Interpretation ID: myles.ztv

Mr. Russel Myles
McDowell Knight Roedder & Sledge, L.L.C.
63 South Royal, Suite 900
Riverview Plaza
Mobile, AL 36602

Dear Mr. Myles:

This is in reply to your letter of March 7, 2003, following up on my letter of

May 24, 2002, regarding prepaid mandatory service insurance policies acquired by registered importers. You have two questions related to that letter.

Your first question is related to my conclusion that if such a policy becomes ineffective because the underwriter has gone out of business, an RI would not be required to secure a new policy that provides coverage for the periods that remain outstanding on all previously imported vehicles. You asserted that this is contrary to my statement in the letter that "policies must remain in effect until ten years have elapsed from" the date on which the vehicle is first purchased after importation. You asked that I reevaluate this interpretation.

Obviously, we hope that the issuer of the mandatory service insurance policy will remain financially able to honor claims against that policy for the full ten years that free remedy of noncompliances and safety-related defects is required. However, as I remarked last year, "the owners of these vehicles would be protected to the extent that the company is required by state regulatory authorities to maintain sufficient reserves or take other measures to cover its outstanding liability on previously issued policies in the event that it should go out of business."At that time, we were unaware that any policy underwriter had gone out of business. You have now brought to our attention one that has: Vehicle Protection Services (VPS) of Michigan. However, you have not indicated that any owner covered by a VPS policy has suffered actual loss as a result thereof, or that Michigan law does not adequately address the issue of reimbursement. As I further noted in 2002, our regulations do not obligate a RI to obtain new policies for previously imported vehicles if the original underwriter goes out of business. For this reason, I cannot provide an interpretation that differs from the one I gave you last year. However, if events transpired that such a requirement would be in the public interest, we could propose an appropriate amendment to our regulations.

You have also expressed concern about contracts issued to a RI by a company that is not an insurance carrier but an entity that is only "backed" by an insurance company. Specifically, you asked who has standing "to make a claim on the real insurance policy," commenting that "the insurance companys only obligation is to the non-insurance company issuing the guarantee." It is our understanding that a vehicle owner holding such a policy would present a claim to the non-insurance company which would either pay the claim or present the claim to the insurer for payment, either to the policy holder or the non-insurance company. We adopted these requirements based upon what we understood were the commercial realities of the time, principally the difficulty in finding businesses that would issue service insurance contracts or policies.

We noted your statement that "vehicle owners and/or RIs could find themselves facing deductibles and other coverage limitations that completely undermine the regulatory coverage requirements and create other practical difficulties for those persons intended to be protected." However, RIs, as part of the application process, are required to furnish us with a copy of the policies they intend to provide to vehicle owners and are thereafter required to notify us within 30 days of any change in the information that is submitted in its application. See 49 CFR 592.5(a)(8) and (f). RIs are also required to include a current copy of their service insurance policy in their annual applications for renewal. See 49 CFR 592.5(e). We routinely review these policies to ensure they are consistent with the obligation of the RI to provide remedy without charge during the term of the policy.

If you have further questions, you may call Taylor Vinson of this Office (202-366-5263).

Sincerely,

Jacqueline Glassman
Chief Counsel

ref:591
d.5/27/03