Are You Ready for the Deluge of Flood Damaged Cars?

Are You Ready for the Deluge of Flood Damaged Cars?

In terms of natural disasters in the United States, 2017 was a hell of a year. All told, the hurricanes, wildfires, hail storms, earthquakes, drought, and other extreme weather events cost the US $306 billion. The second-worst year on record? 2005, when damages from Hurricane Katrina and other disasters totaled $205 billion.

As families and organizations throughout the country are still picking up the pieces, Mark Ornstein—a speaker during our 2018 Predictions for Dealers webinar—told us that the automotive industry faces its own unique, weather-related challenge: disclosures. The following article is adapted from Mark’s presentation:

Most people reading this aren’t going to go out, buy a flood-damaged car, and conceal that fact during a sale to a consumer (although it has happened). Rather, what dealers are concerned about are the sheer number of weather-damaged vehicles that may soon enter the marketplace:

  • Hurricane Harvey destroyed an estimated 300,000–500,000 vehicles in Houston and another 500,000–800,000 in the rest of southeast Texas and Louisiana.
  • Hurricane Irma destroyed an estimated 200,000–400,000 vehicles.
  • And the flooding, fires, and mudslides in California damaged tens of thousands more vehicles.

Statistically, about 50% of those vehicles will wind up in the stream of commerce, which means dealers can expect to see these vehicles, whether they knowingly buy them vehicles or not. Why would a dealership not know if a car had weathered Harvey or Irma? Don’t insurance companies typically total, brand the titles of, and crush these vehicles?

Yes—but not every consumer buys insurance, and many Texas residents neglected to purchase flood protection before last fall. 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.

What’s a dealership to do?

First, note that it is legal to sell a flood-damaged vehicle, so 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.

There are several ways in which dealers can avoid the purchase of a flood-damaged vehicle. First, 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.

Next, 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.

Finally, make sure to 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, as well as other predictions for dealerships in 2018, watch our webinar recording.

Toby Graham

Toby manages the marketing communications team here at Compli. She's on a quest to help people tell clear, fun stories that their audience can relate to. She's a HUGE sugar junkie...and usually starts wandering the halls looking for cookies around 3pm daily.

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