Interpretation ID: 2408y
Santa Fe Insurance Agency, Inc.
231 Washington Avenue
Santa Fe, NM 87501-1926
Re: Europa International, Inc.
Dear Mr. Martinez:
This is in reply to your letter of March 9, l990, to Taylor Vinson of this Office, with respect to "the $2,000 liability policy" that you discussed with him. You have asked four questions with respect to this subject on behalf of a client who intends to apply for recognition as a registered importer by this agency, and as an independent commercial importer (ICI) under EPA regulations.
Initially, let me provide you with some background information. Under the National Traffic and Motor Vehicle Safety Act, specifically Title l5, United States Code, Section 1397(c)(3)(D)(ii), the Department of Transportation is required to prescribe by regulation "provisions for ensuring that the [registered] importer (or any successor in interest) will be able technically and financially to carry out the importer's responsibilities under part B of this title (relating to discovery, notification, and remedy of defects)." These responsibilities primarily are to notify vehicle owners in the event that either a safety related defect or a noncompliance with a Federal motor vehicle safety standard is determined to exist in the owner's vehicle, and to remedy the situation.
In developing a regulation to implement the statutory requirement, the agency examined the regulations of the EPA pertaining to ICIs. In a final rule published on September 25, l987 (52 FR 36136), EPA required ICIs to provide to vehicle or engine owners warranties, and to ensure that the warranties "are insured by a prepaid mandatory service insurance policy underwritten by an independent insurance company", and "are transferable to each successive owner . . . ." (40 CFR 85.1510(b)(2)). In commenting on EPA's proposed regulation, the State of California had noted that CARB's own new regulation addressing non-conforming vehicles required modifiers to post a prepaid surety bond in the amount of $1,000 per vehicle to cover its obligation to perform recalls, or alternatively, to purchase insurance which will cover the modifier's recall obligation. The Department of Transportation, wishing to conform as closely as possible to procedures already in practice for grey market importers who were ICIs, proposed and adopted 49 CFR 592.6(h), requiring registered importers to "maintain in effect a prepaid mandatory service insurance policy underwritten by an independent insurance complany as a guarantor of its performance under paragraph (f) of this section." (which relates to notification and remedy).
With this background in mind, I shall reply to your four questions:
"1. Is it required that the term of the policy be for eight years from the date of purchase/sale?"
In essence, yes. Under the Vehicle Safety Act, manufacturers are required to provide remedy without charge for a period of 8 years following the first purchase of a vehicle (however, there is no limit on the time for notification). The general requirement for registered importers, established by Section 592.6(f)(2)(i), is that the obligation to provide remedy without charge shall not apply if the noncompliance or safety related defect exists in a motor vehicle whose first sale after importation occurred more than 8 calendar years before notification respecting the failure to comply is furnished by the registered importer to vehicle owners.
However, during the 8-year period following sale after importation, the registered importer is not obligated to provide repair without charge if two factors are present. The first is that the condition is a safety related defect that is attributable solely to the original manufacturer of the vehicle, and not to the registered importer. The second is that the date of the original first purchase of the vehicle, if known, or, if not known, the date of manufacture, as determined by the Department of Transportation, is more than 8 years from the date on which notification is furnished by the registered importer to vehicle owners.
"2. The limit is $2,000. Would that apply annually or would it be for the entire eight-year period? The reason for this question is that the companies are wondering whether or not this is a cumulative limit, e.g., $2,000 x eight years = $16,000."
The purpose of the policy is to ensure that any noncompliance or safety related defect that is determined to exist in a vehicle may be remedied without charge to the vehicle owner. If the registered importer is financially unable to effect remedy, then the policy is intended to cover the cost of remedy. The most usual form of remedy is repair. Pursuant to comments received during the course of rulemaking that $2,000 appeared to be the uppermost sum necessary to repair a single noncompliance or safety related defect, the agency adopted section 592.5(a)(8) stating that the policy is "in an amount that equals $2,000 for each motor vehicle . . . ." The answer to your question can be expressed in the following example. If a registered importer becomes insolvent in the second year following sale of the vehicle, for the next 6 years the policy should be available to any owner of the vehicle to cover the costs of repairing any safety related defect or noncompliance determined to exist in the vehicle, with a limit of $2,000 on the cost of correcting any such defect or noncompliance covered by a single campaign. Records of past remedial campaigns are available if insurance companies wish to study the types of noncompliances and safety related defects that have occurred over the years, as well as the model and model years involved. In our judgment, the cost of each repair has been far less than $2,000. If repair is impossible, alternative forms of remedy established by statute are replacement with a vehicle of equivalent value, or repurchase of a vehicle. Obviously this form of remedy cannot occur if the registered importer has gone out of business.
"3. You mentioned that the policy was to cover non-compliance or safety defect situations. What are areas to be covered: emissions controls, latent defects, brake problems, warranty situations such as drive train, etc.?"
Each system, part, or component of a motor vehicle is covered by the remedial authority. If a component is part of a system necessary for compliance with a Federal motor vehicle safety standard, and the vehicle does not comply with that standard because of the design or manufacture of that component, replacement of the component with a satisfactory one would be the object of a remedial campaign. For example, if a vehicle could not meet the stopping distance requirement of Standard No. l05 Hydraulic Brake Systems, and that failure was due to the inadequacy of the brake lining, the object of the campaign would be to recall all affected vehicles and replace the brake lining with one by which the vehicle would comply.
The statute defines a defect as one that is inclusive of any defect in performance, construction, components, or materials in motor vehicles or motor vehicle equipment. But only defects that are determined to be safety related require correction. The question of whether a defect is safety related depends upon the facts of the individual case. Generally, defects in emission controls are not safety related, nor are "warranty situations such as drive trains". Determinations of the existence of noncompliances or safety related defects are made by the registered importer, the Department of Transportation, or the original manufacturer of the vehicle.
"4. Europa is looking into whether or not MBNA would provide a warranty policy [for the G-wagon multipurpose passenger vehicle not sold in the United States] as they currently do for their private passenger vehicles. The present warranty covers for a 12/12 plan. If they were to extend this, is it possible that that could be acceptable as an alternative to the $2,000 limit?"
We doubt that MBNA would be willing to extend any type of warranty to a vehicle that is not originally manufactured by its parent company to comply with Federal safety standards, that it does not import, and that is not sold through its dealers. Further, such a vehicle could not be imported into the United States unless the Department of Transportation had determined that it was capable conformance to the Federal motor vehicle safety standards.
However, assuming that the G-wagon is deemed eligible for entry and that MBNA is willing to extend a warranty to it, there is no legal reason why MBNA could not assume responsibility for remedial work without charge in the event the registered importer were unable to provide it, whether in the form of an express warranty, or other document.
I hope that this answers your questions.
Sincerely,
Stephen P. Wood Acting Chief Counsel
ref:592 d:4/25/90