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Extended warranties present opportunities, pitfalls for dealers

Car dealerships must take care when offering extended warranties to customers, Toronto licensing and compliance lawyer Anar Dewshi tells AdvocateDaily.com.

 “It can be a very lucrative thing for dealerships, and they are allowed to do it, but there are compliance issues that can arise,” warns Dewshi, principal of Dewshi Law Practice, “I have seen notices of proposals to revoke dealer licences where the problem related to warranties.

“It all boils down to whether the consumer is protected or not,” she adds.

Dewshi says extended warranties, which cover mechanical breakdown but not necessarily normal wear and tear on a vehicle, are typically provided by manufacturers, third-party companies, or registered car dealers.

Under Ontario’s Motor Vehicle Dealers Act (MVDA), the warranties are usually insured by a licensed insurer. However, dealers can sell uninsured versions to customers who they lease or sell vehicles to, as long as they provide security to the Motor Vehicle Dealers Compensation Fund in the form of an irrevocable letter of credit for $100,000.

Without meeting those requirements, the dealer can be held responsible for claims if the warranty company goes out of business, Dewshi says.

She explains that extended warranty contracts must be signed by both parties. Within seven days, dealers must then send the warranty provider a copy of the contract, payment and an accurate description of the subject vehicle’s condition, including its total mileage.

Dewshi says the most common compliance problem for dealers relates to the requirement to submit payment to the warranty provider within seven days.

“It almost never happens because dealerships tend to work on the basis of monthly invoices,” she says. “If something occurs in that gap, they could be on the hook, and the Ontario Motor Vehicle Industry Council has also used non-compliance with this rule as the basis for a Notice of Proposal to Revoke Dealership Registration because it is one of the items they review.”

She says many dealers also fall foul of the MVDA’s requirement for all-in-advertised pricing. The only exception applies to taxes, as long as their omission is explicit in the wording of the advertisement. That means all freight and inspection charges and administration fees must be included in the advertised price, including any warranty activation fee. The terms and conditions of all warranties must also be outlined in writing, according to the Act.

“Dealers are allowed to charge the activation fee, but the caveat is that it must be disclosed on the bill of sale,” Dewshi says.

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