By Greg Johnson. In 2013, Insurance Services Office (“ISO”) rolled out its new Auto Dealers Coverage Form (CA 00 25) (“ADCF” policy) The ADCF policy replaces the Garage Liability (“GL”) policy which had been available for decades and retains the complexity of the GL policy. Unlike most commercial policies, the ADCF policy is specifically tailored to meet the insuring needs of a specific industry, auto dealers. Its liability coverages are based on, and restricted to, liability arising out of “auto dealer operations.” Because of the myriad liability risks flowing from an auto dealer’s business operations, the ADCF policy, like the former GL policy, rolls several different coverage forms into one. In addition to its dealer-specific coverages, the ADCF policy incorporates liability coverage parts typically found in a Business Auto policy, Commercial General Liability policy and Personal Injury & Advertising policy.
One of the most significant differences between the GL policy and the new ADCF policy is the addition of “Acts, Errors or Omissions” coverage in Section III of the policy. This optional liability coverage is primarily designed to protect the auto dealer against claims resulting from the dealer’s negligent violation of certain specified consumer protection laws that regulate the dealer’s finance and insurance (“F&I”) operations. The need for “Acts, Errors or Omissions” coverage is readily apparent. Unlike most commercial insureds, franchised auto dealers operate three discreet businesses: vehicle sales, vehicle servicing and vehicle financing and the dealer industry is one of the most heavily regulated in the nation. The auto dealer’s marketing activities, role as a “creditor” or “lessor” in connection with dealer-arranged financing transactions and use of consumer’s private financial information subject the dealer to numerous consumer protection statutes and laws. At the federal level alone, auto dealers must comply with over a dozen laws. These federal laws include, among others, the Truth in Lending Act (“TILA”) and Regulation Z, its implementing regulation, Consumer Leasing Act (“CLA”) and Regulation M, its implementing regulation, Equal Credit Opportunity Act (“ECOA”) and Regulation B, its implementing regulation, Fair Credit Reporting Act (“FCRA”), Magnusson Moss Warranty Act (“MMWA”), Title IV Odometer Requirements of the Motor Vehicle Information and Cost Savings Act (Federal Odometer Act (“FOA”)), Gramm-Leach-Bliley Act (“GLB”) and Federal Trade Commission (“FTC”) Privacy and Safeguards Rule, Telephone Consumer Protection Act (“TCPA”), Junk Fax Prevention Act (“JFPA”), CAN-SPAM Act and various FTC rules and regulations. The 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) — an 828 page law that has thus far produced over 14,000 pages of implementing regulations — adds yet another layer of complexity to the already complicated area of consumer financing. In addition to these federal laws and regulations, auto dealers must also comply with a variety of laws and regulations at the state level which impose additional legal requirements. Prior to the passage of the federal TILA in 1968, the vast majority of states adopted their own retail installment sales acts which also require that certain credit information be provided to consumers prior to consummation of a credit transaction. Other notable state acts include the Uniform Commercial Credit Code (“UCC”) and statutes intended to prohibit deceptive trade practices such as the Uniform Deceptive Trade Practices Act (“DTPA”).
The “Acts, Errors or Omissions” coverage of the ADCF policy obligates the auto dealer insurer to “pay all sums that an ‘insured’ legally must pay as damages because of any ‘act, error or omission’ of the ‘insured’ to which this insurance applies and arising out of the conduct of your ‘auto dealer operations’, but only if the ‘act, error or omission’ is committed in the coverage territory during the policy period.” For purposes of the coverage, an “act, error or omission” is defined as “any actual or alleged negligent act, error or omission committed by an “insured” in the course of your “auto dealer operations” arising:
1. Out of an “insured’s” failure to comply with any local, state or federal law or regulation concerning the disclosure of credit or lease terms to consumers in connection with the sale or lease of an “auto” in your “auto dealer operations”, including, but not limited to, the Truth in Lending and Consumer Leasing Acts.
2. Out of an “insured’s” failure to comply with any local, state or federal law or regulation concerning the disclosure of accurate odometer mileage to consumers in connection with the sale or lease of an “auto” in your “auto dealer operations.”
3. In an “insured’s” capacity an insurance agent or broker in the offering, placement or maintenance of any “auto” physical damage, auto loan/lease gap, credit life or credit disability insurance sold in connection with the sale or lease of an “auto” in your “auto dealer operations”, but only if the “insured” holds a valid insurance agent or broker license at the time the “act, error or omission” is committed, in the jurisdiction in which your “auto dealer operations” is located, if required to do so by such jurisdiction; and
4. Out of a defect in title in connection with the sale or lease of an “auto” in your “auto dealer operations”.
While auto dealer insurers offered similar coverage prior to 2013 (usually referred to as “statutory errors and omissions” coverage), it was typically only available by manuscript endorsement to the GL policy and the scope of the coverage, and the extent of the insurer’s defense and indemnification limits and obligations, varied from one auto dealer insurer to another. See e.g., Automax Hyundai S., L.L.C. v. Zurich Am. Ins. Co., 720 F.3d 798, 801-11 (10th Cir. 2013) (policy provided $25,000 of coverage for statutory errors and omissions defined to cover suits related to violations of the “odometer law,” “truth-in-lending or truth-in-leasing law,” “auto damage disclosure law,” “competitive auto parts law,” and “used car ‘Buyers Guide,’ including federal regulation 455”).
In subsequent articles, I will address in detail the protection afforded by the “Acts, Errors or Omissions” of the ADCF policy (as well as coverage which has historically been provided to auto dealers under “statutory errors and omissions” provisions). However, three general observations are in order. First, the coverage does not provide a form of “all-risk” liability coverage protecting the auto dealer against violations of all consumer protection statutes. Rather, “act, error or omission,” only provides protection against three types of consumer protection laws: truth in lending, truth in leasing and odometer disclosure. Thus, claims under the federal Truth in Lending Act (“TILA”) and Regulation Z, the federal Consumer Leasing Act (“CLA”) and Regulation M and the Federal Odometer Act (“FOA”) fall with the insuring clause. It will also protect the auto dealer against violations of state laws or regulation “concerning the disclosure of” credit or lease terms or accurate odometer mileage. Courts have interpreted similar insuring clause language to embrace state laws and regulations which have a “purpose” and “objective” similar to the federal statutes expressly mentioned. The “arising out of” language in the definition of an “act, error or omission” is sufficiently broad to also include liability under state laws which include “borrowing” provisions. Many state consumer protection statutes make the violation of another statute independently actionable under the borrowing statute. (Some auto dealer insurers have attempted to avoid this result by limiting coverage to liability resulting “solely” by operation of the specifically referenced statutes).
The “Acts, Errors or Omissions” coverage does not apply to several notable consumer protection statutes that are applicable to an auto dealer’s F&I operations. I will address the exclusions in detail in subsequent articles. However, there are several notable exclusions. The insurance does not apply to liability under the FCRA, TCPA and CAN-SPAM Act. It also excludes for “[a]ny federal, state or local statute, ordinance or regulation “that addresses, prohibits, or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information”. Further, the coverage will not apply to damages which can arise under the ECOA for “the violation of a person’s civil rights with respect to such person’s race, color, national origin, religion, gender, marital status, age, sexual orientation or preference, physical or mental condition, or any other protected class or characteristic established by any federal, state or local statutes, rules or regulations.”
There are also two types of consumer protection laws which have historically been covered but which are noticeably absent from the “Acts, Errors or Omissions” coverage. The first involves prior damage disclosure laws. Many states have enacted statutes which require auto dealers to disclose prior damage to consumers in writing before consummation of the transaction if the prior damage exceeded a certain percentage of the vehicle’s fair market value at the time it sustained the damage. The percentage is typically quite low in the case of new vehicles and much higher in the case of used vehicles. Some statutes only require disclosure if the prior damage was “material” or affected certain components. In the past, many auto dealer insurers have extended coverage for “prior damage” claims under policy provisions obligating the insurer to pay, in the event of a non-wilful violation of the law, the difference between (1) the retail price paid by the consumer, and (2) the fair market value of the vehicle in its actual (damaged) condition at the time of sale. See e.g., Automax Hyundai S., L.L.C. v. Zurich Am. Ins. Co., 720 F.3d 798, 801-11 (10th Cir. 2013) (dealership policy provided coverage for “statutory errors and omissions” which were defined to include the violation of an “auto damage disclosure law”). Although claims alleging prior damage represent a significant and not infrequent liability exposure for auto dealers, the “Acts, Errors or Omissions” coverage does not cover such claims. The other law that has historically been insured by auto dealer insurers is the Federal Trade Commission (“FTC”) Used Car Rule (a/k/a “window sticker” rule). While violations of the rule are typically pursued by the FTC under its regulatory enforcement powers, as opposed to individual consumers, a violation of the Used Car Rule is actionable by consumers under the Magnusson Moss Warranty Act (“MMWA”).
Second, the “Acts, Errors or Omissions” coverage does not specify what damages are covered. Rather, the insuring clause obligates the auto dealer insurer to “pay all sums that an ‘insured’ legally must pay as damages because of any ‘act, error or omission’ of the ‘insured’ to which this insurance applies.” Generally speaking, the laws and regulations which fall within the definition of an “act, error or omission,” (thereby satisfying the insuring clause), identify the remedies available to an aggrieved consumer. While virtually all provide for the recovery of actual damages, most proscribe additional remedies because actual damages are often non-existent, difficult to prove or nominal. Many consumer protection statutes authorize a consumer to seek a variety of remedies including actual damages, statutory damages, liquidated damages, civil penalties, equitable relief such as rescission and restitution and injunctive relief, together with an award of reasonable attorney’s fees and costs. Some also authorize the recovery of treble damages or punitive damages.
The “Acts, Errors or Omissions” coverage identifies, in its exclusion section, damages that are not covered. Unlike most commercial liability policies — which obligate the insurer to defend and indemnify the insured against claims for “bodily injury” and “property damage” — the “Acts, Errors or Omissions” coverage does not. Indeed, claims for “bodily injury” and “property damage” are specifically excluded. (On occasion, a consumer will allege that the auto dealer’s violation of a covered consumer protection statute resulted in mental distress with accompanying physical manifestations (“bodily injury”). To ensure the other liability coverages of the ADCF policy do not likewise pick up any “bodily injury” or “property damage” or “personal injury” resulting from an “act, error or omission,” the same are specifically excluded in those separate coverage parts). Also excluded are “[c]riminal fines or penalties imposed by law or regulation, punitive or exemplary damages or demands for injunctive or equitable relief” as well as any damages “based upon, attributable to or arising in fact out of the gaining of any profit, remuneration or advantage to which [the dealer] was not entitled.”
Third, the “Acts, Errors or Omissions” coverage not only obligates the insurer to indemnify the auto dealer for all sums the dealer “legally must pay as damages,” but also requires the insurer to defend the dealer against a “suit” (which includes arbitration) asking for covered damages. Having defended auto dealers for over twenty years in consumer finance-related litigation under a host of federal and state consumer protection statutes — which are frequently alleged on a class action basis or in a regulatory enforcement context – the defense obligation provides valuable “litigation” protection. In many cases, the costs of defending the auto dealer will exceed, and sometimes dwarf, the dealer’s ultimate liability to the consumer. More often the not, the consumer has no actual damages and the litigation only involves statutory damages. Historically, and particularly during the period of 1995-2005, auto dealer insurers sought to reduce their exposure for defense costs by either limiting the defense to a stated limit or by including defense costs within the indemnity limits of liability. Absent a modifying endorsement, the “Acts, Errors or Omissions” coverage appears to obligate the insurer to defend the auto dealer on an unlimited basis.
Representing auto dealers and auto dealer insurers in coverage-related matters is a niche practice area. Among other things, coverage counsel must have extensive, in depth knowledge of the automotive retail industry and risks flowing from auto dealer operations, experience in evaluating and litigating coverage issues under a variety of commercial coverage forms and intimate familiarity with all federal, state and local laws and regulations impacting auto dealership operations, particularly those regulating the auto dealer’s consumer financing activities.
Mr. Johnson grew up in the automobile industry. His father owned an American Motors-Jeep-Chrysler dealership in Rapid City, South Dakota. He has represented auto dealers and auto dealer insurers in insurance coverage disputes and defended consumer finance litigation under the TILA, CLA, ECOA, FCRA, MMWA, FOA, MVRISA, UCC, DTPA and CFA for over 20 years. He defended all 542 Minnesota dealerships in litigation with the Minnesota Attorney General and has served as lead counsel and as a consultant to dealers and insurers on class-action litigation inside and outside of Minnesota.
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. 2010.