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Clearing the Road of Flood-Damaged Vehicles
Ellen Taverna, Project Manager and Counsel, Consumer Protection Project
Severe weather such as hail, hurricanes, and thunderstorms can cause significant damage to homes, commercial property, and surrounding areas. A rising problem resulting from these natural disasters is the number of cars that are damaged by the floodwaters. After Hurricanes Katrina and Rita, an estimated 500,000 vehicles were damaged. In June 2008 in Missouri, Iowa, and Illinois, hundreds of thousands of vehicles were flooded after serious thunderstorms caused rivers to overflow. And Hurricanes Gustav, Hanna, and Ike have caused significant vehicle damage in the Gulf area and East Coast states. However, the vehicle damage is only part of the problem. Instead of junking damaged cars, some unscrupulous sellers simply clean them up before putting them back on the market. How can consumers avoid buying a flood-damaged vehicle and what legal protections can Attorneys General enforce to help them?
Flood-Damaged Auto Fraud
According to the National Insurance Crime Bureau (“NICB”), a flood vehicle is defined as “being completely or partially submerged in water to the extent that the engine or other mechanical component parts have been damaged.” Some states have enacted laws with specific standards requiring that flood-damaged vehicles be titled as salvage, flood, water-damaged, and the like. 
Once a vehicle is flooded, the owner’s insurance company typically settles the claim by buying the vehicle and selling it at an auto auction. Flood-damaged vehicles that were part of vehicle fleets from companies that self-insure may also be sold at auction. Cars and trucks that have been under water for days can be made to look as if they are of good quality, even though the engine or electrical system has been permanently damaged.
Fraud occurs when auto sellers purchase vehicles at auctions, mask the water damage, and resell the vehicles to unsuspecting buyers, including individual consumers, companies, and even car dealers. These vehicles are often transported to states unaffected by the storm or natural disaster where potential buyers can be expected to be less wary of purchasing a flood-damaged vehicle. These dishonest sellers fail to disclose the damage, either directly to the buyer or on the vehicle’s title, and may “wash” any title notation of damage by obtaining a â?œclean title” in another state.
Consumers who unknowingly purchase a flood-damaged vehicle are harmed in several ways. First, flood damage generally diminishes a vehicle’s market value by 50 to 75 percent if, in fact, it has any value at all. Consumers who pay average retail prices for these vehicles suffer substantial monetary loss. In addition, because water damage tends to corrode electrical and mechanical components over time, this latent damage may not be noticed at first, resulting in future substantial repair costs. Finally, flood-damaged vehicles, by definition, are safety hazards. No one knows when the corrosion might cause a brake system or other safety component to fail.
Tools to Determine Flood Damage
The NICB regularly maintains a Flood Vehicle Database that allows consumers to search, free of charge, for flood-damaged vehicles and watercrafts, as well as unrecovered stolen vehicles. According to the NICB, the information in its database is gathered from a number of sources, including insurance companies, salvage yards, and state and local authorities. To search the database, consumers simply enter the vehicle identification number (“VIN”), which is a unique serial number used by the automotive industry to identify motor vehicles. The NICB cautions that the database does not determine the scope of the damage to any particular vehicle. Therefore, some listed vehicles may have had no damage or very minor damage, while others have had extensive damage and are no longer safe to operate. In addition, the database does not include all insurance providers and does not include fleets of vehicles owned and self-insured by large corporations or rental car fleets.
A consumer can also search a vehicle’s history through commercially available Web sites. One site offers a free resource that allows consumers to check vehicles by VIN to see if the vehicle was registered in any of the counties declared a federal emergency disaster area. Another site offers free storm-damage vehicle information to consumers through its “Storm Scan” feature. After entering a VIN, the service tells a consumer whether the vehicle was reported as storm damaged or if the vehicle was registered or titled within 12 months prior to a storm in counties affected by recent disasters. Since these sites get their information from different sources, it is important for consumers to run the VIN through several services for a more comprehensive search. Like the NICB database, the commercially available Web sites cannot claim to include 100 percent of vehicles that have incurred prior damage.
In addition to vehicle history checks, consumers are encouraged to have vehicles thoroughly inspected prior to purchase and to avoid purchasing vehicles from sellers who will not permit a pre-purchase inspection. The Better Business Bureau maintains a database of consumer complaints, which provides complaint information about auto dealers and others who engage in vehicle sales in each state. Although these resources are often helpful for consumers to check, they are not always complete since not all consumers report incidences of consumer fraud and the fraudulent sellers may be located in another state.
States’ Role Against Auto Fraud
Automobile-related complaints consistently lead state Attorneys General’s Top Ten List of Consumer Complaints. All states have some type of consumer protection statute prohibiting unfair and deceptive acts and practices, commonly referred to as the “UDAP” statute. These broad general statutes are supplemented in all jurisdictions by laws that target specific industries or practices found to be particularly problematic, such as auto fraud.
Some states have laws specifically requiring that sellers disclose salvage, flood, fire, and other damage history to prospective buyers prior to the sale, violations of which may be per se violations of the state UDAP statute. In addition, most states have laws requiring that the title be branded to show that a vehicle was previously titled as salvage, flood or rebuilt, or with equivalent terms indicating prior damage.
Various states have also adopted laws requiring that buyers receive pre-purchase notice if a used vehicle was once repurchased by its manufacturer under a state lemon law. Although they vary in coverage, in general, state lemon laws contain eligibility requirements, notice requirements, and set out specific remedies that a consumer may recover in a legal action against the manufacturer if a vehicle cannot be fixed to conform to the warranty after a reasonable number of repair attempts. In most states, the lemon law applies only to new vehicles those within, for example, the first 24,000 miles or 24 months of initial consumer use (whichever happens first). However, a few states have extended similar rights to used vehicle purchasers. New Jersey’s lemon law may cover a used vehicle if a consumer purchases the vehicle within two years and 18,000 miles of its original “new” delivery, but it does not require motor vehicle dealers to disclose if a vehicle incurred flood damage. Typically state lemon laws do not provide a means of redress for consumers who unknowingly purchase a flood-damaged vehicle.
If a vehicle does not meet the terms of protection or other specifics of a state’s lemon law, it does not mean the consumer is out of luck. Consumers may be entitled to compensation for breach of warranty or due to a violation of the state’s UDAP statute or federal law.
When a state Attorney General brings a consumer protection action, he or she does so as counsel for the state, rather than as counsel for consumers individually affected by the alleged auto fraud. With the exception of the Utah Attorney General, who is specially authorized to represent consumers in lemon law complaints, most Attorneys General do not have legal authority to litigate on behalf of individual consumers, but may obtain restitution for consumers through broad-based civil law enforcement actions. For example, Iowa Attorney General Tom Miller reached a settlement with Progressive Insurance Company of Ohio, resolving allegations that the company sold used cars to 45 Iowa consumers that should have been given a “salvage title” designation by the insurance company because of prior damage to the vehicles.
Generally, these automobile-related fraud cases are local in nature and rarely undertaken on a multistate basis, the Attorneys General do share information on a regular basis through the NAAG Auto Working Group. There are also some instances where the states work together to combat auto fraud. In January 2005, 49 state Attorneys General reached an agreement with State Farm Mutual Insurance Company that resulted in $40 million in compensation to thousands of car, SUV, and truck owners nationwide. The agreement resulted after State Farm approached the states and indicated that it was unable to confirm in a small percentage of cases that it had properly titled vehicles it had taken ownership of from policyholders due to damage or theft. The states also have worked with several federal and local government agencies to fight against auto fraud. For example, this past June, the Consumer Fraud Task Force, a joint task force of the Illinois and Missouri Attorneys General, local and federal law enforcement agencies, and the Better Business Bureau, issued several consumer warnings to the thousands of citizens impacted by last year’s rains and rising waters in the Midwest.
Other Regulations Preventing Auto Fraud
Congress enacted the Anti-Car Theft Act of 1992 to deter trafficking in stolen vehicles by strengthening law enforcement efforts against auto theft and fraud. Originally the Act required the U.S. Department of Transportation to develop a National Motor Vehicle Title Information System (NMVTIS), but responsibility was later given to the U.S. Department of Justice (DOJ) by language in the Anti-Car Theft Improvements Act of 1996. The NMVTIS database is intended to provide states with the ability to reliably verify the titling, theft, and damage history of a motor vehicle before a new title is issued. One goal of the database is to control title laundering and to provide businesses and consumers with accurate information about a vehicle’s history. Under this law, junk and salvage yard operators and insurance carriers are required to file monthly reports with the database operator. Each report is supposed to contain a list of the VINs of all junk and salvage vehicles obtained during the previous month. The DOJ maintains that 25 states are currently involved in the NMVTIS as “participating” or “data only” states, which represent about 60 percent of the total U.S. vehicle population. “Participating” states provide files of all active titles and brands to the NMVTIS, make inquiries into NMVTIS prior to issuing a new title, and provide updates as necessary to the NMVTIS files. “Data only” states provide files of all active titles and brands to the NMVTIS and brand files in real time or at least once every 24 hours.
The DOJ sought public comments on the proposed rule to implement provisions of the NMVTIS. In November 2008, Attorney General Miller submitted comments in support of achieving Congress’ intent in fully establishing NMVTIS “to provide an electronic means for verifying and exchanging motor vehicle title, brand, and theft data among motor vehicle administrators, law enforcement officials, prospective purchasers and insurance carriers.” Attorney General Miller stated that insurance companies and states have not been supplying information about damaged vehicles. While NMVTIS is a considerable benefit to law enforcement, it has not reached its full potential until insurance data is being routinely supplied, more states are supplying data, and consumers have access to the data at little or no cost.
The Federal Trade Commission’s (FTC) Used Motor Vehicle Trade Regulation Rule (“Rule”), was implemented in 1984 and updated in 1995, to prevent and discourage oral misrepresentations and unfair omissions of material facts by used motor vehicle dealers concerning warranty coverage. Dealerships are required to post a Buyers Guide (“Guide”) on every used vehicle before it is offered for sale. 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 basic information in writing about any warranty protection they have if there is a problem with the vehicle. Dealers who violate the Rule are subject to penalties of up to $11,000 per violation. Many states have laws or regulations that are similar to the Used Car Rule while other states incorporate the Rule by reference in their state laws. Others simply pursue violations as per se violations of state consumer fraud laws. The FTC sought public comments on the effectiveness and impact of the Rule in 2008. On November 19, 2008, 42 state Attorneys General and the International Association of Lemon Law Administrators submitted joint comments to the FTC to strengthen Buyer’s Guide notices to indicate if used cars, trucks, or SUVs that are for sale have been assigned titles indicating past flood or collision damage. These Attorneys General believe that the current Used Car Rule needs to go further and require disclosure of a vehicle’s damage history and prior use because consumers may not know the true value of the vehicle they are buying. Withholding information that is readily available can lead to deceptive sales practices by unscrupulous dealers and may pose safety hazards to consumers. They noted that Wisconsin already requires prior-damage information to be disclosed on their Buyer’s Guide, and that the FTC approved the Wisconsin regulation.
Whether by flood, hail, or other natural disaster, damaged vehicles continue to hit the marketplace and consumers’ pocketbooks, and state, federal, and local authorities continue to develop more effective legislative, enforcement, and educational tools to help consumers who unknowingly purchased flood-damaged vehicles. Additional states may continue to enact laws requiring that flood-damaged vehicles be titled as salvage or water-damaged, or states may expand lemon laws to include used vehicles. As more resources become available, additional states may also soon participate in NMVTIS or work with their state colleagues and federal enforcers to effectively deter fraudulent vehicle sales practices and improve the safety of consumers.
See e.g., Minn. Stat. Ann. § 325F.6642.
See e.g., Colo. Rev. Stat. § 6-1-708; Haw. Rev. Stat. § 481J-4; Iowa Code § 321.69; Me. Rev. Stat. Ann. Tit. 10, § 1475(2-A); Mass. Gen. Laws Ch. 90, § 7N1/4(8); N.C. Gen. Stat. § 20-71.4; and S.D. Codified Laws §§ 32-3-51.5 to 32-3-51.9, 32-3-51.18.
See e.g., Minn. Stat. Ann. § 325F.6642 (5).
See e.g., Ala. Code § 8-20A-3, 8-20A-4, 8-20A-5; Alaska Stat. § 45.45.335; Ark. Code Ann. § 4-90-412; Colo. Rev. Stat. §§ 6-1-708(1)(b), 6-1-105(1)(x); Iowa Code §§ 321G.11, 321G.12; N.M. Stat. § 57-16A-7; N.C.G.S. § 20-351.3(d); and Tex. Occ. Code Ann. § 2301.610 (Vernon).
 A newer used vehicle might be covered by the state lemon law if the first owner, for example, drove it only for a year and for less than the mileage limit before selling or trading it. Under those circumstances, the second buyer would receive the remainder of the lemon law protection until the vehicle met the 24 month, 24,000 mile, or other, limit. See e.g., Iowa Code §322G.2 (8).
 N.J.S.A. 56:12-30.
 State lemon laws, generally, focus on defects in original vehicle manufacture and design. Thus, unless post-manufacture defects such as those caused by flood damage are specifically covered in the law, the state lemon law may not apply.
 Utah Code Ann. §70A-2-807.
 Pub. L. 102-519, §§ 202-04 106 Stat. 3390-93 (1992).
 Pub. L. 104-152, § 2-3, 110 Stat. 1384 (1996).
 73 Fed.Reg.54544-54553 (2008).
 16 C.F.R. Part 455.
 FTC Used Car Rule Regulatory Review, Matter No. P087604.
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