Optional coverage for auto dealers' acts, E&O
ISO's new program has useful features and also some limitations
By Donald S. Malecki, CPCU
One unique group of coverages that ISO has not made available to garage insureds, and which has long been available with some insurers writing auto dealers, is what can be referred to by different terms, such as Statute and Title Errors and Omissions.
What this coverage does, in general, is to provide insurance for economic damages not based on bodily injury, personal and advertising injury, or property damage. While these coverages vary, they appear to commonly entail coverage for negligent violations of truth in lending laws, odometer statutes, and lemon laws.
With the withdrawal by ISO of the Garage Liability Coverage Form in 2012 and introduction of an Auto Dealers Coverage Form, one of the optional coverages included in this form is Section III – Acts, Errors Or Omissions Liability Coverages.
Before discussing what essentially comprises the foregoing coverage of the ISO Auto Dealers Coverage Form, it may be worthwhile to mention briefly what these various coverages, as are provided by other insurers, intended to encompass.
Truth In Lending Statute Coverage. This coverage applies to the insured's liability for damages because of error or omission resulting in failure to comply with the Truth In Lending Act of the Consumer Credit Protection Act (Public Law 90-513.86 Stat. 974), and as may be amended, along with any similar statute. Briefly this federal law was passed in 1968 and requires that certain information be disclosed to the borrowers (e.g., auto purchasers), such as the annual percentage rate and term of the loan.
Odometer Statute Coverage. This covers the insured's liability resulting in the failure to comply with Title IV Odometer Requirements of the Motor Vehicle Information and Cost Savings Act (Public Law 92-513.86 Stat. 947), and as may be amended, or any similar state statute. Years ago, it was possible for sellers of autos to manipulate a high mileage speedometer so that the auto could appear to be more attractive to prospective purchasers. It is relatively unheard of today, but one never knows when such attempts could still be made.
Lemon Law Statute Coverage. This coverage pays sums the insured may become legally obligated to pay as damages due solely to the application of any statute permitting the purchaser of a vehicle sold by the insured dealer to return the vehicle to the dealer if the vehicle fails to perform adequately. Vehicles can still be purchased today that truly fall within the category of "lemons."
In one incident, a purchaser of a new auto complained to the dealership that the auto's transmission (a high ticket item) was not operating correctly. The attending clerk stated there was nothing he could do. He should have been aware of the existence of this law and so informed the customer. Unfortunately, neither of the two apparently was aware of this law and what it could have done for the auto purchaser.
Prior Damage Disclosure Statute Coverage. This coverage pays sums the insured may become legally obligated to pay as damages because of a negligent act, error or omission resulting in the failure to comply with a federal or state statute that pertains to the disclosure of prior damage.
The insurer, however, will pay no more than the difference between (1) the market value of the auto as represented when sold to the insured's customer, and (2) the market value of the auto in the actual condition which existed at the time of sale.
ISO's Dealer Form
The section of the new Dealer's form of ISO (CA 00 25) that includes some of the above noted coverages is referred to as Section III – Acts, Errors Or Omissions Liability Coverages. This section, when purchased, pays sums the insured is legally obligated to pay as damages because of an "act, error or omission" arising out of the conduct of the named insured's auto dealer operations.
One needs to tread carefully here and not come to conclusions until the entire section is read. Reference, for example, to "legally obligated" connotes liability broad in scope, encompassing civil, as opposed to criminal liability, arising from unintentional (negligent), or intentional acts under common law, contract or statute.
Note, however, that reference to "act, error or omission" is in quotes and, therefore, defined. Since coverage is narrowed to a "negligent" act, error or omission, no coverage applies to intentional acts. And, as noted subsequently, no coverage applies to liability assumed under contract or agreement.
This narrowing of coverage is nothing new, even to ISO forms. For example, the standard ISO Electronic Data Liability Coverage Form, CG 00 65 04 13, and its earlier edition defined "electronic incident" so that coverage is limited to an accident or to a negligent act, error or omission. Some nonprofit directors and officers liability policies also limit coverage to this basis. Perhaps this narrowing is justified, but it still needs to be pointed out because it is grounds for some argument.
Insofar as the ISO Auto Dealer's form is concerned, four different coverages are included under this section dealing with an auto dealer's operations:
The first coverage applies to the insured's liability arising from failure to comply with any local, state, or federal law or regulation having to do with the disclosure of credit or lease terms in connection with the sale or lease of an auto. This coverage also includes the Truth In Lending and Consumer Leasing Acts.
The second coverage has to do with the insured's failure to comply with any law or regulation dealing with the disclosure of accurate odometer mileage. This coverage, however, is restricted solely to the sale or lease of an auto in the named insured's operations.
The third coverage applies in those cases when the insured also acts as an insurance agent or broker in the offering, placement or maintenance of any auto physical damage, auto loan/lease gap, credit life or disability insurance sold in connection with the sale or lease or an auto in its operations.
This coverage, however, applies only when the insured holds a valid insurance agent's or broker's license, at the time the "act, error or omission" was committed and within the jurisdiction, in which the dealer operations are located, if otherwise required by that jurisdiction.
The fourth coverage is for the insured's liability arising out of a defect in title in connection with the sale or lease of an auto in the named insured's operations. This kind of an event can happen, particularly with regard to the sale or lease of use autos. It does not matter whether the auto is taken in trade or purchased wholesale at auction; problems over a title can often be expected.
Space limitations preclude a discussion of the exclusions, but this coverage form excludes coverage for: criminal, fraudulent, malicious, dishonest or intentional acts; bodily injury, personal and advertising injury, and property damage; profit gain; liability assumed in a contract or agreement; noncompensatory damages, i.e., fines, penalties, punitive or otherwise and injunctive relief; failure of products, goods or services to conform with any statement of quality or performance; actual or alleged violations of the Fair Credit Reporting Act or any other ordinance, regulation or law dealing with printing, disposal, collecting or recording of material or information; discrimination; and bankruptcy or insolvency of any insurance company in which insurance was obtained or placed for a customer.
As a general rule, these "frill" coverages of dealers forms are not written for the same limits as the dealers liability coverage. The frill coverages, instead, are written subject to sub-limits with a range of up to $100,000 aggregate limit although in some isolated cases, limits could be as high as $250,000.
While the availability of these coverages certainly is advantageous, dealers have to understand that the sub-limits may not qualify for any excess limits. In fact, the dealers themselves should be able to come to this conclusion by looking at the declarations page of the policy, which is what policyholders generally limit their policy reading to anyway.
These frill coverages are important and should not be taken lightly. It is not unusual for dealers to be confronted with class action suits for violation of various laws dealing with auto dealers. In one case, for example, a dealer found itself confronted with a class action suit alleging a violation because of an extra charge it had made in its sales contract.
The good and bad news here was that, while the dealer was able to obtain coverage for a limit of $100,000, the amount covered fell considerably short of what was the dealer was required to pay as damages.
The coverage form of ISO pays legal costs in addition to liability limits. Considering how legal costs can mount, one wonders if this is a good idea for insurers. In the case of Thomas Ulrich v. Mercedes-Benz USA, LLC 2012 Ohio 1623 (County of Summit, Court of Appeals Judicial District, 2012), the dispute was over a lemon law claim and attorneys' fees amounted to $230,270.
The insurance coverage dispute in the case of Kent Motor Cars, Inc., et al., v. Reynolds and Reynolds Co., et al. 25 A.3d 1027 (Sup. Ct. N.J. 2011) was over the Statute and Title Errors and Omissions (STEO) coverage issued by Universal Underwriters.
This also was a class action suit alleging that the dealerships violated the Consumer Fraud Act and the Truth In Consumer Contract, Warranty and Notice Act. The violations alleged were (1) overcharging customers and failing to disclose license, title and registration fees; (2) charging a deceptive and misleading fee that included charges for services not performed; and (3) utilizing a form in which a required notice about fees was printed in a font size smaller than required by regulation.
The policy in question included a second coverage referred to as Customer Complaint Defense Coverage for a fixed amount. The insurer paid this to all of the dealers but denied coverage for the other allegations. As the case turned out, the court agreed with the insurer, holding that none of the allegations asserted violations under the laws covered by the policy.
It is a good idea that ISO has finally introduced the Acts, Errors Or Omissions Liability Coverages to its new Dealers coverage form. It may also reduce the "competitive edge" other insurers have enjoyed. These new coverages also may lessen the chances of a producer being confronted with litigation in failing to offer these coverages. In fact, this has happened.
Producers, however, need to be careful not to go overboard in selling this coverage for at least two reasons. First, what insurers are willing to provide as limits may fall short of the damages sought for statutory violations having to do with auto dealers.
Second, coverage does not apply on a so-called "all-risks" basis. The coverages provided, in other words, apply solely to certain laws, as the dealers in the foregoing Kent Motor Cars, Inc., case found out.
Finally, coverage is limited to negligent acts, errors or omissions. Intentional act are not covered. This is unlike a commercial general liability policy where intentional acts are covered but not intentional injury. When an insurer denies coverage under the Acts, Errors Or Omissions Coverage based on an intentional act, it is possible for problems to confront everyone.
So, it is fine for producers to point out this coverage option, but rather than expounding about the advantages, perhaps it may be good risk management practice to give equal time to some of the shortfalls of coverage, and there are ways of expressing this without losing the sale.
Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.