You’ve Been Sued! Who Pays?


Every dealer, at some point, gets sued.  Whether it is an unhappy customer or employee, or a simple slip and fall or a vehicle accident, no lawsuit is painless.  You must interact with your lawyer.  You must take time to acquaint yourself and the lawyer with the facts, respond to written discovery, give depositions, prepare for trial, and take time from your business to appear at trial.  Adding insult to injury, your lawyer, perhaps an investigator and an expert, plus a potential settlement or verdict against you, must be paid.  But, who pays?

There are three sources for payment depending on the lawsuit – your franchisor, your insurance company, and your pocket.  Here is how to maximize your chance of avoiding payments coming from your pocket.

What is the Claim?

Your dealer sales and service agreement and Virginia law require the OEM to indemnify you for product related lawsuits.  Lemon law claims and product liability claims for damage to property or to a person are examples.  Sometimes, there may be an exception to franchisor indemnification.  For example, the OEM may contend that the dealer contributed to the loss by missing a problem in the pre-delivery inspection or by installing accessories.  However, Virginia law imposes a very high burden on a manufacturer who wants to avoid indemnifying a dealer.  Virginia Code 46.2-1571 provides:

  1. Notwithstanding the terms of any franchise, it shall be unlawful for any motor vehicle manufacturer, factory branch, distributor, or distributor branch to fail to indemnify and hold harmless its motor vehicle dealers against any losses or damages arising out of complaints, claims, or suits relating to the manufacture, assembly, or design of motor vehicles, parts, or accessories, or other functions by the manufacturer, factory branch, distributor, or distributor branch beyond the control of the dealer, including, without limitation, the selection by the manufacturer, factory branch, distributor, or distributor branch of parts or components for the vehicle or any damages to merchandise occurring in transit to the dealer where the carrier is designated by the manufacturer, factory branch, distributor, or distributor branch. The dealer shall notify the manufacturer of pending suits in which allegations are made that come within this subsection whenever reasonably practicable to do so. Every motor vehicle dealer franchise issued to, amended, or renewed for motor vehicle dealers in Virginia shall be construed to incorporate provisions consistent with the requirements of this subsection.

Some claims are definitely subject to indemnification by your insurance company.  For example, a slip and fall or an auto accident are standard claims for which a business buys insurance.  Other sorts of lawsuits are covered only if you purchased special coverages.  Truth in Lending Act, Equal Credit Opportunity Act, and Fair Credit Reporting Act lawsuits are covered only if your garage policy has “special statutes” coverage.  Employment discrimination or harassment claims are covered only if you purchased employment acts coverage.

Even if you have insurance coverage, you must know the extent of the coverage.  For example, for standard sorts of business losses, your insurance policy will provide defense and indemnification coverage.  Unless you have given the insurance company reason to turn down coverage, it is fully liable for the claim.  Other lawsuits, special statute claims for example, may only be covered for defense costs.  That means the insurer covers your attorneys’ fees and costs, but you are responsible for any settlement or verdict.

Sometimes, you have no coverage by either your franchisor or your insurer.  The most common example is a lawsuit for a breach of contract, whether filed by a customer for failing to provide what the customer says the purchase contract provides or by an employee over a pay dispute.

If your franchisor chooses not to indemnify you when you think it should, consult your attorney.  Given the requirements of your sales and service agreement, and state law, there had better be a good and material reason your OEM is leaving you hanging.  In Virginia you have the right to a hearing for violation of your indemnification rights, as you would for an improper termination or other wrong against which you are protected by state franchise statutes.  The same is true if your insurance company wrongfully refuses to provide coverage, although your relief will have to come from a declaratory judgment action in which you ask the court to rule that you are owed coverage.

Franchisor Indemnification

When you get a lawsuit, or a threat of a lawsuit, over a lemon law or a product liability dispute, forward it immediately to your franchisor with a request for indemnification.  Typically, the information about where you should send the claim and what information you must include is available in the service manual provided by your franchisor.  Once you provide what is mandated in the service manual, expect questions.  The OEM is liable to want to be sure the vehicle was not damaged in delivery or altered or damaged after delivery to you.  Cooperate, and provide any requested information.

Make sure you and your attorney are tracking the response date for the lawsuit.  Sometimes, the OEM may not provide indemnification in time to respond on your behalf.  You must file a responsive pleading to avoid going into default.

Insurance Coverage

When you learn of a lawsuit or a threatened lawsuit, there are several things you should do:

  • Find out if you are covered.  Review the declaration pages, the policy coverages, and the exclusions.  If necessary, the dealership’s legal advisor should review them.
  • If there is any possibility of coverage, report the claim.  If a timely report is not made, the insurance company can deny coverage later, claiming its defense was prejudiced.
  • If the insurer denies the claim and says you have no coverage, consult your attorney.  State laws generally are expansive in favor of coverage, and you may have a claim.
  • If your insurance company accepts coverage, it will probably issue a reservation of rights letter.  Read it and understand it.  If there is something less than full defense cost and indemnification coverage, you must consider whether you want your own attorney to participate in the case.
  • Maintain oversight of the lawsuit’s progress.  In defense cost only situations, you are responsible for any settlement or judgment.  Have your own attorney appear, or have your attorney review actions taken, to protect your interest.  Even when the insurance company is providing full defense and indemnification coverage, dealer oversight of actions taken by the attorney appointed by the insurance company is important.  Positions may be taken, or discovery allowed, or confidential financial information may be revealed, that can prejudice you on matters outside the lawsuit.

If you do not have franchisor indemnification or insurance coverage, you are on your own.  The costs of litigation, and settlements or verdicts, will come out of your pocket.  Even where you have franchisor or insurance protection, the time and inconvenience of a lawsuit are a concern.  If you must come out of pocket, it is much worse.