Many auto industry people never heard of “vicarious liability,” but it's an old law that's become a legal threat to leasing. It could hurt some lease-heavy dealers, especially in New York.
Eight states have vicarious liability laws dating to when many vehicles were driven by owners' employees. New York's law targeted reckless livery drivers too poor themselves to compensate victims of accidents they caused.
But the authors of that 1923 law likely didn't envision a $28 million civil jury verdict rendered against JP Morgan Chase.
A motorist, whose lease JP Morgan underwrote, rear-ended another vehicle, killing the parents of a baby who survived. Guardians collected $1.3 million in insurance from the driver, then went after the lessor in Rhode Island as the vicarious owner.
JP Morgan was held liable because in such conventional leases it held the title until lease-end. That leaves lessors open to lawsuits from accidents they had no part in.
Consequences were dramatic and quick. JP Morgan's insurer paid the $28 million jury award. The bank, which had a huge leasing portfolio, stopped leasing. GMAC and Ford Motor Credit say they'll back off conventional leasing unless something is done.
New York car rental and leasing companies paid more than $1 billion in vicarious liability claims in 1997.
New York State Automobile Dealers Association President Bob Vancavage, says GMAC's decision to quit conventional leasing there on May 1, unless vicarious liability laws are amended or repealed, creates “a crisis for GM dealers.”
Says Joel Lieberman, president of Dobler Chevrolet in Hempstead, “I'm not counting on it, but I'm hoping for some relief from vicarious liability.”
Until GM's big incentive push after Sept. 11, 2001, leasing was as much as 65% of Dobler sales. Now it's 40%.
Lieberman says GMAC has been good for dealers in offering competitive leasing deals. “They didn't want to lose a customer.” Many customers might be lost unless he can convert them to a hybrid GMAC lease product, he says.
Bob Fusco of Roslyn (NY) Buick, Pontiac, GMC, says the impact could be tremendous. “We're 60% leasing in this store.”
He says it will depend on what GMAC comes up with. “They would have to incentivize it heavily,” Fusco says.
Says Dwight McGuirk, president of Smith Cairns Ford, Mazda, Lincoln Mercury and Subaru in Yonkers, says most of his business is leasing. But he's not too worried.
“We'll take most of our renewing customers and put them into a balloon payment-type of lease,” he says.
That includes a Ford Credit alternative leasing product, Red Carpet Option. It transfers title to the lessee instantly. A balloon payment at lease-end works better for many customers, he says.
The last thing GMAC wants is dealers losing customers. That's why it didn't cut leasing immediately after the Rhode Island jury jolt, says Paul Eberlein, an administator at GMAC.
Its insurance costs quadrupled since the verdict. GMAC will not fully abandon leasing, but will focus on alternatives.
Among them is SmartBuy. That has benefits of leasing, but lessees hold titles from the start.
New York's state senate passed a bill amending the vicarious liability law in March. It's a longshot the State Assembly will follow suit. Its transportation committee chairman bottled up similar bills twice before.
The bill considers leasing as a de facto transfer of ownership, making the lessee, not lessor, liable.