NAII Says Calif. Law Treats Service Contracts, Express Warranties Separately

March 17, 2003

DaimlerChrysler Corporation and the National Association of Independent Insurers (NAII) are urging the California Supreme
Court to keep separate the treatment of vehicle service contracts and automobile express warranties in the state insurance code.

A California Court of Appeal recently concluded that a service contract is not also an express warranty under state civil code, but plaintiffs in Gavaldon v. DaimlerChrysler are appealing the decision. DaimlerChrysler and the NAII, in its friend-of-the-court brief, argue that the state Supreme Court should affirm the Orange County Court of Appeal’s decision.

“That the legislature considers automobile express warranties and service contracts to be different and distinct is apparent in the insurance code, which governs automobile insurance,” NAII Counsel Laura Kotelman commented. “The California legislature chose to regulate only vehicle service contracts, not automobile express warranties. The legislature never intended the express warranty to include service contracts.”

Plaintiffs Rosemarie and William Gavaldon claim that, in certain cases, a service contract qualifies as an express warranty. The Gavaldons argue that when a service contract is considered an express warranty, the consumer is then entitled to a repayment stated in California law if the product is defective or non-operational. These “hybrid” agreements occur, the plaintiffs contend, when a consumer purchases an agreement by a manufacturer to pay for
repairs, sold at the time of sale of the vehicle, for an additional cost.

NAII, in its amicus brief, argued that the Supreme Court should reject
Gavaldon’s “hybrid” theory, and that the state’s “replacement/repurchase remedy” is available only for a breach of an express warranty. NAII cites case law to refute Gavaldon’s flawed assertion that state law authorizes restitution
of the purchase price as the measure of damages.

“The plaintiffs failed to demonstrate how legislative history or statutory construction permit a service contract to qualify as an express warranty at certain times,” Kotelman said. “California law refutes the plaintiffs’ assertion that the legislature intended to extend breach of a service contract to include the remedy of repurchase/replacement found in the civil code section of the
Song-Beverly Consumer Warranty Act. The Court of Appeal correctly found that a service contract, separately sold by a manufacturer at the time of a new automobile purchase, is not also an express warranty entitling the consumer to the replacement or repurchase remedy.”

If Gavaldon’s theory were correct, Kotelman continued, then every seller of a service contract would have to offer the replacement or repurchase remedy.

“Under Gavaldon’s claims, a bank, insurer or other independent third party, which lacks the technical know-how to repair a vehicle, would be required to repurchase or replace a vehicle sold by another and for which it received none of the consideration,” Kotelman said. “This absurd result could not have been intended by the legislature. Furthermore, when it was first enacted, the Song-Beverly Act did not provide statutory remedies for violations of service contracts, rather, only for express warranties.”

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