As of this writing, Hurricane Florence appears moments away from making landfall on the East Coast.
It’s unfortunate, but massive, dangerous storms like Florence—not to mention the hurricanes and tropical storms no doubt ahead in the coming weeks—are now frequent occurrences for people living in coastal regions throughout the world. Last year, it was Harvey, Irma, and Maria; before that, Sandy and Katrina. These catastrophic weather events not only pose immediate threats to human life and infrastructure, but have all sorts of secondary consequences.
At our 2018 Predictions for Dealers webinar in January, Mark Ornstein explained a unique, hurricane-related challenge in the automotive industry: flood-damaged vehicle disclosures. Here are a few highlights from Mark:
More Flood-Damaged Cars End Up on the Market than People Realize
Statistically, about 50% of vehicles damaged in hurricanes wind up in the stream of commerce, which means dealers can expect to see these vehicles, whether they knowingly buy them or not. Although insurance companies typically total, brand the titles of, and crush these vehicles, not every consumer buys insurance. For these individuals, a ruined vehicle is a liability to trade in to their local dealership.
Note that some states eliminate this issue. Louisiana will crush disaster-damaged cars. Other states like Florida and Texas will brand the title. But many states do neither. And this doesn’t necessarily stop an unscrupulous wholesaler from washing the title and selling it out of state or forging vehicle identification numbers.
How Dealerships Can Handle Flood-Damaged Vehicles
What’s a dealership to do?
- Note that it is legal to sell a flood-damaged vehicle as long as you disclose it. However, keep the practical considerations in mind: that vehicle is probably going to break down. Cars these days are rolling computers. Even if the chassis seems sturdy, it’s only a matter of time before electrical systems start wearing out.
- Carefully and rigorously inspect the vehicles you buy. If you sell a flood-damaged car by accident because you didn’t give it a close look (or a close smell—water-damaged cars almost always have an odor) it will become an albatross around your neck. If by some miracle your sales contract isn’t voided, and the buyer doesn’t sue you, you can at least expect to see that vehicle show up regularly in your service department. Your best bet is probably to buy back that vehicle or substitute collateral, because that vehicle is going to pose a problem for you regardless.
- Try to avoid purchasing flood-damaged vehicles if you can help it. Draft a plan for how your dealership will handle the intake, repair, and resale of previously damaged vehicles. If you buy vehicles at auction, know the rules: most auctions give bidders a certain amount of time to submit a formal complaint and file for arbitration; if you miss the deadline, you could be stuck with the vehicle. Regardless, make sure to inspect the vehicle as soon as it comes into the shop.
- Learn your disclosure obligations. These vary depending on the state in which the vehicle is being sold, whether the vehicle is new or used, the age of the vehicle, how the damage occurred, and the amount of damage that occurred. Minimal damage to new vehicles does not usually have to be disclosed, while salvaged vehicles (defined by some states as vehicles for which the repair cost exceeds 70–75% of the fair market value) may require additional disclosures. Know your state’s disclosure laws and regulations, as well as the state definitions for terms such as “salvaged,” “flood,” “junk,” and “reconstructed. Create uniform disclosure statements, if your state does not already provide drafted form’s you are required to use. If you are unsure whether you need to disclose previous damage done to the vehicle, it’s best to make the disclosure. Also, determine whether a used car lemon law is on the books in your state.
- Require disclosures during your trade-in process. Every dealer should have a form asking the consumer to represent the car hasn’t been in an accident, damaged by a flood, and the like. Of course, a consumer may lie—but if they lie in writing, you have the basis of an action against them.
For more information about salvaged and flood-damaged vehicles, watch our webinar recording.
Our thoughts go out to everyone who lives (or has family) in North Carolina, South Carolina, and Virginia. We hope you’re staying safe and dry out there.