A common rationalization for some dealers to be less than diligent about their compliance efforts is “my insurance will cover any claim.” Well, that theory took a serious hit recently when a federal judge agreed with two insurance companies that denied coverage in lawsuits against a large public dealer group. The court found that since the dealerships’ employees intentionally misled customers, the insurers were within their rights in refusing to cover the claims.
The dealer group in question was Sonic Automotive, which was named a defendant in at least three separate lawsuits related to how the group’s dealerships sold etch in the F&I office. The suits alleged that Sonic dealerships failed to disclose that the price of the theft-prevention product was included in the amount financed. Employees also told purchasers and lessees they had to purchase etch in order to obtain financing. In addition, plaintiffs charged the stores with providing forms with blank prices. The prices, according to court filings, were not disclosed in any of the transaction documents.
The insurance companies had issued Sonic at least three separate liability policies and each of the policies included an auto dealer enhancement package that provided liability coverage for sums the “insured legally must pay as damages arising from an occurrence because of an alleged or actual negligent act or error or omission by an insured resulting from a violation of truth-in-lending laws.”
Sonic alleged that the types of claims and allegations made in the underlying suits fell within the scope of coverage provided in its auto dealer enhancement package. The insurance companies disagreed. Here’s why: Liability policies typically cover only the negligence of the insured and will not apply to results of willful or intentional acts by the insured. Common exclusions from an insurance policy can include:
- Intentional wrongful acts
- Illegal or dishonest acts
- Intentional or knowing violation of any law, regulation, statute or ordinance
- Gaining of any profit or advantage to which you are not legally entitled
- Claims arising out of false advertising or misrepresentation
- Antitrust, unfair competition, restraint of trade, unfair or deceptive business practices, or violations of any consumer protection laws
- Claims against you that are brought by or on behalf of any federal, state or local government agency
- Claims arising out of any wrongful act committed with the knowledge that it was a wrongful act
- Claims arising out of the same wrongful act or series of continuous, repeated or related wrongful acts, alleging the same or similar facts
The court concluded the dealership’s actions “were done intentionally with the full knowledge of and at the direction of the principals of the dealer as a ‘pattern and practice’ of doing business.”
There are many compliance missteps that may be considered “intentional” under these guidelines. A few are payment packing, bait-and-switch advertising, price gouging, failure to sell at the advertised price and falsifying credit applications.
By training employees to operate compliantly and ethically, the dealership’s exposure will be greatly limited. More importantly, customers will be happier and sales will increase.
Dealers need to ask themselves if they are better off worrying about whether their insurance company will cover a compliance misstep, or training employees to adhere to regulations in the first place. It seems to me that the answer is obvious.
In my humble opinion, dealers need to worry less about their insurance company and more about the people who serve their customers every day. The rest will take care of itself.
Jim Radogna serves as director of compliance for the College of Automotive Management, which is located in Santa Ana, Calif. Email him at [email protected]