New frontiers in automotive sale and finance products

INTRODUCTION

Internet technology and widespread information relating to vehicle invoice pricing, manufacturer rebates, and the like, have squeezed profit margins on vehicle sales and leases, however. (1) Plaintiffs’ lawyers have attacked dealer participation practices that generate dealer income from the origination of retail installment sales contracts, via class action litigation, and recent settlements in such cases have further reduced dealer revenues. (2) These pricing pressures have fueled the development of a burgeoning new frontier of automotive sales/finance products offered by motor vehicle dealers, lessors, finance companies, state and national banks, credit unions, and/or insurers. These sales/finance products may include debt cancellation products and gap waivers (GAP products), (3) excess wear waivers, (4) vehicle protection products, (5) service contracts, (6) maintenance agreements, (7) extended warranties, (8) and vehicle repair products. (9) Any of these products can effectively offset the loss of dealer revenues traditionally derived from vehicle sales and financing, (10) and consequently the pace of their growth in the automotive sales arena continues to accelerate. Insurance companies envision GAP product sales outperforming credit life and disability insurance policies, (11) and estimate that twenty to thirty percent of vehicle buyers will purchase a GAP product when they finance their vehicle purchase with a dealer. (12) Other insurers forecast an expansion of their independent service contract business in the range of $1 billion by 2010. (13)

As the sale of new vehicle sales/finance products becomes more prevalent and diverse, a myriad of significant legal issues surfaces. Lawyers for dealers, lenders, lessors, finance companies, banks, credit unions, and insurers need to familiarize themselves with the intricacies of these vehicle sales/finance products and the resultant legal uncertainties. Increasingly, vehicle sales/finance products have come under the scrutiny of state regulators and consumers. Attorneys General in California, (14) Florida, (15) Minnesota, (16) and Washington, (17) along with private class-action lawsuits, are challenging dealer compliance with state disclosure requirements, alleged excessive upcharges, and unfair sale practices in connection with vehicle sales/finance products. (18) This Article will address the following critical legal issues facing any entity selling and financing these vehicle sales/finance products: (i) classification of vehicle sales/finance products as insurance

INSURANCE CLASSIFICATION (20)

BASIC IMPLICATIONS

Whether a vehicle sales/finance product will be classified as insurance is a threshold question that may have ripple effects on the financing disclosures and upcharge issues. If a product is considered insurance, that product will be subject to the general insurance laws of that jurisdiction. (21) The insurance policy will have to be filed with the state insurance department and will be required to conform with all state law restrictions placed on insurance including, but not limited to, approval of rates and premiums by the state insurance commissioner, insurance refund guidelines, cancellation provisions, financial security standards, and potential state mandated terms and benefits. (22) For products deemed to be insurance, the obligor providing insurance coverage under the contract will likely have to be licensed as an insurance company or producer in order to offer the insurance product. This will also require extensive disclosures, meeting financial standards, and supervision by state insurance regulators. (23)

Motor vehicle dealers and lessors in most cases have to be licensed as insurance agents to lawfully sell any products regarded as insurance. (24) As these insurance products may be financed in connection with the sale or lease of the vehicle, finance companies, banks, and credit unions also may be required to be licensed (e.g., as insurance premium finance companies). (25) Furthermore, if a vehicle sales/ finance product is considered insurance, lenders and lessors will need to comply with federal and state contract disclosure requirements relating to the credit transaction (e.g., in the retail installment sales contract or lease). (26)

GAP PRODUCTS

In most jurisdictions, GAP products are not classified as insurance. There are a number of states that treat GAP products as insurance, however. The Michigan Commissioner of Insurance has taken the position that GAP products are insurance except when a depository institution offers a debt cancellation contract in a loan agreement. (27) Likewise, Kentucky, by statute and Attorney General Opinion, has declared GAP products to be insurance. (28) But in some states, if the GAP product meets certain criteria it may be deemed a noninsurance contract.

For example, in New York, the sale of GAP products will not constitute an insurance business if:

(i) the lessor or creditor or, in the absence of a waiver by the
lessor or creditor, the assignee waives any and all obligations of
the lessee or debtor for the gap amount and the lessee or debtor is
discharged from any and all further obligation to pay the gap
amount
of the personal property occasioned by its theft or physical damage
[and] (iii) in the event the lessor, creditor, or assignee purchases
lessor or creditor gap insurance, the charge to the lessee or debtor
for the waiver does not exceed the cost of the lessor or creditor
gap insurance coverage. (29)

Another element in the classification of GAP products focuses on the benefits offered. GAP products providing additional benefits above the standard GAP benefit, the cancellation of all or part of a consumer’s obligation to repay an extension of credit upon the occurrence of a specified event, are more likely to be considered insurance. (30) Each individual GAP product must be carefully reviewed against state law parameters to determine the exact benefits it will provide and whether it will be considered insurance.

EXCESS WEAR WAIVERS

Excess wear waivers are generally not considered insurance in most jurisdictions. A minority of states, however, has declared excess wear waivers to be insurance products. For example, the Kentucky Office of Insurance and the Nevada Division of Insurance have stated that excess wear waivers are insurance regulated by the general insurance laws of the respective state. (31) For definitive guidance in jurisdictions where no express authority exists, creditors and lessors may have to request a written interpretation from state insurance authorities with respect to a specific excess wear waiver, to the extent that such interpretive letters can be provided. The New Jersey Department of Insurance recently provided such guidance, stating that excess wear waivers are not insurance. (32)

SERVICE CONTRACTS, MAINTENANCE AGREEMENTS, EXTENDED WARRANTIES

Service contracts, maintenance agreements, and extended warranties generally will not be considered insurance. A limited number of states have enacted specific statutes to regulate service contracts. If the service contract and the obligor comply with the service contract statute, the service contract and the obligor are exempt from the general insurance laws. Illinois and New York are both examples of states that have enacted specific legislation to regulate service contracts. (33) Florida has adopted one of the most comprehensive and detailed statutory schemes regulating service contracts, requiring the service contract company to maintain minimum net assets of $500,000 and approval of service contract forms by the Florida Insurance Commissioner. (34)

There is a minority of jurisdictions that treat service contracts as insurance. Alaska excludes non-motor-vehicle service contracts from application of its insurance title, but separately regulates motor vehicle service contracts as insurance. (35) The Missouri Department of Insurance has also classified service contracts as insurance. (36)

Maintenance agreements are often differentiated from service contracts in that maintenance agreements do not cover the repair or replacement of vehicle component parts, but rather provide only for routine maintenance, such as oil changes. Maintenance agreements are generally not characterized as insurance and are not regulated by service contract statutory regimes. In most jurisdictions, maintenance agreements are structured simply as a contract between the consumer and the obligor, subject to basic contract principles and consumer protection statutes. Nonmanufacturer extended warranties are not usually considered insurance in most jurisdictions and may be statutorily exempt from insurance regulation. For example, North Carolina specifically excludes manufacturers’ warranties from the definition of “insurance.” (37) Extended warranties are typically classified and treated like service contracts. (38) Connecticut is in a minority of jurisdictions that regulates extended warranties under specific statutes. (39)

THEFT PROTECTION PRODUCTS

Theft protection products are increasingly regulated by specific statutes, including recent enactments by Colorado, (40) New Hampshire, (41) and Wisconsin. (42) The former states that if the product and obligor comply with the requirements of the Vehicle Protection Product Act, the general insurance laws will not apply. (43) Most states, however, have not yet addressed these products specifically Theft protection products may be regulated as service contracts in some states, (44) or as insurance (45) in other jurisdictions. Theft protection products that include warranties or other benefits that indemnify the consumer for more than the cost of the theft protection product are more likely to be regulated as insurance. (46)

VEHICLE REPAIR PRODUCTS

Vehicle repair products generally are not classified as insurance. Tire and wheel repair and replacement products along with ding and windshield repair products are treated like service contracts. In most instances, service contract statutes are broad enough to cover these types of vehicle repair products. (47) Vehicle repair products may be more specific in the components they cover, but normally provide the same type of benefits that more general service contracts provide: the repair or replacement of defective or damaged motor vehicle components. Roadside assistance products may be regulated as a service contract, as insurance, or as an automobile club or association. (48) Interior and exterior sealant and protection products are generally not insurance as the consumer is simply purchasing a good. When these interior and exterior sealant and protection products also include indemnity provisions beyond the cost or replacement of the defective product, however, their classification becomes more difficult and will depend on the specific terms of the product. It is critical that dealers, lenders, contract assignees, and lessors correctly identify a particular product as insurance or noninsurance because this classification will impact the federal and state law disclosure requirements and upcharge limitations.

DISCLOSURE REQUIREMENTS

Once the product is properly classified as insurance or noninsurance, federal and state disclosure laws must be analyzed. Creditors and lessors who finance GAP products must comply with the federal disclosure requirements in the Truth in Lending Act (TILA), and Regulation M or Regulation Z. (49) In order to exclude the cost of GAP or other debt cancellation products from the finance charge under Regulation Z, regardless of whether the product is considered insurance under state law, the creditor must satisfy several conditions. First, the creditor must disclose that the GAP or other debt cancellation agreement or other coverage is not required by the creditor. (50) Second, the creditor must disclose the fee or premium for the initial term of coverage. (51) Third, the consumer must sign or initial an affirmative written request for the coverage after receiving the disclosures noted above. (52) Finally, if the term of the coverage is less than the term of the credit transaction, the term of the coverage must also be disclosed. (53) The fee or premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions executed by mail or telephone under Regulation Z section 226.17(g), and certain closed-end credit transactions involving a debt cancellation agreement that limits the total amount of indebtedness subject to coverage. (54) Any consumer in the transaction may sign or initial the request to comply with the written affirmation requirement. (55) In addition to the federal disclosure requirements, some states such as Colorado require additional disclosures for the sale of GAP products. (56) If the proper disclosures are not made, the dealer and possibly an assignee may be liable for TILA and state law violations. (57)

All other such products deemed to be insurance will most likely be categorized as property and casualty insurance. To exclude property and casualty insurance premiums from the finance charge, Regulation Z requires that the creditor disclose (i) that “[t]he insurance coverage may be obtained from a person of the consumer’s choice”

For any vehicle sales/finance products not classified as insurance, the charges for the product must be disclosed in accordance with Regulation M or Regulation Z. Such products are generally excludible from the finance charge only if they are not required as a condition of obtaining the credit. (65) Noninsurance vehicle sales/ finance products that are excluded from the finance charge must be disclosed in the itemization of the amount financed under Regulation Z. (66) The creditor must disclose any amounts paid to other persons by the creditor on the consumer’s behalf and must identify those persons. (67) Under Regulation M, noninsurance vehicle sales/finance products are included in the term “gross capitalized cost.” (68) The consumer lease agreement can either (i) itemize the gross capitalized cost on the lease agreement itself, which would describe the finance product(s) being purchased and disclose their cost

UPCHARGE RESTRICTIONS

In many jurisdictions, lenders, contract assignees, and lessors are specifically allowed to share in the profits of vehicle sales/finance products. Federal law does not restrict or prohibit a motor vehicle dealer or lessor from marking up the dealer’s cost of a vehicle sales/finance product. State law, however, may contain such restrictions. For GAP products classified as insurance, the cost of the GAP product is regulated by the rate schedule that must be filed with the state insurance commissioner. (69) States such as Arizona and Louisiana prohibit the sale of GAP products for more than the rate filed with the insurance commissioner. (70) A dealer selling GAP products may be able to share in a portion of the filed rate as a commission arranged between the insurance producer and the dealer as an insurance agent. (71) Even for GAP products not considered insurance, restrictions on upcharges may exist. For example, New York imposes a blanket prohibition on upcharges for GAP products, (72) while Colorado and Pennsylvania limit the upcharge on GAP products to specified amounts. (73)

For other types of vehicle sales/finance products, generally no regulations exist limiting upcharges. Pennsylvania is an exception to this rule. The Pennsylvania Motor Vehicle Sales Finance Act limits upcharges on all such products including GAP products to one hundred percent of the cost to the dealer or lessor or as set by the Banking Commissioner. (74) Any charge above this limit in Pennsylvania is considered an unfair dealer practice. (75) Although the majority of states do not have specific statutes regulating upcharges on vehicle sales/finance products, all consumer sales and leases that impose excessive upcharges on such products potentially are subject to state unfair and deceptive trade practice claims. (76)

DEALER FRAUD

Dealer fraud in connection with vehicle sales/finance products can arise in three different ways: (i) misrepresenting that the product is required in order to obtain financing

Assignee liability under state law can result from dealer misconduct (e.g., because of the Federal Trade Commission Holder in Due Course Rule (the “Holder Rule”)). (80) Under the Holder Rule, an assignee is subject to certain claims and defenses that the consumer has against the original seller or lessor (in this context, the dealer). TILA liability under the Holder Rule is limited to violations that are apparent on the face of the contract disclosures. (81) Assignees clearly need to be vigilant in reviewing the credit contracts they purchase, and to implement contract-review procedures designed to uncover fraudulent vehicle sales/finance products, especially when TILA violations are apparent on the face of the contract.

For non-TILA claims, assignee liability for dealer fraud may be an even more difficult issue. For example, assignees can be held liable in connection with the sale of the vehicle and accompanying service contract for dealer violations of the Pennsylvania Motor Vehicle Sales Finance Act. (82) One way to reduce this potential liability is for the assignee to carefully draft its dealer agreements to provide adequate remedies to compensate the assignee for any dealer misconduct. The dealer agreement can give the assignee or lessor the right to force the dealer to repurchase any defective contracts or transactions involving dealer misconduct. In addition, the dealer agreement should contain broad indemnification provisions to allow the assignee to recoup any losses due to judgments or settlements with consumers originating from dealer misconduct. Furthermore, assignees should periodically audit the contracts they purchase to verify the existence of vehicle sales/finance products and the nature of the intended protection.

CONCLUSION

Before a dealer sells and finances (or an assignee purchases a contract that includes) any of the vehicle sales/finance products discussed in this Article, the following legal issues should be addressed: (i) possible classification of whether the product is insurance

The TILA and Regulation M or Regulation Z will always apply to any sales/ finance product financed under a retail installment sale contract or lease agreement, regardless of the insurance classification. In addition to federal law, creditors must determine whether any state law disclosures are required. After the dealer has properly negotiated, classified, and disclosed the sales/finance product, the dealer and ultimately any assignee of the contract must consider any upcharge limits. Although most jurisdictions do not specifically regulate upcharges on sales/ finance products, upcharge limits in some states will impact certain GAP products and other products that are deemed insurance. Finally, assignees should implement procedures designed to mitigate the effects of potential dealer fraud related to sales/finance products, including: (i) a contract review process to detect TILA violations that are apparent on the face of the TILA disclosures

(1.) Fiona Scott Morton et al., The Effect of Information and Institutions on Price Negotiations: Evidence from Matched Survey and Auto Transaction Data 22-23 (June 2003) (unpublished working paper), available at http:// flomac. haas. berkeley. edu/ ~florian/ Papers/ carsurvey.pdf

(2.) See, e.g., Coleman v. General Motors Acceptance Corp., 220 F.R.D. 64 (M.D. Tenn. 2004)

(3.) GAP is defined under Regulation Z as “debt cancellation coverage that provides for cancellation of all or part of the debtor’s liability for amounts exceeding the value of the collateral securing the obligation, or in the event of the loss of life, health, or income or in case of accident.” Regulation Z, 12 C.F.R. [section] 226.4(d)(3)(ii) (2004). The Office of the Comptroller of the Currency defines “debt cancellation contract” as

a loan term or contractual arrangement modifying loan terms under
which a bank agrees to cancel all or part of a customer’s obligation
to repay an extension of credit from that bank upon the occurrence
of a specified event. The agreement may be separate from or a part
of other loan documents.

Debt Cancellation Contracts and Debt Suspension Agreements, 12 C.F.R. [section] 37.2(f) (2004). The Office of the Comptroller of the Currency defines “debt suspension agreement” as

a loan term or contractual arrangement modifying loan terms under
which a bank agrees to suspend all or part of a customer’s
obligation to repay an extension of credit from that bank upon the
occurrence of a specified event. The agreement may be separate from
or a part of other loan documents. The term debt suspension
agreement does not include loan payment deferral arrangements in
which the triggering event is the borrower’s unilateral election to
defer repayment, or the bank’s unilateral decision to allow a
deferral of repayment.

Id. [section] 37.2(g) (emphasis in original).

(4.) An excess wear waiver generally will be structured as an amendment to a motor vehicle lease. The lessor agrees to forgo a stated dollar amount of excess wear charges to be assessed at lease termination when the vehicle is being returned by the lessee. The excess wear waiver is sold for a stated fee that will be financed in the gross capitalized cost of the lease.

(5.) Vehicle protection products encompass Vehicle Identification Number (VIN) etching, satellite tracking systems, alarms, kill switches, and other anti-theft devices.

“Vehicle protection product” means a vehicle protection device,
system, or service that: (a) Is installed on or applied to a
vehicle
from a specific cause
warrantor stating that, if the vehicle protection product fails to
prevent loss or damage to a vehicle from a specific cause, the
warranty holder shall be paid specified incidental costs by the
warrantor as a result of such failure
warranty reimbursement insurance policy covering the warrantor’s
liability from such product.

See COLO. REV. STAT. ANN. [section] 42-9.5-102(2) (West Supp. 2004). “The term ‘vehicle protection product’ shall include, without limitation, alarm systems, body part marking products, steering locks, window etch products, pedal and ignition locks, fuel and ignition kill switches, and electronic, radio, and satellite tracking devices.” See also CA. CODE ANN. [section] 33-34A-2(6)(c) (Supp. 2004).

(6.) In Illinois,

“Service Contract” means a contract or agreement whereby a service
contract provider undertakes for a specified period of time, for
separate and identifiable consideration, to perform the repair,
replacement, or maintenance, or indemnification for such services,
of any automobile, system, or consumer product in connection with
the operational or structural failure due to a defect in materials
or workmanship, or normal wear and tear, with or without additional
provision for incidental payment or indemnity under limited
circumstances, for related expenses, including, but not limited to,
towing, rental, and emergency road service. Service contracts may
provide for the repair, replacement, or maintenance of such property
for damage resulting from power surges and accidental damage from
handling. Service contracts shall not include contracts of limited
duration that provide for scheduled maintenance only.

215 ILL. COMP. STAT. ANN. [section] 152/5 (West 1999).

(7.) Maintenance agreements provide for routine maintenance of a motor vehicle typically including, but not limited to (i) visual inspection including valve clearance, belts, and brakes

(8.) This Article discusses extended warranties offered by third party nonmanufacturers. Extended warranties offered by vehicle manufacturers or their subsidiaries are not addressed.

(9.) Vehicle repair products typically include: wheel and tire repair and replacement

(10.) Karen Lundegaard, Did You Overpay for Your Car? States Sue Dealers Over Fees, WALL. ST. J., June 20, 2002, at D1.

(11.) Donna Harris, Insurer Seeks to Boost F & I Business, AUTOMOTIVE NEWS, Jan. 12, 2004, at 36.

(12.) Gail Kachadourian, Coming of Age, AUTOMOTIVE NEWS, Nov. 24, 2003, at 26.

(13.) Harris, supra note 11, at 36.

(14.) California v. South Bay Toyota, No. BC255721 (Ca. Super. Ct. filed Aug. 27, 2001).

(15.) Florida v. Sonic Automotive, No. L01-3-1192 (Fla. Union County Ct. filed Apr. 14, 2003).

(16.) Minnesota v. Walser Auto Group, Inc., No. 02-000871 (Minn. Dist. Ct. filed May 8, 2002).

(17.) Washington v. A & D Auto Sales, Inc., No. 02-9-04362-2 (Wash. Super. Ct. filed Aug. 16, 2002).

(18.) Lundegaard, supra note 10, at D1.

(19.) This Article does not address disclosures required in the vehicle sales/finance products themselves.

(20.) This Article does not address credit life or disability insurance as these products are clearly classified as insurance.

(21.) UTAH CODE ANN. [section] 31A-1-103 (Supp. 2003).

(22.) See id. [subsection] 31A-4-101 to -4-116.

(23.) See id. [section] 31A-23a-201 to -23a-207.

(24.) See id. [section] 31A-23a-301 to -23a-302.

(25.) Federal law may preempt insurance licensing and regulation for national banks and other federally chartered depository institutions. First Nat’l Bank of E. Ark. v. Taylor, 907 F.2d 775, 778, 780 (8th Cir. 1990).

(26.) See, e.g., DEL. CODE ANN. tit. 18, [section] 4805 (Supp. 1999).

(27.) Michigan Comm’r of Ins. Declaratory Ruling, Order No. 04-053-M (June 18, 2004). Note that this Article provides examples of how various jurisdictions address a particular issue under consideration. This Article does not provide a complete survey for every jurisdiction for the issues discussed.

(28.) KY. REV. STAT. ANN. [section] 304.5-070(1)(i) (Banks-Baldwin 2004)

(29.) N.Y. INS. LAW [section] 1101(b)(3) (McKinney 2000).

(30.) Griffin Sys., Inc. v. Ohio Dep’t of Ins., 575 N.E.2d 803, 807-08 (Ohio 1991).

(31.) Telephone Interview by Patrick Vining with Robin Coombs, Assistant Director, Kentucky Office of Insurance (May 7, 2004)

(32.) Letter from Bonnie E. Bajor, New Jersey Department of Banking and Insurance Legislative and Regulatory Affairs, to Patrick Vining, Associate, Nisen & Elliott, LLC (Mar. 16, 2004) (on file with authors).

(33.) “Service contract providers and related service contract sellers and administrators complying with [the Illinois Service Contract] Act are not required to comply with and are not subject to any provision of the Illinois Insurance Code.” 215 ILL. COMP. STAT. ANN. [section] 152/10 (West 1999). “Notwithstanding any other provision of this chapter to the contrary, the marketing, sale, offering for sale, issuance, making, proposing to make and administration of service contracts by any provider, administrator or other person, shall be exempt from all other provisions of this [insurance] chapter.” N.Y. INS. LAW [section] 7903(a) (McKinney 2000).

(34.) FLA. STAT. ANN. [section] 634.041 (West 1996 & Supp. 2005).

(35.) ALASKA STAT. [section] 21.03.021(e) (Michie 2004). “This title [insurance] does not apply to a service contract offered, issued for delivery, delivered, or renewed in this state. In this subsection, ‘service contract’ … means a contract or agreement … [to provide for the] repair, replacement, or maintenance” of property over a definite period of time in exchange for a fixed amount of money. Id. “Service contract” does not include “a contract to provide service on a motor vehicle subject to registration under [section] 28.10.011.” Id. [section] 21.03.021(e)(2)(C).

(36.) Service contracts are insurance currently pursuant to Mo. Ins. Admin. Bull. 93-13 (Dec. 13, 1993). Senate Bill 1009, pending in the Missouri legislature, would remove service contracts from regulation as general insurance.

(37.) “Any warranty or extended warranty made by any person other than the manufacturer, distributor, or seller of the warranted goods or services is a contract of insurance.” N.C. GEN. STAT. [section] 58-1-15(c) (2003).

(38.) See, e.g., LA. REV. STAT. ANN. [section] 22:1812(B) (West 2004). “All vehicle mechanical breakdown insurers operating pursuant to a license as required by this Part shall be exempt from the applicability of all other insurance laws of this state, except where such laws are specifically incorporated herein by reference.” Id.

“Vehicle mechanical breakdown insurance policy” means any contract,
agreement, or instrument whereby a person other than the owner,
seller or lessor of a vehicle, assumes the risk of and/or the
expense or portion thereof for the mechanical breakdown or
mechanical failure of a motor vehicle and shall include those
agreements commonly known as vehicle service agreements or extended
warranty agreements.

Id. [section] 22:1800(5).

(39.) CONN. GEN. STAT. ANN. [section] 42-260 (2000).

(40.) COLO. REV. STAT. ANN. [subsection] 42-9.5-101 to -9.5-106 (Supp. 2004).

(41.) N. H. REV. STAT. ANN. [subsection] 415-C:1 to -C:12 (Supp. 2004).

(42.) WIS. STAT. ANN. [section] 100.203 (West Supp. 2004).

(43.) “A vehicle protection warranty that complies with this section shall not be deemed to be insurance and shall be exempt from regulation as insurance pursuant to title 10 [(insurance)].” COLO. REV. STAT. ANN. [section] 42-9.5-105 (Supp. 2004). In New Hampshire, “[c]onsumer guaranty contracts are not insurance and are exempt from this state’s insurance laws, except for the provisions of [sections] 400-A:16 through … 400-A:25 or as provided by this chapter.” N.H. REV. STAT. ANN. [section] 415-C:2(II) (Supp. 2004). The law defines “consumer guaranty contract” as “an agreement in which one party, for consideration, promises to pay, indemnify, provide a specified or determinable amount or benefit, or to do some act of value for another party, based upon a determinable risk contingency or peril, but which is not insurance or does not warrant full application of the state’s insurance statutes or rules.” Id. [section] 415-C:1(III)(a). The statute includes in the definition of “consumer guaranty contracts,” any “[c]ontracts deemed by the commissioner by rule or order subject to this chapter.” Id. [section] 415-C:1(III)(b)(4). In Wisconsin, the product warranty must contain a disclosure that “[t]his agreement is a product warranty and is not insurance.” WIS. STAT. ANN. [section] 100.203(4)(a)(10) (West Supp. 2004).

(44.) “‘Vehicle protection product’ means a product or system installed or applied to a motor vehicle or designed to prevent the theft of the motor vehicle or assist in the recovery of the stolen motor vehicle.” FLA. STAT. ANN. [section] 634.011(7)(b)(1)(b) (West 1996 & Supp. 2005).

“Vehicle protection expenses” means a preestablished flat amount
payable for the loss of or damage to a vehicle or expenses
incurred by the service agreement holder for loss or damage to
a covered vehicle, including, but not limited to, applicable
deductibles under a motor vehicle insurance policy
vehicle rental expenses
is at least the same year, make, and model of the stolen motor

vehicle

vehicle that is at least the same year, make, and model of the
stolen vehicle
agreement.

FLA. STAT. ANN. [section] 634.011(7)(b)(1)(a) (West 1996).

Vehicle protection expenses shall be payable in the event of loss
or damage to the vehicle as a result of the failure of the vehicle
protection product to prevent the theft of the motor vehicle or
to assist in the recovery of the stolen motor vehicle. Vehicle
protection expenses covered under the agreement shall be clearly
stated in the service agreement form, unless the agreement provides
for the payment of a preestablished flat amount in which case the
service agreement form shall clearly identify such amount.

FLA. STAT. ANN. [section] 634.011(7)(b)(2) (West Supp. 2004).

Motor vehicle service agreements providing for the payment of
vehicle protection expenses shall either:
a. Reimburse a service agreement holder for the following
expenses, at a minimum: deductibles applicable to comprehensive
coverage under the service agreement holder’s motor vehicle
insurance policy
taxes and registration fees on a replacement vehicle that is at
least the same year, make, and model of the stolen motor
vehicle
service agreement holder for the stolen vehicle under the
service agreement holder’s comprehensive coverage and the actual
cost of a replacement vehicle that is at least the same year,
make, and model of the stolen motor vehicle
b. Pay a preestablished flat amount to the service agreement
holder.

Payments shall not duplicate any benefits or expenses paid to the
service agreement holder by the insurer providing comprehensive
coverage under a motor vehicle insurance policy covering the
stolen motor vehicle
expenses at a preestablished flat amount of $5,000 or less does
not duplicate any benefits or expenses payable under any
comprehensive motor vehicle insurance policy.

FLA. STAT. ANN. [section] 634.011(7)(b)(3) (West 1996). The term “motor vehicle service agreement” includes any agreement that provides for payment of vehicle protection expenses. FLA. STAT. ANN. [section] 634.011 (7) (West 1996 & Supp. 2005).

(45.) See, e.g., N. Y. INS. LAW [section] 3446(c) (McKinney 2000 & Supp. 2005)

(46.) NY Insurance Opinion, supra note 45.

(47.) “Service Contract” means a contract or agreement whereby a service contract provider undertakes for a specified period of time, for separate and identifiable consideration, to perform the repair, replacement, or maintenance, or indemnification for such services, of any automobile, system, or consumer product in connection with the operational or structural failure due to a defect in materials or workmanship, or normal wear and tear, with or without additional provision for incidental payment or indemnity under limited circumstances, for related expenses, including, but not limited to, towing, rental, and emergency road service.

215 ILL. COMP. STAT. ANN. [section] 152/5 (West 2002).

(48.) Gerald A. Buchanan, Insurance Compliance Examiner II with the Louisiana Department of Insurance, stated that roadside assistance products are automobile clubs and would not be considered insurance. Telephone Interview by David Gemperle with Gerald A. Buchanan, Insurance Compliance Examiner II, Louisiana Department of Insurance (Sept. 20, 2004). See also supra note 4.

(49.) Truth in Lending Act, 15 U.S.C. [subsection] 1601-1667 (2000)

(50.) 12 C.F.R. [section] 226.4(d)(i)(i), 226.4(d)(3)(i)(A) (2004).

(51.) Id. [section] 226.4(d)(1)(ii), 226.4(d)(3)(i)(B).

(52.) Id. [section] 226.4(d)(1)(iii), 226.4(d)(3)(i)(C).

(53.) Id. [section] 226.4(d)(1)(ii), 226.4(d)(3)(i)(B).

(54.) Id.

(55.) Id. [section] 226.4(d)(3)(i)(C), 226.4(d)(1)(iii). National banks offering and selling debt cancellation contracts and debt suspension agreements are required to make specific disclosures to consumers. Id. [subsection] 37.1-37.8 (2004). These disclosures will not be discussed in detail as they are not required to be on the retail installment sale contract or lease agreement. National banks have the authority under 12 C.F.R. [subsection] 37.1-37.8 and First National Bank of Eastern Arkansas v. Taylor, 907 F.2d 775 (8th Cir. 1990), to sell debt cancellation contract or debt suspension agreements regardless of whether a state deems such finance products insurance. See 12 C.F.R. [section] 37.1(c). Taylor held that debt cancellation contracts and debt suspension agreements were not insurance and federal law preempted state regulation. 907 F.2d at 780.

(56.) In Colorado, the consumer credit sale contract must contain a disclosure substantially similar to the following:

If this transaction contains a fee or premium for guaranteed
automobile protection, all holders and assignees of this
consumer credit transaction are subject to all claims and
defenses which the debtor could assert against the original
creditor resulting from the consumer’s purchase of guaranteed
automobile protection.

Rules of the Administrator of the Colorado Uniform Consumer Credit Code, July 1, 2003, Rule 8(m) [hereinafter Colorado Rules], available at http://www.ago.state.co.us/uccc/ucccregs.pdf. In addition, the buyer must provide affirmative written authorization for the purchase of GAP after receiving written notice of the following in bold face type before credit is extended:

(1) that the purchase of GAP is not required in order to obtain the credit or any particular or favorable credit terms

(2) the fee or premium for GAP

(3) that the buyer may wish to consult an insurance agent to determine whether similar coverage may be obtained and at what cost

(4) that GAP benefits may decrease over the term of the consumer credit sale or consumer loan

(5) that the consumer may cancel GAP for any or no reason within thirty (30) days after GAP was purchased and receive a full refund of the GAP fee or premium so long as no loss or event covered by GAP has occurred

(6) GAP is not a substitute for collision or property damage insurance.

Colorado Rules, supra note 56, Rule 8(b).

(57.) 15 U.S.C. [subsection] 1601-1667 (2000).

(58.) Regulation Z, 12 C.F.R. [section] 226.4(d)(2) (2004).

(59.) Id. [section] 225.4(d)(2)(ii).

(60.) Id.

(61.) Id. [section] 213.4(o)(1).

(62.) Id.

(63.) Id. [section] 213.4(o)(2).

(64.) “An additional charge may be made for insurance … against loss of or damage to property, or against liability, if the creditor furnishes a clear and specific statement in writing to the consumer setting forth the cost of the insurance if obtained from or through the creditor and stating that the consumer may choose the person through whom the insurance is to be obtained.” KAN. STAT. ANN. [section] 16a-2-501(2)(a) (1995). “An additional charge may be made for insurance … against loss of or damage to property, or against liability arising out of the ownership or use of property, if the financial institution furnishes a clear, conspicuous, and specific statement in writing … setting forth the cost of the insurance if obtained from or through the financial institution and stating that the borrower may choose the person through whom the insurance is to be obtained.” MINN. STAT. ANN. [section] 47.59(6)(b)(1) (West Supp. 2005).

(65.) “The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.” Regulation Z, 12 C.F.R. [section] 226.4(a) (2004).

(66.) Id. [section] 226.18(c)(iii).

(67.) Id.

(68.) The gross capitalized cost, including a disclosure of the agreed upon value of the vehicle, a description such as “the agreed upon value of the vehicle [state the amount] and any items you pay for over the lease term (such as service contracts, insurance, and any outstanding prior credit or lease balance),” and a statement of the lessee’s option to receive a separate written itemization of the gross capitalized cost. If requested by the lessee, the itemization shall be provided before consummation.

Regulation M, 12 C.F.R. [section] 213.4(f)(1) (2004).

(69.) See, e.g., UTAH CODE ANN. [section] 31A-4-101 (Supp. 2003).

(70.) “The amount, if any, included for insurance, which may be purchased by the holder of the retail installment contract, shall not exceed the applicable premiums chargeable in accordance with the rates filed with the director of insurance of the Arizona corporation commission.” ARIZ. REV. STAT. ANN. [section] 44-288(A) (West 2003).

Any insurance provided, sold, or obtained through an extender of
credit shall be written at lawful rates and in accordance with the
provisions of the Louisiana Insurance Code by a company authorized
to do business in this state which is not under a court-ordered
rehabilitation, conservation,
liquidation, or dissolution
written in accordance with R.S. 22:1257 through 1270 if the
provisions thereof are applicable. Any extender of credit that
writes insurance in compliance with the preceding requirements
shall not be liable to any insured as a result of the insurer’s
inability to pay any claim to an insured due to insolvency, or
pursuant to any court-ordered rehabilitation, conservation,
liquidation, or dissolution. The contract or agreement must
briefly indicate the kind, coverage, term, and amount of premium
of such insurance.

LA. REV. STAT. ANN. [section] 6:969.28 (West Supp. 2005).

(71.) A licensed New York insurer cannot pay any commission or compensation to any entity except a licensed property and casualty insurance agent or broker. N.Y. INS. LAW [section] 2115(a)(1) (McKinney 2000).

(72.) N.Y. INS. LAW [section] 1101(b)(3) (McKinney 2000 & Supp. 2005).

(73.) See Colorado Rules, supra note 56, Rule 8(k) (“The maximum fee that may be charged for GAP may not exceed the following: $300 or 2% of the amount financed, whichever is higher. This provision (k) shall not apply to any GAP insurance that is subject to regulation by the Colorado Division of Insurance.”).

(74.) PA. STAT. ANN. tit. 69, [section] 610 (A)(14) (West 2004). In addition, the Pennsylvania Motor Vehicle Sales Finance gives the Pennsylvania State Banking Department the power to issue a “Statement of Policy” that contains guidelines determining mark-ups that the department finds, after reasonably considering market data, not to be excessive and shall update and revise the Statement of Policy to reflect changing business conditions. Id.

(75.) Id.

(76.) See Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283 (7th Cir. 1997)

(77.) See supra note 76.

(78.) Bescos v. Bank of Am., NT & SA, 129 Cal. Rptr. 2d 423, 434 (Cal. Ct. App. 2003).

(79.) Duran v. Leslie Oldsmobile, Inc., 594 N.E.2d 1355, 1364 (Ill. App. Ct. 1992).

(80.) Preservation of Consumers’ Claims and Defenses, 16 C.F.R. [section] 433.2 (2004). See, e.g., David A. Worsley, Consumer Credit Issues in Automobile Purchasing, 58 CONSUMER FIN. L.Q. REP. 188 (2004) (noting that the Holder Rule preserves certain existing state law liability claims but does not create new ones).

(81.) Preservation of Consumers’ Claims and Defenses, 16 C.F.R [section] 433.2

(82.) See Beemus v. Interstate Nat’l Dealer Servs., Inc., 823 A.2d 979, 986 (Pa. Super. Ct. 2003).

Kenneth J. Rojc and Gregory Eidukas *

* Kenneth J. Rojc is a partner with the law firm of Nisen & Elliott, LLC and manages the firm’s automotive financial services legal practice in Chicago, Illinois. He is a member of the Legal Committee of the Association of Consumer Vehicle Lessors. Mr. Rojc is also a member of the Illinois bar and the American Bar Association (ABA) Section of Business Law. Gregory Eidukas is an associate with Nisen & Elliott, LLC and concentrates his practice in automotive financial services. Mr. Eidukas is a member of the Illinois and New York bars and the ABA Section of Business Law.