How to Manage Automotive Warranty Litigation

Tariq Hafeez

First Reviewed : January 30, 2019

Last Reviewed: January 30, 2019

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Automakers around the world are expanding warranty coverage to increase clientele and remain competitive, but the associated costs and risks are proving to be detrimental. The mechanized makeup of today’s automotive units has resulted in rising manufacturing defects, maintenance issues, and difficulties in identifying the source of defects. The mounting safety requirements and warranty litigation are terminating in highly liable products that exceed their break/fix costs[1]. Historical data has proven that Original Equipment Manufacturers (OEM) will face increased warranty expenses this year while suppliers may have to contribute a greater per-vehicle percentage to these expenses[2].

To manage these warranty risks and claims, automotive companies can follow systemized procedures that will reduce the number of claims and cost of repairs[2]:

1.Warranty Risk Management Prior to Contracting

The warranty risk management process should begin even before the contracting phase. Suppliers should outline the product design and specifications in the contract documents, and include disclaimers about warranties that are beyond the company’s scope. They should record all product testing documents and acceptance criteria since they may need to present these in the event of a warranty dispute. Also, it is useful to draft documents relating to alternative product designs not approved by the OEM[2].

Contractual provisions (insurance, indemnification, dispute resolution) can help manage warranty risk during the contractual phase. Suppliers should design a response strategy in case of a warranty claim that will help identify the source of the defect(s), dealer repair codes, and incriminating OEM warranty information, allowing for efficient reporting. The strategy should also cover the claim handling process, product return and inspection, warranty period, and other obligations to the OEM. A clear strategy will help suppliers be responsible only for a portion of the recall costs, in case of involvement of multiple parties, and recover their losses[2].

2. Reduce Litigation Risk

Determining the nature of the counter-party in the contract helps reduce litigation risk at the contractual phase. Before entering the contract, the supplier should review the counter party’s litigation and credit history. While drafting the contract, one must ensure that the contract includes all rights, obligations, and promises. In case of a foreign counter-party, the supplier should consider invoking a forum selection or arbitration clause[2]. For long-term contracts, the supplier should assess risks of early termination by the counter-party.

Once the contract is in action, designating a point of contract who guarantees contractual compliance at all times is vital. The point of contact should also be responsible formaintaining appropriate, accessible documents when necessary. Upon the occurrence of a dispute, all meetings and discussions should be recorded, documented, and available to all involved parties. Lack of proper product information often drives the OEM to simplify warranty cost and assign a 50/50 sharing responsibility[3]. Being able to access and analyze relevant information can protect suppliers from such charges. If the dispute ends with a claim being made, the designated point of contact will be responsible for assessing past documents, and confirming or denying the claim’s validity. Meanwhile, during the course of the dispute, the supplier should also record all damages (time, cost, travel etc.) that it is sustaining as a result of the dispute.

3. Reporting to the National Highway Traffic Safety Administration

If a situation arises where a supplier needs to report a safety defect to the National Highway Traffic Safety Administration (NHTSA), it is necessary to have a defined internal safety procedure. In case the defect has been caused by lower-tier suppliers, one must thoroughly examine and understand purchasing contracts for “recall, decision-making, reporting, cooperation, design responsibility, and allocation of cost recovery”2 provisions. The purchase order T&Cs should also contain contractual protection from these lower-tier suppliers wherever necessary. In case of an investigation of defect(s), the OEM may need to submit the supplier’s confidential information to the NHTSA, in which case the supplier must appeal to the OEM to treat such information as per the NHTSA’s regulations[2]. Often, the supplier may need to submit an affidavit that makes a plea for exempting confidential information using the Freedom of Information Act.

The supplier should make use of historical data and past warranty claims relating to similar products to determine its position i.e if the defect has caused safety concerns under the Highway Safety Act and NHTSA’s regulations[2]. It should also continuously keep an eye on OEM’s regulatory developments, new safety guidelines, and amendments to existing standards, in order to safeguard its products from further litigation.

Conclusion

Due to today’s safety-conscious world, the automotive industry is knee-deep in product recalls and warranty claims, and suffering from significant financial liabilities . Proactively preparing for disputes and claims, tracking all product and test information, and staying informed about the nation’s automotive safety guidelines will work wonders for avoiding or managing warranty litigation risks.

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