One of the many consequences of the tort reform movement has been the practical elimination of the civil rights of the average consumer. The clock has literally been turned back to the era of frontier justice.
While it may seem a small consequence, one of these has been in the area of the extended automobile warranty or repair insurance contract. Unfortunately, Oklahoma is a state which permits this business to operate in a largely unregulated manner.
The average automobile owner and driver has no competence or ability to evaluate much less articulate the causation of a breakdown. Nevertheless, extended automobile warranties, or repair insurance contracts, increasingly have long lists of technical exclusions. In Oklahoma, these contracts can be underwritten by non-insurance companies, typically subsidiaries of insurance companies, and are often described by the sellers as non-insurance products to avoid insurance laws and regulators. Additionally, these contracts are becoming increasingly complex, such that non-lawyers will have difficulty evaluating them. Usually, these contracts are offered as “service agreements” and are offered with differing levels of “service,” but increasingly higher premiums are accompanied by promises of broader “service” coverage.
When these contracts were first introduced, they were offered by a limited number of companies and were an excellent way to protect against engine and transmission failures, economically crushing repair costs. Also, when these contracts were first introduced, the civil tort system was still intact, and these contracts could be enforced by the average consumer. I purchased several of these contracts and heartily recommended them to motorists who wracked up a lot of miles but could not tell a rotor from a distributor cap. However, beginning with tort reform statutes that limited or eliminated punitive damages and capped off by Campbell v. State Farm Insurance Co. (previously analyzed on this site), the fear of litigation once instilled in such companies is gone.
There are several reasons an insurance company would go to the trouble to set up a corporate subsidiary or other duck blind to issue automobile repair contracts and to label the contracts as anything other than warranties or insurance products. The reasons are interesting. If the issuer is not an insurance company, then the insurance commissioner of a state probably has no jurisdiction. If the contract is not an insurance product, same result. Also, if the contract is not an insurance product, then the consumer protection impact of the law of “bad faith,” the law of “reasonable expectations,” and attorney fee statutes may or may not apply. The short of it is the consumer is “toast.”
The car dealers have likewise protected themselves by adopting mandatory arbitration provisions, especially through the American Arbitration Association. While a biographical profile of each proposed arbitrator is presently available from the AAA, a decisional history is not. Thus, arbitrators who have never awarded money to anyone cannot be identified and eliminated any better than arbitrators who seem to have a fair and balanced decisional history can be selected or proposed. Arbitrators that have never awarded attorney fees or interest, or who rule in favor of businesses rather than individuals, cannot be stricken without that sort of information. As a result, AAA arbitration typically will make a consumer case uneconomic. The AAA will, of course, tell you that consumers win about half the time and lose about half the time. That statistic is meaningless if, in fact, the winners are not made whole because they had to absorb their own forum fees, attorney fees, interest or were awarded less than the loss.
The proof is in the reality of current events. In a case now pending in the state trial courts of Oklahoma, the used car purchaser thought she would buy her used car from Steve Bailey Honda and then purchase a Vehicle Service Contract offered by Steve Bailey Honda but issued by Westchester Specialty Insurance Services, Inc., a Nevada corporation. Westchester is owned by ACE USA, Inc., a Delaware corporation, which also owns Westchester Fire Insurance Co., a New York corporation.
The purchaser suffered a catastrophic engine failure that Westchester alleged was triggered by the failure of a bolt. The Westchester Vehicle Service Contract contained an exclusion that stated “this Contract does not provide Coverage: (b) For any of the following parts: nuts, bolts, and fasteners…” The phrase “nuts, bolts, and fasteners” is proceeded by “upholstery and carpet, zipper” and followed by “cup holders, ash trays.” Thus, when I first read this, it seemed to me the “bolts” in question were in the trim and not in the engine. But, as this proud used car purchaser found out, after being hit with $1,700 in repairs (after already paying “premiums” of $1,600 for the contract), Westchester claimed that it meant all “bolts,” even those in the engine and transmission, and denied the claim because a “bolt” came loose and tore up the engine.
Steve Bailey Honda, the name of the selling dealership, which may be no more than its marketing nom deplume, was sued for selling the Westchester Vehicle Service Contract, too. But, Steve Bailey Honda was ready and invoked its arbitration clause, effectively deflecting any responsibility it has for the contract it sold.
The state regulators are ineffective or unable to regulate these contracts. If I can figure out how to do it, I’ll link this story to the state legislative representative for Canadian County, Oklahoma, Ray Young. But, there will be no meaningful contract or tort relief in the courts, even if the consumer wins the case, because the recovery will not make the case economic. Even a class action approach would be difficult to press to a conclusion meaningful to the consumer under present law.
Sadly, the car dealers make money on these types of products and will have no incentive to self-regulate them because there is no economically viable litigation threat (and only a few even make a pretense at caring about reputation, and fewer still actually do care). Companies like Westchester that can evade responsibility for claims by the use of exclusions that defeat the reasonable expectations of purchasers need only make certain their claims defense costs are less than their collected premiums in order to be motivated to continue to sell worthless embossed paper documents to consumers.
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