On July 31, the Federal Trade Commission announced with great fanfare that it had settled a consumer protection lawsuit it had been working on for several years involving automotive maintenance contracts.
The defendants in this case were NRRM, which did business as CarShield, and American Auto Shield. The commercial agreement between these two companies provided for American Auto Shield to develop, issue and administer the contracts.
CarShield was responsible for the marketing. The marketing included extensive television advertising with exaggerated promises and endorsements from professional athletes, celebrities and people claiming to be CarShield customers.
The FTC’s 50-page complaint, filed in federal court in Missouri, went into great detail about the deceptive practices the agency alleges the defendants engaged in.
Some examples: Buyers were told they could take their vehicle to a repair shop of their choice – which is not true. Buyers were not told they might have to pay for expensive diagnostic disassembly to determine the cause of the problem, although they were not told that labor costs would be reimbursed at below-market rates. And they were not told that only used or reconditioned parts would be used in repairs.
Buyers of the most expensive contract variant – the Diamond Edition – were falsely told that they had the same protection as the manufacturer’s fully comprehensive warranty for new cars.
Buyers found that garages refused to honour CarShield contracts because of the onerous conditions attached to approving repairs – and they were not paid for doing so. Buyers who wanted to cancel contracts were referred to a team of staff with a firm mandate, whose job it was to urge them not to cancel.
The FTC’s complaint, which paints a sad picture of a free market economy gone out of control, alleges violations of the Federal Trade Commission Act, a long-standing law that broadly prohibits deceptive trade practices, and the Telemarketing Sales Rule.
This is an FTC commercial rule that has the same force and effect as an Act of Congress. It was enacted under the Telemarketing and Consumer Fraud and Abuse Act of 1994 and prohibits deceptive marketing practices over the telephone.
As part of the settlement, the defendant companies will be fined $10 million, receive an injunction stopping their fraudulent practices, and be subject to strict regulations imposed by the FTC.
Of note, Colorado has an automobile repair contract law that is enforced by the state’s attorney general. This law prohibits deceptive business practices and requires automobile repair contract providers to obtain an insurance policy from a licensed and regulated insurance company that will back their contractual obligations. So, if a repair contract provider fails to meet its obligations, its customers can make claims under the insurance policy.
To be clear, automobile repair contracts are not “warranties.” (Warranties are only available from vehicle manufacturers and sellers.) They are simply contracts between a vehicle owner and a company that agrees, for a fee, to assume the risk of an “operational or structural defect” not covered by the manufacturer’s warranty.
Additionally, in 2016, the Colorado state legislature amended the vehicle repair contract law to allow contracts that cover tires and rims damaged by road hazards, windshields damaged by rock chips, dents in doors and other body damage that can be repaired with paintless repair methods, and lost keys and key fobs.
Jim Flynn is a business columnist with the Colorado Springs firm Flynn & Wright. He can be reached at [email protected].
