Why do dealerships keep purchasing statutory errors and omissions coverage that is not likely to protect the dealership if it is sued by a customer for truth in lending violations?

I’ve been handling dealership insurance coverage disputes for a long time. I thought the following insurance coverage form became obsolete by the early 2000's, but recently learned I was mistaken:

[A]ll sums which the insured shall become legally obligated to pay as damages solely by operation of Section 130, Civil Liability, of Title 1 (Truth in Lending Act) of the Consumer Credit Protection Act (Public Law 90-321; 82 State 146, et seq.) because of error or omission in failing to comply with said section of said Act.

What’s the problem with this type of coverage form? In addition to not providing any protection to dealerships for liability associated with a variety of other consumer protection statutes (which has been the subject of prior articles on this blog), this form does not even purport to protect the dealership against truth-in-lending liability under state automobile financing acts. It is specifically limited to violations of the federal TILA. More specifically, although state automobile financing acts obligate a dealership to disclose the exact same minimal credit information required to be disclosed under the federal TILA (e.g., total sales price, APR, finance charge, itemization of amount financed, monthly payment, etc.) and most truth in lending litigation against dealerships is based on violations of state auto financing laws as opposed to the federal TILA, this insurance form will likely not protect the dealership.

Several courts have interpreted this type of coverage form and held that an insurer will only have an obligation to protect the dealership if the customer’s complaint specifically alleges (1) a violation of the federal TILA and (2) seeks damages under the federal TILA. See e.g., Luna v. Praetorian Insurance Co., 2015 WL 1539041 (Cal. Ct. App. March 30, 2015); TIG Insurance Company v. Joe Rizza Lincoln–Mercury, Inc., 2002 WL 406982 (N.D. Ill. Mar. 14, 2002); John Markel Ford v. Auto–Owners Ins. Co., 543 N.W.2d 173 (Neb.1996); Tynan’s Nissan v. Am. Hardware Mut. Ins. Co. 917 P.2d 321 (Colo.App.1995); Heritage Mut. Ins. Co. v. Ricart Ford, 663 N.E.2d 1009 (Ohio App. 10 Dist.1995). See also, Sonic Automotive Inc. v. Chrysler Insurance Co., 2014 WL 1382070 (S.D. Ohio Apr. 8, 2014) (discussing cases and finding insurer had no obligation to defend dealerships). Stated another way, this coverage form is not likely to protect the dealership against truth in lending claims which only allege violations of a state auto financing act or only seek damages under the state auto financing act – despite the fact that the violation complained of would also violate the federal TILA.

What can a dealership do? First, make sure you know what kind of insurance coverage you are purchasing to protect your sales and F&I operations risk. Many insurers offer statutory errors and omissions coverage for a dealership’s violation of a “federal, state or local” truth-in lending laws. Second, if your current policy is limited to violations of the federal TILA, ask the insurer to issue a manuscript endorsement extending coverage to “any federal, state or local” truth in lending laws. While such a manuscript endorsement would not protect the dealership against liability associated with the myriad of other consumer protection statutes, it would at least protect the dealership if sued under any truth in lending law.

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. 2015.