The Used Car Rule was enacted to prevent and discourage oral misrepresentations and unfair omissions of material facts by used motor vehicle dealers concerning warranty coverage. The main purpose of the Guide is to provide important information to consumers about used vehicles they are considering purchasing and to ensure that consumers get information in writing about any warranty protection they have if there is a problem with the vehicle. Dealerships are required to post a Buyers Guide on every used vehicle before it is offered for sale. A vehicle is considered used under the Rule if it has been driven more miles than are necessary to deliver it to an ultimate purchaser.

A used vehicle is offered for sale when the dealer allows a customer to inspect it for the purpose of buying it, even if it is not fully prepared for delivery. The Buyers Guide must be prominently and conspicuously placed on or in a vehicle when it is made available for sale, and in such a way that both sides of the Guide are readable. The layout for the Buyers Guide is set forth in the Rule. The dealership must use the wording, type style, type sizes and the format as specified in the Rule. Furthermore, the Guides must be printed in one hundred percent black ink on white paper cut to at least eleven inches by seven and one-quarter inches. Colored ink may be used to fill in the blanks on the Guide. It may be removed during a test drive, but it must be posted again as soon as the test drive is over.

Dealers must give specified vehicle and dealer information on every Buyers Guide. With respect to the vehicle information that must be included, the dealer must fill in the vehicle’s make, model, model year, and vehicle identification number (VIN) that are located at the top of the form. The dealer may also write in a dealer stock number if it wishes to do so. On the reverse side of the Buyers Guide, the dealer must fill in the name and address of the dealership and the name and telephone number of the person the consumer should contact in the event that he or she has complaints about the vehicle. This information can be pre-printed on the Buyers Guide.

In addition to providing vehicle and dealer information, the dealer must also state whether or not a warranty is being provided to the consumer and, in the event that a warranty is being provided, describe the warranty coverage. There are two versions of the Buyers Guide: One for states that permit “as is” sales and another for states that limit or prohibit dealers from disclaiming the implied warranties in connection with the sale of a motor vehicle. If state law allows it, and the dealer chooses not to offer a warranty, written or implied, the dealer must use the “As Is” version and check the box next to the heading “As Is-No Warranty” on the Guide. If the state law limits or prohibits the elimination of implied warranties, the dealer must use the “Implied Warranties Only” version and check the box next to the “Implied Warranties Only” heading if the dealer does not offer a written warranty.

If the dealer offers the vehicle with an express warranty, it must check the box next to the heading “Warranty” and fill out the remaining portion of that section of the Buyers Guide. Warranties that are required by state law must also be disclosed in this section. If a warranty is offered with the vehicle, the dealer must briefly describe the warranty terms in the space provided. This description must include the following information: Whether the warranty is “Full” or “Limited”; what systems are covered and for how long; whether the manufacturer’s warranty still applies; and what percentage of costs the warranty covers.

The FTC’s Used Car Rule sets forth five points that must be considered to determine whether the warranty offered is “Full” or “Limited”. For a warranty to be considered “Full”, warranty service must be provided to anyone who owns the vehicle during the warranty period free of charge when necessary, even for services like removing and reinstalling a system covered by the warranty. The consumer must be able to choose either a replacement or a refund if the vehicle cannot be repaired after a reasonable number of tries. The consumer may not be required to take any action to receive service, except to give notice that service is needed, and service must be rendered after notice unless the warrantor can demonstrate that it is reasonable to require the consumer to do more than give notice. Finally, the length of implied warranties must not be limited. If any of these conditions do not apply, the warranty is considered “Limited”. Most warranties offered by motor vehicle dealerships will traditionally fall within the Limited Warranty category.

Once the dealer determines the type of warranty it is offering, it must specify the systems covered by the warranty and list the duration of the warranty for each system. The dealer must state specifically each system that is covered by the warranty in the left-hand column on the Buyers Guide. The Rule prohibits the use of shorthand phrases such as “drive-train” or “power-train” when it is not clear what specific components are included within the definition of the terms. Keep in mind also that the systems covered should coincide with the systems that the dealership lists in the separate limited warranty document required by the Magnuson-Moss Warranty Act. In the right hand “duration” column, the dealer must state how long the warranty lasts for each warranted system. If all systems are warranted for the same length of time, the dealer is only required to state the duration once.

Communicating the percentage of parts and labor costs that the warranty covers is relatively simple. The dealer merely fills in the percentage of parts and labor costs it wishes to cover. If a deductible applies, the dealer should put an asterisk by the number (i.e. 100%*) and explain the deductible in the space provided under the “Systems Covered/Duration” section. A sample explanation of a deductible may read as follows: “*A $50.00 deductible applies to each repair visit”.

If a manufacturer’s warranty on the vehicle has not expired, the dealer should disclose this fact by adding the following paragraph below the “Full/Limited Warranty” disclosure: “MANUFACTURER’S WARRANTY STILL APPLIES. The manufacturer’s original warranty has not expired on the vehicle. Consult the manufacturer’s warranty booklet for details as to warranty coverage, service location, etc.” If the consumer must pay a fee to obtain coverage under the manufacturer’s warranty, then the dealer may not state that a warranty is being provided. If the dealer provides a warranty in addition to the balance of the manufacturer’s warranty, it should explain the terms of the warranty on the Buyers Guide as well. If the dealer offers its customers a service contract for repair coverage and state law permits, the dealer may check the box beside “Service Contract”.

Because the Buyers Guide is completed prior to offering a motor vehicle for sale, there may be instances when as part of the negotiation process the dealer offers a warranty that differs from that stated on the Buyers Guide posted in the vehicle. If that is the case, the dealer may modify the Buyers Guide to reflect the agreement reached between the dealer and consumer, in which case both the consumer and an authorized dealership representative should initial any such changes, or the dealer may complete a new Buyers Guide. If a dealer conducts a used car transaction in Spanish, a Buyers Guide written in Spanish should be posted on the vehicle prior to offering it for sale.

The information on the final version of the Buyers Guide is incorporated in the contract for each dealer sale of a used vehicle to a consumer. Information on the Buyers Guide expressly overrides any contradictory statement in the contract. In order to inform consumers of this fact, dealers must include the following statement or language similar to the following on each and every Buyers Order or purchase contract for a used vehicle: “ The information you see on the window form for this vehicle is part of this contract. Information on the window form overrides any contrary provisions in the contract of sale.”

The Rule also requires dealers to give the purchaser a copy of the Buyers Guide at the time of the sale and contains penalties for non-compliance. The dealer may include a signature line on the Buyers Guide and ask the buyer to sign to acknowledge that he or she received a copy, but a signature line is not required by the Rule. If the dealer opts for a signature line, the following statement must appear in close proximity to the signature line: “I hereby acknowledge receipt of the Buyers Guide at the closing of this sale.” The signature line and required disclosure must appear in the space containing the name of the individual to be contacted in the event of complaints after the sale. Dealers who violate the FTC Used Car Rule may be subject to statutory penalties of up to $11,000 per violation and various other enforcement actions, including civil penalties and state and federal enforcement actions.

Many dealerships struggle with how to comply with the various disclosure requirements and maintain consistency throughout their forms. In order to comply with all of the state and federal warranty laws, the dealership must ensure that the Retail Buyers Order, FTC Buyers Guide and Limited Warranty Document contain the required disclosures and those disclosures must be consistent and properly integrated into the appropriate forms. Remember, all material statements (including warranty information) must be integrated into the Retail Buyers Order; the Buyers Guide must communicate whether a warranty is being offered and, if so, the type of warranty offered; and, if a Limited Warranty is offered by a dealership, a separate Limited Warranty Document must be provided in accordance with the Magnuson-Moss Warranty Act.

Dealers began offering GAP in the early 1980’s in the wake of rising vehicle prices, extended terms on motor vehicle loans and the increasing popularity of leasing. It’s no secret that a vehicle is a depreciating asset and that the value of most vehicles immediately decreases when they are driven off a dealership’s lot. In addition to the cash price of the vehicle, customers may also finance other costs, such as documentary fees, sales tax and other after market products. If a vehicle happens to be totaled or stolen, a debtor could end up owing thousands of dollars, even after the insurance company pays the insurance claim. In other words, GAP closes the gap between what the insurance company pays and what is owed to the finance company or lessor.

Does that sound like insurance to you? Maybe not, but that is exactly what consumer attorneys across the United States alleged when dealers first began offering GAP. They claimed that the sale of such products constituted the sale of property damage insurance in violation of State Insurance Codes. The answer today varies depending upon the state where GAP is sold and how it is presented to the customer. This is the first and foremost issue every dealer should address before offering GAP.

The good news is that most states have now addressed whether dealers may sell GAP as an optional product to their retail customers. The bad news is that the answer is not always easy to find and, even in those states that permit the sale of GAP, there are often caveats that may be difficult to understand. Someone who has knowledge about both the products being offered and our industry should always review the GAP program and any related materials. Using Ohio as an example, there is no statutory language directly on point with respect to this issue. Someone who is unfamiliar with the history of offering GAP waiver products in Ohio may even advise lenders that GAP cannot be sold there by dealers. After a number of these challenges were raised, the Ohio Department of Insurance issued an opinion that the sale of GAP products by motor vehicle dealers, if done properly, does not constitute the sale of property damage insurance within the meaning of Ohio Law.

In case you didn’t catch that caveat, I said: “if done properly.” As with any other third party product or service, dealers must do some due diligence with respect to both the GAP provider and the product it is offering prior to selling it in the dealership. All too often we find that dealers rely on representations made by a provider as to the compliance of its marketing materials and the structure of the product it offers despite the fact that the GAP contracts and program materials themselves may expose the dealership to liability. For instance, legislation passed in New York in 1994 created an exemption pursuant to which GAP may be sold without an insurance license, but only under certain narrow circumstances, including a requirement that a lessor or creditor (or an assignee thereof) waive only the “gap” amount. Offering a program in New York whereby the debtor would be reimbursed for the amount of a deductible, or any obligation other than the gap amount for that matter, would be deemed engaging in an insurance business and would require licensing as an insurer. We have frequently found terms and conditions such as these, as well as inappropriate references to an “insurer,” “insured” or “premium” in GAP contracts that otherwise were not regulated as policies of insurance.

While you are reviewing the GAP contract, you may want to take the opportunity to consider other issues related to the sale of these products, such as whether marketing and research data substantiate claims made about the product and whether the representations made in the GAP contract are consistent with the representations made in other documentation provided by the product supplier, signage posted at the dealership and the dealership’s F&I menu. It is important for dealership personnel to know about the products they sell. A few things to keep in mind are whether a claim will be honored if the debtor fails to maintain collision and comprehensive insurance coverage; whether there are any coverage exclusions and limitations (i.e. maximum claim amounts, exclusions of negative equity amounts and caps on costs exceeding a percentage of the MSRP or an Official Used Car Guide); maximum loan terms; and cancellation policies. The last thing a dealer wants to happen is to sell a GAP contract to a customer who is not eligible for coverage.

When selecting a program, also consider the GAP provider’s current ability and past history with respect to the payment of claims. Dealers should always inquire about the type of insurance coverage the provider has obtained for the program and obtain copies of the current insurance policy. The bottom line is, if everyone else involved with the program becomes insolvent, the customer’s last resort is the dealership where the GAP contract was sold. Making sure claims are effectively handled and paid helps to keep your customers satisfied and loyal to your dealership. It is always a good idea to ask for dealership references, to use advisors who understand the motor vehicle industry and, when necessary, check with the appropriate State Regulatory Agency.

A motor vehicle GAP program can, when structured properly, be an important profit center in the F&I Department of a dealership. The exercise of a little due diligence by the dealership prior to executing a dealer agreement with a GAP provider and selling its products will not only protect the dealership from unforeseen liability, but will help ensure the overall success of the program.


As with many of the legal and business issues that arise in the motor vehicle industry, reviewing contracts can seem like an overwhelming task. Granted, they often can be long and complex documents written in legalese, which means they tend to put the average reader to sleep. They can, however, be quite simple to review if you understand a few basic principles. By the time you receive the contract, you have hopefully already spoken to other dealers who have a relationship with the company, evaluated the financial aspects of the relationship and conducted other steps in a proper due diligence examination. At this point, you may even be sold on the opportunity. Keep in mind, however, that it’s the written contract that governs the relationship. So lets get started. Go ahead and pull out one of your contracts and I will walk you through it.

Most standard contracts begin with the “preamble”. The preamble identifies the parties, their respective addresses and principal places of business, and usually defines how they will be referenced in the main body of the document. The preamble may also briefly state the desired objectives for both parties. Once the basic objectives of the parties is defined, most contracts will move into the sections that define the parties’ relationship and their responsibilities and obligations to one another, including any applicable representations and warranties being made. Payment terms may also be included.

It is important to define whether the relationship with the other party is that of a supplier, agent, independent contractor or employee because this usually determines the scope of liability and responsibility for the relationship between the parties. Make sure that your responsibilities and the other side’s obligations, as well as the products and services to be provided, are clearly and accurately described. Ambiguous language in a contract can lead to misunderstandings, delays, frustration and even litigation. If you are relying on something important when entering into a contract, such as a promise or guarantee, take the time to verify that this information is actually written in the contract. If the verbal promises aren’t reduced to writing, you shouldn’t count on them. The payment terms should also describe in detail the amount to be paid, when and how it will be paid and whether offsets against other amounts owed will be permitted. If offsets are permitted, you should request that notice of the amount and reason for the offset be provided.

Consistency between the terms of the contract and any terms set forth in attachments and the other documents provided to you, including any brochures and/or documents that will be provided to your customers, is a must. Usually this isn’t a problem, but sometimes you’ll find inconsistencies between the terms in the contract and these documents. For instance, we have on occasion found discrepancies between a service contract document that indicates a service contract program is “dealer obligor” and a dealer agreement that indicates the program is “administrator obligor”.

With the parties’ expectations and obligations defined, the next set of provisions often address the duration of the relationship and what will happen if and when it ends. Duration and renewal provisions define whether the contract will remain in effect for a fixed period, until otherwise terminated by one of the parties, or until a specified event occurs. The parties may also agree on a method of renewing the contract. For instance, the contract may automatically renew unless otherwise terminated upon prior notice, or it may expire unless renewed within a set time period. Keep in mind that automatic renewal or termination provisions will require some type of action on your part, usually on an annual or semi-annual basis, in order to continue the relationship. That means calendaring and staying on top of providing notices within the appropriate time frames.

Speaking of termination, most of us know from the beginning of any business relationship that it will probably end some day; yet dealers often sign contracts that do not clearly state what will happen upon termination. Ownership interests in data and customer lists, responsibility for returning or destroying documents provided by one party to another and which, if any, obligations and responsibilities continue to exist even after termination, are just a few of the issues that must be addressed. You should also make sure that you have the same right to terminate as the other party. Too often we see clauses that permit only one of the parties to terminate the contract, with or without cause or notice, and one-sided default provisions. Both parties should have the right to end the relationship under similar conditions and terms. If termination is permitted based upon a breach, you should also request a reasonable notification of the alleged breach and an opportunity to cure it prior to the termination becoming effective.

Indemnification, limits of liability and damages clauses often go hand-in-hand with termination provisions. They are also typically one-sided in favor of the drafting party. There is an old saying, “when it comes to business contracts, you don’t get what’s fair, you get what you negotiate.” So negotiate! Indemnity provisions should provide that if something goes wrong due to an error on the part of one of the parties, that party will hold harmless and indemnify the other party from all damages, costs and expenses, including attorney’s fees, it incurs as a result of that error. If the other party retains the ability to assess damages, make sure you do too. Damages can be limited to actual damages (lost revenue and expenses actually incurred) or may include consequential damages (such as loss of potential revenue) and liquidated and punitive damages that are assessed primarily as a punishment or penalty.

Virtually every contract includes “boilerplate” or “standard” provisions at the end of the contract. This language may seem trivial, but it is often not “standard” at all and can end up being tremendously important in the event of a dispute. For example, attorney fee provisions often state that the non-prevailing party will pay the legal fees and costs of the prevailing party. You may wish to suggest that both parties be responsible for their own costs and fees unless a court of law rules otherwise. Choice of law and forum (location) selection clauses identify the laws that govern the contract and the state, county and even courts where lawsuits or arbitration proceedings must be commenced. Again, the drafter of the contract often seeks to apply the law in its home state, which may be disadvantageous and costly for your dealership. Finally, pay attention to the provisions governing modification of the contract. Revisions may be necessary for routine things, such as a change of address, as well as to materially alter the terms of the contract. Too frequently the proposed modifications become effective by a dealer continuing business as usual. Changes to material terms should always be in writing and signed by both parties.

One last piece of advice: Never sign a contract you don’t understand. A well-drafted contract spells out the rights, responsibilities and obligations of each party and protects you and your business. Clarify the issues you don’t understand, try to negotiate those that don’t fit your needs and, when necessary, get help from a knowledgeable and experienced advisor to assist you in making your decision. Remember, no contract can save a bad business relationship, but a bad contract can destroy a good one!