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Does the Sale or Loan of a Vehicle Create Dealer Liability?

Dealer Associations Get Involved in Court Case

By Michael W. Dunagan
TIADA General Counsel

We often get inquiries from member dealers who have been threatened with a lawsuit, or actually sued, by someone who claims the dealer is responsible for an accident caused by the dealer's uninsured customer. These calls raise two questions: (1) as a lien holder, do I have an obligation to make sure that my buyer has liability insurance; and (2) do I have liability if the buyer causes an accident? The answer to both questions is no.

Texas law requires drivers to have liability coverage, and dealers should remind their customers of this requirement at closing. However, once ownership changes, there is no obligation to for a seller/lienholder to be the liability insurance police. In fact, the Texas Finance Code doesn't authorize a lienholder to make having liability insurance (unlike collateral protection insurance) a condition of a motor vehicle retail installment contract.

As to the second question, Texas courts (including the Texas Supreme Court) have made it clear that a seller/lienholder has no liability for the negligence of a buyer after a completed sale has taken place.

There may be potential liability, however, for damages caused when a vehicle is loaned. The legal theory of negligent entrustment can create liability if an owner (such as a dealer) turns over possession and use of a vehicle to someone the owner knows, or should know, is an unsafe driver. Anyone without a driver's license is presumed to be an unsafe driver.

In a recent case involving a claim of negligent entrustment, industry trade associations worked together to help protect the interests of dealers. In this case, someone who was struck by a repair loaner, driven by the dealer's customer, sued the dealer. The customer was under the influence at the time of the accident and had a suspended driver's license. The dealer responded that the accident occurred 18 days after entrustment, and was thus too remote from the entrustment to create liability. 

On appeal of an adverse ruling by the court of appeals, the question was submitted to the Texas Supreme Court. A friend-of-the-court brief supporting the dealer's position was filed by the Texas Automobile Dealers Association and signed by TIADA, the Texas Recreational Vehicle Association and the Texas Motorcycle Dealers Association. The Supreme Court reversed the court of appeals and found for the dealer. 

Despite the favorable ruling in this case, which had unusual facts, dealers should exercise due diligence in letting potential buyers test drive vehicles and in loaning vehicles in repair situations. We recommend requiring a valid driver's license and proof of liability insurance before allowing a test drive or providing a repair loaner. Also, dealers should review what is covered, and not covered, under their garage liability policies.

See a more extensive article on this topic in the October 2016 issue of Texas Dealer.     

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