State Questions Add-On for Car Buyers’ Protection

A number of new car dealers in Southern California have begun selling a new and potentially lucrative add-on service that some law enforcement officials say buyers may not need.

The add-on is an auto registration certificate service that purports to protect buyers from problems that could cloud proof of ownership.

But the service, sold for as much as $95 a vehicle, is being scrutinized by two state agencies to determine if it offers consumers any significant benefits. So far, agency officials said, the protection appears to be negligible.

State law already requires auto dealers to make sure the cars they sell have clear titles, and customers who buy cars that turn out to be stolen or have other title problems are entitled by law to recoup from dealers any resulting losses.

About the only major contingency that would be covered by the service is a title problem that might arise after a car dealer has gone out of business. And state officials say such instances are rare.

Marketed Nationally

The service, marketed nationally by Vehicle Title Services in Westlake Village and underwritten by Cadillac Insurance Co. in Farmington Hills, Mich., guarantees to reimburse the dealer, lender and retail car buyer for losses sustained if a vehicle becomes unmarketable because its “certificate of ownership or registration . . . prove to be false or erroneous.”

Under the five-year policy, Vehicle Title Services also promises to:

- Replace documents necessary to prove legal ownership of a vehicle, including lost or stolen license plates and annual license renewal tags.

- Provide, upon request, an annual appraisal of the car’s current market value.

- Assist insured car owners in transferring title if they sell the car to a private party.

- Correct errors on any “vehicle documents . . . necessary to prove your legal ownership.”

Until late last week, the service was being sold as a “vehicle title policy.” But the state Department of Insurance in a letter mailed Feb. 26 told Cadillac Insurance that it was not authorized to issue title policies in California.

Vehicle Title Services subsequently began calling the product a “vehicle certificate of ownership policy.”

Revision of Policies

Frank Phillips, Vehicle Title Services’ owner and president, said he had begun revising the policies and changing the name of the program long before the Insurance Department sent its letter to Cadillac. He said his attorneys had advised him that the changes will enable Cadillac to continue issuing policies that his company can include in the program it markets.

But John M. Fogg, an attorney for the Department of Insurance, said Friday that his office had just received copies of the new policies and still must determine whether they are “in conformity with the law.” He said he would not be able to issue an opinion until later this week.

And DMV investigator Claire E. Page said she still wants to determine if the registration protection portion of the policies offers consumers anything that state law doesn’t already require car dealers to provide at no cost.

Page said that based on an initial review, it appears that the title policy only protects retail car buyers in an extremely limited set of circumstances.

For example, the title policy would pay off if a customer bought a car from a dealer and later lost it because the car turned out to have been stolen and was reclaimed by the rightful owner. Normally, the car buyer would be able to get a refund from the dealer. But if the dealer had gone out of business in the interim, Vehicle Title Services would pay.

Under the terms of the policies, the buyer would receive the full purchase price if the car was taken away within 120 days of purchase. After 120 days, he would receive “current market value” of the vehicle. The policies remain in force five years.

Cadillac Insurance President Ernest Solomon said the policies also would protect consumers against loss if a car dealer went out of business without paying off his commercial lender for cars purchased from the manufacturer and then sold to retail buyers.

But Page and state Deputy Atty. Gen. Michael R. Botwin, who is working with the DMV agent, said the dealer’s lender would have no claim against the retail buyers in such a situation.

Phillips, of Vehicle Title Services, maintained that the policies also protect car buyers against losses they would incur if a dealer made a mistake while filling out the registration papers filed when a car is purchased--such as listing the wrong vehicle identification number--and then went out of business before correcting the error.

Additionally, he said, Vehicle Title Services will handle all the paper work and processing required to correct any errors made by the DMV on a registration, saving the customer the time and expense involved in taking a day or more off work to process the correction himself.

Vehicle Title Services field representative Phil Quinn said the company has paid off on several claims since it began selling policies in October.

In one case, he said, a dealer sold a pickup truck to a customer as a 1988 model and at 1988 prices, but when the registration papers came back, they showed that it was a 1987 model.

Vehicle Title Services, Quinn said, “negotiated a settlement with the customer and paid him the $1,400 difference.”

Defense of Program

That was a service not only to the immediate customer but to future customers as well, Quinn said in defense of the program, because the dealer didn’t have to pay so he “did not feel any need to raise his prices to recoup a loss” since the insurance paid the bill.

But based on Quinn’s explanation, it appears that the dealer actually made $1,400 on the deal.

Quinn said at least 4.6% of all registrations, or about 5.6 million documents a year, are processed with incorrect information because of DMV errors. Phillips repeated that figure in a recent interview.

But Norma Dawson, an attorney for Vehicle Title Services attorney, said DMV errors that affect titles are “rare.”

And Page said that Quinn’s figure is far too high and that most of the DMV’s errors in any event are simple misspellings or incorrect addresses that do not cloud the title.

She said an audit by the DMV showed that for the 12 months ended in February, the department’s rate of “critical errors” that could affect title was only 0.4% of all titles issued. And, she said, internal audits catch most of those before the papers are sent to the car buyer.

Vehicle Title Services began marketing its registration protection service in October. So far, only new car dealerships are offering the service. The policy is sold by a dealer’s finance and insurance department as an add-on item after a customer agrees to purchase a car.

Typical Add-Ons

Other profitable add-ons include extended warranty policies, “no-wax” silicon paint protection, upholstery stain-repellent treatments and etched vehicle identification numbers on car windows.

Only about 100 Southern California dealers are selling the title policies, Quinn said. But the company is trying to interest lenders in the program, hoping that they will require the policies with every loan.

So far, only two lenders, both small firms specializing in financing for car buyers with poor credit histories, require the policies, Quinn said.

The program still is new, and it is too early to tell just how successful it might become if it survives government scrutiny. But Page said one new car dealer in Orange County told her that more than 90% of his customers are purchasing the optional service.

Dealers pay $20 for the policies and are marketing them at prices of up to $95, although Phillips said $45 is the norm.

Page, who works out of the DMV office in Santa Ana, and Botwin, who is based in Los Angeles, said they are concerned that some dealers may not be telling customers that the policies are optional and that, in any event, auto dealers in California already are required by law to guarantee clear title to the cars they sell.

Called ‘Outrageous’

“It is outrageous in my mind for an auto dealer to charge a customer to warrant that the dealer has title to the car he is selling,” Botwin said. “We will be very concerned if the DMV investigation reveals that dealers are selling (a product to protect consumers) against bad title on the cars the dealers are selling.”

Botwin said the attorney general’s office must decide whether Page’s investigation shows any wrongdoing. If so, it would initiate any necessary legal action.

In addition to the DMV investigation, a spokeswoman for the Department of Insurance said that Commissioner Roxani M. Gillespie has decided to send an examiner to Cadillac’s offices in Michigan “to see what they are doing and to try to clear this up.”

Cadillac’s president, who had been interviewed earlier, could not be reached for comment after his company received the Insurance Department’s letter.

But Vehicle Title Services’ President Phillips said his company had asked its attorneys in mid-January to review the program. He said the attorneys had advised that Cadillac was not authorized to sell title insurance in California so the word “title” should not be used.

In any event, Phillips said, Vehicle Title Services is not selling insurance. Instead, he said the firm is selling a group of services that include a guarantee to correct any problems that might crop up on a title that would make a vehicle unmarketable.

Insurance Policy to Dealer

Dawson, the Vehicle Title Services attorney, said that as part of the program, Cadillac issues an insurance policy directly to the participating auto dealer, and the dealer’s retail customers and their lenders are made “irrevocable beneficiaries” of that policy.

The program, she said “is an indemnification for errors in the certificate of ownership document only. It is an indemnity policy, not a title policy.”

She said that all of the old documents, which were called vehicle title policies, have been reclaimed from the participating dealers and replaced with the new “certificate of ownership” policies.

And Phillips said that all retail car buyers with the old Vehicle Title Services “title” policies are being sent a copy of a new “certificate of ownership” policy, a replacement certificate of insurance that names them as irrevocable beneficiaries of that policy, and a brochure describing the services they have purchased.

The letter, which asks that the old vehicle title policy and insurance certificate be returned in an enclosed, postage-paid return envelope, does not tell the customer the reason for the changes.

Despite Quinn’s claim that every policy holder is to receive a brochure describing the service, one recent customer of Anaheim Mazda said she had received no brochure. And the manager of the dealer’s finance department said he has never been given any brochures to distribute.

In fact, it was Jean Fritch’s purchase of a 1988 Mazda 323 from Anaheim Mazda that kicked off both the DMV and Insurance Department inquiries when Fritch’s credit union called both agencies to ask if they had ever heard of a vehicle title policy.

Fritch’s purchase contract listed a $95 charge for “vehicle title services.”

Phillips said Fritch should not have been charged $95 because his company has an agreement with dealers that they are not to charge more than $75 for the policies unless they are sold along with motor homes and luxury or exotic cars.

But Fritch’s credit union issued her a check that covered the $95 fee, and she took it to Anaheim Mazda to pay for the new sedan she had purchased.

Fritch, a Garden Grove resident, said she told the dealer’s finance department before she handed over the check that her credit union had questioned the title service charge. “I was told that it was standard for all the cars they sold,” she said. “They never told me it was an option.”

Fritch said the car was the first new auto she had purchased in 13 years. “I didn’t know what went with it, and I trusted the dealer,” she said. “No one ever told me anything about the title insurance. I was shopping, and they asked me how much I could spend, and I told them, and they said they could sell me this car for that much.

“When I agreed to buy it, they filled out the paper work and showed me that the total was what we’d agreed on and said it included all these things (including the title insurance policy). But they didn’t go over each item individually, and I didn’t ask.”

Anaheim Mazda finance department manager Leo Matteo said his employees are supposed to explain the policies to customers. He said he could not comment on Fritch’s case but added that if she “doesn’t understand it, we will explain it again, and then if she doesn’t want it, we will take it off” and refund her money.

The inquiry from Fritch’s credit union landed on DMV special investigator Page’s desk. It intrigued her.

“I was interested because of the way it was shown on the contract, as ‘vehicle title services.’ I thought it was a document preparation fee that was in excess of what was allowed by law. Then I found out, by asking the dealer, that it was for vehicle title insurance, which I had never heard of before.

Page said she obtained a copy of the policy and began an investigation “because it (the policy) seemed misleading. They appear to be selling you something the dealer already is required to do by law.”

And, she said, “the policy wasn’t clear to me even after reading it. And if I didn’t know what it was after 12 years as a DMV investigator, I have to wonder if the average consumer can understand it.”