How to Contain the Damage

Toyota's recent high profile recall problems are an example of a painful lesson that too many dealers have learned recently: A manufacturer's problems can become major trouble for its dealers.

When your franchisor catches cold, your dealership may face a potentially fatal pulmonary emergency.

If your franchisor is handling a crisis, especially of the recall variety, what do you do? Here are some suggestions.

Make Sure Your Insurance is Solid

Highly publicized problems lead to lawsuits. This can be happen to any franchisor with recalls or safety campaigns, and they all have them.

Sometimes, dealers become embroiled in those legal actions. If you are a franchised dealer, you are entitled to indemnification from your franchisor for product lawsuits. However, some things can lead to a manufacturer's refusal to fully indemnify — allegations that you did faulty work on a vehicle or that you altered the vehicle are examples.

Make sure that your insurance coverage is solid. Does your policy create an unbroken chain of liability coverage for vehicle sales over the last several years? Is your liability coverage for vehicle future sales solid? Are there any gaps that can be closed with endorsements to your current policy? Are the limits of coverage sufficient to protect your assets?

Talk to your insurance consultant if you have any concerns.

Watch for Subpoenas

A dealer should always track subpoenas served on the dealership. They may signal coming problems. A subpoena for a deal file in an accident case could be a precursor of a coming product lawsuit. A subpoena from a state or local government agency could indicate a looming investigation. If you receive a subpoena that concerns you, discuss it with your attorney to determine whether action beyond simple compliance is warranted.

Train Personnel

You don't want publicity that a safety campaign or recall is handled poorly. Don't assume your personnel knows what to do. Make sure your service and parts departments are ready to handle the additional load.

Have the necessary parts. Make sure technicians are trained to do the work.

Ask whether the new-car department has grounded inventory with unrepaired recalls.

Train used-car department staff to understand how to find recalls on inventory and to make sure repairs are done before sale. (Sales of used cars are not covered by the federal recall law, but knowingly selling a used car with an open recall, especially if it's the brand for which the dealer has a franchise, could lead to liability in the event of an accident.)

Train all personnel to work with emotional customers fearful of a safety problem with their vehicles.

Sales Impact? Negative publicity can hurt sales. Prepare a marketing plan to attract buyers, regardless of the publicity. Train sales employees to handle recall-related objections. Be prepared to help employees who suffer financially through the difficult time.

Control Public Comments

When your franchisor has a high-profile problem, media often contact local dealerships. Comments that embarrass the franchisor make news. Media inquiries should go to the dealer or a selected senior official.

When speaking to the media, indicate confidence in the ability of your franchisor to respond to problems and in its products. Know and understand your franchisor's position about the issues.

Counter Reckless Charges

Recognize that there is an industry of lawyers who sue manufacturers.

The recall industry often generates public statements that are unsupported and even reckless in an attempt to attract clients who can become plaintiffs. Those should not go unchallenged. When you see those in local media, get involved and respond. The reputation of the vehicles you sell is at stake.

Michael Charapp, an attorney with Charapp & Weiss, LLP who specializes in representing motor vehicle dealers, can be reached at (703) 564-0220 or [email protected]

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