Calif. Supreme Court Rejects “Hybrid” Service Contract Theory

June 2, 2004

In a move that clarifies and upholds current state law, the California Supreme Court recently ruled that a vehicle service contract is not an express warranty and should be treated separately.

In a May 27 decision, the California high court upheld a 2002 appeals court decision in Gavaldon v. DaimlerChrysler stating that the two contracts were separate.

“The Supreme Court’s decision goes to the heart of the California insurance code, which governs automobile insurance,” said Laura Kotelman, regional manager and senior counsel for the Property Casualty Insurers Association of America (PCI). “The legislature regulates only vehicle service contracts, not automobile express warranties, and the Supreme Court ruling makes that doubly clear.”

In the original case, the plaintiff claimed that in certain “hybrid” cases, a service contract qualifies as an express warranty and the consumer is entitled to a repayment stated in California law if the product is defective or non-operational. Plaintiff maintained these agreements occur when a consumer purchases an agreement by a manufacturer to pay for repairs, sold at the time of sale of the vehicle, for an additional cost.

PCI filed an amicus in support of the defendant citing case law to refute this assertion. “If we were to accept the ‘hybrid’ theory, every seller of a service contract would have to offer the replacement or repurchase remedy,” Kotelman said. “Banks, insurers and other third parties to an auto sale would have to repurchase or replace a vehicle sold by another. This absurd result could not have been intended by the legislature.”

In its decision, the Supreme Court rejected the “hybrid” theory, and maintained that the state’s “replacement/repurchase remedy” should only be available for a breach of an express warranty.

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