The Politics of Leasing

A $13 million out-of-court settlement between an Ontario car leasing company and a woman catastrophically injured in an accident could have a chilling effect on the auto leasing and auto insurance industries in the province and, possibly, in a number of other Canadian jurisdictions as well.

The November settlement was reached in the case of 29-year-old Laura May Browne, who was thrown from a car she was riding in when the driver lost control and rolled the vehicle several times just outside Peterborough, Ontario in August, 1997. The accident left Ms. Browne mute and paralyzed.

The driver, later convicted of dangerous driving, had leased the vehicle from Primus Automotive Financial Services, a subsidiary of Ford Motor Company.

According to The Toronto Star, December 7, 2004, almost $3 million of the settlement will come from the $1 million in liability coverage, and no-fault accident benefits available under the driver’s State Farm Insurance policy. The rest will come from Primus’ insurer.

The culprit, a form of vicarious liability, is a nearly century-old section of the province’s Highway Traffic Act which states: “The owner of a motor vehicle or street car is liable for loss or damage sustained by any person by reason of negligence.” In the case of leased vehicles, the leasing company is listed in registration papers as the legal owner, despite the fact that the lessee has day-to-day control of the vehicle.

Quoted in the November 29, 2004 National Post, David Powell, president and CEO of the Canadian Finance and Leasing Association (CFLA) noted: “What we’re dealing with is an antiquated law that is almost 100 years old…I guess we have to ask ourselves if this is a fairness issue and responsibility issue. This statute imposes liability without any fault. To me that is a disturbing principal. It’s holding leasing companies responsible when they have not done anything wrong.”

According to the Post article, the section of the Act harkens back to a time when judges commonly ruled that owners of chauffeur-driven vehicles should bear a portion of the liability in the case of an accident, primarily because they are responsible for hiring drivers. Alberta, Saskatchewan, Manitoba and the three territories make up the other jurisdictions in Canada with similar provisions.

In the United States only New York mandates that lessors and lessees hold joint and unlimited liability for injuries incurred in vehicular accidents involving leased vehicles. Up to quite recently, Connecticut and Rhode Island, along with New York, made up a trio until legislation was passed there amending unlimited lessor vicarious liability (LVL) legislation.

On October 1, 2003, new legislation repealing sections of Connecticut’s vicarious liability laws took effect. The new law holds that companies leasing passenger vehicles for more than one year will not be held liable for damages caused by operators as long as the vehicle is insured with the minimum levels of liability insurance – i.e., US$100,000 of bodily injury liability insurance per person and US$300,000 per accident (companies that lease vehicles for under one year, or rent vehicles are still on the hook for unlimited liability).

Rhode Island repealed its lessor vicarious liability law, but placed a sunset of June 2004 on the rescission, hoping to buy time until the legislature can properly and permanently address the issue. The sunset has since been pushed forward to June 2005.

Many online sources note that New York, Connecticut and Rhode Island are (or, in the case of the latter two, recently were) the only states where leasing companies could be held vicariously liable for injuries incurred in accidents involving their vehicles. However this is not entirely accurate. The three are (or, again, recently were) the only states where the liability was “unlimited”. Anywhere from eight to 11 other states (depending on the source of the information used) have lessor vicarious liability which is capped, with the highest limit being US$500,000 in Florida. The average is US$40,000.

NOT EVERYONE LOVES NEW YORK

According to the article “Crash Test Dummies” published in the Long Island Press, vicarious liability was enacted in New York in 1924, aimed at horse-and-carriage owners. “By 1934, the bill was smartly amended to eliminate vicarious liability for lien holders (people or institutions who lend money to buy a car). But when leasing companies first appeared on the scene in 1954, the law was not adjusted any further – an oversight that has been addressed state by state.”

The long and short of it is that vicarious liability was never meant to apply to automobile leasing, it is just that legislation never kept up with the advent of new vehicle financing options. Now, New York is the only state to continue with an unlimited lessor vicarious liability regime. The result? According to Elaine Litwer, legislative coordinator for the National Vehicle Leasing Association (NVLA), and a leasing company owner herself, from August 2001 to August 2002 there were 216 vicarious liability claims pending in New York seeking a total of US$1.6 billion.

“Our insurance premiums have quadrupled, and payout claims are in the millions,” said Paul Eberlein, director of leasing at the General Motors Acceptance Corporation (GMAC), in the New York Times, February 5, 2003.

But in New York, failure to change LVL legislation hasn’t come from a lack of trying.

Bruce Bendell, chairman and CEO of Major Automotive Companies, Inc. commented in the Long Island Press on July 15 of last year: “I believe this stalemate need only be a temporary state. Reason, economics and common sense dictate that the needs of New Yorkers, injured victims and businesses must result in compromise. Several state legislators have proposed ideas that could constitute that compromise. Assemblyman Ron Canestrari (D-Albany) has submitted an outright repeal of the statute, leaving liability solely with the consumer and the basic insurance policy purchased. Sen. Owen Johnson (R-Suffolk) has proposed a mandatory coverage of US$100,000/US$300,000 per leased vehicle to be fully paid by the consumer. A bill to reform the law was passed by the Senate but stalled in the assembly.”

He continued: “Recently, however, a proposal has been floated in Albany to create a leasing liability reform act. This bill would establish a fund, via voluntary contributions from lessors (leasing companies, manufacturers or banks), to self-insure or purchase insurance. This would offer additional protection to treat the injured victims of leasing accidents. A voluntary contribution of US$75 per year per leased vehicle to the fund from these lessors would permanently remove their exposure to vicarious liability. This proposal would prohibit a pass-along to consumers, and would not require the consumer to purchase any additional insurance. A consumer or business would be able to choose a vehicle knowing that the insurance requirement is the same for a lease as it was for a purchase or financing. This would hopefully stimulate more leasing in the state, which would increase the fund and provide greater protection, while substantially reducing the outrageous lease acquisition fees being charged only to New York State lessees to cover the lessors’ cost of vicarious liability protection.”

In the meantime, fallout from New York’s inability to address the issue, and the failed attempt to reform its LVL legislation has resulted in several major players pulling out of the auto leasing business in the state. Among them are General Motors, Ford, DaimlerChrysler, Honda, Porsche, Chase Manhattan Automotive Finance, and a number of other lease financers, including Primus (which stopped operating in New York state in July, 2003). According to Bob Vancavage of the New York State Auto Dealer’s Association, quoted in Bloomberg News, May 1, 2003, “These [LVL] judgments or just their threat have caused over 30 independent leasing companies to leave the state since September 2002.” V
ancavage said about a third of all new vehicles sold in the state are leased.

These defensive moves have proven to hurt consumers, who now have fewer vehicle leasing options from which to choose, and who now have to pay higher acquisition and administrative fees so that leasing companies can offset the increased costs caused by vicarious liability lawsuits.

However, while withdrawing from the New York market will limit the above companies’ future liabilities, LVL cases from the past still come back to haunt those firms who at one time have leased vehicles to New York drivers. According to the NVLA, Chase recently was ordered by a court to pay US$13.9 million to a Farmingdale, NY, man who lost his leg after a leased vehicle crashed into his motorcycle. Ford Motor Company has had to respond to a case filed by the parents of a young boy who was skating in the street without a helmet and was struck by one of its leased vehicles. Both cases involve accidents which occurred in 2002.

The NVLA notes, however, that things may be looking up in 2005. “Particularly encouraging,” it notes, “is the fact that Governor George Pataki included lessor vicarious liability in his wish list of issues he will tend to in this upcoming session.”

“REPRESENTATIVE PLAINTIFFS”

It seems that often, major legal trends have a seminal case that can be pointed to as the one which jump-starts an avalanche of others. For sexual harassment, it was Clarence Thomas; for spilled coffee, Stella Liebeck; for mold, Melinda Ballard; for environmental, Erin Brockovich; and, for lessor vicarious liability, Billy Martin.

Martin, who over the course of his career was hired and fired five times as manager of the New York Yankees, died in 1989 after the pickup truck he was a passenger in struck a tree. Ford Motor Credit paid Martin’s estate to settle a multimillion-dollar lawsuit in which it was accused of liability because it owned the leased truck in which he died.

In another oft-quoted case, Rhode Island’s high court in 2002 upheld a suit against Chase Manhattan Automotive Finance over an accident caused by one of its lessees. A jury ordered the company to pay US$28 million in October 2003, a figure that was later reduced. According to the New York Post, June 9, 2003: “Since the number of leased vehicles on the road in Rhode Island is estimated at just 25,000, lessors would have to hike fees by US$1,000 a customer to recoup the cost of that one verdict over three years – to say nothing of the other suits they face.”

In 2000, a Florida jury awarded US$7 million to a woman who suffered brain damage when her car was hit broadside by a drunken driver six years prior. The judgment November 21, 2000 from a Broward County panel found McFadden Leasing Inc. and Next Generation Inc. liable. The sport utility vehicle that hit the woman’s car was owned by McFadden and leased by Next Generation, whose insurance companies were ordered by the jury to pay damages.

Elaine Litwer, legislative coordinator for the NVLA, quoted above on the subject of LVL lawsuits, knows of what she speaks. Litwer, a leasing company owner herself, was sued in 1997 after a client who leased a car from her was in an accident. Her insurance company at the time agreed to pay US$7.2 million of a US$9.2 million judgment won by a third party. Her client paid the balance. She noted in Bloomberg News, May 1, 2003: “I haven’t been able to get a[n insurance] policy since.” The article notes that her portfolio, once containing more than 13,000 leases, has shrunk to about 700, “…mostly people she knows and hopes won’t sue her.”

According to Crash Test Dummies, “…lessor vicarious liability cases had been fought and won in sparse amounts over the years leading up to the Martin case. However, the Martin case’s notoriety created a virtual feeding frenzy. Attorneys offered up how-to tracts. Joseph and Robert S. Kelner published a series of bulletins outlining step-by-step instructions on how to ‘find the lessor’ in auto accidents and make a fortune, in the New York Law Journal in 2001. By 1997, LVL cases were a trend: a $1 million lawsuit here, a $500,000 award there. At the end of last year, eight major leasing companies (Volvo, Ford, Subaru, General Motors, Honda, Mitsubishi, Independent Lessors, Toyota) submitted data to NVLA that showed US$1.5 billion in outstanding vicarious liability claims.”

Jennifer Babe, commenting in the National Post, November 29, 2004 on the Laura May Browne case notes: “It doesn’t take very long to have one or two of these decisions and the decision will be made by the leasing company, ‘We will not lease cars in Ontario because we cannot afford the exposure.’ That’s what happened in the United States.” Babe is a lawyer for Miller Thomson, which is working on behalf of the Canadian Finance and Leasing

According to the National Post, the CFLA and other leasing organizations are lobbying the Ontario government to change the archaic wording in the Highway Traffic Act. “What we would like to see happen, as has happened elsewhere, is basically that they recognize that the person who has got daily control of the vehicle is the person who has got primary responsibility for how that vehicle is used,” said the CFLA’s Powell.

The CFLA and others met this fall with Harinder Takhar, the Ontario Minister of Transportation, and according to spokeswoman Danna O’Brien, are scheduled to meet again at the beginning of December. “We’re certainly considering changes based on the issues they’ve raised,” Ms. O’Brien said. “We have to make sure it is a good policy and fits with current conditions.”

So, at this point, the Laura May Browne case may serve to do one of two things: Either spur the Ontario government to revamp the antiquated Highway Traffic Act to make the lessee (and his insurer) solely liable for damages caused by a leased vehicle; or, open the floodgates to similar payouts, in which case leasing companies, their insurers, and the leasing public may find themselves facing crises similar to those seen in New York, Connecticut and Rhode Island.

Like much in this business – as with life – only time will tell.