Good Lawyering Pays Off in Defense of GAP

Cigarettes. Black lung. Asbestos. Breast implants. Plaintiffs’ lawyers never seem to run out of reasons to sue people.

Lawyers who make their livings suing car dealers have latched onto yet another way to get their hands into dealers’ wallets. A slew of class action lawsuits around the country allege claims against dealers when car buyers have financed credit insurance, GAP, service contracts and other such products along with the cars that are the subject of the retail installment contracts they sign.

The plaintiffs’ lawyers claim that when the car buyers pay their obligations early, the dealer, the finance company or at least someone other than their clients, is obligated to refund some part of the cost of the products. I mean, after all, you gotta’ blame somebody, right?

The cases, many of them filed as class action suits, are serious business, and dealers defending the cases need all the ammo they can find. A recent opinion may provide them some.

In connection with the purchase and finance of his new Audi, Andrew Massih enrolled in the Total Loss Protection Program for a fee of $499. The TLPP was a typical GAP program that protected Massih against owing a deficiency in the event the car was a total loss.

Jim Moran & Associates, Inc. (JMA) was the TLPP administrator. Massih prepaid his contract in full, but received no refund of the GAP premium from JMA. Massih filed a class action against JMA for breach of contract for failure to refund the unearned GAP premium.

The trial court granted JMA’s motion for judgment on the pleadings. Massih appealed.

The U.S. Court of Appeals for the Eleventh Circuit affirmed. The court reasoned that under the terms of the GAP agreement, Massih was entitled to a refund only if he made a request to cancel coverage during the original term of the retail installment sales contract and that because Massih had not sent a notice to cancel coverage during the term of the contract, he was not entitled to a refund.

Now, think about the car buyer’s allegations here for a moment. How is the GAP company (or credit life or credit disability insurance company) supposed to find out that the car buyer has prepaid his retail installment contract so it can make a refund? There are only two parties who will know for certain that the retail installment contract has been paid off early – the buyer and the bank or sales finance company that is the holder of the retail installment contract.

The GAP company probably has no relationship with the bank or sales finance company holding the retail installment contract, and is in no position to require the contract holder to go to the trouble and expense of notifying the GAP company of an early payoff. Indeed, the GAP company may not even know who holds the contract, because the contract may well have been reassigned.

The GAP company, in drafting the contract, had a better plan. It put the obligation of the notification of prepayment squarely where it belongs—in the hands of the person whose self-interest would give him incentive to go to the trouble of making the notification. That was good lawyering on the part of the drafter of the TLPP, and, says the court, the language placing that duty on the buyer actually works! Of course, whether this defense will work with other products will depend on how well the documentation for the other products was drafted.

As they used to say on the A Team, “I love it when a plan comes together . . . .”