad Faith, Coverage, First Party Coverages | Leave a comment

Auto Coverage: Minnesota No-Fault Act Does not Apply to Out-of-State Insurers?

thIAFM15N9By Greg Johnson, Esq. In Founders Insurance Company v. Yates, A15-1174 (Minn. Ct. App. Feb. 29, 2016), the Minnesota Court of Appeals recently held that an auto insurer that is not licensed to write motor vehicle insurance in Minnesota (“out-of-state insurer”) is not required to provide minimum basic economic-loss and residual liability coverage to its named insured policyholder when involved in an accident in Minnesota. Although the Court of Appeals noted that the No-Fault Act “could be interpreted as applying to all insurers regardless of licensure, and the result would be consistent with the purposes of the no-fault act,” it ultimately held it was “bound by” its decision in Burgie v. League Gen. Ins. Co., 355 N.W.2d 466, 469-70 (Minn.Ct.App.1984), review denied (Minn. Feb. 16, 1985), where the court said that subdivisions 1 and 2 of Minn. Stat. 65B.50 must be read together such that they apply only to licensed insurers.

I have recently been retained to appeal the case to the Minnesota Supreme Court. Review with the Supreme Court is discretionary, but the case satisfies the requirements for further review. It presents the issue the Supreme Court specifically left unaddressed over 35 years ago in Petty v. Allstate Ins. Co., 290 N.W.2d 763, 765, n. 1 (Minn.1980) (“[w]e are not confronted with the problem of a … motor vehicle insured by a company not licensed to do business in Minnesota and do not pass on this issue”), has statewide impact (the Burgie rule followed in Yates creates a significant gap in Minnesota’s otherwise comprehensive auto insurance system) and will continue to recur until resolved by the Supreme Court as Minnesota’s minimum mandatory coverages exceed those of the vast majority of jurisdictions, including each of its surrounding states. So, stay tuned for (hopefully) further developments in this case.

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 licensed in your jurisdiction. Gregory J. Johnson © All rights reserved. 2016.

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Guest Article Jim Ragodna: Compliance vs. Ethics: The Lines are Getting Blurry in the Car Business

jimBy Jim Ragodna. Ethics and compliance are different from each other, but both are vitally important to the long-term success of dealerships and automotive professionals. Often the terms “unethical” and “illegal” are used interchangeably. Ethics is personal – it means the process of discerning what the correct action is. Law is impersonal and requires no discernment, just compliance. Ethics refers to moral principles and values that guide a person or an organization, and ethical conduct refers to knowing the difference between right and wrong and choosing to do what is right. A company or person can be unethical without breaking laws.

For instance, it’s not illegal per se to charge different prices for the same F&I products – and many finance practitioners do so on a regular basis. They’ll charge one customer $795 for GAP and another $1500 for the same coverage because “X Bank allows that much”. Another example I recently read about is that some dealers charge a “certified pre-owned” fee to customers on CPO vehicles they sell. Although that practice may be against OEM guidelines, it’s not necessarily unlawful from a strict legal standpoint.

One more illustration of dubious ethics in my opinion is vehicles that are marketed as a “CarFax One Owner”, even when the “one owner” was a rental car company. Even though the “one owner” statement may be technically true, the descriptions I’ve seen for some of these vehicles are questionable at best: “With just one previous owner, who treated this vehicle like a member of the family, you’ll really hit the jackpot when you drive home with this terrific car”; “This 2010 Elantra is for Hyundai fans that are searching for that babied, one-owner creampuff” and “From the looks of it, I’d say this car has been garage kept and babied regularly. If only my wife treated me as nice!!!”

Now some will argue that these statements are just harmless puffery that is intended to make the vehicles stand out, but isn’t it safe to assume that most consumers place more value in a true one-owner car than a prior rental? Even if the dealership discloses the vehicles’ previous histories at some point, is it OK for the first contact with a consumer to be secured by misleading claims? Even if it’s legal, is it truly ethical?

The reality of the car business is that pay plans and sales quotas can sometimes make acting ethically a challenge. Dealership personnel may be under continuous pressure to abandon their personal standards to achieve sales goals. The actions of salespeople mirror the behavior and expectations of their managers. The words and actions of sales and F&I managers often reflects the moral and ethical considerations of top management’s philosophy.

Ethics can be a very personal decision and different people will have different opinions about the above scenarios, but here’s where the lines have gotten blurry: While I agree that “profit is not a dirty word”, it appears that regulators and consumer attorneys have been redefining what is “legal” by applying their own interpretations of “ethical” standards.

In the last few years we’re seeing more and more enforcement actions and lawsuits against dealers for a number of seemingly “legal” activities. Recent cases have charged dealerships with assessing dealer fees that were deemed excessive even though they aren’t regulated by state laws. Another target for regulators is pricing of add-on products. For instance, NY Attorney General Schneiderman said in a statement announcing a $14 million settlement “New York consumers must beware: Car dealerships sometimes pad their pockets by charging for worthless after-sale items, which inflate the price of their car. These items are often ones that consumers don’t need, did not ask for and often are not even told about. Businesses need to make a profit to survive, but it’s illegal to do so by duping consumers.” Whether or not these products are “worthless” is a matter of opinion, but these consumer watchdogs seem to think so.

Another notable case is where a dealer group agreed to pay $1.6 million to settle a class-action lawsuit that claimed the dealerships sold car buyers an over-priced window etch package (and they were only charging $295!)

Former CFPB official Rick Hackett had this to say at an industry event: “If I found out that Walmart set the price of their products at different levels, and they were all the same product, and they were just hoping I would buy one for $20.95 because I was a particularly gullible consumer, I’d be grumpy. That’s the bureau’s perspective of variable pricing of ancillary products.”

We can complain all we want that it’s not fair for the government to limit our profits but it’s clear that they’ve drawn a line in the sand and there’s no relief in sight.

But here’s the good news. Taking an ethical approach has several benefits beyond just avoiding legal issues:

Increased Closing Ratios and Higher Product Penetrations – Higher levels of satisfaction with the selling process result in higher closing rates and higher sales. The more people trust you, the more likely they will buy from you.

Lower Cancellations and Chargebacks – How many times do your customers read the contract after the sale and realize they paid much more than they thought? How many times are credit unions, insurance companies, friends or family members telling your customers they paid too much? Even if you hold their feet to the fire for non-cancellable products, what are the chances you’ll ever see that customer again?

Improved Reputation (your REAL reputation, not necessarily the one you “manage” online) – A dealership’s reputation is difficult, if not impossible, to maintain when staff members depend on “old school” practices. Customers often make decisions during a vehicle sale transaction that they come to regret after the “ether has worn off”. You can be sure they’re telling somebody about the transaction. Or perhaps they’re telling thousands of people online?

Increased Customer Satisfaction – Lack of ethical behavior and old school tactics invariably diminish the customer experience. Nobody likes surprises. Sure, you made the deal but are your customers truly satisfied with your processes or do you just wear them down? At the end of the day higher customer satisfaction translates into more repeat and referral business.

Increased Customer Loyalty – Customers only have loyalty if you earn it from them. Ethical processes help build customer loyalty and retention. You’ll find that customers will be willing to spend more when they feel they’re buying from a business they can trust.

You’ll Exceed Customer Expectations – Your potential customers have unprecedented access to information in real time. The increase in the amount of data available to consumers has brought them a quick and easy way to analyze not only different prices but also to identify who they want to do business with. Car shoppers simply have too many choices and will quickly discard dealers they feel are hiding something. Holding back information or playing fast and loose with the truth will only make them trust you less.

You’ll Stand Out From Your Competition – Progressive dealers can easily differentiate themselves by marketing their ethical processes and demonstrating their honesty. Consumers will respond – after all, how many consumers prefer old-school tactics?

Good ethics can be the pot of gold at the end of the rainbow. An ethical business model can greatly enhance your sales, reputation, customer retention, and bottom line. The most successful dealerships have not only a standard of “don’t break the law” but a standard of “always do the right things”.

Here’s something to think about: If you treat each customer as you would like your mother to be treated, you’re most likely practicing good ethics. After all, it was probably your mom who first said “just because you can, doesn’t mean you should.”

Jim Radogna is a nationally-recognized auto industry consultant specializing in dealership sales and regulatory compliance. He is the President of Dealer Compliance Consultants, Inc., based in San Diego, California and a frequent contributor to automotive publications including Dealer Magazine, Automotive News, WardsAuto, Auto Dealer Monthly, DrivingSales Dealership Innovation Guide, AutoSuccess, CBT News Magazine, and F&I Magazine. He can be reached at (858) 722-2726 or by email at jim@dealercomplianceconsultants.com

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The Liability Insurer’s “Hidden” Duty to Defend– the Obligation to Pay for its Insured’s Affirmative Claims.

insurance-contracts-300x199By Greg Johnson. The typical liability insurance policy requires the insurer to “defend” the insured (i.e., dealership) if it is sued by a third-party on a claim covered by the policy. Often, the “defense” feature of a liability policy is more important to the dealership than the insurer’s obligation to “indemnify” (pay a judgment against) the dealership as the costs of defending the suit often exceed the amount that could or may be awarded against the dealership. A typical liability policy will state something along the following lines:

We have the right and duty to defend an insured against a suit seeking damages to which this insurance applies. However, we have no duty to defend any insured against a suit seeking damages to which this insurance does not apply. We may investigate and settle any pre-suit claim or suit as we consider appropriate.

Is the liability insurer also required to pay for the costs (including attorney’s fees) the dealership incurs in pursuing an affirmative claim against that same third-party? This issue often arises in the context of litigation involving dealership customers. Often when the customer alleges a claim against the dealership, the dealership also has a claim against the customer arising out of the same purchase or financing transaction.

So, does the liability insurer have to pay the dealership for the costs the dealership incurs in pursuing its claim against the customer? Some liability insurers may say, “No.”

But, in many jurisdictions, they would be mistaken.

As a general rule, defense costs are expended only to investigate and determine the insured’s liability to a third-party (see Westling Mfg. Co. v. W. Nat’l Mut. Ins. Co., 581 N.W.2d 39, 47 (Minn.Ct.App.1998), review denied (Minn. Sept. 22, 1998)), and a liability insurer’s “duty to defend” does not include bearing the costs of an insured’s claims or counterclaims against a third-party. See St. Paul Fire & Marine Ins. Co. v. Nat’l Computer Sys., Inc., 490 N.W.2d 626, 632 (Minn.Ct.App .1992), review denied (Minn. Nov. 17, 1992); Sullivan v. Am. Family Mut. Ins. Co., 2007 WL 2106142, at *2 (Minn.Ct.App. July 24, 2007).

However, the rule is otherwise where the insured initiates a lawsuit (or asserts a counterclaim) against a third-party which could defeat or reduce the insured’s potential liability to that third-party. When a liability insurer has a duty to defend the insured against a suit by a third-party, it is also contractually obligated to pay expenses “reasonably necessary either to defeat liability or to minimize the scope or magnitude of such liability” (Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 738 (Minn.1997)), which means the liability insurer must pay the legal costs the insured incurs in pursuing its affirmative claims (in addition to the legal expenses incurred in refuting the third-party’s claim against the insured). The legal costs the insured (dealership) incurs constitute covered “defense costs” under the policy.

While a few states have rejected this rule, many courts across the country have applied it to require the insurer to reimburse the insured for the costs of its affirmative claims, as long as the affirmative claim could defeat or reduce the insured’s potential liability to the third-party. See, e.g., Hartford Fire Ins. Co. v. Vita Craft Corp., 911 F.Supp.2d 1164, 1183 (D.Kan.2012) (holding that insurer’s duty to defend Vita Craft included the cost of Vita Craft’s counterclaims that were inextricably intertwined and were part of the defensive strategy to reduce Vita Craft’s liability); IBP, Inc. v Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 299 F.Supp.2d 1024, 1031 (D.S.D.2003) (defendant’s cross claim against plaintiff in a separate lawsuit was “in essence IBP’s answer to Tyson’s complaint in Arkansas,” and thus fell within insurer’s duty to defend); Great West Cas. Co. v. Marathon Oil Co., 315 F.Supp.2d 879, 882 (N.D.Ill.2003) (holding that duty to defend requires liability insurer to cover claims and actions asserting contribution as a “means to avoid liability”); Ultra Coachbuilders, Inc. v. General Sec. Ins. Co., 229 F.Supp.2d 284, 289 (S.D.N.Y.2002) (insurer was liable for legal fees incurred by insured in asserting counterclaims where the counterclaims were “inextricably intertwined with the defense of [defendant’s] claims and necessary to the defense of the litigation as a strategic matter”); TIG Insurance Co. v. Nobel Learning Communities, Inc., 2002 WL 1340332 at *14 (E.D.Pa. June 18, 2002) (insurer had obligation to pay for insured’s affirmative counterclaims where claims could “defeat or offset liability”); Perchinsky v. State, 232 A.D.2d 34, 660 N.Y.S.2d 177, 181 (N.Y.App.Div.1997) (insured was entitled to recover costs in pursuing third-party actions “because the filing of the third-party actions was an essential component of the defense of the main action”); Smart Style Indus., Inc. v. Pennsylvania Gen. Ins. Co., 930 F. Supp. 159, 161 (S.D.N.Y.1996) (holding that insurer was liable for attorney fees in connection with insured’s prosecution of declaratory judgment action that it did not infringe trademark); Oscar W. Larson Co. v. United Capitol Ins. Co., 845 F.Supp. 458, 461 (W.D.Mich.1993) aff’d, 64 F.3d 1010 (6th Cir.1995) (insurer was liable to insured for attorney fees and costs insured incurred in prosecuting counterclaims and cross claims where claims were asserted to defeat or limit insured’s potential liability); Safeguard Scientifics, Inc. v. Liberty Mutual Ins. Co., 766 F.Supp. 324, 334 (E.D.Pa.1991), aff’d in part rev’d in part, 961 F.2d 209 (3d Cir.1992) (insurer’s duty to defend extended to the litigation of counterclaims “inextricably intertwined with the defense” of the covered claims); Potomac Elec. Power Co. v. California Union Ins. Co., 777 F.Supp. 980, 984–85 (D.D.C.1991) (noting that an insured’s affirmative suit is not per se unrecoverable as a defense cost).

The rule recognized in Domtar makes sense. As one court noted, “[d]efense” is about avoiding liability … [and] a duty to defend would be nothing but a form of words if it did not encompass all litigation by the insured which could defeat its liability.” Great West Casualty Co. v. Marathon Oil Co., 315 F.Supp.2d 879 882-883 (N.D.Ill.2003).

So, if the liability insurer fails to acknowledge its obligation to pay (or reimburse) the dealership for the costs of pursuing a claim which could defeat or reduce the dealership’s potential liability, you may want to talk to an insurance coverage attorney and consider filing a declaratory judgment (coverage) action against the insurer.

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. 2016.

Posted in ADCF Policy, Auto Dealer, CGL, Coverage, Duty to Defend | Tagged | Leave a comment

Minnesota Supreme Court Rules in Nissan Dealer Relocation Case under MVSDA

franchise lawBy Greg Johnson. The Minnesota Supreme Court recently issued a decision interpreting the Minnesota Motor Vehicle Sale and Distribution Act (“MVSDA”), Minn. Stat. §§ 80E.01 .17 (2014).

In Wayzata Nissan LLC v. Nissan North America, Inc., Case No. A14-1652 2016 WL 626069 (Minn. Feb. 17, 2016), the Supreme Court held that a dealer which had operated a Nissan dealership in Bloomington, MN for three months before relocating it to Eden Prairie, MN, was not an “existing dealer” for purposes of the MVSDA such that another Nissan dealer located within a ten mile radius could challenge the relocation.

The Background Facts

Feldmann Imports Inc. (“Feldmann”) operated a Nissan dealership in Bloomington, MN. Feldmann wanted to sell the Nissan dealership, but retain the property for other purposes.

In March 2014, Feldmann executed an asset purchase agreement (APA) with a third-party for the sale of the dealership. The APA specified a potential new dealership location in Eden Prairie. The Eden Prairie location was 7.6 miles from another Nissan dealership Wayzata Nissan LLC (“Wayzata”). By the terms of Feldmann’s franchise agreement, Nissan North America, Inc. (“Nissan”) maintained a right of first refusal on the sale of the Feldmann dealership. In May 2014, Nissan exercised its right of first refusal and later assigned its right to McDaniels. Although McDaniels operated motor vehicle dealerships pursuant to franchises with other manufacturers, McDaniels had never held a franchise agreement with Nissan. McDaniels then purchased the real property in Eden Prairie that was referenced in the APA.

After hearing rumors of the proposed relocation, Wayzata sent a letter to Nissan inquiring about its intentions, claiming the proximity of the relocated dealership (7.6 miles) would impinge on Wayzata’s primary geographic area of business. By letter dated May 8, 2014, Nissan responded that it intended to allow Feldmann or its successor in interest to relocate the Bloomington dealership to a location within 10 miles of the Wayzata dealership.

In July 2014, Nissan approved McDaniels as a Nissan dealer, as well as the relocation of the Bloomington dealership. McDaniels closed on the purchase of the dealership and immediately commenced operation of the dealership in Bloomington, pending its relocation to Eden Prairie. McDaniels operated the dealership in Bloomington for three months before completing the relocation to Eden Prairie in November 2014.

In June 2014, Wayzata filed suit against Nissan and McDaniels challenging the relocation under the Minnesota Motor Vehicle Sale and Distribution Act (MVSDA), Minn. Stat. §§ 80E.01 .17 (2014). The MVSDA regulates contracts between manufacturers and dealers of new motor vehicles. Minnesota Statutes § 80E.14, subd. 1, imposes requirements on a manufacturer that seeks to enter into a franchise establishing an additional dealership or relocating an existing dealership. In relevant part, the statute provides:

In the event that a manufacturer seeks to enter into a franchise establishing an additional new motor vehicle dealership or relocating an existing new motor vehicle dealership within or into a relevant market area where the line make is then represented, the manufacturer shall, in writing, first notify each new motor vehicle dealer in this line make in the relevant market area of the intention to establish an additional dealership or to relocate an existing dealership within or into that market area.

Minn. Stat. § 80E.14, subd. 1.

A “relevant market area” encompasses a 10-mile radius around an existing dealership. Id. Within 30 days of receiving notice, an affected dealership may commence a civil action challenging the relocation. Id. After a civil action is filed, “the manufacturer shall not establish or relocate” the proposed dealership until the district court finds that the establishment or relocation is supported by good cause. Id.

However, the notice and good-cause requirements do not apply to the “relocation of an existing dealer” within the “area of responsibility” described in the dealer’s franchise agreement when the proposed relocation site is within five miles of the existing dealer’s current location and is not within five miles of another dealer of the same line make. Id.

The Eden Prairie location was within five miles of the Bloomington location and more than five miles from the Wayzata dealership. Nissan and McDaniels contended that Wayzata had no right to challenge the relocation because McDaniels had operated the dealership in Bloomington for three months before relocating the dealership to Eden Prairie and, thus, was an “existing dealer” within the statute’s notice and good-cause exemption.

The Supreme Court’s Rulings

The district court and Court of Appeals held that Nissan and McDaniels were exempt from the statute’s notice and good-cause requirements. Under the court of appeals’ holding, the notice requirement and existing-dealer exception of Minn. Stat. § 80E.14, subd. 1, applied on the date of the physical relocation of a dealership, not on the date that the manufacturer developed an intention to relocate a dealer. See Wayzata Nissan, LLC v. Nissan N. Am., Inc., 865 N.W.2d 75, 82 (Minn. Ct. App. 2015). Thus, the Court of Appeals determined that notice was required on November 1, 2014—the date that McDaniels completed the relocation of the Bloomington dealership to Eden Prairie. Id. (stating that McDaniels was an “existing dealer” at “the time of the relocation in November 2014” because McDaniels “had operated as a Nissan dealer in Bloomington for over three months”).

The issues before the Minnesota Supreme Court were two-fold: (1) whether the notice and good-cause requirements of Minn. Stat. § 80E.14, subd. 1 applied on the date that a manufacturer developed an intention to relocate a dealership or the date of physical relocation; and (2) whether the existing-dealer exception applied when the relocation of a dealership was accompanied by a change in the person or entity operating the dealership.

As to the first issue, the Supreme Court held that “notice is required on the date that a manufacturer develops the intention to authorize a relocation, not on the date of the physical relocation of a dealership.” 2016 WL 626069 at *6. Because Nissan had developed a definite intention to authorize the relocation of the dealership from Bloomington to Eden Prairie by May 8, 2014, Nissan was required to provide notice on or before May 8, 2014 unless the “existing-dealer” exception applied. The Supreme Court next addressed whether the existing-dealer exception applied. The court held the phrase “existing dealer” in Minn. Stat. § 80E.14, subd. 1, “refers to the person or entity that is operating a dealership on the date that the manufacturer develops a definite intention to relocate the dealership.” Id. at *7. Because Nissan intended to approve the relocation of the dealership to Eden Prairie on May 8, 2014 and the relocated dealership was not to be operated by Feldmann — the entity that was operating the dealership on May 8, but rather by a new dealer — McDaniels — the existing-dealer exception did not apply and Wayzata was entitled to notice and a good-cause hearing.

The decision leads to odd results. As Nissan and McDaniels pointed out, Wayzata would have had no statutory right to challenge the relocation if either (1) Feldmann had first relocated the dealership to Eden Prairie and then sold it to McDaniels; or (2) McDaniels had purchased and operated the dealership in Bloomington and then decided, as an existing dealer, to relocate to Eden Prairie. The Supreme Court rejected this argument on two grounds. It first noted that the “Legislature could have created the existing-dealer exception to accommodate dealers that have occupied a particular geographic area, but find it necessary to slightly shift their location,” but did not do so. Id. at *8. Second, while courts will not presume that the Legislature intended an absurd or unreasonable result, this rule of construction only applies where a statute is ambiguous or where the plain meaning of the statute “utterly confounds” the clear legislative purpose of the statute. Id. at *7. Here, the statute was not ambiguous and the fact “[t]hat an existing dealer … may take advantage of the existing-dealer exception certainly [did] not confound any clear legislative purpose.” Id.

Because the exemption for relocation of an existing dealer did not apply, Wayzata was entitled to a good cause hearing on the relocation and the case was remanded to the district court for that purpose.

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 licensed in your jurisdiction. Gregory J. Johnson © All rights reserved. 2016.

Posted in Auto Dealer, Coverage, Dealer Franchise Laws | Leave a comment

Auto Coverage: Are Household (Family Member) Step-Down Exclusions Void Under Minnesota Law?

1273a11By Greg Johnson. A 2014 decision of the South Carolina Supreme Court decision invalidating a household (a/k/a “family” or “intra-family”) “step-down” (a/k/a “drop-down”) to a personal auto policy caused me to dust off my research from over a decade ago to determine whether such provisions would be invalid under Minnesota law as well. In Williams v. Gov’t Employees Ins. Co. (GEICO), 409 S.C. 586, 594, 762 S.E.2d 705, 709 (2014), the court held that a household step-down provision which purported to reduce the policy limits from $100,000 to $15,000 when the named insured or resident family member was injured, was void and unenforceable.

The Minnesota Supreme Court has not determined whether step-down provisions are enforceable under the Minnesota No-Fault Automobile Insurance Act. In a step-down provision, “the coverage ‘steps down’ from the actual policy limits to the minimum required by statute.” Liberty Mut. Ins. Co. v. Shores, 147 P.3d 456, 458 n. 4 (Utah Ct.App.2006) (quoting 1 Rowland H. Long, The Law of Liability Insurance, § 2.05[5] (2003)). Although such provisions are typically found in the exclusions section of the policy and may be called “exclusions” in court opinions, they are not actually exclusions because they do not bar all coverage under the policy.

The Minnesota No-Fault Act refers to bodily injury and property damage liability coverage as “residual liability coverage.” When addressing liability step-down provisions, it is important to distinguish between two different types: (1) those in a vehicle owner’s liability policy which reduces the liability coverage available to a permissive user-driver (a/k/a “omnibus”) insured (but not the named insured); and (2) those which purport to reduce the coverage available to the named insured or resident family member when injured in an accident.

The Minnesota Standard

The validity of step-down provisions must be measured against the following standard: Minnesota courts first consider whether the provision is unambiguous. Pepper v. State Farm Mut. Auto. Ins. Co., 813 N.W.2d 921, 925 (Minn.2012) (citing Latterell v. Progressive N. Ins. Co., 801 N.W.2d 917, 920 (Minn.2011)). If the provision is unambiguous, courts “then consider whether the exclusion omits coverage required by the No–Fault Act or contravenes the No–Fault Act. Id. (citing Latrell at 921). See also, Lobeck v. State Farm Mut. Auto. Ins. Co., 582 N.W.2d 246, 249 (Minn.1998) (same). “[S]o long as coverage required by law is not omitted and policy provisions do not contravene applicable statutes, the extent of the insurer’s liability is governed by the contract entered into.” Am. Family Mut. Ins. Co. v. Ryan, 330 N.W.2d 113, 115 (Minn.1983).

Omnibus Step-Down Provisions

A step-down provision which reduces the amount of liability coverage available to an omnibus insured should be found enforceable by the Minnesota Supreme Court. Omnibus step-down provisions are usually only found in the commercial auto context. The Minnesota Court of Appeals approved omnibus “step-down” provisions in Agency Rent-A-Car, Inc. v. American Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn. Ct. App. 1994) and State Farm Mut. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160 (Minn. Ct. App. 2001), review denied (Minn. June 27, 2001), cases I handled for the involved rental car company and auto dealership insurer.

In Agency Rent-A-Car and Universal Underwriters, the insuring agreements provided one stated limit of liability for the named insured vehicle owner (a car rental company in Agency Rent-A-Car and dealership in Universal Underwriters) and another, lower limit (statutory minimum) for permissive user-customers. A typical provision provides that the permissive user-customer qualifies as an “insured” under the policy only to extent of the minimum limits required by law. In both cases, the step-down provisions were upheld. The vehicle owner’s self-insurance plan (in Agency Rent-A-Car) and liability insurer (in Universal Underwriters) was only required to extend minimum limits omnibus liability coverage to the customer on a primary basis, followed by the non-owned vehicle liability coverage available to the customer under his or her own personal auto policy, which applied on an excess basis. If uncompensated damages remained and the vehicle owner had any tort liability to the injured party (vicarious or active), the vehicle owner’s self-insurance plan or insurance policy would come back into play to pay up to the difference between its full liability limit and the minimum limits omnibus coverage afforded the permissive user-customer.

While nothing in the No-Fault Act expressly authorizes an omnibus step-down provision in a vehicle owner’s policy, such provisions do not contravene any provision of the No-Fault Act or public policy because they do not reduce the bodily injury liability protection the named insured purchased and, thus, do not reduce the coverage that is available to injured accident victims or any class of accident victims. The vehicle owner’s insurer remains liable to pay up to its full limits of liability regardless of the step-down provision. Omnibus step-down omnibus provisions only operate to allocate liability coverage between the policy issued to the vehicle owner and the permissive-user customer’s policy, if any. In Universal Underwriters, State Farm argued the No-Fault Act “prohibits [an] owner’s residual liability policy from providing different liability limits for the permissive user and the owner.” Id. at 164. Relying on Agency Rent-A-Car, the court rejected State Farm’s argument, holding: “[n]othing in [the No-Fault Act] shows a clear intent by the legislature to restrict an insurer’s right to freely contract for different liability limits for permissive drivers and owners so long as the minimum statutory coverage is provided.” Id. The permissive user-customer has no grounds to object to a step-down provision; a non-family member permissive user cannot claim any reasonable expectation that the vehicle owner’s policy would afford him or her more than minimum limits coverage.

It should be noted that the omnibus step-down provisions at issue in Agency Rent-A-Car and Universal Underwriters are distinguishable from the policy provisions at issue in Illinois Farmers Ins. Co. v. Depositors Ins. Co., 480 N.W.2d 657, 661 (Minn.Ct.App.1992). In that case, three men were killed in a single-vehicle accident in 1989. Donald Olson owned the vehicle and insured it through Depositors. His son, Joseph, had permission to use his father’s car. He allowed a friend, Kevin Redlund, drive the car. Two passengers’ heirs brought wrongful-death claims against Donald Olson and Redlund. Depositors insured Olson’s vehicle, with liability limits of $500,000 per person/$500,000 per accident. Farmers insured Redlund. The Depositors’ policy extended omnibus coverage to anyone using the insured vehicle with permission. Unlike the step-down omnibus provisions in Agency Rent-A-Car and Universal Underwriters — which specifically restricted the omnibus liability coverage to the minimum limits required by law — the Depositor’s policy contained an endorsement stating that the insurance available for any person other than the named insured or a resident relative (i.e., a permissive user) “that exceeds the financial responsibility law limits where the auto is principally garaged shall be excess over any other collectible insurance.” The “other insurance” clause of the Farmers’ policy likewise stated that “any insurance we provide for a vehicle you do not own shall be excess over any other collectible insurance.” Because the other insurance clauses of the two policies in Depositors conflicted, the Court of Appeals applied Minnesota’s three-part “closeness-to-the risk” test and held that Depositor’s policy was primarily liable up to its $500,000 limits, followed by the Farmers’ policy.

Household Step-Down Provisions

Household (a/k/a “family” or “intra-family”) step-down provisions differ significantly from omnibus step-down provisions. First, household exclusions have been banned in Minnesota since 1969. Hime v. State Farm Fire & Casualty Co., 284 N.W.2d 829 (Minn.1979) (citing Minn. Stat. § 65B.23, repealed by Laws 1974, c. 408 s 33 and noting that “Minnesota law has prohibited household or family exclusions in automobile liability insurance policies since 1969”), cert. denied, 444 U.S. 1032 (1980)).

Prior to 1969, household (a/k/a “intra-family”) exclusions for bodily injury sustained by the named insured and members of his or her family residing in the same household were held enforceable on the grounds that they served to prevent fraud and collusion by family members. See, Tomlyanovich v. Tomlyanovich, 239 Minn. 250, 58 N.W.2d 855, 862 (1953) (upholding household exclusion and noting that the “obvious purpose of the clause here involved is to exempt the insurer from liability to those persons to whom the insured, on account of close family ties, would be apt to be partial in case of injury”).

However, with the erosion of the common-law doctrines of inter-spousal and parental immunity and rejection of their purported rationale (i.e., the possibility of family members engaging in fraud and collusion), the legislature rejected the auto insurance industry’s efforts to incorporate those immunities into their policies by use of contractual household exclusions. Minnesota Statute § 65B.23, subd. 1(a) provided that “No policy of automobile liability insurance … shall contain an exclusion of liability for damages for bodily injury solely because the injured person is a resident or member of an insured’s household or related to the insured by blood or marriage.” Subdivision 1(b) prohibited exclusions for “bodily injury sustained by any person who is a named insured, except where such injury is sustained by a named insured who is driving the insured automobile at the time such injury is sustained.”

In 1979, in Hime, the Minnesota Supreme Court addressed a household exclusion in connection with an accident that occurred in 1972, before the No-Fault Act was in effect. The policy obligated State Farm to “pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages …,” but excluded “bodily injury to the insured or to any member of the family of the insured residing in the same household as the insured.” Id. at 831. The issue was whether Florida law (which enforced household exclusions) or Minnesota law (which did not) would apply as the policy was issued in Florida, but the accident occurred in Minnesota. The court held that application of Minnesota law was proper under Minnesota’s “choice-influencing considerations” and invalidated the household exclusion.

Second, while household step-down provisions do not eliminate all coverage as would be the case with a true household exclusion (the lone fact relied upon by auto insurers in support of the validity of household step-down provisions) household step-down provisions differ from the omnibus step-down provisions found enforceable in Agency Rent-A-Car and Universal Underwriters as the former purport to reduce the liability protection the named insured purchased, often significantly so, and thereby also serve to reduce the insurance coverage available to an entire class of accident victims based solely on the injured party’s status as a named insured or resident relative of the named insured’s household. Further, unlike omnibus step-down provisions – where the permissive user-customer has no expectation of being afforded more than minimum limits coverage –, a household step-down “may be a surprise to most policy holders. The insurance-buying public may assume that injured family members have the benefit of the full policy limits.” Frey v. United Servs. Auto. Ass’n, 743 N.W.2d 337, 343 (Minn. Ct. App. 2008).

The Minnesota Court of Appeals and Eighth Circuit Court of Appeals approved household step-down liability provisions in Frey v. United Servs. Auto. Ass’n, 743 N.W.2d 337 (Minn. Ct. App. 2008) and Babinski v. Am. Family Ins. Grp., 569 F.3d 349 (8th Cir. 2009). In Frey, the Minnesota Court of Appeals upheld a household step-down “exclusion” which reduced the stated policy limits from $300,000 to $30,000, the minimum amount required by Minnesota law. See Minn. Stat. § 65B.49, subd. 3(1). In Babinski, 569 F.3d 349 (8th Cir. 2009) (applying Minnesota law), the court, relying in large part on Frey and Universal Underwriters, upheld a household step-down “exclusion” which reduced the stated policy limits from $1,000,000 to $30,000.

In Frey, seventeen-year-old Nathan Frey was permissively operating a vehicle owned by his father, Stephen Frey, when he caused a one-vehicle accident. Stephen Frey and Thomas Alexander were killed in the accident and Nathan’s mother, Patricia Frey, and sister, Aven Frey, who was a college student in Iowa, sustained injuries. The vehicle was insured under a policy issued to Stephen Frey by USAA. The policy had stated limits of liability of $300,000 per person/$500,000 per accident. However, the exclusions section contained a step-down limit for bodily-injury liability coverage to $30,000 per person or $60,000 per accident when a “covered person” was legally liable to pay “a member of that covered person’s family residing in that covered person’s household.” It was undisputed that Nathan Frey was a covered person under policy. When Aven Frey submitted a claim for her injuries, USAA denied coverage for amounts above the policy’s step-down limits of $30,000/$60,000, claiming that Aven also resided in the home with her brother Nathan.

In holding the step-down provision valid and enforceable, the court first held the USAA policy did not “omit” any coverage required by Minnesota law because the policy still provided the minimum limits of liability coverage required by the No-Fault Act after application of the step-down provision. Id. at 341. The court next found that the step-down provision did not “contravene” applicable statutes. Id. Aven Frey argued, and the district court concluded, the step-down provision contravened Minnesota law and was unenforceable because USAA’s reduction of coverage for family members (i.e., a status-based exclusion) was not one of the enumerated grounds for cancellation or reduction of liability insurance under Minnesota law. However, the statute relied upon by the district court, Minn. Stat. § 65B.15 (2006), only governs changes in coverage during a policy term and, thus, had no applicability. The Court of Appeals also noted that while the Minnesota Department of Commerce’s 2005 procedure manual prohibited drop-down limits on bodily-injury coverage for resident family members (see Minn. Dep’t of Commerce, Private Passenger (Personal) Automobile Insurance, 7 (2005)), the “disapproval was withdrawn and there is no claim that this policy provision violates or violated a regulation of the Minnesota Department of Commerce or other state agency.” Id. at 342.

In Babinski v. Am. Family Ins. Grp., 569 F.3d 349 (8th Cir. 2009) (applying Minnesota law to an auto policy issued in South Dakota where the accident occurred in Minnesota), Kathi Babinski was killed in an automobile accident in Minnesota while her husband John, who was also killed, was driving a Dodge Ram pickup. The vehicle was insured under a policy issued by American Family. The policy required American Family to “pay compensatory damages an insured person is legally liable for because of bodily injury” and had liability limits of $1,000,000. However, the policy contained an exclusion providing that coverage did not apply to bodily injury to “[a]ny person related to the operator and residing in the household of the operator.” An exception to the exclusion then stated: “This exclusion applies only to the extent the limits of liability of this policy exceed the limits of liability required by law.”

After Kathi’s heirs commenced a wrongful death claim against John’s estate in Minnesota, American Family commenced a declaratory judgment action claiming that, pursuant to the “household drop-down exclusion,” it was only obligated to pay $30,000, the amount required by law, not the $1 million limits. See Minn. Stat. § 65B.49, subd. 3(1). Kathi’s heirs contended that the household step-down provision was unenforceable.

The Minnesota federal district court found the policy “vague, ambiguous, and [fell] far below any ordinary consumer’s reasonable expectation” as “it [was] impossible to tell from within the policy’s four corners the amount it [would] pay.” Id. at 351. The Eighth Circuit found the policy unambiguous. The court noted that in Agency Rent–A–Car, Inc. v. Am. Family Mut. Auto. Ins. Co., 519 N.W.2d 483 (Minn.Ct.App.1994), the Minnesota Court of Appeals found no ambiguity in a policy that limited liability coverage to “the MINIMUM dollar amount required” by a state’s “motor vehicle financial responsibility laws” and did not provide a specific dollar amount. “[T]he mere fact that we must look beyond the Policy’s four corners to state law in order to determine the exact dollar amount of coverage does not render the drop-down exclusion ambiguous under Minnesota law.” Id. at 352. The court also rejected application of the reasonable expectations doctrine, holding the doctrine “applies only on the few ‘egregious’ occasions when an exclusion is disguised in a policy’s definitions section.” Id. at 353 (quoting Allstate Ins. Co. v. Steele, 74 F.3d 878, 881 (8th Cir.1996)). According to the court, the household step-down provision was not hidden and “appear[ed] exactly where an insured would expect — in the Policy’s exclusions section.” Id. The court rejected Babinski’s assertion that because the provision was actually only a “limitation” or “reduction” of the liability limits, a reasonable insured would not expect to find it in the “exclusions” section of the policy. Id.

The court then addressed the issue of whether the step-down provision was valid and enforceable. In determining the provision was enforceable, the court noted that while the Minnesota Supreme Court had not specifically addressed the enforceability of household step-down exclusions, “the purpose of the no-fault act is to fully compensate the insured to the extent of the mandated insurance” (quoting Scheibel v. Ill. Farmers Ins. Co., 615 N.W.2d 34, 39 (Minn.2000)), and “the Minnesota Court of Appeals has consistently held that drop-down exclusions are enforceable so long as they satisfy the minimum coverage limits in Minnesota’s no-fault act.” Id. at 354 (citing Frey v. United Servs. Auto. Ass’n, 743 N.W.2d 337 (Minn.Ct.App.2008); Bundul v. Travelers Indem. Co., 753 N.W.2d 761 (Minn.Ct.App.2008) and State Farm Mut. Auto. Ins. Co. v. Universal Underwriters Ins. Co., 625 N.W.2d 160 (Minn.Ct.App.2001). Because the step-down provisions in these cases reduced the liability coverage “only to the extent the limits of liability of this policy exceed the limits of liability required by law,” the court held that it was enforceable in Minnesota.


The Minnesota Supreme Court has not determined whether step-down provisions from residual liability coverage are enforceable under the No-Fault Act. However, the Minnesota Supreme Court should hold that step-down provisions which reduce coverage to a non-family member omnibus insured (such as those involved in Agency Rent-A-Car and Universal Underwriters) are valid and enforceable. Such provisions have no adverse impact on the policyholder or accident victims.

While the Minnesota Court of Appeals and Eighth Circuit Court of Appeals upheld household step-down provisions in Frey (which could be viewed as dicta as the court ultimately held the step-down provision did not apply because the injured claimant did not qualify as a resident relative under the policy) and Babinski, the Minnesota Supreme Court would likely hold that household step-down provisions contravene the provisions of the No-Fault Act and are void and unenforceable. This assumes, however, that the correct legal arguments are made. The courts in Frey and Babinski were either not presented with, or overlooked, the strongest legal argument against the validity of household step-down provisions — a basic and fundamental concept I located in my decades old research that was built into the No-Fault Act when passed in 1974.

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 licensed in your jurisdiction. © All rights reserved. 2016.

Posted in ADCF Policy, BAP, Coverage, PAP | Tagged , , , , , , | Leave a comment

Guest Contributor Jim Radogna: F&I Fact vs. Fiction

Fact v Fiction By Jim Radogna. It’s not uncommon for me to be asked to weigh in on the occasional compliance conundrum posed on some social media forum. Many such inquiries involve disagreements about long-held beliefs in F&I and whether or not they’re legally valid. So I’ve decided to take a crack at clarifying some of the issues surrounding these pervasive compliance myths. Now, there’s no legal advice here — just my thoughts based on a bit of common sense and my years of being a compliance car guy. Ultimately, it’s up to you to decide what works best for you, your customers and your dealership.

Myth No. 1: The 300% rule is a compliance tool

Many F&I processes that started out as solid sales techniques have somehow morphed into compliance requirements. The 300% rule is a great example of this phenomenon. I wholeheartedly agree with this rule from a sales perspective. As they say, you’ll miss 100% of the shots you don’t take. But as a compliance requirement, I’m not so sure.

First, let’s look at why failing to adhere to the 300% rule is considered a compliance blunder. A common rationale is that if you don’t offer protection products to your customers that they end up needing, you can be sued. I have, in fact, heard of lawsuits where a customer wasn’t offered credit life insurance, subsequently died and the spouse sued the dealership.

However, this scenario seems far less likely when it comes to other products. For instance, credit life insurance is only available from the dealer at the time of sale, so there may indeed be an obligation to inform eligible customers of its availability. On the other hand, many other products sold in the F&I office are available elsewhere. I recently purchased a new car, and within days my inbox was full of offers from independent service-contract providers. I’m not sure even the most desperate attorney would want to file a lawsuit against a dealer for not offering products that are readily available on the open market.

But some F&I pros insist on practicing the 300% rule without exception and having a signed declination sheet in every deal jacket to avoid claims of discriminatory treatment. Discrimination is defined as treatment of an individual or group based on their actual or perceived membership in a certain group or social category, “in a way that is worse than the way people are usually treated.”

In my view, if you fail to offer all of your customers all of your products all of the time, it would be a big hill to climb to prove that you’re being discriminatory. On the other hand, if you adhere to the 300% rule but offer your products at different prices, that discrimination claim may very well be low-hanging legal fruit. But there are other potential issues that subscribing to the 300% rule could raise.

Let’s say, for example, you present your customer with 100% of your products and she says, “I’ll take it all.” So far, so good, right? But you then discover your lender won’t allow you to finance it all. Besides the obvious customer satisfaction issues, you’ve made an offer on which you can’t deliver. Is it conceivable that a lawyer may try to make a contractual legal issue out of that? It certainly wouldn’t surprise me. The same applies with max loan-to-value (LTV) or amount-financed callbacks. If you present 100% of your products in these scenarios, I suggest you let the customer know up front how much more money he or she will need to come up with.

There are also situations where the customer shouldn’t be offered all of your products. For instance, you wouldn’t sell GAP protection on a cash or low LTV deal (especially when the LTV falls below state or lender limitations), or a service contract on a car that’s exceeded your program’s mileage limit. Offering such products in these situations could result in deceptive practices or fraud claims.

The same principle applies to declination sheets. They certainly come in handy when a customer complains that he wasn’t offered a product that turned out to be needed. But the significance of declination sheets as a compliance tool has been somewhat overstated, in my opinion. From a sales standpoint, declination sheets can provide you with one additional chance to sell products, but they should be used accurately. Products that aren’t available to particular customers shouldn’t show up on their declination sheets. If they do, they should be marked “N/A” or “Unavailable.”

Myth No. 2: It’s illegal to give a customer a copy of their credit report

This myth has no basis in law, as far as I am aware. In fact, the Fair Credit Reporting Act specifically states that a credit bureau provider cannot prohibit a user (the dealer) from disclosing the contents of the credit report to the consumer. However, contracts with some credit bureau providers may prohibit the dealer from giving the consumer a copy of his or her credit report.

Telling customers it’s illegal to give them a copy of their credit report when that information is inaccurate is not a good idea, at least in my opinion. On the other hand, telling the customer you can’t hand over a copy of his or her credit report because your company’s contract with the credit reporting agency prohibits it is accurate and true. There’s never a downside to telling the truth.

Myth No. 3: It’s illegal to highlight a contract

Many automotive professionals believe that this is a no-no because you can be accused of “leading” the customer to sign the highlighted areas without reading the rest of the contract. In reality, you can lead a customer by pointing your finger to the signature sections and saying, “Sign here.” It appears this folklore originated with a case where a creditor utilizing a motor vehicle pawn contract was sued for failure to disclose the APR as conspicuously as other disclosures on the contract.

The court ruled that the creditor violated the Truth in Lending Act (TILA) because it put dashes and arrows pointing to the due date, thereby making the due date disclosure more conspicuous than the APR and finance charge. So there was far more going on than highlighting. In fact, according to the court’s decision, there was handwriting and other markings on the contract, and the annual percentage rate on the contract was 304.24%. No surprise there.

So while highlighting customer signature areas probably isn’t a big issue, make sure certain TILA disclosures aren’t more prominent than others. Of course, if you work with a lender that won’t accept a contract with highlighted signatures, you’ll probably want to avoid the practice altogether.

Myth No. 4: A contract is valid once signed by both parties, even if the customer hasn’t taken physical delivery

The validity of this statement depends on where you conduct business. Some states specifically define when a contract is considered valid. For instance, California law states that “a 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.”

So before you attempt to hold a customer’s feet to the fire prior to the delivery of the vehicle, you may want to check the laws in your state.

Myth No. 5: Menus are required to disclose the base payment

This has been the subject of much spirited debate in F&I circles. First, menus are not required by law at all. In fact, contrary to popular opinion, even California doesn’t require the use of a menu. All that is required is a “pre-contract disclosure” that shows the monthly installment payment with and without the optional products or services.

So, really, there is no such thing as a legally compliant menu as some vendors claim. But it’s not a bad idea to include the base payment in your menu presentation (and in your write-up as well).

Myth No. 6: Everyone must be charged the same doc fee

This notion again stems from worries about discrimination claims. The thought is that if a dealership charges one customer a fee, it has to charge everyone the same fee to avoid potential litigation.

So, could charging varying doc fees attract the attention of regulators? Well, we’ve certainly heard enough about alleged discrimination in rate markups over the last few years. And as recent actions by the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) show, even if there’s no intent to discriminate, you can still face fines if protected classes pay more than non-protected classes.

So the easy answer is to just charge everyone the same doc fee, right? Perhaps. But here’s the rub: Doc fees are dealer-imposed charges and therefore not mandatory; only government fees are compulsory. So it is improper to tell a customer that you must charge them the fee, as you could be setting yourself up for a deceptive practices claim. Some states, like Washington, require you to inform the customer that the doc fee is negotiable.

So to avoid potential discrimination claims, be sure you can show proof that any downward deviations in fees are for valid business reasons, such as needing to match the doc fee offered by a competitive dealer in order to close the deal. Remember, documentation is key.

Myth No. 7: Payment ranges up to $XX are allowed

To many regulators and plaintiffs’ attorneys, using a payment range in certain circumstances could be a sign of payment packing. While it’s generally acceptable to quote a range of payments using an average APR before the customer’s credit report is pulled, once a credit profile is accessed, a best practice is to quote an exact payment.

Let’s say you’ve pulled the customer’s credit but aren’t sure what her rate is because you’re waiting for a callback from the bank. If you pencil the deal back with a payment range, it’s a good idea to include an APR range as well. Once you determine the actual terms of the deal, a final base payment should be disclosed. Also, if you’re using a payment range to account for variations in days to first payment, you should disclose the exact payment at each level. In other words, never give any impression that would allow a regulator or court to infer that the payments quoted are in any way misleading.

So there you have it: my take on some of F&I’s most common compliance myths. Again, how you handle these issues may depend on the laws in your state and your individual processes and philosophies. You may agree or disagree with my analysis and that’s OK. My goal here is not to steer you in any particular direction, but to simply give you something to think about beyond the status quo.

The information presented in this article is solely the opinion of Jim Radogna and is not intended to convey or constitute legal advice, and is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.

Jim Radogna is a nationally-recognized auto industry consultant specializing in dealership sales and regulatory compliance. He is the President of Dealer Compliance Consultants, Inc., based in San Diego, California and a frequent contributor to automotive publications including Dealer Magazine, Automotive News, WardsAuto, Auto Dealer Monthly, DrivingSales Dealership Innovation Guide, AutoSuccess, CBT News Magazine, and F&I Magazine. He can be reached at (858) 722-2726 or by email at jim@dealercomplianceconsultants.com

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