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

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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.

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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.

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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

Posted in Auto Dealer, Indirect Financing, Regulatory Compliance | Tagged , , , | 1 Comment

Auto Coverage: “Absolute” & “Frozen” Liability under the Minnesota No-Fault Act

1273a11By Greg Johnson. A parent completes a personal auto application for automobile insurance and does not disclose that there are any other licensed drivers in the household that will operate the insured vehicle. Later, after the policy is issued, a minor child who was a licensed driver and resided with the parent at the time of the application, permissively operates the insured vehicle and causes an accident injuring an innocent third party. Is the insurer entitled to rescind the policy after the occurrence of the accident based on alleged fraud in the procurement of the policy to avoid coverage for the accident?

Many states have statutes which allow an insurer to cancel a policy based on misrepresentations, omissions, or concealment of facts which are fraudulent and material to the acceptance of the risk, or allow cancellation where the insurer in good faith would have either not issued the policy or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer.

The answer to this question depends in part on where the policy was issued and whether the jurisdiction has enacted a compulsory financial responsibility law as well as a “frozen-liability” (a/k/a “absolute-liability”) statute which makes the coverage “absolute” after an accident. Mandatory liability insurance coverages hold a special status under the law. Like many other jurisdictions, the Minnesota No-Fault Automobile Insurance Act contains a “frozen liability” statute. Minnesota’s statute provides:

(a) The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute whenever injury or damage covered by the policy occurs. The policy may not be cancelled or annulled as to such liability by any agreement between the insurance carrier and the insured after the occurrence of the injury or damage. No statement made by the insured or on behalf of the insured and no violation of the policy defeats or voids the policy.

Minn. Stat. § 65B.49, subd.3(3)(a).

Statutory frozen-liability provisions bar rescission after an accident has occurred and require the insurer to pay statutorily required liability coverage to an innocent accident victim regardless of an insured’s conduct. See Nimeth v. Felling, 282 Minn. 460, 165 N.W.2d 237 (1969) (applying similar, pre-No-Fault Act absolute liability statute and holding that insured’s failure to comply with policy condition requiring notification of change in vehicles could not defeat injured party’s claim under the policy). The language of the Minnesota frozen liability statute is clear: (1) no “agreement between the insurance carrier and the insured” can defeat or void the policy; (2) no “statement made by the insured” can defeat or void the policy; and (3) no “violation of the policy” by an insured can defeat or void the policy. In short, nothing the insured did or said prior to the accident and nothing the insured does or says after an accident provides a basis for the insurer to avoid liability coverage. Thus, even if the insured misrepresents the risks insured under the policy, violates a policy condition or the insurer fails to collect a premium commensurate with the risks insured, the policy will afford coverage. The liability coverage contained in the policy as written (or as required to be provided by law) is “frozen” after an accident occurs.

Many other states (27 in addition to Minnesota) have enacted similar “frozen- liability” statutes. See e.g., Torres v. Nev. Direct Ins. Co., 353 P.3d 1203 (Nev. 2015 (insured’s violation of notice and cooperation provisions of policy was not binding on injured party as no post-injury violation of a policy releases insurer under the absolute-liability statute); Cowan v. Allstate Ins. Co., 357 S.C. 625, 594 S.E.2d 275 (2004) (noting that breach of a policy’s notice requirements by the insured did not release the insurer from liability); National Ins. Ass’n v. Peach, 926 S.W.2d 859 (Ky. App. 1996) (insurer required to extend mandatory liability limits to accident victim despite fact that insured misrepresented on his application that he would be the sole operator of the motorcycle); Midland Risk Mgmt. Co. v. Watford, 179 Ariz. 168, 876 P.2d 1203 (Ariz. Ct.App.1994) (requiring insurer to indemnify the insured despite misrepresentations on the insurance application because of absolute-liability statute); Harris v. Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380 (Del.1993) (holding that non-cooperation of insured cannot defeat application of absolute-liability statute where innocent third-party is injured); Odum v. Nationwide Mut. Ins. Co., 101 N.C.App. 627, 401 S.E.2d 87 (1991); Safeway Ins. Co. v. Harvey, 36 Ill.App.3d 388, 343 N.E.2d 679 (1976); Allstate Ins. Co. v. Dorr, 411 F.2d 198 (9th Cir.1969).

These holdings are consistent with the public policy underlying mandatory automobile liability systems. Compulsory auto insurance systems are based on an interest in protecting accident victims and were enacted to benefit the public as well as the insured. States that require liability insurance have a strong public policy interest in assuring that individuals who are injured in motor vehicle accidents have a source of indemnification. Frozen-liability statutes are consistent with these purposes by providing a mechanism for an injured party to recover his or her damages despite any wrongdoing or breach of contract on the part of the policy insureds. Allowing rescission of an insurance contract after an accident would strike at the heart of compulsory liability insurance and would operate as the functional equivalent of a contractual exclusion. The result would likewise defeat minimum coverage, with the consequence that an innocent, injured third-party would bear the burden of intentional misrepresentations by the insured. It would shift the loss to one who was entitled to rely on obedience to the law and one who was without any means of determining whether a policy had been fraudulently procured. As between an injured third-party and the insurer, the latter is in the far superior position to protect itself.

Some jurisdictions, which have enacted automobile financial responsibility statutes but not frozen-liability statutes, have likewise prohibited rescission of an auto policy after the occurrence of damage or injury to an innocent third-party. See e.g, Erie Ins. Exch. v. Lake, 543 Pa. 363, 671 A.2d 681 (1996); Munroe v. Great American Ins. Co., 234 Conn. 182, 661 A.2d 581 (1995); Van Horn v. Atlantic Mut. Ins. Co., 334 Md. 669, 641 A.2d 195 (1994); Continental Western Ins. Co. v. Clay, 248 Kan. 889, 811 P.2d 1202 (1991); Ferrell v. Columbia Mut. Cas. Ins. Co., 306 Ark. 533, 816 S.W.2d 593 (1991); Fisher v. New Jersey Auto. Full Ins. Underwriting Ass’n, 224 N.J.Super. 552, 540 A.2d 1344 (App.Div.1988); American Underwriters Group v. Williamson, 496 N.E.2d 807 (Ind.Ct.App.1986); United Sec. Ins. Co. v. Commissioner of Ins., 133 Mich.App. 38, 348 N.W.2d 34 (1984). Cf Colonial Penn Ins. Co. v. Guzorek, 690 N.E.2d 664 (Ind.1997) (holding that financial responsibility act did not abrogate common law right of rescission even after an accident and injury to an innocent third-party because minimum compensation protection for an accident victim could be satisfied by the injured party’s uninsured motorist (UM) coverage).

Whether an insurer can pursue an action against its insured for any amounts it is required to pay an innocent, injured party due to a frozen-liability statute is an open question in most jurisdictions. Some states have statutes which directly address the issue by allowing insurers to recoup such losses. For example, North Carolina G.S. § 20–279.21(h) states: “Any motor vehicle liability policy may provide that the insured shall reimburse the insurance carrier for any payment the insurance carrier would not have been obligated to make under the terms of the policy except for the provision of this Article.” Minnesota does not contain a similar statutory provision. Of course, whether a claim against the insured would be significant or illusory would depend upon the financial resources of the insured. It may not be worth the effort.

In addition, some states have held that their frozen liability statutes bar rescission only to the extent of the minimum liability insurance limits required by law, at least in cases of fraud in the procurement of the policy. Stated another way, an insurer is not barred from asserting the defense of fraud as to any coverage in excess of the statutory minimums. See Prudential v. Estate of Rojo–Pacheco, 192 Ariz. 139, 962 P.2d 213 (1997); Harris v. Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380 (Del.1993); Farmers Ins. Exch. v. Anderson, 206 Mich.App. 214, 520 N.W.2d 686 (1994); Odum v. Nationwide Mut. Ins. Co., 101 N.C.App. 627, 401 S.E.2d 87 (1991); Dairyland Ins. Corp. v. Smith, 646 P.2d 737 (Utah 1982). These holdings are often based on statutes which bifurcate a policy’s stated limits of liability between the minimum liability amounts required by the compulsory financial responsibility law and amounts in excess of those minimum amounts. A North Carolina statute, for example, states that “Any policy which grants the coverage required for a motor vehicle liability policy may also grant any lawful coverage in excess of or in addition to the coverage specified for a motor vehicle liability policy and such excess or additional coverage shall not be subject to the provision of this Article. With respect to a policy which grants such excess or additional coverage the term “motor vehicle liability policy” shall apply only to that part of the coverage which is required by this section.” North Carolina G.S. § 20–279.21(g).

The Minnesota No-Fault Act contains a somewhat similar statute, but it distinguishes between mandatory and optional “benefits” and “coverages,” not between minimum and excess amounts for mandatory coverages that have been purchased. Minnesota Statute § 65B.49, subd. 7, entitled, “Additional benefits and coverage not prohibited,” states: “Nothing in sections 65B.41 to 65B.71 shall be construed as preventing the insurer from offering other benefits or coverages in addition to those required to be offered under this section.” Unlike the North Carolina statute, the Minn. Stat. § 65B.49, subd. 7, does not specifically state that the portion of liability coverage in excess of the minimum liability amounts required by the No-Fault Act may be treated differently than the portion included within the minimum amounts. On the flip side, Minnesota’s frozen-liability statute states that “The liability of the insurance carrier with respect to the insurance required by this chapter becomes absolute whenever injury or damage covered by the policy occurs,” Minn. Stat. § 65B.49, subd.3(3)(a), which could be read to suggest that an insurer is not barred from asserting the defense of fraud as to liability coverage in excess of the statutory minimums.

So is the parent’s insurer entitled to rescind the policy after the accident based on the parent’s alleged fraud in the procurement of the policy to avoid coverage for the accident? As noted above, the answer depends, in part, on the jurisdiction where the policy was issued. In many states, the insurer will not be able to avoid coverage, at least for the minimum liability limits mandated by state law, due to the frozen-liability statute.

But that is not the end of the inquiry. One also has to look into whether the parent’s non-disclosure of the minor-child actually had any material effect on the insurer’s acceptance of the risk and/or whether the insurer would not have issued the policy or adjusted the premium had the true facts had been made known to the insurer. The internal underwriting guidelines of insurance companies vary. Some only require an adjustment of premium when a resident relative will be a “primary” or “occasional” operator of a vehicle and define those terms based on certain usage of a vehicle. In the case of a minor child of divorced parents, some will only require the parent who has primary custody of the minor child to list the child as a driver on their policy. As noted in one insurance website: Now when teenagers split time between divorced parents on a regular basis it is a common question of which parent should include the teen on his or her auto insurance policy. Many insurance providers suggest the parent, who has custody of the teen the most, should add the child to his or her policy. In some cases, insurance companies say it is whichever parent has custody of the teen when the child is attending school.”

So what’s the answer? Can the insurer avoid coverage (or limit coverage to the minimum limits)? Since insurance companies’ underwriting guidelines, rating manuals and insurance policies differ, the ultimate answer is: it depends. Typical attorney answer.

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.

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Auto Dealers Entitled to Money Distribution in Auto Parts Antitrust MDL Case

thXO2B22BG By Greg Johnson. On November 19, 2015, U.S. District Judge Marianne O. Battani of the Eastern District of Michigan issued an Order Granting Final Approval of an initial, partial settlement of $59 million to auto dealers in the multi-district (MDL) antitrust litigation against certain Japanese parts manufacturers. The MDL alleges that the parts manufacturers rigged bids and fixed the prices of auto parts to the detriment of auto dealers and retail consumers over the period of January 1, 1998 to September 12, 2015.

My firm, G Johnson Law LLP, represents White Bear Lake Superstore GMC-Buick, one of the lead plaintiff auto dealers in the case. On a national level, the auto dealer class is represented in the MDL by Attorney Shawn Raiter of Larson King LLP in St. Paul, MN as well as the law firms of Cuneo Gilbert & LaDuca LLP and Barrett Law Group PA.

Auto dealers in over 30 jurisdictions (full list below) can make a claim for money benefits from the settlement fund if they purchased certain component parts or vehicles containing the parts and submit a claim. The Notice of Settlement and Claim Form can be accessed on the settlement website at The amount a dealership may be entitled to receive from the settlement depends on the number, make and model of vehicles purchased during the period of January 1, 1998 to September 12, 2015.

The process to submit a claim is simple as all information needed to fill out the Claim Form can be derived from the dealership’s year-end financial statements for each OEM.

The Claim Form must be postmarked no later than March 31, 2016 or the dealership will not be eligible.

Auto dealers in the District of Columbia and the following states are eligible: Arizona, Arkansas, California, Florida, Hawaii, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Oregon, South Carolina, South Dakota, Tennessee, Utah, Vermont, West Virginia, and Wisconsin.

The MDL is In re: Automotive Parts Antitrust Litigation, Case Number 2:12-md-02311 (U.S. District Court for the Eastern District of Michigan). Please note that the MDL is ongoing as some defendants have not settled. The Claim Form submitted by March 31, 2016 can be used to claim money benefits from future distributions as well.

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.

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