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BBB examining how warranties are advertised

November 15, 2010

By Patricia Kelly

A question arose recently on the issue of which motor vehicle advertisements that promote dealer warranties in connection with the sale of vehicles would violate Rule 475.590 of the Illinois Motor Vehicle Advertising Regulations, which prohibit free gifts or other incentives with negotiated sales. 

Industry representatives and Illinois attorney general staff discussed the issue at an Auto Dealers Advisory Council meeting in September. Participants agreed that only those dealers who absorb the cost of repairs under such warranties would obey the language of Rule 475.590 (c), which states: "Nothing in this Section shall prohibit a dealer from including a warranty with the purchase or lease of a vehicle. A warranty shall not be advertised as using the word ‘free.’ " Most dealers do not absorb this risk themselves but purchase insurance to cover the costs of honoring these warranties.

In the future, the BBB will ask for substantiation of the way dealers deal with the risk to them resulting with the warranties they sell. If a dealership buys insurance to cover potential loss or sells a service contract, that dealership cannot advertise its own warranty as included in the purchase price of a vehicle without violating Rule 475.590 (a) which states: "It is an unfair or deceptive act for a dealer to advertise or offer free prizes, gifts or other incentives in connection with the purchase or lease of a vehicle where the vehicle is sold or leased at a price arrived at through bargaining or negotiation, unless the dealer meets the requirements of subsection (b) of this Section." If a dealer does not buy insurance but absorbs any loss itself then such an advertisement published by that dealer would be permitted by Rule 475.590 (c).

The BBB is aware that this is an important fine point in the advertising of dealer warranties sold with vehicles and will continue to monitor this form of advertisement. The BBB will ask for substantiation to make sure that only those dealers who actually cover this loss themselves engage in this form of advertising.

The BBB desires to maintain a situation where dealers who include their own warranties with the purchase of vehicles and who then absorb the costs of repairs under these warranties, without insurance to cover their loss, are allowed to advertise the availability of the warranties.

Patricia Kelly is senior counsel of the BBB of Chicago and northern Illinois.